Speech to AmCham Presidio series event

Second Commissioner Jeremy Hirschhorn, Compliance and Engagement Group
Speech at AmCham Presidio series event
Sydney, September 2026
(Check against delivery)
Reflections on developments in large market taxation (and why Australia is different)

Introduction

Thank you for having me here tonight, it is wonderful to have the opportunity to speak with an organisation that reflects the important and enduring relationship between Australia and the US, both at a country-to-country level, but also with significant cross border investment and trade between our private sectors.

Tonight I have been asked to reflect on the evolution of large market taxation over the last twenty years (and the last ten years in particular), drawing out some macro themes, and then how that has influenced tax administration in Australia (and given this is AmCham, some occasional comments on the US position!).

In terms of macro themes, I will touch on:

• Broad policy shifts in ‘market jurisdiction’ taxation in particular, but also holding jurisdictions and intermediary jurisdictions
• The digitalisation of the global economy and the rise of intellectual property heavy supply chains
• How this puts pressure on tax administrations and policy responses.

Then I will turn to Australia, and draw out:

• The nature of Australia’s economy
• Australia’s historic high reliance on corporate tax to fund services
• The attitude of the Australian community to large market taxation
• Where Australia’s policy choices and directions have aligned with or differed from the macro trends.

(Hopefully) leading logically to:

• the pressures this places on the ATO’s tax administration
• a discussion of the ATO’s approach
• how and why, it differs from other countries’ approaches, but also
• how large corporates can and should engage constructively with the ATO to obtain confidence in their Australian tax affairs.

Trends in taxation of inbound activity in market jurisdictions

At a global level, at least for developed jurisdictions, the last twenty years have seen a trend of reductions in corporate taxation and tariffs on inbound activity but offset by a rise in Value-Added Taxes (VATs).

Together with other trends in the taxation of outbound activity (for example participation exemptions), this has dramatically changed the taxation of ‘real’ activity.

A theme for this speech is that these measures may have each been justified on economic and competition grounds, but cumulatively and in combination have increased incentives for, and removed previous safeguards against, artificial structuring, with significant implications for tax administration (and felt very strongly in Australia due to country specific factors).

Reducing corporate tax rates

Corporate tax rates are relevant for inbound supply chains for the ‘last mile’ taxation, the bit which naturally (or in some cases must) be carried out ‘in jurisdiction’.

As a general comment, corporate tax rates have trended downwards (albeit some recent reversals of this trend), with some jurisdictions choosing to move to structurally lower corporate tax rates in order to attract capital investment, and/or to establish themselves as intermediary jurisdictions (but still obtaining the benefits of being ‘members’ of the network of treaties for the avoidance of double taxation, established when jurisdictions had structurally higher levels of taxation).

Figure 1: Statutory corporate tax rates to 2025, OECD countries

Source: OECD Data Explorer – Corporate income tax (CIT) – statutory and targeted small business ratesExternal Link

And looking at some specific countries in more detail:

Figure 2: Statutory corporate tax rates to 2025, select OECD countries

Source: OECD Data Explorer – Corporate income tax (CIT) – statutory and targeted small business ratesExternal Link

Reducing tariffs on imports

It is beyond the scope of tonight (and my expertise) to go into this topic in detail, but tariffs (whether described as customs duties) on imports have trended down significantly over the last twenty years due to the rise of Free Trade Agreements. (Again, with perhaps some recent reversals of this trend in some jurisdictions.)

In this regard, perhaps Digital Services Taxes (DSTs) could usefully be seen as sort of low-rate tariff on a range of imported services.

Reducing withholding tax rates

Another way that market jurisdictions taxed inbound supply chains was through withholding taxes on capital and intellectual property deployed in their jurisdiction.

Again, it is beyond scope of tonight to have a global analysis of this trend, but it is clear that the historic withholding tax rates embedded in Treaties have reduced from levels of often 30% for dividends and royalties, and 10% for interest, to dramatically lower rates, often 10%/5%/0% for dividends, 10%/5% for royalties, and often 0% for interest.

Increased reliance on Value Added Taxes

Indirectly offsetting this reduction of tax on inbound economic activity, many jurisdictions have introduced (relatively) comprehensive VATs, and gradually increased the rates applicable, with rates in the 20%+ range now very common.

Figure 3: Evolution of standard VAT rates – OECD average 1975–2024

Source: Consumption Tax Trends 2024 (EN) (PDF, 4.5MB)This link will download a file

This is also reflected in VATs being a relatively high and increasing percentage of GDP and of tax collections in many countries (with the chart below showing that Australia has consistently had a relatively low reliance on VAT). Of course, the US has taken a different path, not adopted a VAT, but retaining various sales taxes at different levels of Government.

Figure 4: Value added taxes (5111) as a percentage of GDP 2005-2022

Source: Consumption Tax Trends 2024 (EN) (PDF, 4.5MB)This link will download a file

Importantly, responding to the digitalisation of the global economy, most jurisdictions now are extending their VATs to imports of services and low value goods (often initially excluded from scope, reflecting historical customs duties exceptions), particularly B2C transactions (noting that B2B transactions are implicitly included in the VAT base at the next level of the supply chain). (Noting that excluding these B2C supplies from the VAT base arguably behaved like a ‘reverse tariff’ on local retailers – thus inclusion is an important measure to level the playing field and not disadvantage local (often small) retail businesses.)

The falling away of CFC taxation and the rise of participation exemptions

Another very important macro trend is the movement away from comprehensive taxation of offshore subsidiaries (often referred to as controlled foreign companies or CFCs) in the parent entity’s jurisdiction (usually with a credit for underlying foreign tax).

