back to article Why Joe Hockey's Oz tax proposals only get five out of 10

I was fascinated to see El Reg's report on the new proposals to change the Australian tax system, as put forward by Joe Hockey. It's a strange mixture: half is the very sensible plugging of a hole in the tax regime, while the other half shows shocking ignorance of the basis of another part of the international tax system. The …

  1. Buzzword

    Politicians don't do delayed gratification

    "The tax system really does get its slice, eventually"

    That's not good enough. Our beloved leaders want their slice now, up front, so that they can deliver on their wild promises to the electorate. If they don't get their hands on the money, or at least show that they're making an effort, they won't be re-elected.

    1. Tim Worstal

      Re: Politicians don't do delayed gratification

      Well, yes, quite.

  2. Voland's right hand Silver badge

    Err... Worstall missed the plot (as usual)

    The aim of a company is to make profits that the shareholders can cash in and consume as beer 'n' burgers.

    To do that, the money has to be taken back into the home tax jurisdiction of the company,

    No it does not. 99% of the "profit" to the shareholder in USA from shares manipulation, not from dividends or other conventional Adam Smith Economics (TM) ROI.

    Shares in this day and age are manipulated (grow or fall) on the basis of mere promise for return. In order for the share value to go up the money does not need to be repatriated. Apple is a textbook case. It has not repatriated any income for a decade or so, but its shares are growing proportional to that income on the mere promise that this income will be repatriated or otherwise converted into something real one day. There may be some repatriation at the end of the rainbow. Or maybe not. The shareholders are happy extracting value from the shares growth on the market instead of getting dividend and as long as this is the case no repatriation will be forthcoming. Ever.

    Another example. Miscrosoft. It paid its first dividend ~ 20 years or so after the company was founded. Another example... and another... and another...

    Granted, this is not the case for a lot of Eu companies - in most Eu countries there are various accounting and taxation regs which make not paying dividend quite painful. If the subject under discussion is a USA company... well... all you need is to trawl through the filings on NASDAQ and see exactly how much dividends did most of them pay in the last few years. Hint - not a lot.

    1. Tim Worstal

      Re: Err... Worstall missed the plot (as usual)

      " In order for the share value to go up the money does not need to be repatriated."

      That's what I said. If the money is to be paid as a dividend then it gets taxed. Even if it doesn't, and the stock price rises, then the stockholder still pays CGT when they sell the share.

      "We might argue that they'll never bring the money back onshore, but this means that the capital value of the company increases. So when shareholders sell stock (the only way they can cash in, as dividends aren't being paid from those profits not repatriated), then they'll pay income or capital gains tax on that increase in value."

      1. FelixReg

        Re: Err... Worstall missed the plot (as usual)

        Isn't the idea to hold the money outside the taxing country until the politicians in that country get desperate and offer a really low, "one time only," tax rate? Which they do every so often.

      2. Ironclad

        Re: Err... Worstall missed the plot (as usual)

        Unless at some point Apple starts to make a loss. Difficult to imagine now, perhaps with that amount of cash lying around never going to happen but the same argument applies to other less financially well endowed companies.

        In this case the cash in the bank may be used to offset the losses. Because the company is now making a loss the share price drops and the cash that should have been taxed starts to disappear.

        1. Anonymous Coward
          Anonymous Coward

          @Ironclad

          If Apple starts to make a loss, that information will be taken into account when people decide what they're willing to pay for / accept for Apple shares, and their value will go down. That's true whether or not they are losing a billion a year with two billion in the bank or a billion a year with 200 billion in the bank.

          If that happened, the value of Apple would eventually approximate the value of the cash they held - Apple stock would be like shares of a giant mutual fund with very conservative investments (almost all their money is in T-bills and similar instruments, so it isn't exactly invested for a high return)

      3. Anonymous Coward
        Anonymous Coward

        Re: Err... Worstall missed the plot (as usual)

        There's a known strategy known as "Tax Planning 101," otherwise known as "Buy, Borrow, Die." The shrewdest investors don't sell their shares, they borrow against it to avoid the capital gains tax. They then hold the debt until they die, whereupon the heir can take advantage of "adjusted basis" tax loopholes to re-base the shares and then sell the shares to pay back the debts. Since the shares have been re-based, there is no capital gain, and thus no tax.

        1. Tim Worstal

          Re: Err... Worstall missed the plot (as usual)

          Well, that sorta works in the US tax system but it most certainly don't in Dear Old Blighty. Because we don't have the adjusted basis (nor the step up) for inheritance tax.

    2. PMJ

      Re: Err... Worstall missed the plot (as usual)

      Actually, he didn't...

      In order for shareholders to benefit from the increase in share price (be it real or manipulated) then they must sell and be subject to capital gains tax.

      PMJ

  3. auburnman

    "(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise"

    They sorely need to turn the screws on (a) then. Not to eliminate it entirely, but acknowledge the fact that if you have a UK warehouse that delivers a certain amount of its stock within the UK you are a de facto UK retailer with a UK presence regardless of whether your sales are transacted via internet or mail order catalogue or smoke signals. That changing treaties is hard is no excuse if it needs doing, and as the article notes these are updated every couple of decades anyway AND they are all of a similar structure.

    The other important point is that tax delaying may not be tax dodging but it is still bad because time is money. If work owed me a bonus by a certain date and then delayed it several months, I would be out of pocket for the interest in the sum of my mortgage/student loans/etc that I could have paid off, not to mention the added work of making sure I am still getting my money and when. Translate that to a cash strapped government paying millions in interest every week and you can see why people are miffed.

    1. Anonymous Coward
      Anonymous Coward

      interest on what?

