Global rent-seekers undermine Hockey at G20

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The AFR is reporting exclusively that:

The Australian Financial Review has learnt that at least two of America’s top business groups are lobbying intensely behind the scenes to kill off or dilute the plan outlined by Treasurer Joe Hockey and agreed to by G20 finance ministers in Sydney last month.

US multinationals including Apple, Google, Paypal and Starbucks have been the public faces of aggressive ­corporate tax planning that has ignited an international response to tax base erosion and profit shifting (BEPS).

The National Foreign Trade Council and US Council for International Business have written to express their concerns to the bodies steering the reforms: the G20 member countries and the Organisation for Economic Co-­operation and Development.

Powerful US business interests are also pressuring the Obama administration not to sign up to the changes or to water down the proposals. The US Treasury said on Saturday it “fully supports the G20’s efforts to combat tax avoidance by multinational firms and raise standards around the world”.

However, in Washington there are doubts that pro-business Congressional Republicans, who receive political donations from big companies and are sceptical of multilateral institutions such as the Paris-based OECD, will ratify an international agreement into domestic law. One of the major concerns of US business is that existing offshore investments made under the current rules will be adversely affected by global changes to complicated cross-border tax rules.

Transfer pricing is the major issue. Multinationals mis-price cross-divisional transactions to boost and reduce their profit margins not according to actual pricing but in reference to different tax jurisdictions. In short, a firm can make motza in Australia, using and degrading Australian infrastructure and services, yet pay no tax because the profit shows up in low-taxing Djibouti or similar.

Rent-seeking 101.

5 Responses to “ “Global rent-seekers undermine Hockey at G20”

  1. RaglanParade says:

    Yep. Car makers here do it.

    Most cars are built in Asia for under $10,000 – but the wholesale car prices ‘sold’ to the Australian affiliates are between $15,000 to $25,000.

    The manufacturing country has an inflated ‘transfer price’ because it has a low tax base, and the profits are there syphoned away to countries with low taxes.

    The Australian Government is probably on average losing $3,000 in tax revenue for every vehicle sold in Australia as an import – which when you multiply this by over 1 million new car units per year – is a whopping total.

    The car company makes the profit, the consumer pays the price, but the tax revenue does not get received. One year of this being corrected for just Motor Vehicles in this country would fix the structural deficit, pay for the NBN, and most of the new road projects too!.

  2. The Claw says:

    Don’t forget that where there is good competition companies will make small profits.
    If a wigget sells for $100 in a competitive market, there might be only $5 profit for the company. The govt however gets $10 GST.
    Perhaps the real problem is lack of competition and excessive profits.

  3. Explorer says:

    Transfer pricing and structuring affairs to take advantage of low tax jurisdictions has been a problem in Australia for 40 years at least.

    Royalties have long gone through Caribean tax havens using tax treaties between different countries.

    Reinvoicing through Hong Kong was all the rage in the 80′s.

    Australian subsidiaries of major multinationals have been subject to transfer pricing tax audits in the distant past (and probably more recently).

  4. Pat20 says:

    I’m not surprised US businesses are lobbying Congress. US tax revenue is the biggest loser from BEPS.
    There isn’t much in it for Australia. Not much valuable IP originates or resides here. The rents at risk for Australia are resource rents. These are immobile and we have the tools (transfer pricing rules) to deal with mischief such as the use of offshore marketing hubs by the big resource companies.
    If we want tax Google and Apple more heavily because of the business they do with Australians, the best option is to raise the GST rate.

    • fitzroy says:

      Gst is regressive. If profits or deductions are imported, impute a mark up,or a mark down for the item sought. If the input is from an independent Australian firm then the actual cost could be used with a reversal of onus to prove independence. There is no reason why these corporations should pay no company tax. The rules are insufficiently harsh. If the corporations cannot be trusted not to transfer price they should be treated accordingly and the onus reversed and deeming percentages having regard to the industry replacing the current system. Bad behavior should not be rewarded.