These provisions effectively acted as a ‘top up tax’ on activities in a market jurisdiction (albeit in the ‘home country’) and meant that there was little incentive for parent companies to artificially shift profits into low tax rate jurisdictions, or indeed countries to offer low tax rates or tax holidays (the benefit would be reversed through the CFC rules unless there was some form of ‘tax sparing’ agreement).

By contrast, now most developed countries have a ‘participation exemption’ for underlying earnings of foreign subsidiaries both when they are earned, but also when they are remitted as dividends. Sometimes this will be limited to ‘active’ earnings, with some residual taxation of passive earnings. For other countries, such as the US, there may not be an explicit participation exemption, but a gradual structural reduction in the scope of CFC rules, perhaps matched with concessional treatment of profit repatriations, so giving the same practical result.

By way of demonstration, of the 37 OECD member states, 34 countries now offer some exemption or deduction for dividend income, 30 countries offer an exemption for capital gains, and 29 countries offer an exemption or deduction for both. Chile, Korea, and Mexico provide neither an exemption for capital gains nor dividends.

The previous concept underpinning comprehensive CFC taxation was that profits of a local multinational business should be taxed at the local rate (much as an individual tax resident is fully taxed on their worldwide income, with credits for foreign tax), effectively providing a level tax playing field when a local company was choosing between onshore and offshore investment/deployment of capital (both would be taxed at the local corporate rate of the parent). The shift in economic thinking was that this would hinder the competitiveness of local businesses expanding offshore into lower tax rate jurisdictions, and they should be freed up to compete on a level playing field with the offshore competitors bearing the lower offshore rate (the rhetoric was often to support regional or global ‘champions’).

However, a side effect of eliminating the ‘top up tax’ was removal of an important handbrake on aggressive tax planning by corporates. This opened up aggressive tax competition by intermediary jurisdictions (e.g. the notorious ‘Double Irish Dutch Sandwich’), as well as encouraging a race to the bottom for market jurisdictions competing for capital and convinced that lower tax rates were the solution. (Interestingly, BEPS 2.0 Pillar Two can be seen as a partial reversal of this shift and reinstatement of a CFC variant.)

The digitalisation of the economy

Physical presence no longer so important

When the international framework was agreed (all the way back to the League of Nations, but preserved through the OECD model), physical presence was much more important, and indeed often necessary, for supply chains which are now much more digitally enabled.

If we think about music by way of a simple example, it used to be that you needed a local manufacturing plant (subject to corporate tax) or to import physical goods (subject to customs duty), and either way to have a local retail presence (subject to corporate tax) (some in the audience may remember buying LPs or cassettes at the local record store). It is now predominantly an intellectual property heavy service provided digitally with minimal if any local presence.

Similarly, advertising services matching together local businesses with local customers were performed locally, for example through local television stations or newspapers. The advertising profit was fully within the tax net. Now, when advertising is primarily online, a large part of the advertising supply chain can be performed offshore, with a significant component of the profit being attributable to intellectual property, often located in a low tax jurisdiction.

Another example is simply business to consumer (B2C) retail sales: prior to the internet, most retail activity occurred through local ‘bricks and mortar’ retailers. Mail order from overseas was possible but not appealing for many consumers or sales categories. Now, an increasing amount of retail trade occurs without a physical presence in Australia, other than possibly warehousing / parcel delivery services.

Thus, a consensus built around physical presence (‘permanent establishment’) is less relevant to many supply chains of today and means that an increasing amount of economic activity (mostly) falls outside the corporate tax net.

This consensus also increasingly does not make common sense to citizens, whose concerns can be summarised as: how can a company with such significant importance to their lives and to Australia more broadly have so little role in their tax system?

More value attributed to intellectual property

Building on this, in most supply chains, it is likely that more of the value will be attributed to intellectual property. The nature of intellectual property is that it is less tied to any particular jurisdiction and thus be subject to both ‘real’ tax competition (attracting that intellectual property to intermediary jurisdictions) and artificial allocation of profits.

In many cases, the theoretical inherent restriction on transferring intellectual property to an intermediary jurisdiction is either a tax selling event (potentially crystallising a capital gain on the increase in value) or to pay an arm’s length royalty to the original generator of the intellectual property. However, this theoretical tax trigger is difficult for tax administrators to enforce in practice. By way of example, from a quick search of matters in the public domain, significant cases out of just the US involving the transfer of intellectual property include Meta, Amazon, Veritas, Coca-Cola and Microsoft.

Once the intellectual property is in an intermediary jurisdiction, there is then a question when it is deployed in the market jurisdiction. Does it remain a payment for intellectual property, or is it a service (albeit IP heavy)? Where is the border line? How much activity in the intermediary country does there have to be to perform the alchemy of turning intellectual property into an intellectual property heavy service?

Stepping back from the detail, I think the broader lesson is this.

Over the last two decades customers may not have moved, profits may have, but

• Markets still exist somewhere.
• Customers still live somewhere.
• Economic activity still occurs somewhere.
• Yet increasingly valuable parts of multinational supply chains are capable of being organised across multiple jurisdictions.
• That creates opportunities, but it also creates tensions within a framework that was designed for a much more physical economy
• And the consensus position doesn’t make sense to citizens!

Implications for tax administrations and policy responses

Increased exposure to real tax competition

At a first level, these macro factors all lead to increased exposure to ‘real’ tax competition and erosion of tax bases. In other words, where real activity moves to jurisdictions with lower tax rates. As above, one critical but often overlooked element contributing to this outcome is the move away from comprehensive CFC regimes towards participation exemptions.

This is a feature of (legitimate) competition between countries, but perhaps the cumulative effect of the various macro trends discussed above was not fully appreciated.

