Taxing digital business in Australia – Treasury discussion paper to be issued

In the 8 May 2018 Budget, the Treasurer, foreshadowed action on the digital economy. He said that “we need to do more” – referring to the Government’s crackdowns on multinationals (including the MAAL), which have prompted Multi-nationals to book and additional $7 billion a year in sales in Australia (but have resulted in way less than that amount, in extra tax revenue). The Multi-Lateral Anti-avoidance Legislation (MAAL) deems a permanent establishment to exist (in Australia), where companies have structured around this (s177DA of the ITAA36)

Over the past year, he said he has been working with counterparts at the G20 to bring the digital economy into the global tax net. “In a few weeks’ time”, the Treasurer said he will release a discussion paper that will explore options for taxing digital business in Australia.

This was after reiterating the Government’s already announced measures re:

• changing the tax treatment of stapled securities (announced on 27 March 2018); and
• further tightening of the thin cap rules, Mr Morrison said “the next big challenge is to ensure big multinational digital and tech companies pay their fair share of tax”.

Comment

Taxing the digital economy remains a difficult and contentious issue. In a recent address, the Treasurer said “we are seeing a big part of our tax base being ripped out of our country by the business models of global digital and social media companies”. He said the international tax system was simply designed for a different time and a different economy. This is increasingly acknowledged by the companies themselves, with Mr Morrison saying that at a recent meeting he had with several digital companies such as Google and Amazon, there was an understanding that the current system that has benefited them greatly is simply not sustainable, nor palatable to the public.

At the March G20 meeting of finance ministers in Buenos Aires, there was a deep understanding of the need to work collaboratively, not just with each other, but with the architects of the new economy, the Treasurer said. “We need their involvement to ensure our tax and regulatory systems are calibrated for the new economy.” Mr Morrison said there are some big decisions being made in this area and Australia continues to work with other countries.

Perhaps the Treasurer was taking his lead from what has been happening in Europe. Europe has been taking a lead in measures to tax the digital economy. In March this year, the European Commission proposed to introduce a digital services tax aimed at addressing the tax challenges of the digital economy in the European Union. Companies such as Google and Facebook would clearly be impacted.

The Commission said the current EU tax rules were not designed for the recent boom in global digital business that have little or no physical presence. According to the Commission, lucrative profits made through selling user-generated data and content are not captured by the current tax rules. With 9 of the world’s top 20 companies by market capitalisation now digital, the Commission said the challenge is to ensure digital companies contribute their fair share of tax. The Commission has put forward a more coordinated approach involving 2 distinct legislative proposals:

• Reform to corporate tax rules (long-term solution) – significant digital presence – EU Member States would be able to tax profits that are generated in their territory, even if a company does not have a physical presence there. Profits would be registered and taxed where businesses have significant interaction with users through digital channels. It would apply to a taxable “digital presence” (or a virtual permanent establishment) in a Member State if it fulfils one of the following criteria:
  • it exceeds a threshold of €7 million in annual revenues in a Member State;
  • it has more than 100,000 users in a Member State in a taxable year; or
  • over 3,000 business contracts for digital services are created between the company and business users in a taxable year.
• Digital services tax (interim solution) – the proposal is for an interim digital tax (say 3%) to cover the main digital activities that currently escape tax altogether in the EU. This interim tax would apply to revenues created from activities where users play a major role in value creation, such as those revenues created from: (i) selling online advertising space; (ii) digital intermediary activities (which allow users to interact with other users and which can facilitate the sale of goods and services between them); or (iii) the sale of data generated from user-provided information.

FJM 29.6.18

[TT site: Related Digital Tax article]

Study questions (answers available)

1. Did the Treasure fore shadow release of a discussion paper taxing ‘digital business’ in Australia?
2. Does this initiative involve working with the G20?
3. Does he say that Australia will wait for the G20 to formulate a plan, before Australia announces any measures?
4. Has the MAAL brought in much tax revenue?
5. Did the Treasurer the announced measures of changing the tax treatment of stapled structures and changes to the ‘thin capitalisation’ provisions?
6. Is the ‘long term’ solution, which the EU is contemplating, allowing member states to tax profits from a ‘digital presence’ in if it exceeds a threshold of annual sales in the member state, or similarly exceeds a threshold of users or exceeds a threshold of business contracts?
7. Is the EU’S interim solution to allow member states to levy tax on turnover on certain digital activities which currently escape tax altogether?
8. Have you read any of the ‘Related Digital Tax Article’?

[Answers: 1. yes; 2. yes; 3. no (only Working With G20); 4. no (but $7b Sales Brought In); 5. yes; 6. yes; 7. yes; 8. yes/no (only You Know)]