- The challenge of globalisation
Recent media attention has focused on the taxation of global revenues from the exploitation of intellectual property (IP) developed by technology companies.
Managing the challenges of globalisation
Recent media attention has focused on the taxation of global revenues from the exploitation of intellectual property (IP) developed by technology companies. This has been buoyed by an increasing demand for fairness in tax outcomes by the public at large and the rise of technology brands to become the most valuable IP assets in the world. Popular headlines have accused tech giants such as Apple and Google of unfair tax minimisation, not only in Australia, but on a global basis. Repeatedly blamed for not playing fair, those companies have always stood firm in their position that they pay tax in compliance with national tax laws.
A 2014 survey of the world’s most valuable brands positions technology companies as accounting for almost one third of the brand value of the top 100 brands, with a 16% increase in value for the sector since 2013. It is necessary to read down the list to number 5 before reaching the world’s most valuable non-technology brand, McDonalds. The legendary Coca-Cola brand is now barely more than half the value of that of Google, which tops the list.
It is clear that the increasing value of technology-related IP and the advantages of e-commerce platforms will continue to both encourage and enable technology companies to structure their operations so as to make use of tax-effective jurisdictions. However, technology businesses should be acutely aware of the current focus of economic leaders to levy appropriate levels of tax on those companies that have the ability to host their IP or perform their e-commerce operations in low tax jurisdictions. Protecting the tax base of IP and e-commerce transactions is a hot-topic and a priority for all major economies.
Multi-national organisations operating in Australia need to be particularly alert to the brand damage that can be caused by a perceived failure to “pay their way”. The recent Federal Budget is currently being portrayed in the media as an attack on lower-income earners, who are seen as bearing an unfair share of the tax burden. This only heightens the reputation risk for successful businesses that pay little or no tax on their Australian operations, irrespective of any valid commercial rationale.
Some of the difficulties for governments in regulating the taxation of IP and e-commerce platforms arise directly from the application of bricks and mortar tax law principles to ‘virtual’ businesses that can involve complex operational supply chains. As a result, the G20 members, through the global discussion on Base Erosion and Profit Shifting (BEPS), are concentrating their efforts in developing guidance for governments in determining the residence and taxable presence of IP and e-commerce platforms.
Taxable presence and residence
The generation of a taxable presence based on IP rights is a focus for policy-makers, most notably the Organisation for Economic Cooperation and Development (OECD). Technology companies are finding themselves increasingly under scrutiny on tax residency in relation to their IP and e-commerce platforms, particularly those that rely heavily on the use of a server, the internet or a cloud environment to carry out commercial activities.
The operation of a server or other e-business activities may be sufficient to create a taxable presence or Permanent Establishment (PE) in a country other than the business' principal location. Where such a PE exists, a question arises as to what profit, if any, should be allocated to each of the jurisdictions involved in the supply chain.
The OECD Model Tax Convention provides only general guidance for its members on tax residence issues associated with the uses of servers. Broadly speaking, the model convention considers that, for a server to constitute a taxable nexus, the equipment must be set up in a manner that it is: owned or leased; operated in a fixed location; and perform core functions for the benefit of the taxpayer. It is important to note that human interaction is not required to meet the definition of taxable nexus.
However, very little guidance is available with respect to the taxation of more complex transactions, such as the sale of products via e-commerce platforms where the supplier and the customer are located in different jurisdictions. It remains unclear whether the transaction should be taxed in the location where the customer is located or in the place where the supplier regularly conducts its business.
E-commerce and the digital economy may fairly be regarded as the catalysts for the current BEPS dialogue. In March 2014, The Australian Financial Review brought to public attention reports that approximately $8.9 billion in untaxed profits had been channeled from Apple's Australian operations between 2002 and 2013 to a tax haven structure based in Ireland.
Treasury did not provide any specific response to these claims, but the news did much to ignite debate at both a public and governmental level. The then Federal Minister of Finance, Mathias Cormann, swiftly indicated that it was the government’s intention that businesses in Australia pay their fair share of tax where they earn profits, and that Australia intends to address BEPS issues in a coordinated way through international forums such as the G20. It is timely that Australia has commenced its presidency of the G20 and little surprise that BEPS sits high on the agenda.
At this stage the OECD has identified a number of areas for discussion, including a proposal to modify the existing permanent establishment rules. As a result of the work at the OECD level, a series of recommendations may be adopted by the Australian government, such as changes to the regulations in connection with the taxation of the digital economy, the introduction of rules to neutralise the effects of hybrid instruments and the enforcement of information exchange agreements with other tax authorities.
Further, the ATO has commented that investigations are taking place to confirm that “e-commerce and digital approaches are being implemented in existing business operations to shift that part of the tax base from Australia.”
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