Australia could gain up to $5.7bn in tax revenue from a new agreement setting a global minimum corporate rate of 15% and forcing the biggest companies, including tech giants, to pay more tax in the country where revenue is raised.
The agreement struck between G7 nations is a world-first, as developed countries seek a collective solution to corporate profit-shifting that has deprived their budgets of billions of dollars of revenue.
Since 2017, Australia has attempted to crack down on tax avoidance by charging a 40% tax on diverted profits, and through tax office litigation such as its case against Chevron that netted $340m.
But it has still struggled to raise revenue from tech giants such as Apple, Facebook and Google who collectively paid $216m in tax on $11bn of revenue raised in Australia in 2018-19.
How does the G7 tax agreement work?
The tax agreement has two pillars.
The first applies to “profit exceeding a 10% margin for the largest and most profitable multinational enterprises”, who will pay a rate of 20% tax on residual profits, which will then be allocated to countries where they have consumers.
The second pillar sets an effective minimum corporate tax rate, allowing countries where companies are headquartered to charge them until they are paying at least 15% on worldwide profits.
How will this apply to Australia?
The in-principle agreement struck between G7 countries will be expanded to include the G20 countries, of which Australia is one, by a global tax treaty.
The chief executive of the Tax Justice Network, Alex Cobham, told Radio National it estimated Australia would gain US$4.5bn (A$5.7bn) in extra revenue.
Miranda Stewart, a professor in the tax group of Melbourne Law School, said the first pillar would direct revenue from the 100 most profitable companies globally to countries where they have a market, including Australia.
“But [the revenue has] got to be spread across more than 140 countries based on their consumers, and we are small in population, with 25 million people.”
Stewart said the second limb would give Australia “additional taxing rights over outbound investment” both for Australian corporate groups, such as BHP and Rio Tinto, or large corporate groups with Australian divisions.
What would it mean for the big tech companies?
Stewart said it was “expected” that revenue from the big tech companies would flow to Australia under the first pillar, as Australia’s population is “highly digitised”, with many users of Facebook, Google and Apple.
Shumi Akhtar, associate professor from the University of Sydney business school, said income from intangible sources (such as patents, intellectual property and royalties), inter-company loans or digital sales were “vehicles” to avoid taxes used by software, pharmaceutical or digital platform companies.
“This will increase the chance of companies like Google, Facebook … and other local or international multinational corporations operating in Australia to pay more tax in Australia.”
However, international tax experts have suggested the 10% threshold could allow Amazon to avoid paying more tax.
Stewart also noted the United States had insisted that in return for new global tax rules, countries such as France, Spain and India that unilaterally imposed digital services taxes would have to repeal them to take part.
In Australia, the treasury studied the introduction of a digital services tax in 2018 but the treasurer, Josh Frydenberg, decided to delay action pending a multilateral solution. A digital services tax was favoured by some on the crossbench and in Labor.
On Monday, the former prime minister Malcolm Turnbull said, “Facebook should pay tax on its profits in Australia in Australia, not in Ireland or Singapore.”
Could the deal be fairer?
The Tax Justice Network is concerned that G7 countries, where many global corporations are headquartered, will benefit disproportionately, scooping up 60% of extra revenue generated despite having just 10% of global population.
Worldwide the deal is expected to raise US$275bn, of which just $5bn-12bn would be raised by the first pillar, which Cobham described as a “trivial” amount.
The Tax Justice Network has proposed that revenue raised by the 15% corporate tax cut floor should also be distributed where companies’ revenue, sales and employment occur, not just where they have their headquarters.
Cobham said the “fairer proposal apportioned according to activity” would net Australia twice as much revenue.
What about Australia’s company tax rate?
Australia has a company tax rate of 25% for small-to-medium enterprises and 30% for big businesses.
Responding to the G7 deal, Business Council of Australia chief executive Jennifer Westacott said the global minimum of 15% “leaves Australia severely exposed in its ability to attract global capital”.
“That means we run the risk that investments in major projects and the new industries that create new jobs will simply flow to other countries,” she said. “Australia needs a permanently competitive tax system.”
But Cobham said Australians should take this call with a “massive pinch of salt”.
Although Australia has a headline rate of 30%, “the effective rate, what they actually pay, is barely above 15%”. Cutting the headline rate further would result in companies paying an effective rate below 15%, allowing revenue to be raised elsewhere at Australia’s expense.
Stewart also noted that in the May budget the Coalition introduced a “patent box” policy that would reduce the corporate rate to 17% for bioscience and medical patents.