Application Exercise 8aa: The ‘Google Tax’
Task: Imagine you’re explaining the ‘Google Tax’ furore to a friend who doesn’t study Economics.
- In your own words, explain ‘base erosion and profit shifting,’ and briefly explain why so many rich country governments are worried about
Base erosion and profit shifting occur when large (global) corporations intentionally manipulate their tax affairs to minimise paying tax in rich countries where they earn large revenues. Instead they shift their profits to low or no-tax locations. Companies manipulate where they formally make any money (i.e. profits) for tax purposes, so that they don’t need to pay as much tax in high tax countries. In simple terms, they are accused of ‘dodging taxes by pretending sales in high-tax countries are actually happening in overseas, lower-tax countries.’
In simple terms, MNCs earnt revenue in Australia (e.g. by selling services to Australian customers) and then moved that money offshore before they paid tax on it, claiming those services were actually provided by an overseas entity, or significantly and artificially inflating the cost of service provision in Australia so very little profit is made here. Since no profit = no tax payable, they reduced their tax bill substantially.
Governments are worried about BEPS because in order to finance expenditure, governments need to collect tax. And it is getting increasingly hard to ensure large corporations that are making profits in their countries are paying their ‘fair share’ of tax to contribute to community welfare.
- Explain how transfer pricing works and how the use of marketing hubs has contributed to the ability of large corporations to use transfer
Transfer pricing refers to when corporations sell their product between two arms of the company. The arm of the company in the high-tax country (e.g. Australia) sells the product extremely cheaply to the arm of the company in the lower-tax country (e.g. Singapore). This means the Australian arm of the company makes little, perhaps no, profit because of its low sales price. But it means the company’s profits are recorded as being made (in accounting terms ‘booked’) in the lower-tax country. This reduces the company’s overall tax liability without the company as a whole losing any money. BHP uses a marketing hub based in Singapore for this exact purpose (or rather it
- Explain the possible longer-term implications for developed country economies of BEPS continuing
Developed countries currently experience high material and non-material living standards, and this is partly attributable to strong governance, supported by taxation regimes that work to collect sufficient revenue to support significant social safety nets and provide largely universal social services. If BEPS continues unchecked, the level of taxation revenue available will fall substantially, compromising the ability of government to continue to provide the kinds of services currently provided, without experiencing high levels of debt.
- Explain the likely different perspectives on the so-called ‘Google tax’ of the CEO of Google and an average Australian income tax
The so-called ‘Google tax’ – technically the Multinational Anti-Avoidance Law (MAAL) in 2015, followed by the Diverted Profits Tax (DPT) in 2017 – arose in response to community outrage. The MAAL applies to significant global entities with an annual income greater than $1 billion. The DPT imposes tax penalties on those companies found to be diverting profits.
The CEO of Google would probably suggest that its primary purpose is to serve its customers and shareholders. It does this by providing a good service, and thereby ensuring shareholder value through maximising sales revenue and minimising costs (including taxation) to maximise profit and provide a return on investment. For example, the Chief Financial Officer of BHP, defended the company’s tax minimisation. He claimed it benefits Australia and BHP’s shareholders, by creating value for both, including tax revenue.
An average income tax payer may disagree, as they have no capacity to minimise their tax by moving their income so it can be taxed in low-tax countries. Former Australian Treasurer, Wayne Swan, accused BHP of using transfer pricing to ‘smuggle profits out of Australia’.