Increased exposure to transfer mis-pricing and/or artificial allocation of activity and profits

From a tax administrator’s perspective, these macro trends also create incentives for multinationals to artificially structure affairs to minimise global tax.

• The significant relative reduction in corporate tax rates in some jurisdictions as compared with others, provides incentives to shift profits to the low-rate jurisdictions (there is no incentive to misprice if all jurisdictions have roughly the same corporate tax rate).
• These benefits are no longer ‘cancelled’ by comprehensive CFC rules.
• Selling to a market at an over-value no longer results in increased customs duties.
• Over-charging a market jurisdiction subsidiary for intellectual property (to reduce its local taxable profits) is no longer subject to punitive withholding tax rates (and no withholding tax if it can be structured as services).

A challenge for an administrator is often to untangle the artificial mis-pricing from the ‘real’ response to incentives.

There is also an interaction between the two: it is bad enough to lose real economic activity in your jurisdiction because of (permitted) competition on tax rates applicable to the attributed profit (but at least it is the result of policy choices). On the other hand, it is a failure of the tax administration if real economic activity shifts, not (just?) because of the tax rate spread on the fair profit, but because there is a perception or reality of ‘bonus’ tax savings through lax enforcement of transfer pricing rules (or what might more correctly be described as ‘anti-transfer mis-pricing rules’).

BEPS 1.0

BEPS 1.0 can be seen as a reaction to the realisation that, far from eliminating double taxation, the international consensus around large market corporate tax was allowing significant non-taxation of profits (or single inclusion in a highly tax concessional way).

From my perspective, BEPS 1.0 was a remarkably strong package of measures, which addressed much of the highly aggressive cross-border tax planning which had been occurring. However, it did not address the fundamental strain of a consensus built on physical presence in a rapidly digitalising world (thus BEPS 2.0).

As will be discussed below, Australia was a rapid and effective implementer of BEPS 1.0, building on solid foundations of addressing the transfer pricing / transfer mis-pricing borderline and tax avoidance more generally (BEPS 0.0?).

BEPS 2.0

Much has been written about BEPS 2.0, and it is beyond the scope of this evening to discuss in detail.

As above, BEPS 2.0 was intended to address the strain of a consensus built on physical presence in a rapidly digitalising world, which, without a new consensus, might result in a proliferation of new taxes such as DSTs (which can be seen as relatively low-rate tariffs on imported services).

Pillar 2, which Australia has implemented, can be seen as a partial reinstatement of CFC ‘top up’ taxation, thus removing incentives for market countries (or countries seeking to attract investment) to participate in a race to the bottom (or at least below 15%). It was also intended to reduce incentives for companies to artificially shift profits to low tax intermediary jurisdictions (although a reduction, not a removal, of those incentives).

Pillar 1 Amount A is focused more on the super profits of digital companies and reflects the reducing relevance of the old concept of ‘permanent establishment’. However, consensus is proving difficult.

Pillar 1 Amount B (a deemed profit margin for limited or low risk distributors) is clearly useful for jurisdictions which have significant inbound distribution and limited ability to conduct audits as to whether something has been appropriately transfer priced or inappropriately transfer mis-priced. It was not intended to be a safe harbour for multinationals.

One observation I would offer is that reaching a new international consensus around taxation allocation is very challenging – BEPS 1.0 was still difficult but arguably easier, because it addressed artificial profit allocations and tax planning. By contrast BEPS 2.0 goes to fundamental allocation of taxing rights, and accordingly it is much harder to obtain consensus, particularly when some jurisdictions may be ‘losers’.

The Australian perspective

Open economy to capital and trade, but concentrated by industry

Australia is an open economy, from both capital and trade perspectives.

This means that cross border transactions are highly significant to the Australian economy with Australia’s most significant trade partners being China, the US and Japan.

Figure 5: Total trade by country breakdown, 2023–24

Source: Australia's direction of goods & services trade – financial years from 2006-07 to present (XLSX, 3.2MB)This link will download a file

Australia’s economy is also relatively concentrated by industry, with heavy reliance on a few sectors, such as mining.

High reliance on corporate tax generally

Australia has a high reliance on corporate tax as part of its tax base.

As can be seen from the chart below, Australia has sustainably the highest corporate tax take as a percentage of GDP, a step change above other jurisdictions, with the (arguable) exception of Norway (where its very significant petroleum taxes are included in the OECD corporate tax collections statistics and distort the figures).

This means that Australian Governments over time have had to pay close attention to any risks to the corporate tax base, as a key funder of government services.

Figure 6: Corporate tax collections as % of GDP to 2024, select OECD countries

*Note – not adjusted for imputation system

Source: OECD Data Explorer – Revenue Statistics in OECD member countries – Comparative tax revenuesExternal Link

Interestingly, the significant difference in collections does not reflect the much smaller difference in headline tax rates. This implies one or more of several factors, including: corporate profits being higher as a percentage of GDP; those profits are taxed in the corporate system rather than at an investor level (cf S Corps in the US, as an example); the tax base is broader, with fewer exceptions; compliance is higher, etc. My guess is that it is a mixture of all of these factors.

Highly concentrated corporate activity together with high reliance on corporate tax receipts

Another factor, highly relevant to the economy, but also to tax administration, is the concentration of that corporate activity, and hence the Australian corporate tax base. In many significant industries there are a few dominant players.

This is exacerbated by Australia’s high reliance on corporate tax receipts (not just as a percentage of GDP as above, but as a percentage of overall tax receipts), illustrated in the chart below.

What it also demonstrates is that the tax paid by the largest corporates is a significant component not just of corporate tax, but of total federal tax receipts.

This also means that changes in behaviour of just a few companies can have a significant impact on the ability of the Australian Government to fund services to the community.

