Companies like Facebook, Google and Apple are staring into the course of a massive crackdown on their tax affairs as the Albanian government moves to recover billions from multinational giants.
In a paper released Friday by treasurer Jim Chalmers, the government is enacting a series of reforms designed to prevent large corporations from minimizing their notoriously low local tax bills.
It includes new limits for companies that shift profits abroad and use controversial tax deductions.
dr. Chalmers said the proceeds from the crackdown will be used to fund public services.
“Our multinational tax package will close tax loopholes exploited by multinationals and improve tax transparency,” he said in a statement.
“This will benefit Australians by funding vital services such as Medicare, aged care and childcare; help pay off the trillion dollars in debt accumulated by the former government; and leveling the playing field for Australian companies.”
The crackdown will cement one of Labor’s election pledges and is expected to bring in an additional $1.89 billion for the federal budget in four years’ time, although this is only an estimate.
Australia’s effort is designed to co-operate with a wider international crackdown on large corporations that are deliberately giving taxpayers around the world “the refugee,” led by the Organization for Economic Co-operation and Development (OECD).
Tax crackdown explained
The reforms that Labor is pursuing to counter multinational tax minimization are according to the consultation paper published Friday.
The first is a proposal to limit the deduction restrictions multinationals can claim on the debt financing their Australian operations, which are currently restricted under a so-called ‘thin capitalization regime’.
In principle, multinationals can reduce their tax bills by claiming a deduction on the interest they pay on debts related to their activities – usually limited to 60 percent of their average asset value.
These rules are often exploited by companies, which use their international scale to adjust the mix of debt and equity in a particular country, allowing them to drastically lower their tax bills.
The government wants to tighten this regime and align it with the OECD’s proposals by limiting instead the interest charges that multinationals can claim, which is a much more direct approach.
This would limit the amount of net interest deductions that a multinational company can claim to 30 percent of their pre-tax profits, so that their tax deductions are linked to actual economic activity.
The second part of the reforms outlined by Treasury on Friday concerns multinationals that use royalties and other intangible assets, such as their brand names and logos, to lower their tax bills.
In principle, companies can use these mechanisms to shift profits to tax- or non-tax jurisdictions, allowing them to avoid taxation in Australia by structuring their property outside the country.
The government wants to put a limit on the amount of these deductions that can be claimed, which should (in theory) make it much more difficult for multinationals to shift their profits abroad.
The third part of the tax strategy will improve tax transparency.
The government wants to introduce rules requiring the public disclosure of high-level data on the tax amounts large multinationals pay where they operate, in addition to the number of people they employ.
The measure is commonly known as ‘country by country’ reporting and is supported by the OECD’s tax reform efforts, with the idea that better information about tax regimes will inform the public debate on the issue and put additional pressure on companies to pay taxes. .
Reforms are just the beginning
Tony Greco, director of technical policy at the Institute of Public Accountants, said the paper is just the start of a long reform process that will require international cooperation.
“The consultation document complies with [Labor’s] pre-election commitments and complements the other tax initiatives of multinational entities,” he said.
The global portion of tax reforms is still shrouded in uncertainty, with US political roadblocks hanging over attempts to fix a 15 percent minimum for global tax rates, and create new measures designed to ensure that multinationals pay taxes in the countries in which they sell books.
“While [Labor] has no control over the OECD’s BEPS solutions, as it is one of many participants in the negotiations, as far as country and timing is concerned, it moves forward with what it can control,” said Mr Greco.
The government is inviting submissions on its plan until September 2.