Australia in the global economy
Australia is relatively dependent on corporate income tax (TY2012: $64 billion of $298 billion total tax) compared to the other OECD countries, and the corporate income tax base is highly concentrated. In TY2012, 52% of total corporate income tax came from the financial services and mining sectors, and 41% of corporate income tax was paid by 20 companies.
We have high levels of foreign investment and our nominal net foreign direct investment (FDI) position was a $143 billion deficit in FY2012. This foreign investment has supported the Australian economy, with inbound FDI to GDP growing at a similar rate to the OECD average. This has made the Australian economy and its corporate tax base increasingly linked to foreign trade and investment.
Improvements in technology, reduced barriers to international trade, and the integration of developing economies into the global value chain have led to a fundamental change in how businesses operate. These developments challenge the existing global tax framework, which has been based on the physical transfer of merchandise goods and easily definable capital instruments. Today, a business can move its intangible and financial assets around the world and earn revenues from customers in countries where it has no physical presence. They also operate in an environment of increasing complexity, tax arbitrage opportunities, financial deregulation and corporate structuring.
Because business now has the ability to streamline value chains globally, companies are placing increasing emphasis on:
- centralising and transferring business activities, particularly service functions using digital platforms, and
- capitalising, sharing and transferring intangible assets to where their development and protection is most efficient.
Aligned with the growth of global supply chains, particular economies are attracting significant and increasing FDI relative to their economic output (GDP). They offer competitive business environments, targeted policy settings, including those that attract mobile capital, and relatively low corporate tax rates. We have termed these economies ‘hubs’.
The ATO is also addressing international tax concerns, including the migration of intangibles (IP) offshore, the creation of offshore marketing and procurement hubs, debt dumping arrangements and transfer pricing results which are inconsistent with arm's length outcomes.
The increasing international trade of mobile functions and assets is indicated by the high growth in net services and royalties credits into these hubs. Net services and royalties credits to GDP were between 3% and 5% in CY2012. This is also reflected in high levels of international related party services and royalties trade between Australia and these hubs. In CY2012:
- ABS figures totalled $110 billion for trade in services and royalties
- revenue and expenditure shown in tax returns for international related party dealings in royalties and services totalled $67 billion
- 27% ($18 billion) of international related party services and royalties reported to the ATO was with hub economies.
Australia has comparatively strong transfer pricing, general anti-avoidance, thin capitalisation and controlled foreign corporation rules that provide defences against BEPS risks. This places pressure on particular tax mechanisms, such as transfer pricing and permanent establishments that have been designed to support the concept of fair global tax distribution and minimise double taxation. The OECD Base Erosion & Profit Shifting ('BEPS') Action Plan highlights many of these issues.
The OECD’s Action Plan on BEPS focuses on areas where the existing international tax framework lags behind the global evolution of MNEs’ business operations. Existing data and studies do not provide enough information to reach definitive conclusions about how much BEPS actually occurs.