Unfortunate facts for those who want more tax from multinationals

I once worked for one of these multinationals. It was a US Company with a direct investment in Australia. The US company charged the Australian subsidiary management fees for head office costs, legal, finance…

We were subject to a transfer pricing review by the ATO and at the same time the IRS in the US subjected the US parent to a transfer pricing review. The ATO initially indicated they were of the opinion the management fees were too high for the services provided and so would consider denying deductions. Two months later the IRS indicated the management fees were too low and they would be considering substantially increasing the taxable income of the US entity.

In the end we had to get the ATO and the IRS officials on the same phone call and remind them that in their desire to collect taxes they had to remember that in international transactions, every additional dollar of tax one country collects, due to the various international tax agreements, is one less dollar collected in the other country. Both finally agreed that the management fess were appropriate (months and months and months later…).

With our wonderful politicians and media outlet screaming for more tax from multinationals they need to learn the same lesson.

The US Treasury’s top international tax official, Robert Stack, is also concerned about Australia forming an alliance with Britain and lining up US digital companies to be slugged with a so-called Google tax. The mooted changes would divert to Australia money that was potentially in line for US government coffers, triggering a cross-country fight over taxing rights… “We understand that governments are under enormous pressure to raise revenue and it must be tempting to target non-residents,” Mr Stack said in an interview with The Australian Financial Review in his Washington office. “However, we hope and expect that all companies, including US companies, will be treated fairly and in accordance with international norms of taxation.”

Let me explain it by looking at a multinational’s presence in Australia, my favourite example company, Banana IT.

The IP in the Banana products is owned by Banana US. It licences the right to use this to Banana Singapore (Owned by Banana US) with the rights to sell the product in South East Asia. Banana Singapore pay Banana US a fee for this right. Banana Singapore makes the products (by contracting third parties in China) and sells them to Banana Australia (Owned indirectly by Banana US) at an arms length wholesaler price (as required by international tax agreements). Banana Australia sells the product and makes a retailers profit.

The reason they chose Singapore for the South East Asia hub is the low company tax rate.

Now the Australian Government wants to get more tax in Australia on this supply chain. This is done by increasing the profit in Australia, thereby decreasing the profit in Singapore, meaning less tax in Singapore and more in Australia (Singapore not happy).

But remember, when Banana US is in a bit of financial trouble or wants to make a big acquisition it calls in all of its profits in subsidiaries and dividends get paid back to the US. Banana US has to pay tax on these dividends less the tax already paid in Australia, Singapore… So for every additional dollar of tax paid in Australia is a dollar less tax paid in the US in the future.

If I was the US Treasury, with a $17 Trillion deficit, I would not be happy with Australia claiming taking my future tax revenues from US companies…


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