Budget 2018: Crackdown on R&D and tech taxation

The Australian government has used its 2018-19 Budget to announce a crackdown on research and development (R&D) tax incentives, as well as ensuring multinational technology companies are paying taxes in Australia.

"We are cracking down to ensure that R&D tax incentives are used for their proper purpose, with enhanced integrity, enforcement, and transparency arrangements, saving taxpayers AU$2 billion over the next four years," Australian Treasurer Scott Morrison said in his Budget speech on Tuesday night.

"Our crackdowns on multinationals have already brought around AU$7 billion a year in sales revenue by multinationals into our tax net. But we need to do more.

"To support companies genuinely investing in R&D, we are refocusing the R&D tax incentive to give more support to companies that invest a higher proportion of what they spend in R&D, over and above what others would just do anyway."

According to the government, it will use the findings of its 2016 review of the R&D tax incentive to reform the program, "sharpening its focus on additional eligible business R&D while ensuring its ongoing fiscal affordability" including greater transparency.

"The 2016 review of the R&DTI found that the program is failing to meet its objectives of encouraging additional R&D and generating the associated flow-on benefits (spillovers) for the Australian economy," the Budget papers explained.

"In response, from 1 July 2018, the government will better target the R&DTI through a new R&D premium for companies with turnover of AU$20 million or more. This will ensure support for larger companies is directed towards those companies undertaking additional, high-intensity business R&D."

Therefore, for companies with an aggregated annual turnover of AU$20 million and above, the marginal R&D premium will be the company's tax rate plus 4 percentage points for R&D expenditure between 0 percent to 2 percent R&D intensity; 6.5 percentage points for R&D expenditure above 2 percent to 5 percent R&D intensity; 9 percentage points for R&D expenditure above 5 percent to 10 percent R&D intensity; and 12.5 percentage points for R&D expenditure above 10 percent R&D intensity.

The maximum R&D expenditure eligible for tax offsets will be increased from AU$100 million to AU$150 million per year, although expenditure on clinical trials will not count towards the cap.

For companies with an aggregated annual turnover of less than AU$20 million, the refundable R&D offset will be 13.5 percentage points above a claimant's company tax rate, capped at AU$4 million each year.

Compliance and administrative improvements to the R&D tax incentive program, meanwhile, will see the Australian Taxation Office and Department of Industry, Innovation and Science undertake "greater enforcement activity and provide improved program guidance to participants"

"Other changes include improving the transparency of the program by enabling the ATO to publicly disclose claimant details and the R&D expenditure they have claimed, limits on time extensions to complete R&D registrations, and amendments to technical provisions (such as the feedstock and clawback rules and the general anti-avoidance rules)," the Budget papers explained.

"The measure is estimated to have a net gain to the budget of AU$2.4 billion in fiscal balance terms over the forward estimates period. In underlying cash terms, the net gain to the budget is AU$2 billion over the forward estimates period."

Taxing tech companies

"The next big challenge is to ensure big multinational digital and tech companies pay their fair share of tax," Morrison said on Tuesday.

"Over the past year, I have been working with counterparts at the G20 to bring the digital economy into the global tax net. In a few weeks' time I will release a discussion paper that will explore options for taxing digital business in Australia."

According to the government, it has used its Diverted Profits Tax (DPT), Multinational Anti-Avoidance Law (MAAL), and Tax Avoidance Taskforce to raise around AU$5.2 billion in tax liabilities from large companies since July 2016.

"Globalisation and digitalisation of the economy present challenges for the international and Australian tax frameworks. Under existing frameworks, digital businesses can have a significant economic presence in Australia without making a significant contribution to tax revenues here," the papers said.

"The government is taking action to ensure the integrity of Australia's thin capitalisation rules, which limit the amount of debt deductions multinational entities can claim in Australia. The government will improve the integrity of these rules by ensuring that asset valuations used to justify debt deductions are robust and that inbound investors cannot access tests that were only intended for outward investors.

"The government will strengthen the definition of a large multinational (or Significant Global Entity) to ensure that it operates as intended. This will ensure that large multinational businesses that are ultimately owned by private entities or investment entities are not inadvertently excluded from the application of tax integrity rules.

Morrison had in March used a G20 finance minister meeting to highlight its multinational tax avoidance scheme, pushing his counterparts to work together on ensuring multinational tech companies like Google, Apple, and Amazon are properly taxed.

The black economy crackdown, meanwhile, will now expand to include computer system design and related services, as well as to security providers.

The government also outlined its plans to extend the goods and services tax (GST) to Australian hotel bookings made through offshore digital businesses, which it said complements its extension of the GST to digital products and services from July 1, 2017, and to low value imported goods from July 1, 2018.

The Australian Taxation Office (ATO) has been allocated AU$5 million in funding for the online hotel booking GST extension.

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