The existing worldwide tax program was developed
in the last century when the web was not yet formed. At that time, a foreign company would typically require a considerable physical presence in Australia before it could be in a position to earn a significant quantity of earnings from Australian consumers. This is what’s understood in the tax world as an irreversible facility.
The principle of the long-term establishment is embedded in most domestic tax laws as well as virtually all the 3,000 plus tax treaties on the planet. It determines that in general, service revenues of a foreign company will be subject to tax in Australia only if the business has a long-term facility in Australia. Simply put, the ATO can not tax an international business’s earnings if it has no irreversible establishment in Australia.
The recent hearings of the Senate questions into corporate tax avoidance made it clear the tax structures of Uber, Airbnb, like their older peers Google and Microsoft, are designed to guarantee income from Australian customers is earned by a foreign business that does not have an irreversible establishment here. The long-term establishment idea is ineffective for today’s digital economy.
Uber’s company and tax structure
Take Uber, which though developed in the US, has a wholly-owned subsidiary in the Netherlands, which in turn has a wholly-owned subsidiary in Australia.
The most crucial possession of Uber is its digital platform that supports the app connecting individual chauffeurs and their clients. It’s not likely this app was developed in the Netherlands. Regardless of this, Uber-Netherlands can book income created from clients in Australia.
For example, if a client pays $100 for a flight in Sydney reserved through the Uber app, the money remains in truth paid to Uber-Netherlands. Out of the $100, Uber pays the driver about $75. The gross profit of $25 is scheduled in the Netherlands. This is so even though the transaction happens mostly in Australia, consisting of the chauffeur, the consumer and the flight.
Uber-Australia gets a service charge from Uber-Netherlands for its marketing and support services performed in Australia. The cost is identified based upon the operating costs of Uber-Australia, plus a markup of 8.5%. The increase is successfully the taxable revenue of Uber in Australia under its tax structure
Airbnb’s organization and tax structure.
Airbnb, another young organization, founded in the US, has a structure very comparable to that of Uber. Airbnb’s parent business in the US has a wholly-owned subsidiary in Ireland, which in turn has an entirely owned subsidiary in Australia.
Airbnb charges costs to both hosts and guests for lodging booking through its digital platform. Instead of Airbnb-Australia, Airbnb-Ireland books the cost earnings created from accommodation bookings in Australia. This is so even if the host, the guest, and the accommodation are all in Australia. For example, if a Sydneysider uses the Airbnb app to book accommodation in Melbourne, the payment is in reality paid to Airbnb-Ireland. The host of the lodging is then paid by Airbnb-Ireland which charges a fee of 3%.
Airbnb-Australia is responsible for the marketing activities in Australia. It gets a service charge from Airbnb-Ireland for those activities, and the fee is again computed based on its operating costs plus a markup.
Déjà vu– Google and Microsoft
Comparing the tax structures of Uber and Airbnb with that of Google and Microsoft reveals striking resemblances. It suggests that the appetite for tax preparation is similar in between recognized and relatively “young” technology companies.
The typical pattern: a parent business in the United States develops entirely owned subsidiaries in market jurisdictions (such as Australia) along with in low-tax nations.
While the business truth is that all business in a group is successfully one single enterprise, the tax law in general deals with each company as a different taxpayer.
On the one hand, the Australian subsidiary usually is responsible for marketing and support services that need to be physically performed in Australia and makes a service charge on an expense plus basis. The number of revenues subject to tax in Australia is typically tiny compared to the earnings produced by Australian consumers.
On the other hand, copyrights– which are often the most important and valuable assets of technology companies– lie in low-tax jurisdictions such as Ireland, the Netherlands, and Singapore. This structure allows those low-tax subsidiaries to book the income produced from customers in Australia and effectively shields the revenue from the Australian tax internet.
Action product 1 of the OECD’s base disintegration and earnings shifting (“BEPS”) project is “tax difficulties of the digital economy.”
The original objective of the OECD was to explore how the 20th-century worldwide tax regime must be reformed in response to the digital economy in the 21st century. It rapidly understood it was incredibly difficult, if not impossible, to accomplish international consensus on the designated reform. The often conflicting and vested interests among countries provide a powerful obstacle to the international agreement on a meaningful change of the foreign tax regime.
Instead of relying on the BEPS project to resolve the issue, Australia has followed the lead of the UK and is in the process of introducing the Multinational Anti-Avoidance Law– commonly known as the Google tax– to address the issue. As the new law incorporates concepts that are new and untested, it is not clear whether it will be useful.
In any case, it’s important to remember that multinational corporations are very agile. They may replace their “avoided permanent establishment” structures to circumvent any Google tax or to incorporate new tax avoidance tools.