Someone once said that a good tax system enables the government to pluck the feathers from the taxpaying goose with the least amount of hissing, says Rod Houng-Lee. The least amount of hissing occurs when the law is simple and clear.
The hissing increases exponentially when the law is more complex, the story goes. The challenge faced by governments trying to fight transfer pricing is that this taxpaying goose is going to spit and hiss very loudly for a long time to come as individual country tax laws and the double tax treaties they have signed encourage it.
It is refreshing to hear somebody from the very highest echelons of the world of multinational tax affairs espouse the cause of common sense, in public, rather than predictably tread the tax industry line.
That person, Rod Houng-Lee, was consistently voted as one of the leading tax advisors in Asia by the readers of International Tax Review Magazine for well over a decade as a tax partner with PwC.
That tax industry line has it that Australia is “on course” for reform and should stick with the pack and thrash out a multilateral solution to multinational tax avoidance, albeit despite the logic that G20 talk-fests don’t make laws, sovereign nations do. And despite the fact that each nation has its own peculiar self-interest and a win for one often entails a corresponding loss for another.
If multilateral talks are not the solution then, what is? Rod Houng-Lee says reform can be achieved in a single country and partially address the issue if the political will is strong enough, though he concedes this will not be easy.
Yes, greater transparency and disclosure would help address the challenges of taxing multinationals but significant reform, says the former Big Four tax head, would require renegotiation of more than 40 Double Tax Treaties (DTTs) which Australia has signed with other nations.
“It may be worth looking at the rate of withholding tax on interest and royalties (which is one of the simplest strategies used by MNCs to transfer profits) as a means of protecting the Australian revenue,” he says. “This has the advantage of simplicity and relatively low cost of compliance and collection but it would still require our DTTs to be re-negotiated.”
Should Australia be indignant at foreigners reducing their Australian tax liabilities by extracting their Australian-sourced profits in the form of tax deductible interest and royalties for the use of IP (intellectual property)?
We should be concerned, says Houng-Lee, but what do we expect if our domestic law provides for a 10 per cent non-residents’ interest withholding tax rate, and a royalty withholding tax rate of 0 per cent – 12 per cent (depending on the DTT) which compares to a 30 per cent Australian corporate tax rate?
“A simple solution would be to simply increase these withholding tax rates to a number closer to the 30 per cent corporate tax rate. I accept that would require all our DTTs to be re-visited.”
Should Australia be indignant at foreigners reducing their Australian tax liabilities by using transfer pricing techniques (typically transferring commercial and economic risks) to a subsidiary of the MNC in a low tax jurisdiction?
“The reason this is possible is because our DTTs all provide that the taxing rights in respect of profits not connected with a “permanent establishment” in Australia are allocated to the government in which the company is located,” says Houng-Lee. “The company to which the profits are transferred would obviously be structured so that it does not have an Australian permanent establishment.”
As for the separate issue of widespread tax deferral (we wrote last week Apple had almost $US200 billion of cash in offshore tax havens which would be taxed if it were repatriated), Houng-Lee says governments can more easily address this problem unilaterally.
Typically, an MNC looks to minimise tax in the foreign countries in which it operates and to defer the tax it would need to pay in its home country by deferring for as long as possible the repatriation of its foreign sourced profits back home.
Australia like the US, says Houng-Lee, would rather our MNC’s pay less tax in the foreign countries in which they operate because it would mean more tax paid back home. Australian MNC’s would in fact prefer that they pay more tax here because of the demand for franking credits under our dividend imputation system.
“You can’t hope that your MNCs pay less tax overseas but not the foreign MNCs operating down under. The deferral of Australian tax by Australian MNCs deferring the repatriation of foreign profits is a concern but is entirely within our government’s control. It would however require significant political will.”