Australian Economics

[Willo]

I think people often have quite naive takes on paying tax.

If you invest 100 million in infrastructure and make 10 million in sales and have 5 million in operating costs and have a straight line depreciation of 5% you will pay no tax.

Cash wise you are still out of pocket 95 million.

Headline wise you look bad.

There will no doubt be some shenanigans going on with multinationals who will be incentivised to shift costs from low tax regions to high tax regions and vice versa with revenues.

This is where you see intercompany loan stuff with non market rates.

The focus should be on this kind of stuff. Zero tax isn’t a bad way to start to work out where to hunt.

I get what you’re saying, but I’m sure infrastructure builds, depreciation, etc are taken into account. But I doubt some companies have that investment though mate.
Facebook? Alphabet? Etc
The Australian taxpayer bailed Qantas out with a few $billion (again) during covid. Qantas went on to make a multi $billion profit since then. I’d expect tax to be paid as well as arrangements for the “loan” to be repaid. No wonder “Upgrade” Albo and the other pigs slurping at the taxpayer trough get looked after.

These international corporations need to pay their share. Not sic the ATO some PAYG person who claimed an extra $100 and needed auditing.

 

[RoarEmotion]

I get what you’re saying, but I’m sure infrastructure builds, depreciation, etc are taken into account. But I doubt some companies have that investment though mate.
Facebook? Alphabet? Etc
The Australian taxpayer bailed Qantas out with a few $billion (again) during covid. Qantas went on to make a multi $billion profit since then. I’d expect tax to be paid as well as arrangements for the “loan” to be repaid. No wonder “Upgrade” Albo and the other pigs slurping at the taxpayer trough get looked after.

These international corporations need to pay their share. Not sic the ATO some PAYG person who claimed an extra $100 and needed auditing.

Yep spot on. We don’t disagree mate.

Some of the headlines are so click baity though they would make Cornes cringe and suck 99% of people in.

Qantas is an absolute liberal leadership robbery of the Australian public. Government should have got shares in the company or at least got paid back.
If you look by country it was generally a subsidised loan.

Government Bailouts of Airlines in the COVID-19 Crisis: Improving Transparency in International Air Transport - PMC

Coronavirus disease 2019 (COVID-19) presents the airline industry with unprecedented challenges that constitute no less than an existential threat. Given airlines’ importance in the economy, which includes providing connectivity, preserving jobs, ...

pmc.ncbi.nlm.nih.gov

Nothing really to do with not paying tax though.

For the international streaming / social media companies I agree. The set up costs would be minimal - office and staff / potentially some local data centres? I imagine they push the licensing costs of the material to basically match the revenue and essentially use Australia as a dumping ground for those costs and take profits in Ireland or Singapore. Surely Australia can’t be all that profitable given its market size so is more than likely a tax play. But I have nfi having never worked in one. If the rules get tightened up though expect the service to cost more and stream as many ads as kayo/binge.

I guess I come from oil and gas where developing a well and a gas plant (or lol in the old days a refinery) can be multi billions. And at the end you typically have a liability (environmental remediation) and not something you can sell. That’s real capital that employs locals. It’s only fair a company gets to depreciate that. Again I’m sure bean counters may have funny games they play with that stuff too.

 

[Sintiger]

I think people often have quite naive takes on paying tax.

If you invest 100 million in infrastructure and make 10 million in sales and have 5 million in operating costs and have a straight line depreciation of 5% you will pay no tax.

Cash wise you are still out of pocket 95 million.

Headline wise you look bad.

There will no doubt be some shenanigans going on with multinationals who will be incentivised to shift costs from low tax regions to high tax regions and vice versa with revenues.

This is where you see intercompany loan stuff with non market rates.

The focus should be on this kind of stuff. Zero tax isn’t a bad way to start to work out where to hunt.

I worked overseas in finance with a MNC.

It’s about brand ownership and royalty payments to the brand owner, quite often in a tax haven. It’s about transfer pricing of goods and services from overseas affiliates with a lower tax rate, it’s about putting minimal capital in overseas subsidiaries and borrowing heavily in the local market (which also minimises risk to the balance sheet of currency fluctuations). There are other ways as well.

