A senior Australian Treasury official has detailed how online giants such as Google, Twitter and FaceBook pay less than 1 percent tax on over a billion dollars in advertising sales and claims the consequences could undermine the willingness of taxpayers to pay their share.
“Our high level of willing participation in Australia is the result of many factors – such as belief in taxes, trust in the fairness of our system and the integrity of the administration,” Rob Heferen, executive director of the Treasury’s revenue group, said in a speech to the 2014 Economic and Social Outlook Conference, Melbourne Institute, where he explained tax arrangements such as the Double Irish Dutch Sandwich method.
“Ultimately, (these practices) could lead to a bigger risk that other taxpayers stop complying and thereby erode Australia’s tax base,” Heferen said. He added that 95 percent of revenue collected comes from those who lodge and pay on time.
The digital economy has a greater number of intangible assets such as online software and advertising. Forbes values the Apple brand alone at over US$104 billion, Heferen said. Last month a committee at the 2014 OECD International Tax Conference in the US struggled to define a digital economy and the companies, activities and assets that moved within it.
How To Make a Low-Tax Sandwich
Intangibles have been the source of some very high profile and sophisticated tax planning techniques in recent years with unusual names such as the Double Irish Dutch Sandwich, a method apparently approved by the US tax department.
Under this arrangement, a US parent company sells the overseas rights to some intellectual property assets to a subsidiary in Ireland which is managed and controlled from a tax haven such as Bermuda. The Irish company licences the right in the IP to another subsidiary in the Netherlands for a royalty fee.
The Dutch company sub-licences the IP to a second Irish company which could then sell advertising contracts overseas such as to Australian businesses, Heferen said. The income to the Irish retailer is reduced by the royalty payment to the Dutch company, which in turn pays a small amount of corporate tax on the difference between royalties received and paid.
The royalty payment received by the Irish holding company is not taxed because it is headquartered in the Bermuda tax haven.
Although the Double Irish Dutch Sandwich “didn’t pass the sniff test” it still wasn’t clear whether Australia had a right to tax the advertising revenue collected from Australian companies, Heferen said. If the goods were instead tangible – say the Irish company was importing tractors, for example – then the erosion of corporate tax revenue was just a switch from domestically-sourced to imported goods. It would “simply be a by-product of international trade” and would not be subject to Australian corporate tax.
“This raises fundamental questions as to how enterprises in the digital age add value and make their profits, and how tax systems need to respond,” Heferen said.
Australia is the president of the G20 in 2014 and is leading the taxation discussion on base erosion and profit shifting.