Figure 7: Large market corporate tax as % of tax receipts, to 2025

*Note – The large market income threshold is based on $250 million in current dollar terms and has been retrospectively adjusted for inflation for back years.

Source: Australian Taxation Office data

The attitude of the Australian community to large market taxation

High compliance by individuals and high expectations of large business

Australians are highly compliant with their tax obligations, with our ‘tax gap’ estimate that individuals (not in business) pay approximately 95% of their tax due at lodgment, increasing to around 96% after compliance activity. Interestingly, this is broadly comparable with our estimates of large business tax performance, at around 93/94% at lodgment, and 96% after compliance activity (although tax performance of Australian listed companies is higher than this, and inbound companies is lower).

This reflects, if not an exuberance at paying tax, a recognition that a functioning and compliant tax system means that the Government can provide services that are for the benefit of the entire community.

In terms of our administration, we aim to support this by making it as easy as possible for Australians to meet their obligations, through withholding at source, easy digital interfaces (especially the ATO App – a shameless plug here!), and pre-filling of information to the maximum extent possible so to make life easy. This is reflected in average time ‘in App’ to prepare a tax return of around 12 minutes (down from 9 to 12 hours in ‘Tax Pack’ days – just think of the many millions of hours that are freed up so people can do better things with their time!)

The flip side of this, is that Australians are highly focused on everyone (but especially large business and the wealthy) meeting their obligations. Accordingly, the Australian community has very high expectations of large businesses and multinationals.

2014 as a trigger point

2014 was a bit of a trigger point, worldwide but especially in Australia, in relation to the taxation of multinationals.

It was the era of ‘Occupy Wall Street’, ‘the 99%’ and general concern around large business (not just taxation), which kicked off in earnest in 2011 following the GFC.

In September 2014, the Tax Justice Network published a report ‘Who Pays for Our Common Wealth’, analysing the tax performance of Australia’s largest public companies. This quickly led to the Australian Senate setting up the ‘Inquiry into Corporate Tax Avoidance’. As the newly Acting Deputy Commissioner Public Groups at the time of the first hearing in October 2014, I vividly recall the intense scrutiny placed not just on large corporations but also the operations of the Australian Taxation Office by that Committee over the next few years, both in that Inquiry and in several spin-offs.

One challenge, which I will touch on later under transparency, is that the ATO could only report on its audit activity and results but was not (initially) able to provide the Committee confidence about the bits of the system that were operating well – our only significant tax gap figures were for GST (Australia’s VAT).

The Tax Avoidance Taskforce

In the 2016 Budget, the then Coalition Government announced the Tax Avoidance Taskforce. This both pulled together some existing programs, but also added significant new funding, so that the Australian Taxation Office could significantly increase its coverage of the largest businesses operating in Australia.

Since then, the Taskforce has come up for review multiple times under a succession of Governments, each time being expanded.

Over the decade the Taskforce has significantly exceeded all its targets on traditional measures, but also with a future focus: we will not resolve a historical matter without locking it in for the future.

But perhaps more importantly, the Taskforce enabled the ATO to move beyond a risk-based auditing approach to a more comprehensive coverage and assurance approach (including justified trust), as well as being the basis of our analysis of ‘tax gap’.

Continued scepticism in the community

That said, there remains scepticism in the Australian community about the taxation compliance of large corporates (some of this probably being mixed in with concern about policy settings – refer the discussion before).

To give an indication of this, a 2025 tax survey by Per Capita asked Australians about where the Government should seek extra tax revenue to fund a hypothetical new Government service, and cracking down on multinational avoidance was the number one choice, chosen by almost 50% of respondents.

Figure 8: Approaches to raising additional revenue

Source: Per Capita Tax Survey 2025 – Per CapitaExternal Link

This scepticism can also perhaps be seen reflected in the persistent community desire for more transparency as to the affairs of large companies.

Where Australia’s policy choices have aligned with or differed from others

Australia has had a mixed approach to these policy trends, in some cases aligning (or even leading) the trend, in other cases taking a different approach.

Debt capital

In terms of attracting foreign debt capital, Australia has aligned with, or even exceeded, the trend with a reduction in withholding tax rates from a standard 10%, to in many cases a 0% rate, for example commercial paper (‘Section 128F bonds’), or more recently in several of our Treaties (for example the UK and US treaties both have 0% withholding for borrowing from unrelated financial institutions).

This treatment of debt capital is sometimes overlooked in discussions of whether Australia has the right settings to attract foreign capital, which often focuses on the corporate tax rate and equity capital only.

Tariffs

Aligning with international trends, Australia’s tariffs have been substantially reduced or removed, supporting trade and lowering the cost of imported goods and business inputs.

Figure 9: Australia’s average applied tariff rate, to 2025

Source: WTO Tariff and Trade DataExternal Link

Tariffs have an incidental effect of being a natural stabiliser against the over-pricing of related party inputs (and the under-booking of corporate profits in the market jurisdiction). The reduction or removal of tariffs removes this stabiliser.

Corporate tax rate

The corporate tax rate is an area where Australia has arguably diverged from the broader OECD trend.

Australia’s corporate tax rate has reduced over the period (from as high as 49% in 1986), but has stabilised at 30%, which at introduction was one of the lower rates, but now is among the higher of the OECD corporate tax rates (more recently with a special 25% rate for small to medium businesses).

As will be discussed below, a relatively high corporate tax rate has implications for both ‘real’ tax competition and artificial tax planning, particularly where some jurisdictions offer significantly lower tax rates (explicitly or implicitly).

