While the black economy is valued at approximately 30% of the country’s GDP, it is thought multinational’s transfer mis-pricing and general tax avoidance takes up the largest proportion of this figure.
In response to these concerns the Australian government has released draft laws to strengthen the transfer pricing legislation.
Sharif As-Saber, RMIT’s deputy head of the school of management, said such illicit practices were beyond control because of poor global governance and multinationals are prone to tax avoidance. He said mining companies “are given too much freedom and power because of their money”. Such large companies “are undermining the capacity of the state, they are challenging the authority of the government”.
However, tax practitioners in the country think transfer pricing has a branding issue. Lyndon James of PwC believes the Australian media may have got their facts wrong.
“Politically the government has a lot riding on delivering a budget surplus in 2013 and there are paranoiac concerns in Treasury that the tax collections from the new MRRT (mining resources tax) and companies generally will be well below expectations,” said James. “This is fuelling all kinds of scrutiny over the levels of tax being paid by the corporate sector and hence reports, like the one referred to, are getting a lot of airplay.”
The article blames MNCs for tax evasion but Paul Balkus of Ernst & Young said transfer pricing should not be confused with tax evasion which is where companies take advantage of legal loop-holes to reduce their tax purely for tax purposes. Transfer pricing is a fact of business for any company that transacts with a related entity.
“I have one client undergoing an APA application and they wanted to make absolutely sure the ATO was aware of their R&D credit, which was granted by a government body,” said Balkus. “They were concerned about a legitimate government concession.”
Balkus said that a global economy means there will inevitably be more competition between jurisdictions for tax revenue. Balkus also questioned the statistics, to which RMIT has not yet replied, saying that 30% is an incredibly high figure considering the university thinks the largest proportion of is a result of transfer pricing.
“30% of GDP is about A$300 billion ($309 billion) annually. That’s a huge amount considering the ATO has to be informed about all the big taxpayers. Taxpayers have to file all their returns etcetera. Is the ATO letting this money go? The ATO clearly has visibility because taxpayers have to declare who they are transacting with.”
But, more work needs to be done within the Australian Tax Office (ATO).
“In my personal experience with the ATO in audits and in public forums, more work and time is required to assist ATO officers in developing a more thorough and realistic appreciation of how global businesses operate and the risks and challenges they face,” said Jock McCormack of DLA Piper.
James does not dispute the concerns the Treasury and ATO will have over transfer pricing as a source for lost income.
“I have no doubt that separately both tax evasion and transfer pricing would be seen by Treasury officials and the ATO as tax leakage points. However, the article I read incorrectly merges the two topics suggesting that transfer pricing is tax evasion. Transfer pricing is not a dirty word and every multinational I have ever worked with has wanted to do the right thing with its transfer pricing -make sure it aligns with the arm's-length principle.”
The draft legislation is only a small step to rectifying Australia’s tax losses, however.
“We have only reviewed draft legislation reflecting Stage 1 of the proposed transfer pricing amendments in Australia and consider more work is required to progress this legislation into an acceptable form before it is introduced into the Australian parliament,” said McCormack.
As-Sabar doesn’t think this will be quick enough to stop tax leakage though.
“I think that all governments around the world are lagging behind and Australia definitely is not an exception. They are not capable of acting faster because it is a democratic process, legislation is a process. Business will do business as usual. They will not worry whether it is ethical.
