Budgets are a matter of light and shade. You have to get the balance right. And so having spent the weekend talking about its wonderful childcare plans, yesterday the Government paraded Treasurer Joe Hockey in front of cameras toformally announce some of the budget’s so-called “tax integrity measures”.
Yes, tax integrity measures. Treasury’s spinners would have worked hard on that little catchphrase. Funny how measures to strengthen the integrity of a tax system always seem to deliver more tax to the government.
First, the Government plans to adjust anti-avoidance laws to crack down on multinationals shifting their profits to lower taxing jurisdictions. Second, the Government is going to introduce a Netflix tax – that is, try to impose the GST on digital downloads like books, music, videos and so on.
These two are linked, and in an important way that perhaps even Hockey does not realise. Analogue tax system, meet digital world.
Let’s start with profit shifting. I’ve tackled the claims that multinationals are evading taxation by shifting their profits across borders on The Drum before. Long story short: it’s a beat up. But the Government wants a budget that sounds fair and nothing sounds fairer than beating up on big companies. The corporate tax is a diffuse and confusing tax. It’s designed that way.
We are told Australian Taxation Officers have been “embedded” in 30 different multinational companies. We’re not told which companies. And at the press conference yesterday the treasurer didn’t want to tell us how much revenue the new anti-avoidance measures might raise. “It’s billions of dollars, obviously.”
This should be a red flag. It’s true that Treasury doesn’t have a good track record for estimating how much money new taxes will raise – recall the embarrassingly low take from the mining tax. But this looks less like prudence and more like a lack of confidence. Running a media or political campaign against corporate tax avoidance is easy. Trying to reverse engineer the tax accounting of the world’s biggest firms is hard.
The Government’s crackdown has a certain Sisyphean quality. In a world where much value is tied up in intangible intellectual property, it is borderline nonsensical for politicians to command that economic activity occurs in this jurisdiction or that jurisdiction.
It used to be the case that big firms had capital assets you could see and touch. Factories, vehicles, equipment, land. What mattered to firms were things like location, infrastructure, access to markets, the price and skills of the labour force and so on. But now the assets of the biggest firms can be placed anywhere in the world instantaneously. So they tend to be clustered in low tax jurisdictions with established and reliable legal systems. Like Ireland and Singapore.
What isn’t obvious is why this is a bad thing. Yes, higher tax countries like Australia would prefer that firms book their intellectual property here so Treasury could skim some cash off the top. But treating big firms to a publicity focused “crackdown” only harms what we should be trying to improve: the Australian investment environment. Firms should want to put their assets here. Implicitly, the Government’s profit shifting claims suggest they do not.
There is almost exactly the same issue with the Netflix tax. Once again, the Government is trying to shoehorn a national tax better suited for an analogue era into the age of digital globalisation.
“It is plainly unfair that a supplier of digital products into Australia is not charging the GST whilst someone locally has to charge the GST,” Hockey said at the press conference on Monday.
But why? The GST is a tax that the Australian government has chosen to place on Australian businesses. If there is an unfairness here it is an unfairness imposed by the government when it chose to introduce the GST. It is not “unfair” that other countries do not charge the Australian GST.
When we import goods from other countries – real or intangible – they are priced free of the burden of the many taxes and regulatory costs imposed by the Australian government. This does not make international trade unfair. In fact, all those institutional, regulatory and geographic differences between different trading partners are why international trade is so beneficial.
And – as with the profit shifting debate – the Government’s rhetoric is running far ahead of its capabilities. It is absolute fantasy that Hockey and the Australian Treasury will be able to impose our taxes on international digital goods providers in any meaningful way.
Yes, they might be able to convince a few of the big firms to play ball. But many already are playing ball. Apple, for instance, already charges GST. Those online firms with no Australian base and few Australian interests are unlikely to sign up to this new impost. What’s the Government going to do? Censor them?
It was reported last week that the Abbott Government has scotched many of the tax increases on the table in order to free itself to attack Bill Shorten for wanting to increase tax. That’s good, as far as it goes.
But it would be better if they opposed tax increases because they find increasing tax inherently objectionable.
Ultimately, the tax “integrity measures” announced yesterday have to be seen in the context of a Government that thinks the only viable way back to surplus is more revenue.