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Treasurer Joe Hockey's moves to extract more tax out of multinationals risk starting a revenue war with the US and could undermine international efforts to deal with cross-border companies, experts have warned.
Announced on Monday, Mr Hockey's plan to stop multinationals shifting profits to low-tax or no-tax nations has been slammed by some tax experts as "pathetic" and others as "draconian"
But some also warn that the changes proposed by the government could start a tax war with the US.
On Monday, after much public pressure to fight tax avoidance by companies such as Google, Apple, Microsoft, BHP Billiton, Rio Tinto, and Glencore, Mr Hockey announced the government would beef up Australia's anti-avoidance laws to catch multinationals dodging tax.
Under the plan, the Australian Taxation Office would be able to use its strengthened powers to chase 30 companies accused of diverting profits in order to avoid tax. Tax Commissioner Chris Jordan is also to be given the power to recover unpaid taxes and issue a fine of an additional 100 per cent of those unpaid taxes, plus interest.
'Contrived and very complicated'
Mr Hockey said artificial tax arrangements such as the highly publicised "Double Irish Dutch Sandwich" were "contrived and very complicated arrangements that have been used to avoid paying Australian tax".
He would not say how much the anti-avoidance measure would raise from the 30 companies in question, but said that it would target the billions of dollars being shifted offshore.
But Tax lawyer Mark Leibler said the anti-avoidance provisions, known as Part IVA, already covered the "contrived or artificial tax arrangements" referred to by Mr Hockey.
The government may end up facing disputes with other tax authorities, he said.
"We may well end up trying to tax profits, which are not sourced in Australia and which may raise concerns with other jurisdictions, particularly the United States," he said. "[The US] may form the view that such profits ought more appropriately be taxed by the jurisdiction in which the foreign multinational is headquartered or domiciled."
Global moves
Tax Justice Network spokesman Mark Zirnsak said Mr Hockey's announcement about tackling the definition of "taxable presence" for companies was "very welcome".
But the government's response to multinational's practice of artificially loading up their Australian subsidiaries with debt to cut their taxable profit was a "pathetic and ... business as usual response", he said.
"The Treasurer needs to support a global move to allocate profit and debt within multinational corporations on the basis of where they are actually doing business, not on the artificial arrangements they construct for themselves," Mr Zirnsak said. "The OECD has already put up these options up to governments."
Pitcher Partners partner Paul Glover expressed concern that Australia was going to "unilaterally seek to extract additional tax revenues from a small number of very large multinational companies that utilise such arrangements".
"This could be counterproductive to the OECD's coherent policy response and trigger counter responses from other jurisdictions," Mr Glover said. "In a way we are jumping the gun, like the UK, and could possibly harm the OECD efforts to develop international tax principles for dealing with these arrangements."
Mr Glover said other taxpayers who were acting lawfully could be inadvertently caught up, saying the 100 per cent penalties plus interest were "extremely draconian".
Clayton Utz tax partner Niv Tadmore also said the new proposed penalties were "unusually high".
PwC partner Peter Collins said the announcement was lacking detail. "The OECD has been clear that countries should not pre-empt the OECD's BEPS project with unilateral measures," he said.
Defining tax havens
BDO tax partner Mark Molesworth said it would be interesting to see how the government defined "tax haven".
Regardless, the proposal would place an unnecessary compliance burden on all corporate groups with global turnover of more than $1 billion, he said.
KPMG tax partner Grant Wardell-Johnson said the government would have been better off awaiting the outcome of the G20 and OECD plan against profit shifting, but said he was pleased that there was a high turnover threshold in the proposed rules that would will exclude small to medium players.
"These new rules will only apply if all three of the following tests are deemed to have occurred: the multinational corporations would be using mainly Australian employees to deal with Australian customers; the otherwise untaxed profits would flow through to tax havens; and there must be a principal purpose of avoiding a taxable presence in Australia," he said. "So the bar is set quite high before the rules kick in."
More tinkering
Other tax experts said the government was needlessly tinkering with the rules and pre-empting its own white paper.
Tax Institute president Steve Healey said "while further strengthening our anti avoidance rules may have merit our concern is that this is yet more tinkering with an already complicated tax system".
"This measure has the potential to increase uncertainty and compliance costs in our tax system," Mr Healy said. "We have a tax reform white paper process underway and we are keen to ensure this process is not compromised by ad-hoc announcements along the way."
