The emergence of new technology is proving to be problematic for Australia's tax system, according to a new discussion paper by the Australian government.
The government's Re:think tax discussion paper, released on Monday, points to new technology, along with the digitisation and globalisation of the economy, as being among the prime suspects behind the trend for multinational companies to engage in tax avoidance practices.
"New ways of transacting, including cryptocurrencies such as bitcoin, were not contemplated when the current tax system was designed," the paper said. "These developments make determining the appropriate tax outcome for a particular company in a specific country difficult, and raise concerns about the ability of companies to relocate profits to minimise their tax."
While digitisation and globalisation of the economy are positive developments, said the paper, a globalised economy means that companies have greater choice about where to locate their activities and assets, including intangible assets such as intellectual property.
"This has increased the opportunities for multinational companies to use legal means to minimise their tax liabilities, through multinational tax avoidance, also known as Base Erosion and Profit Shifting (BEPS)," it said.
BEPS refers predominantly to situations where the interaction of different tax rules allows profits to be shifted away from the countries where the activities creating those profits take place, leading to low taxation or even no taxation.
Some of the largest technology companies operating in Australia, including Google and Apple, have previously come under the gaze of the government and the Australian Taxation Office (ATO) due to their predilection for the so-called "Double Irish Dutch Sandwich" legal mechanism allowing companies to shift profits from Australia to low-tax countries, while keeping losses local in order to pay a lower tax rate.
In the lead up to the G20 summit in Brisbane late last year, Australian Treasurer Joe Hockey referred to such tax-avoiding companies as "thieves".
"They're stealing from us and our community," he told the Nine Network at the time. "The only way we can address this is through global action."
Hockey's comments came just weeks after the Australian Senate voted in favour of a motion to launch an inquiry into corporate tax avoidance.
While the government's discussion paper suggests that increasing the country's corporate tax rate would discourage local investment, it is clear that closing such tax loopholes remains a top priority.
"The extent to which tax avoidance is currently affecting Australia's corporate tax base is unclear," the paper said. "The imputation system provides strong incentives for Australian-owned companies to pay tax in Australia. However, it is clear that the risks to the corporate tax base are increasing.
"To maintain the integrity and fairness of our tax system, it is important to ensure that companies that conduct business in Australia pay tax in Australia," it said.
However, the paper also stressed the steps the government has already taken to clamp down on Double Irish Dutch Sandwich-style loopholes, saying that the two-year G20/OECD BEPS Action Plan, of which Australia is part, is designed to address deficiencies in the international tax system that create opportunities for tax avoidance. Its recommendations will be finalised by December.
"Recent reforms have tightened Australia's thin capitalisation rules to stop multinationals claiming excessive debt deductions and closed other loopholes in the tax system. The ATO also has several compliance programs specifically addressing global tax structuring arrangements by multinational companies," the paper said.