Australia has some rules that reduce some of these things. For instance I wonder if the tax stats includes withholding tax on royalties? We have thin capitalisation rules ensuring a minimum level of share capital. We have rules about assessing transfer pricing. However they aren’t enough imo.

I have said many times on this site and over the years that of Australia reduced the company tax rate we may well collect more tax because the incentive to profit shift away from Australia is reduced.

 

[RoarEmotion]

I have said many times on this site and over the years that of Australia reduced the company tax rate we may well collect more tax because the incentive to profit shift away from Australia is reduced.

Becomes a global race to the bottom though.

Don’t disagree though - where you aren’t sure follow self interest. If the gap is large folks will try and collect or you create an illegal version of the same industry (see tobacco in aus now and prohibition era peaky blinders)

Effectively you want a global corporate tax rate. Obviously that will never happen.

Who is the Delaware of countries etc.

 

[Sintiger]

Becomes a global race to the bottom though.

Don’t disagree though - where you aren’t sure follow self interest. If the gap is large folks will try and collect or you create an illegal version of the same industry (see tobacco in aus now and prohibition era peaky blinders)

Effectively you want a global corporate tax rate. Obviously that will never happen.

Who is the Delaware of countries etc.

There is no easy answer of course. I would like to see more indirect taxes like a higher GST rate and a lower company tax rate matched with lower PAYG income taxes. Obviously some other elements/payments would need to be introduced to protect lower income earners, like means tested increases in child care subsidies as an example.
30 % company tax rate is too high to avoid MNCs wanting to move income to other places.

 

[Baloo]

Becomes a global race to the bottom though..
.
.

Effectively you want a global corporate tax rate. Obviously that will never happen.

The proposed OECD Minimum Tax Rule will go some way to stopping companies shipping profits to low corporate taxing countries. But that minimum tax threshold is 15%.

https://www.weforum.org/stories/2024/02/oecd-minimum-tax-rate/

 

[mrposhman]

I worked overseas in finance with a MNC.

It’s about brand ownership and royalty payments to the brand owner, quite often in a tax haven. It’s about transfer pricing of goods and services from overseas affiliates with a lower tax rate, it’s about putting minimal capital in overseas subsidiaries and borrowing heavily in the local market (which also minimises risk to the balance sheet of currency fluctuations). There are other ways as well.

Australia has some rules that reduce some of these things. For instance I wonder if the tax stats includes withholding tax on royalties? We have thin capitalisation rules ensuring a minimum level of share capital. We have rules about assessing transfer pricing. However they aren’t enough imo.

I have said many times on this site and over the years that of Australia reduced the company tax rate we may well collect more tax because the incentive to profit shift away from Australia is reduced.

Correct.

Withholding from royalties paid to foreign residents | Australian Taxation Office

If you pay royalties to a foreign resident, the amount paid is subject to a final withholding tax.

www.ato.gov.au

Australia does charge withholding tax on royalty payments to foreign residents (includes companies) but there rates vary. For example, a lot of those MNC's like Alphabet etc are resident in Ireland, where the withholding tax rate is 15% instead of the standard 30%.

Even allowing for that, as you say, most of the "cost" of this region, will be charged back by the overseas entity for things like brand ownership and trademark usage where there is no withholding tax as essentially its a licence payment to the licencee. They will all be setup like this, where the host overseas entity owns the naming rights of facebook / instagram etc, and then charge every jurisdiction a licence fee to use the service. I would hazard a guess this licence fee would be quite high in order to restrict profits in those countries. It would be very difficult for any tax agency to be able to disprove the value of those trade names.

The other thing they will chargeback, will be again what you mention in transfer pricing. They will have support centres in low cost regions of the world, who will charge a fee to each country to support them, ie. if we have support in Manila for facebook etc, then they will charge us a cost to utilise that service.

All of the above are tax deductible and devised in the right way will minimise tax liabilities in most countries, other than those that have lower tax regimes.