At a policy level there is international research and discussion about whether the corporate tax rate should be lower in that it would attract extra foreign capital (‘capital deepening’) (or retain domestic capital which would otherwise go offshore?) which would increase productivity by effectively freeing up (or even forcing) labour into more productive jobs. (An interesting reflection is whether the rise of AI and large language models does the same thing?) As I understand it, the follow-on argument is that this foregone productivity means that labour (not shareholders) economically bears some of the corporate tax.

As a tax administrator, and definitely not an economist, I reflect on whether particular features of the Australian economy and the Australian tax system make this analysis more nuanced (and the international research less directly applicable), for example:

• The role of the imputation system as compared with a ‘classical’ system (and here, I understand that many companies ascribe value to franking credits in their shareholder value models, often up to 70% of tax paid – implying a 9% net cost).
• Given the large savings administered by the Australian superannuation system, whether the marginal cost of equity capital, to the extent it is driven by after tax returns, is driven by their (post imputation credit) returns (and the post tax incentive it gives those funds to invest in Australia rather than overseas), rather than the nominal corporate tax rate applied to pre-tax returns.
• The nature of the Australian economy is that many of the profits in the Australian corporate tax net are relatively immobile and with less sensitivity to tax rates (e.g. super profits in concentrated industries, the mining industry etc).
• By way of example, these ‘economic rents’ could include legislated/regulatory rents (such as for the financial sector, to ensure stability), oligopoly rents (e.g. for the big retailers), and resource rents (e.g. for mining and gas).
• Much of the existing capital in the Australian economy was already deployed at the current rates (with any reduction in corporate tax rates arguably being a windfall gain) (also meaning that any incremental capital attracted by a rate reduction is offset by a significant loss of revenue on existing capital).
• That our attractive taxation of foreign debt capital (and some limited types of equity capital in specific industries, e.g. those that can be operated through Managed Investment Trusts), means that Australian can still access the capital it requires to grow, but just in a different form.
• I also wonder if the rise in global platforms/digital offerings, and that the marginal sale has low variable cost, mean that the decision to sell into a particular economy (for that service to be productively employed by local enterprises) is increasingly an incremental sales decision rather than a deployment of capital decision, with the possibility that economic participation is less sensitive to corporate tax rates.

Deployment of intellectual property

In terms of deployment of intellectual property, Australia has been part of the macro trend, with Treaty royalty withholding tax rates being highly favourable to non-Treaty (generally 10% versus 30%, and with a further move to 5% in relation to several key jurisdictions, including the US, UK and Switzerland).

Some other countries have effectively foregone some elements of their royalty withholding tax for IP deployed in their country, but Australia (like the US) has preserved its right to tax this.

(As an aside, for a country that has a corporate tax rate of 30%, a 5% withholding tax rate could be seen as broadly equivalent to corporate tax on a projected profit margin of around 17%.)

Value Added Taxes

In terms of VAT rates, Australia has taken quite a different approach from many other countries.

With a 10% GST (and on a relatively narrow base), Australia has much less reliance on VAT than countries with rates often in the low 20’s.

Figure 10: Standard VAT rates in OECD countries, 2024

Source: Consumption Tax Trends 2024 (EN) (PDF, 4.5MB)This link will download a file

This then plays out in relatively low reliance on VAT collections – on some measures the lowest of any OECD country with a VAT (obviously this excludes the US, with no VAT).

Figure 11: Value added taxes (5111) as a percentage of total taxation 2022

Source: Consumption Tax Trends 2024 (EN) (PDF, 4.5MB)This link will download a file

Although there is suggestion from some commentators from time to time that the GST rate should be increased and/or the base expanded, it appears that there is little community appetite for this, with a strong theme being concerns around regressivity. The survey quoted earlier indicated around 15% support for a GST rate increase, and slightly less for GST base expansion.

Australia has, however, been an early (and highly successful) adopter of extending the GST to inbound supplies of B2C services and low value goods. (As an aside, in an era of online retail activity, the absence of a VAT on low value goods puts local retailers at a significant disadvantage to online retailers – effectively a reverse tariff on your local businesses.)

Transparency

Since 2014, Australia has taken a leading role in increased transparency of large market taxation, over and above ‘ordinary’ filings of financial statements with the corporate regulator (ASIC).

Some of this is transparency to the community of the tax affairs of specific taxpayers, measures, including:

• Corporate Tax Transparency reporting (limited information relating to large taxpayers)
• Research and Development Tax Incentive reporting
• Petroleum Resource Rent Tax reporting
• ‘Backstop’ financial statements (where no ASIC lodgment requirement)
• Voluntary tax transparency code, and
• Most recently, and soon to publish for the first time, public country by country reporting.

However, the increase in transparency over the decade is much broader than this, with increased transparency to large market taxpayers, for example:

• As to the ATO’s stance on key ‘grey zone’ issues such as the transfer pricing / mis-pricing borderline (e.g. Practical Compliance Guidelines in key industries / transactions)
• As to large corporate’s peer behaviour to allow benchmarking (e.g. various findings reports)
• Our framework in understanding risks in the tax system (the Three Tier Tolerance model, now published)
• Specific transparency, with detailed reports provided to large market taxpayers after our reviews so that boards and senior management know how they are viewed by the ATO.

In addition, we publish significant contextual information, so that the community can understand the health of this important part of the Australian tax system. This includes our Tax and Corporate Australia information, released with the Corporate Tax Transparency information, as well as information in our Annual Report, including ‘tax gap’ performance.

Effective and pragmatic implementation of the international consensus (BEPS)

As mentioned earlier, the Base Erosion and Profit Shifting project at the OECD could be seen as a countermeasure to the tax avoidance opportunities opened up by some of the macro shifts over the last twenty years.

As a country almost uniquely exposed to base erosion and profit shifting, Australia was (and had to be!) an early, effective and pragmatic implementor of the international consensus.

