Although it may sound like the same thing, there is a stark difference between ‘tax avoidance’ and ‘tax evasion’. The main distinction between the two is that one is legal, and the other is illegal. Put simply, it is illegal to evade paying tax, and the evasion of taxes in Australia (much like many other countries around the globe) constitutes as a criminal offence. On the other hand, tax avoidance measure are ways in which the taxpayer utilises various financial strategies to minimise their taxes payable within the limits of the law. These strategies are commonly referred to as methods of tax minimisation.
With all this said, are the current laws surrounding the payment of tax for large multinational companies fair? Should the law be amended to tighten up the tax obligations of these massive profit-making companies or individuals?
In early December 2017, the European Commission opened an in-depth investigation into the tax arrangements of IKEA, over concerns that certain Government tax rulings given to the IKEA group by the Dutch Government allowed the furniture and homeware giant to avoid paying tax by using transfer pricing schemes to shift company profits. This move by the Commission follows similar investigations that led to earlier multi-billion Euro tax assessments Google and Apple.
The European Commission has voiced concerns that the tax rulings that were given to IKEA allowed them to pay less tax, and in turn were given a grossly unfair advantage over its competitors, thus being in breach of the EU State Aid Rules.
In Australia, the Federal Government has already acted in attempting to arm the Australian Taxation Office with the power to tax some of the world’s strongest economic powers who create schemes to avoid paying their taxes. During the first half of 2017, the Australian Government approved the Diverted Profits Tax (DPT), more colloquially known as the “Google Tax”, which is a 40% tax rate on multinational companies that use overseas tax havens to avoid paying tax in Australia. The DPT works alongside the Multinational Anti-Avoidance Law (MAAL), but only applies to large multinational companies that demonstrate an annual global turnover of at least $1 billion, and an annual domestic income of more than $25 million.
A multinational company that exceeds the above turnover figures may be subject to pay DPT if:
- It has entered into a scheme to divert profits from Australia;
- The diverted profits are subject to a foreign tax rate of less than 24%;
- The tax structure lacks economic substance; and
- The primary purpose of the scheme is to obtain a tax benefit in Australia.
It is interesting to note that after the United Kingdom in 2015, Australia is only the second country in the world to introduce such a company tax, making it (almost) a global leader in this area of tax law.
Domestically, the implication of the DPT by itself may not be enough to tackle all forms of international tax avoidance strategies, however its introduction by the Federal Government to protect the economic interests of Australia is a welcomed move in the war against tax avoidance by large multinational companies.
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