I'm not sure what countries can do, other than make these sort of payments non-tax deductible, or maybe have them seperated at use a different tac liability calculation for them.

Ie. Maybe something like.

Revenue is $1bn
Trademarks = $0.5m
Transfer Pricing = $0.5m

Maybe Transfer pricing for example, can only utilise 50% of the cost of the transfer pricing costs as being tax deductible.

In above example, this would lead to $250m as taxable income. MNC's wouldn't be able to immediately change their model and increase transfer pricing rates as its obvious that you were playing the game, if your transfer pricing rate went from 100 to 200 for example. but they would creep up over time.

 

[Baloo]

The current tax policy also impacts jobs and careers as well. I am not sure of the exact laws or rulings, but my understanding is If an Australian subsidiary of an MNC starts to employee Regional or Global roles in Australia, the subsidiary's tax obligations can be challenged by the ATO to include overseas revenue/profits.

I've worked in MNCs for most of my working life and I can't think of one that had a major regional or global role located in Australia. Singapore seems to be the regional base, or Hong Kong.

 

[Sintiger]

Correct.

Withholding from royalties paid to foreign residents | Australian Taxation Office

If you pay royalties to a foreign resident, the amount paid is subject to a final withholding tax.

www.ato.gov.au

Australia does charge withholding tax on royalty payments to foreign residents (includes companies) but there rates vary. For example, a lot of those MNC's like Alphabet etc are resident in Ireland, where the withholding tax rate is 15% instead of the standard 30%.

Even allowing for that, as you say, most of the "cost" of this region, will be charged back by the overseas entity for things like brand ownership and trademark usage where there is no withholding tax as essentially its a licence payment to the licencee. They will all be setup like this, where the host overseas entity owns the naming rights of facebook / instagram etc, and then charge every jurisdiction a licence fee to use the service. I would hazard a guess this licence fee would be quite high in order to restrict profits in those countries. It would be very difficult for any tax agency to be able to disprove the value of those trade names.

The other thing they will chargeback, will be again what you mention in transfer pricing. They will have support centres in low cost regions of the world, who will charge a fee to each country to support them, ie. if we have support in Manila for facebook etc, then they will charge us a cost to utilise that service.

All of the above are tax deductible and devised in the right way will minimise tax liabilities in most countries, other than those that have lower tax regimes.

I'm not sure what countries can do, other than make these sort of payments non-tax deductible, or maybe have them seperated at use a different tac liability calculation for them.

Ie. Maybe something like.

Revenue is $1bn
Trademarks = $0.5m
Transfer Pricing = $0.5m

Maybe Transfer pricing for example, can only utilise 50% of the cost of the transfer pricing costs as being tax deductible.

In above example, this would lead to $250m as taxable income. MNC's wouldn't be able to immediately change their model and increase transfer pricing rates as its obvious that you were playing the game, if your transfer pricing rate went from 100 to 200 for example. but they would creep up over time.

Good stuff Mr P

On WHT i was wondering whether when the ATO quotes tax paid by foreign MNCs whether it includes WHT paid? It may not but of course they pay lots of taxes in Australia apart from company tax that aren’t included in the stats like GST and state based taxes like payroll tax.

 

[Sintiger]

The current tax policy also impacts jobs and careers as well. I am no sure of the exact laws or rulings, but my understanding is If an Australian of an MNC starts to employee Regional or Global roles in Australia, the subsidiary's tax obligations can be challenged by the ATO to include overseas revenue/profits.

I've worked in MNC for most of my working life and I can't think of one that had a major regional or global role located in Australia. Singapore seems to be the regional base, or Hong Kong.

Years ago I worked for a company that had its Asia pacific regional office for one division in Sydney. I was working in Singapore so I actually facilitated their move to there for all the reasons mentioned.

Most of the work was done in Sydney still but the “ head office” was in Singapore of which I was a part I am slightly embarrassed to say now !!

 

[RoarEmotion]

When I worked in ExxonMobil everything to do with commercial stuff (which was a heritage Mobil set up) got moved from melb to Singapore in early 2000s.