In doing so, it was identified that a simplistic or minimalistic implementation of the measures could allow tax planning to simply evolve around the measures. As such, Australia implemented supplementary measures to ensure that the BEPS consensus had its intended effect, such as the MAAL (aimed at schemes to artificially avoid a permanent establishment), the Diverted Profits Tax (aimed at schemes where there is significant information asymmetry, falling somewhere between transfer mis-pricing and anti-avoidance provisions), and bolstering the anti-hybrid rules for low rate and exempt entities (which generate effective hybridity, but might fall outside a minimalist implementation).

These measures are sometimes characterised (by those who do not like them) as unilateral measures, but in my opinion are better seen as ensuring that the intent of the consensus (the result of hard work over years) was achieved, rather than being able to be simply side-stepped by slightly more sophisticated tax planning.

In terms of BEPS 2.0 and the ‘pillars’, Australia has adopted pillar 2, a form of minimum tax measure, centred on a tax rate of 15%. This reduces, but far from eliminates, the incentive for artificial structuring of international supply chains, particularly for a country such as Australia which seeks to maintain a corporate tax rate significantly above 15%.

As above, Pillar 1 Amount B (a deemed profit margin for limited or low risk distributors) is clearly useful for jurisdictions which have significant inbound distribution and limited ability to conduct audits as to whether something has been appropriately transfer priced or inappropriately transfer mis-priced. However, the Australian experience is that limited or low risk distributors are rare ‘in the wild’, and our series of Practical Compliance Guidelines gives a sense of where we see appropriate returns across a range of key industries.

How this has forced ATO’s tax administration to evolve

So let me now turn from policy to administration.

Everything I have discussed up to this point leads to an obvious practical question.

If you are a country with a relatively high reliance on company tax, significant cross-border activity, increasingly complex multinational supply chains and strong community expectations, what kind of tax administration should you build?

Australia could have chosen to rely primarily on risk-based audits and litigation.

Instead, over time, we have increasingly invested in transparency, engagement and assurance.

In my view, that shift is one of the defining developments in Australian tax administration over the last decade.

A selective timeline of key legislative, administrative and public developments impacting the evolution of the Australian tax system and large market is included at [Appendix 1].

Transfer pricing versus mis-pricing

A key challenge for the ATO is to distinguish ‘transfer pricing’ (on which the international tax system relies), from ‘transfer mis-pricing’ (which results in insufficient taxable profits being booked in Australia).

This is both incredibly important to the Australian tax base, but also very difficult to administer across a system, given the significant information asymmetries and work to understand unique supply chains, meaning that audits can be extremely expensive and time consuming (for taxpayer and ATO alike), let alone subsequent litigation. It is also rare that a transfer pricing case will provide guidance to a broad group of taxpayers, meaning that the ‘spill-over benefits’ of litigation may be less valuable (an exception being the Chevron litigation around related party financing).

In addition, the nature of the Australian economy is that there are natural intermediary jurisdictions within the Treaty framework with structurally lower corporate tax rates. Here the challenge is to untangle activities which naturally sit in that jurisdiction, including those which might shift to that jurisdiction for non-tax and/or ‘real’ tax competition reasons, where a fair profit should be booked in that jurisdiction, and distinguish that from artificial allocation of profits or even mischaracterisation of the contribution of that jurisdiction.

A tangible example of this is Singapore as a trading hub for commodities. Singapore has become a natural location for centralised trading activities, and the traders situated there add great value to their organisations. This has developed due to a combination of geography, non-tax settings and tax settings (for both corporate profits and employees).

So, under the international tax system, it is appropriate that profits (and potentially very significant profits) are allocated to those activities based in Singapore. But Australia must be very aware of the risk of companies not just allocating the appropriate profit, but instead over-allocating profit to Singapore to reduce their global tax bill (and similarly with other key relatively low-taxed intermediary jurisdictions, for example Ireland and Switzerland).

Why do I find this example useful?

Because it highlights that the most important international tax questions are not binary arguments about compliance versus non-compliance.

They are often questions of judgment.

Singapore operations clearly create value, and potentially significant value (if they didn’t, the tax analysis would be easy!).

The question is not whether value exists there.

The question is how much value exists there relative to other parts of the supply chain.

The importance to Australia can be demonstrated by comparing the chart below (of international related party trade by jurisdiction) with the chart earlier in this paper of physical trade. Albeit there is a little ‘apples versus oranges’, the differences between them are stark.

Figure 12: Total IRPDs by country breakdown, 2023–24

Source: International related party dealings 2023-24 – IRPDs – Table 2 – Data.gov.auExternal Link

For these reasons, the ATO has put significant work into refining its audit selection parameters (and audit capability) for key areas of the Australian economy (to have a good sense of what is ‘normal’) and then exposed those parameters to the large taxpayer community, usually in the form of Practical Compliance Guidelines.

Areas we have focused on include:

• Commodity exports and trading hubs.
• Inbound (and outbound) related party financing.
• Imports of different types of goods (for example pharmaceuticals, ICT equipment etc).

This allows taxpayers to act on an informed basis as to what is likely to attract the ATO’s attention in an audit sense, as well as being useful in obtaining certainty in advance, for example through APAs.

We have seen this transparency work extraordinarily well in practice from both administrator and taxpayer perspectives, with significant shifts towards and into the ‘green zones’, and much more clustering of transfer pricing outcomes, providing greater certainty without the significant compliance costs (for taxpayers and us) of transfer pricing disputes. The ATO can then spend its time on focusing on ‘outliers’ and understanding their positions (and those taxpayers not being surprised by that attention).

Mischaracterisation of transfer payments and royalties

A related issue is mischaracterisation of transfer payments. Here, it may not simply be the amount of the payment that is relevant to the Australian tax base, but what it is for.

