THE GREAT INTERNATIONAL TAX DODGE

MY TWO CENTS WORTH (WHICH WILL SHORTLY BE SENT OFFSHORE)

We all know that Uber, Google, Facebook and the like all pay bugger income tax in Australia.  The first question is...how?  I'll keep this simple, because even though it is hidden behind a veil of complex structure and offshore tax havens, at it's heart it can be drawn up on the back of a napkin.

Everybody, be it a salary earner or a Mornington Peninsula based small business or a corporate multinational, earn an income and are entitled to deduct the costs of earning that income.  The difference between what you earn and what you deduct is taxed at the applicable rate.

Where multinationals differ to the rest of us, is that they have a head office in place like Ireland or the Cayman Islands or another low taxing country. This head office serves as the hub for the multinational.  This hub then "charges"a fee to the companies set up in places like the higher taxing Australia.  These fees are called things like royalties or marketing services, a charge levied to use the hub's services.

This fee is treated as an expense in Australia, and deducted against the Australian income, leaving less avalable to be taxed in Australia. Simple!

Of course, it is hidden far better than this (eg interest on loans from the Irish company to the Australian one, treating online sales in Australia as being exported from the Cayman Islands etc), but at its heart, suspicious costs are applied to the businesses in the higher taxing nationalities by the businesses from the lower taxing nationalities.

And this happens because it's great not only for the multinational, but also for the country in which they are based. Sure they might only charge 15% comany tax instead of Australia's 30%, but it's 15% on a whole lot more profits than would otherwise be the case!  And besides, the "hub" creates jobs and brings in tax paying employees.  

It needs to be remembered that Australia does have some wins on this front.  Rio Tinto can extract coal from mines it owns in Canada, put them on a ship and deliver them straight to China, yet pays tax in Australia for the profits on that transaction, without a single Aussie being involved.

But clearly it is unfair.  And you know what, it is also illegal.  I'm loathe to bore you by quoting excepts of tax law, but there are provisions to apply penalties to businesses (and individuals) that have entered into transactions where the sole or dominant purpose of the transaction is to obtain a tax benefit.  Sorry, but paying a massive royalty to a conveniently located head office would seem to me to meet that criteria.  Paying 12% interest on a loan the same head company, when fnance can be obtained for half that in Australia sounds like an attempt to get a tax benefit to me.

Next week, part two: Why the Hell don't we do something about it!!