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Here is an international tax update.
International Tax Update
What tax issues is the world grappling with? In this episode Bob Deutsch, Senior Tax Counsel of The Tax Institute, walks you through the top 3 issues.
Here is what we learned. But please listen in as Bob Deutsch explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
International Tax Update
The three most pressing issues when it comes to international tax are transfer pricing, MLI and digital services tax.
Transfer Pricing
The legislation around transfer pricing is complex. Trying to comply is fraught with danger. Transfer pricing agreements are time consuming and tedious. You usually need external help to get you to the point in which you have a secure agreement with revenue authorities.
Transfer pricing is an acute problem for medium size enterprises with a revenue of A$30m+ expanding offshore. They usually don’t have a dedicated tax department to deal with transfer pricing issue. And experienced specialist are expensive. And so their internal finance staff tries to deal with the issue, often making expensive mistakes.
The big enterprises on the other hand have dedicated tax departments that can handle transfer pricing issues either on their own or in consultation with external specialists.
Multi Lateral Instrument
The multi-lateral instrument (MLI) tries to modify the over 2,000 double tax agreements globally in place to achieve some consistency across the globe. Working out how the MLI affects international business transactions is a complex matter that advisers are still coming to terms with.
The MLI is so complex because it tries to plug the holes we in Australia – just like many other countries – left in our basic source rules. So we should go back and start again. Get the source rules right. The source rules should ensure that income from economic activity in Australia is actually taxed in Australia and not somewhere else.
At the moment those basic common law source rules do not work effectively. All these other measures are designed to correct that defective working of the basic source rules. We need to fix the basic source rules and then we don’t need so many of these band aids to fix these underlying problems.
Digital Services Tax
The digital services tax is an idea that links to the OECD’s initiative for a global minimum tax. The UK and France are at the forefront of this initiative while other countries watch with interest from a safe distance.
A digital services tax would tax digital services in the jurisdiction where they are performed. Such a tax would very much affect US tax revenue. Think o Google, Facebook and Amazon as examples. At the moment their global revenues come back to the US with little or no foreign tax credits attached. And so the US gets to fully tax this income.
A digital services tax would change all this. The effect would be that tax paid in France or the United Kingdom would then give rise to foreign tax credits in the US, which would reduce the tax payable in the US.
And so the US of course is up in arms against it. Donald Trump has indicated that if France or the UK proceed with the digital services tax, he will impose tariffs.
Corporate Residency
Corporate residency is not an international tax issue. It is rather an issue we need to sort out in Australia but that will affect international business into or out of Australia.
The board of taxation currently examines this issue. One of possible proposal is to use a place of incorporation test to determine corporate residency.
Not Just The Big End of Town
International tax very much affects the big end of town, but not solely. When an enterprise grows from small to medium – from $10m to $15m revenues upwards – they usually start to expand offshore, often starting in New Zealand and then further afield. And these business already have significant international tax issues.
Summary
Transfer pricing, digital services tax and coming to grips with the multilateral instruments are the three big issues at the moment. They are not the only ones in the international scene but they are certainly the three biggest ones. But these things have the habit of changing and what is today’s topic is not necessarily tomorrow’s.
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Foreign Investment Review Board
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 17 March 2021
Tax Talks spoke to Bob Deutsch - Senior Tax Counsel at The Tax Institute - for more details.