A prime example is the borderline between payments for the use of intellectual property (subject to royalty withholding tax), and payments for services heavily based on intellectual property (not subject), which might be binary or apportionment questions.

This issue is becoming relatively more important to the Australian economy (and many other economies), although noting that some jurisdictions have conceded their right to tax payments for the use of intellectual property.

Interestingly a regime along the lines of the US Base Erosion and Anti-Abuse Tax (BEAT) could be seen as an alternative and potentially more equitable and predictable way (for both taxpayers and countries) of taxing the value of these intellectual property heavy services (where currently arguably fine differences in documentation of intra-group transactions could make a significant difference in tax outcomes).

Much has been written and said about the recent ATO ruling on software intermediaries and the corresponding Practical Compliance Guideline, and it is beyond the scope of tonight to go into the issues in detail, but I would make a few points:

• As above, the ruling is the ATO’s view of the law in Australia, it does not make or change the law – there is no ‘Chevron deference’ in Australia (which I will discuss further below)
• It is better that all potentially affected taxpayers know our view, rather than have a partially informed market
• The ATO’s job is to apply the law as it is, not as some might think it should be or would prefer it to be
• It is not a change in position, and in our view aligns with the case law (refer for example the IBM case)
• Given the importance of the issue, and the desire to clarify the borderline between royalties and services (under both domestic law and relevant Double Tax Agreements), the ATO is actively looking to take disputed cases to the Courts, so as to provide broader guidance to all taxpayers, as in the Oracle matter. This is not to avoid MAP processes (although these will usually be more productive where the underlying law is clear / uncontested), but rather to provide spill-over benefits to the broader group of affected taxpayers.
• We are also highly attuned to the potential for double taxation, and only levying tax where payable under Australian domestic law and after application of the relevant Treaty. Australia’s Double Tax Agreements are clear that where tax is paid in Australia in accordance with the Double Tax Agreement, then the counterparty jurisdiction should be providing relief for Australian tax.
• In practice, most payments in question will ultimately fall to be considered under the scope of the Ireland and Singapore treaties.
• Our Practical Compliance Guideline points to where we think the issue is important in practice (or not so important), and means that most taxpayers will not need to grapple with the issue.
• Any potentially affected taxpayers can approach us in relation to their specific circumstances and explain their position as to why they think their position is different (or to resolve prior years).

‘Chevron deference’ and Australia

It is worth clarifying a misconception that seems to underpin some commentary on the actions of the ATO. In the US, there has historically been a doctrine of ‘Chevron deference’ (although I understand the current Supreme Court has dramatically reduced its scope). My simplistic understanding is that this stood for the proposition that, when the legislation or regulations set by Congress are ambiguous, the Court would prefer the interpretation of the regulator (on the basis that they are experts in the field).

By contrast, in Australia, there has never been a judicial concept of ‘Chevron deference’ against the interest of taxpayers (certainly in tax matters and to the best of my knowledge more generally). When the ATO communicates its view of the law (or its administrative stance), it is simply that: it is the ATO’s view and does not bind the Courts in any way. It is not a new law or a change in law.

On the other hand, there are some ways in which the ATO is bound (legally or administratively) to its positions where favourable to the taxpayer. Where the ATO issues a private or public ruling in favour of the taxpayer, the ATO is legally bound by that position. Supplementing this, in some cases, the ATO will consider a change in position to be a ‘U-turn’ and will only apply the newly held position prospectively.

So, when the ATO issues a tax ruling on, say, its view of royalties, that does not change the law or bind a Court in any way. To the contrary, it can only benefit a taxpayer, who may seek to rely on the ruling if it is in their favour.

Data centres

I also wanted to take the opportunity to briefly mention our position in relation to data centres.

There is currently massive capital investment (in Australia and worldwide) in data centres. The ATO is seeking to better understand this increasingly important and fast evolving part of the Australian and global economy, and to understand the contribution of activities in Australia to global supply chains.

We understand the desire for up-front tax certainty on significant investments. We also understand that tax settings are relevant for investment, and that countries legitimately compete on tax rates to attract investment. However, our job at the ATO is to administer the law as it is.

The ATO offers various ways of obtaining tax certainty, which includes APAs, BAPAs and private rulings. However, we will require full information in relation to the global supply chain relating to the investment in Australia. The more complicated the structure, and the more distorted the allocation of profits (particularly away from Australia and to low tax jurisdictions), the more ‘due diligence’ we must perform before providing that certainty. Unfortunately, sometimes the certainty will be that we agree to disagree.

For those wanting to obtain certainty, our starting hypothesis is that where there is a data centre in Australia as part of a global supply chain, having the activities in Australia (rather than somewhere else) could well be highly beneficial, and hence the activities in Australia might add significant value over and above the mere hosting of data (which itself must have some value).

For example, we are thinking about factors such as stability (from political to infrastructure to geological!), the value of data sovereignty to major Australian customers, proximity to customers (in Australia and the region) etc. In more classical terminology, perhaps something akin to ‘site goodwill’.

On the other hand, we will generally be sceptical of propositions that data centres (as part of highly profitable supply chains) are simply refrigerated warehouses filled with computers that are jurisdictionally fungible, risk free, and command a small cost-plus margin. It is very unlikely that we will agree to a very low taxable return on significant investments without very compelling information.

A coverage and assurance model rather than solely a risk-based model

As discussed above, with the inception of the Tax Avoidance Taskforce in 2016, and various expansions since under a series of Governments, the ATO has been funded on the basis of a coverage and assurance model, rather than solely a risk-based model.