Cheaper wages and I guess the commercial trading profits go to Singapore which I think had 10% company tax rate. All legit but to the point above shifts revenue and jobs to a different country. In this case the work shifted there too and plenty of Melbourne redundancies which were usually well received from those 35 year into their career on defined benefit super programs.

Some real experts here. Interesting reading.

None of this creates any value in a real world sense (just shifts it IMO) Lots of jobs for government bureaucracy, accountants and lawyers.

 

[Baloo]

Cheaper wages

Not anymore. Singapore is struggling to retain its reputation as an ideal regional/global hub. The corporate entity might be domiciled in Singapore, but a lot of the jobs are moving to other locations. It's also one of the signatories to the OECD minimum tax proposal which will remove some of Singapore's advantages.

 

[Sintiger]

Not anymore. Singapore is struggling to retain its reputation as an ideal regional/global hub. The corporate entity might be domiciled in Singapore, but a lot of the jobs are moving to other locations. It's also one of the signatories to the OECD minimum tax proposal which will remove some of Singapore's advantages.

We moved a factory out of Singapore to Johor Bahru years ago for wage cost reasons. It’s got far worse since then.

 

[mrposhman]

Not anymore. Singapore is struggling to retain its reputation as an ideal regional/global hub. The corporate entity might be domiciled in Singapore, but a lot of the jobs are moving to other locations. It's also one of the signatories to the OECD minimum tax proposal which will remove some of Singapore's advantages.

This is right, even previous low cost hubs like Prague have had significant changes to labour rates. The company I work for has regional processing hubs in Prague, Manila and in India. The likelihood is we will move from Prague at some stage, its just not cheap anymore. The same will occur at some stage with Manila and with various Indian cities and these hubs of processing activity will then shift to the next low cost environment.

 

[mrposhman]

Good stuff Mr P

On WHT i was wondering whether when the ATO quotes tax paid by foreign MNCs whether it includes WHT paid? It may not but of course they pay lots of taxes in Australia apart from company tax that aren’t included in the stats like GST and state based taxes like payroll tax.

The other thing I wasn't sure taken onto that table were whether it was just purely corporate tax paid or included royalties, especially for the mining / oil and gas companies, as those contributions to the states are significant.

 

[Baloo]

We need a PwC Tax Partner on this thread. I'm sure they can give us a quick run down on the loopholes MNCs can use effectively.

 

[Sintiger]

When I worked in ExxonMobil everything to do with commercial stuff (which was a heritage Mobil set up) got moved from melb to Singapore in early 2000s.

Cheaper wages and I guess the commercial trading profits go to Singapore which I think had 10% company tax rate. All legit but to the point above shifts revenue and jobs to a different country. In this case the work shifted there too and plenty of Melbourne redundancies which were usually well received from those 35 year into their career on defined benefit super programs.

Some real experts here. Interesting reading.

None of this creates any value in a real world sense (just shifts it IMO) Lots of jobs for government bureaucracy, accountants and lawyers.

Exxon Mobil had its oil trading in Singapore when I was there, I knew a couple of the traders. They were high up on the “nerd” scale !! I also knew a couple of people involved in their plastics side, I think they built a massive plant in the 1990s?

You are right about not adding real value, lawyers and accountants paradise this stuff. A bit like investment bankers! (Apologies to any investment bankers)

 

[Sintiger]

We need a PwC Tax Partner on this thread. I'm sure they can give us a quick run down on the loopholes MNCs can use effectively.

If they don’t they just go to a treasury briefing and email it out to all their clients later

 

[Willo]

We need a PwC Tax Partner on this thread. I'm sure they can give us a quick run down on the loopholes MNCs can use effectively.

If they don’t they just go to a treasury briefing and email it out to all their clients later

You blokes were way ahead of them

AFP officers raid PwC Sydney office as part of tax leaks probe — The Australian

AFP officers will sift through documents and computers at PwC’s Sydney office in an escalation of its investigation into the audit and consulting giant’s Treasury disclosure probe.

apple.news