KPMG has released a new report, entitled Tax 2025: People, the economy and the future of tax, which warns that the global push to impose corporate taxation in the jurisdiction for goods and services could “be of substantial disadvantage to Australia” because of its heavy reliance on the taxation of profits of its major minors (think BHP and Rio):
Depending on how certain technical proposed changes are interpreted by the Chinese and Indian revenue authorities, Australia could find a diminished corporate tax base from its major exporters with more of their profits being taxed by overseas revenue authorities…
There is an additional problem. There will be a tension between China, other developing countries and most developed countries on the location of value associated with intellectual property in the future. Is the value of the trademark associated with a handbag located in Switzerland where the intellectual property is registered, or in Shanghai where the bag is sold?
We have a predisposition to thinking that the value lies in Switzerland. Others take the view that the capacity to sell the handbag into the Chinese
market is what gives it substantial value, and that it is located in China.These issues will also impact on the size of the Australian corporate tax base…
Commenting in Fairfax, the authors note that the financial loss to Australia is “easily in the billions”.
KPMG also warns that the increasing ‘gig’ economy – using independent contractors for short-term engagements – could also erode Australia’s tax base, as more small scale work is undertaken offshore:
2025 is likely to see more project work being undertaken overseas as Australian businesses interact with a highly educated group of people globally willing to provide services through the internet for lower cost. This ‘gig’ economy may diminish our personal income tax base, unless Australians can provide similar, and hopefully more highly skilled, services such as IT, engineering, architectural or energy efficiency services to an overseas market…
As labour becomes more mobile, the ability to maintain high taxation rates on labour income diminishes…
One possible solution to counter the erosion of Australia’s tax base – often espoused on MB – is to implement a broad-based land tax:
Economists find the taxation of land to be most efficient. It is not mobile, it is a relatively stable tax base and is not easily avoided.
Australia introduced land taxes in the late nineteenth century at the state level and in 1910 at the Federal level, largely as an efficiency drive to break-up large holdings with large tracts of unused land. It was abolished at the Federal level in 1952 as the base had narrowed significantly due to primary production and other concessions.
It has remained at a state level with a relatively narrow base. States rely on stamp duty for a significant portion of their revenue. These are considered to be highly inefficient taxes as they act as an impediment to the transfer of land to its most efficient user. Thus it inhibits people from downsizing when they no longer need a five bedroom house or selling in one place to move to another where the job prospects are greater. There have been significant calls for a switch from stamp duty to land tax in recent times…
Finally, KPMG argues that there will likely be increased user-charging and environmental taxes as a trade-off to lower personal and corporate taxes:
… there is likely to be a drive to user-charges as a source of revenue rather than through taxation. Congestion charging based on mass-location-time-distance using GPS technology is a major example of this. This is a highly efficient form of raising revenue and, to the extent that it is effective in changing people’s behavior, can lead to a reduced need for infrastructure expenditure.
Singapore presents an interesting comparison to Australia. It has low corporate taxes, personal income taxes and indirect taxes compared to Australia. But nearly half, 48 percent, of its revenue base is in the form of user-charges outside the three traditional tax bases. For Australia the equivalent amount is about 3 percent.
Moving to a system of greater user charges will not be without its political challenges, but technology may assist in ensuring that such charges are
efficiently collected.The second area of increased taxation is likely to focus on the environment… it is likely that we will see either direct carbon taxation, or indirect taxation through an emissions trading scheme or the use of renewable energy targets.
