THE BLOG

Global Tax Reform: Solution Lies in Working Together, Unilaterally

07/05/2015 17:27 BST | Updated 06/05/2016 10:59 BST

As we all continue to adjust to the realities of the digital, interconnected global economy, one of the more perplexing challenges relates to the mobility of corporate capital.

This is all about the ability of multinational entities to move funds across national boundaries in search of higher returns. Despite these companies not necessarily breaking any laws, many argue that they are in effect taking money from certain jurisdictions in which they operate and are not paying their 'fair share' of tax.

You may recall just a few years ago protests by activist groups such as Uncut UK who arranged 45 sit-ins in Starbucks stores across the country after the company announced it had amassed GBP3 billion in sales over the past 14 years but had made a loss over all of those - thereby avoiding paying UK taxes.

It's all very emotive. The chase for so-called 'diverted profits' is perfect fodder for talkback radio and is front page news: in Britain with the introduction of a brand new 'Google tax' and in Australia too.

Base erosion and profit shifting - BEPS - was one of the main topics of discussion at the recent G-20 leaders conference in Brisbane, Australia and it remains a key issue for which the OECD is trying to develop a global solution.

The problem with multilateralism is that you have leaders of multiple countries trying to create pain in their own electorates for the greater good. It takes forever, and chances of success are slim, particularly when the re-election prospects of those leaders are factored in.

Consequently we have seen individual countries trying to address the issue unilaterally and on their own terms. And rightly so. A fact that is often lost on many commentators is that each country, be it the UK, Australia or the United States, all have tax sovereignty. Put simply, each country is responsible for developing and enforcing the tax laws in their own country. What this means is that each country has the right to tax how it sees fit, so creating the opportunity for a multinational to establish its operations and 'profit shift' to a lower tax jurisdictions.

If you think about it at a personal level we have all done it. Many will recall that it used to be almost a rite of passage before the EU existed to hop over to Calais on the ferry to stock up on 'cheap' alcohol. This is exactly what the multinationals are doing, just in a much more complex and significant way.

With the introduction of the Diverted profits Tax (DPT), the UK is leading the way to address this issue. The reasoning behind the new policy is that a company should pay tax where and when a profit is earned. For example, under the DPT if you buy your coffee at Starbucks and the company makes a profit on that sale, then the tax should be paid to the UK. If not at the standard corporate rate of 21 per cent, then at the DPT rate of 25 per cent.

Unfortunately when it comes to tax, especially international tax, politicians are involved which is when simplicity quickly becomes complexity.

Take for example what has been happening in Australia. Over recent months our Government has talked up the case for a UK-style 'Google tax' and is now talking about forming an alliance with the UK on international tax issues, with lots of work to be done together after the General Election. That all sounds very reasonable. Where it gets interesting is that the US has now come out to publicly warn Australia not to follow the example of the UK - why? Basically because if we do, it will potentially mean less money flowing back to US-owned companies, such as Google.

As Sir Isaac Newton postulated, for every action there is an equal and opposite reaction. It's as true in physics as it is in international taxation.

It will be interesting to see what happens as we move forward, because this is just the first in what I am sure will be a range of issues that will continue to arise as technology enables companies, and individuals, to act and behave in truly global ways. What this will all mean for governments and their ability to tax and pay for vital services such as education, health care and pensions remains to be seen.

Alex Malley is chief executive of CPA Australia