The recent announcement by the UK's Chancellor of the Exchequer George Osborne of a new levy on companies seeking to avoid income tax is firming up as a sign of what's to come for many jurisdictions around the world, including Australia. The business community is watching developments with increasing interest.
In his Autumn Statement Mr Osborne announced that the UK government would introduce a Diverted Profits Tax (DPT) 'to counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK.'
The DPT, or 'Google Tax' as it has become known, will be applied at the rate of 25% on diverted profits from 1 April 2015.
While there have been many in the community imploring countries to find a universal solution to base erosion and profit shifting (BEPS), one of the risks to such an outcome is countries seeking to 'go it alone' in an effort to protect their revenue bases in the meantime.
The UK's decision to take the proposed action in lieu of waiting for a so-called universal solution through the G20 and the OECD is understandable of course. In the global economy, competitiveness - including tax competitiveness - is the name-of-the-game and many jurisdictions are playing. Against this background, many would also argue that a universal solution to BEPS is little more than a pipe-dream.
We know that the Australian Treasurer Joe Hockey has been closely monitoring the developments in the UK and that identifying new sources of revenue is a priority for his Government. Consequently there is increasing speculation that Mr Hockey and Prime Minister Tony Abbott will announce a new revenue raising initiative targeted at multi-national tech companies prior to Christmas.
What is attracting the interest of Australia and other jurisdictions is that the UK DPT is expected to raise some 1.3 billion euro in revenue over the next five years. It is interesting to note that the UK only some twelve months ago introduced for the first time a general tax anti-avoidance provision which they do not seem to want to rely on in this instance.
Questions of how the new UK tax will actually operate remain. For example, how will diverted profits be calculated? And will the tax be able to be collected, particularly if the company involved does not have a domestic address? And will it lead to double taxation of profits?
Businesses and their legal advisers will also be pouring over the details to determine if the DPT is valid under the constitution, amongst other things. Some of the initial reaction in the UK has focused on the potential of the DPT to undermine global efforts to overhaul tax rules. John Cridland from the Confederation of British Industry has observed "the legislation will be complex to apply, and if other countries follow suit businesses will have a patchwork of uncoordinated unilateral rules to navigate."
As I have commented in a previous Huffington Post piece, there is a real challenge for policy makers to find the acceptable middle ground between companies who on the one hand have an obligation to pay their share of tax, but an understandable interest in making that share as small as possible, and governments who want a bigger slice.
I have also long maintained that it is incumbent upon us all to continue a calm, rational conversation about the best overall tax mix - for Australia and for all nations.
The G20 and the great work undertaken by the team at the OECD on BEPS has clearly articulated the problems and the many challenges revenue authorities and governments face. While universal solutions to many of the problems will still be sought, now that Australia's hosting of the G20 has put BEPS firmly in the minds of governments around the world, we expect to see many more countries resorting to taking unilateral action in the future.
Alex Malley is chief executive of CPA Australia