As such, the ATO seeks to comprehensively review taxpayers under its ‘top 100’ and top 1,000’ programs. This is sometimes described as the ‘justified trust’ program. Large taxpayers outside these programs have a more traditional risk-based approach.

Again, it is beyond the scope of this evening to go into these programs in detail (and there is significant information on the ATO’s website), but in short, it means that any significant operation in Australia can expect to have its affairs comprehensively reviewed by the ATO on a regular basis (generally once a year for the ‘top 100’, and on a four year cycle for the ‘top 1000’, overlaid by a ‘normal’ risk based approach). There is no ‘audit lottery’ in Australia for large corporates. The flip side is that we will provide certainty, in that we will tell you exactly what we think of you, whether good or bad! For the increasing number of taxpayers who achieve ‘high assurance’, this is something that is useful for boards to understand, but also many taxpayers choose to share this with a broader range of stakeholders.

Implications for multinational groups operating in Australia

In summary, multinational groups should recognise that Australia is a distinctive tax environment. Company tax (and large market corporate tax as a significant component of that) is unusually important to public revenue, the ATO has substantial specialist capability, and hence large groups are subject to close and continuing scrutiny.

Early engagement is therefore important. Groups should understand published ATO guidance, identify Australian tax risks when transactions are being designed, and discuss significant or uncertain positions before they become disputes. Playing the ‘audit lottery’ does not work in Australia.

Good tax governance is equally important. Australian tax outcomes should be supported by reliable data, clear records and a consistent explanation of how profits, people, assets and risks are distributed across the group. Boards and senior management should understand the main Australian tax positions rather than treating them as matters only for the tax function.

Conclusion

Before I conclude, let me leave you with four observations.

First, Australia occupies a distinctive position among advanced economies because of the contribution company tax makes to public revenue.

Second, the cumulative effect of lower tariffs, lower withholding taxes, participation exemptions and digitalisation has fundamentally changed the environment in which multinational taxation operates.

Third, Australia's response has increasingly been built around transparency, assurance and engagement, together with forward certainty, rather than relying solely on traditional audit activity.

And fourth, taxpayers that engage early, explain their positions clearly and invest in strong governance are generally far more likely to achieve certainty than those that do not.

Modern tax administration depends on tax authorities, taxpayers and advisers being able to engage openly and constructively on complex issues.

In many ways, that is the central idea underpinning Australia's current approach.

So, thank you for your time this evening. I hope that by reflecting on international trends in large market taxation and understanding where Australia has aligned and where it has diverged, you will have a better appreciation of the ‘how’ and ‘why’ of Australia’s distinctive approach to tax administration of large companies, and a better sense of how and when to engage.

Appendix 1.

Evolution of the Australian tax system and the large market

Period and phase	Whole-of-system developments	Large-market measures
1981–2001 Legal and administrative foundations	Part IVA commenced in 1981, establishing the modern general anti-avoidance framework, following the excesses of the 1970s. Electronic lodgment, data matching and other digital capabilities progressively strengthened tax administration across the system. The Australian economy went through significant productivity enhancing deregulation and opened up to the world	Part IVA became increasingly important in addressing complex large-business arrangements, while growing public and media attention placed greater scrutiny on corporate tax outcomes. Significant reduction in corporate tax rate
2001–2014 Increased focus on international tax settings and competitiveness	Tax policy aimed at international competitiveness for cross border capital. Rise of the digital economy	Implementation of the Ralph / ANTS reforms Winding back of CFC measures Corporate tax rate stabilizing
2014–2017 Transparency and targeted anti-avoidance	myTax began in 2014 and expanded digital administration. LuxLeaks in 2014 and the Panama Papers in 2016 increased public attention on offshore arrangements. Broader tax-gap reporting and major compliance operations strengthened system-wide visibility.	Serious community concern as to the large companies’ tax affairs The Senate corporate tax avoidance inquiry began in 2014. The OECD/G20 base erosion and profit shifting final reports followed in 2015, the multinational anti-avoidance law applied from 1 January 2016, and the Tax Avoidance Taskforce was announced in 2016. Justified trust became the organising concept for large-market assurance around 2016–17. The Chevron litigation culminated in the High Court declining special leave in 2017, and the diverted profits tax applied from 1 July 2017.
2018–2020 Data-led assurance and visible accountability	Single Touch Payroll began for substantial employers in 2018 and expanded to smaller employers in 2019, increasing the use of real-time data. JobKeeper and the cash flow boost in 2020 demonstrated the tax system’s role as a delivery platform during the pandemic.	The ATO made increasing use of country-by-country reporting data under rules applying from 2016. Publication of large corporate group tax-gap estimates and justified trust findings reports gave large groups and the community greater visibility of market-level outcomes and assurance results.
2021–2023 Governance, adviser integrity and financing	Operation Protego began in 2022 in response to large-scale GST refund fraud. Stronger attention to fraud, payment and debt management reflected a wider focus on integrity across the system.	The PwC tax leaks matter and related parliamentary scrutiny reinforced expectations of adviser conduct, confidentiality and tax governance. Reformed thin capitalisation rules generally apply to income years beginning on or after 1 July 2023, strengthening the treatment of multinational financing arrangements.
2024 onwards International coordination and real-time administration	The move towards earlier visibility continues through more timely reporting and payment arrangements. Payday Super is scheduled to commence from 1 July 2026.	Australia’s global minimum tax income inclusion rule and domestic minimum tax apply for income years starting on or after 1 January 2024, with the undertaxed profits rule applying from 1 January 2025. Public country-by-country reporting applies for reporting periods commencing on or after 1 July 2024. Together, these measures add new calculation, disclosure and consistency requirements alongside existing company tax and integrity rules.

Note: This is a selective timeline of key legislative, administrative and public developments rather than a comprehensive history.