      If you mean interest on national debt, well, that's a different problem.

      I agree that all of the issues (I almost said problems) are intertwined and solving them all at once is probably impossible, and solving them one at a time only exacerbates things.

      IMHO...

      1. auburnman

        Re: interest on what?

        I do mean interest on national debt, which is a separate problem, but also a concrete measurable example of why time is money and why tax delaying is such a problem.

  4. Warm Braw

    Hm.

    >Because those warehouses are specifically for the delivery of goods: that doesn't create a PE

    The only thing that makes Amazon different from a shop is that the consumer transaction takes place in Luxembourg so that the UK sub has no income (save what it is paid to warehouse and ship goods).

    Presumably by the same token, there's nothing to stop our high street shops relocating the retail part of their operation offshore and then the actual shop network would simply exist for the "storage, display or delivery of goods". I suspect if they did, the renegotiation of thousands of bilateral treaties would suddenly be less of an obstacle.

    1. Anonymous Coward
      Anonymous Coward

      Re: the consumer transaction takes place in Luxembourg

      Luxembourg? Luxembourg?

      I could have sworn I was still sitting in front of my computer, attached to a UK adsl line, paying in pounds, while using my UK credit card. I really don't see anything Luxembourgish in that list!

      :-)

      1. Squander Two

        Re: the consumer transaction takes place in Luxembourg

        We all have different views on the EU, sure, but this is the first time I've run into someone who actually hasn't heard of it.

  5. crayon

    "Corporation tax is to be paid, in theory, where the economic activity that created the profit took place, which isn't just where the sales took place."

    I'm not an economist and don't know how economists define "economic activity that created the profit took place". But to me that clearly means where the sale took place. Before a sale takes place, any goods or services produced have no profit attached to it and thus any activity before then has produced no profits. It is only when someone is willing to pay for a good/service that a profit can be realised.

    "If it were, then of course all that value from the Pilbarra iron ore mines should be taxed by the Chinese government, which wouldn't go down at all well in Australia."

    A mining company based in Australia selling ore mined in Australia to China would normally mean that the sale took place in Australia and will be taxed as such. How does one come to the conclusion that the Chinese get to tax it?

    "The tax system really does get its slice, eventually, whatever else happens."

    But does it get the same sized slice that the tax-withholding company were obliged to pay at the time the profits were made? When a company repatriates profits will they be taxed at prevailing rates or the rates at the time those profits were made? Plus interest? And late tax penalty?

    1. Tim Worstal

      "A mining company based in Australia selling ore mined in Australia to China would normally mean that the sale took place in Australia and will be taxed as such. How does one come to the conclusion that the Chinese get to tax it?"

      On exactly the same basis that Joe Hockey is arguing that something designed by Americans in America, built by Chinese in China (an iPhone for example) should have the profit taxed where it is sold in Oz.

  6. PMJ

    GST/VAT Rates for International Sales

    My understanding is, at the moment, sales of physical goods within EU borders should have VAT applied at the rate of the seller's country unlike the buyer's country for digital goods. This is inconsistent.

    However, the new digital regime is difficult for small online sellers who have to have an eCommerce solution that copes with the multiple tax rates and can use the two pieces of evidence to identify the buyer's location (typically GEO IP and shipping destination). Their accounts are going to be more complex too.

    I understand the sentiment but a simpler solution is needed (for example a standard rate for cross border EU transactions).

    PMJ

    1. Pellinor

      Re: GST/VAT Rates for International Sales

      You're almost right about the sale of goods: the basic rule would be that the sale is where the seller is. However, there are special rules for "distance selling", which is a cross-border sale where the customer isn't VAT-registered. If you're over the threshold for distance selling in a jurisdiction (which is usually €35k though it can be €100k), the place of supply moves to the customer's location.

      VATMOSS is designed to replicate this for digital services; the problem for small businesses is that they neglected to put in the threshold.

      1. adrianww

        Re: GST/VAT Rates for International Sales

        Not only is he "almost right" about the sale of goods, he's specifically and actually right - so long as (as you mentioned) your annual sales into other EU countries fall below the distance-selling threshold in each one. I suspect that there are a lot of UK small businesses/SMEs who fall into that category and who are grateful that the system is actually fairly rational in that respect. These are also the businesses who are going to suffer the most from the ill-thought-out and poorly-publicised way in which the digital products/services rules were introduced. We all suspect that we know who the EU were trying to target when it came to that almighty shambles, but it's the little guys who are going to feel most of the pain. As you say, it would have been better and far more workable if they had applied the same rules/thresholds as for physical products, but the idiots didn't do that.

    2. Mark 65

      Re: GST/VAT Rates for International Sales

      The biggest issue is not the applicable rate but the enforcement. A company in the EU selling into the EU (France to UK etc) is easy for enforcement as there is overarching EU law. A non-resident company in say Hong Kong selling digital goods into Australia, what then? Hockey says "add GST". Company says "Get fucked fat boy, your move". What then? He's screwed. Although Tim might consider it an entirely logical thing to do that is only from the theory of application side. The practical part in the real world tends to be a right bitch. I would argue that GST on digital goods is one of the easiest thing in the world to avoid. I buy my Adobe licenses from wherever gives me the best price. I see no reason why Australia should clip that particular ticket. It is a lazy tax.

      1. Anonymous Coward
        Anonymous Coward

        Re: GST/VAT Rates for International Sales

        Wouldn't Hockey's next move be, "You get blacklisted, no Australian bank or financial institution gets to do business with you. You pay the price or you get locked out. Take It Or Leave It."?

  7. graeme leggett Silver badge

    "Channel Islands retailers selling into the UK, for example"

    Wasn't this caused by exploiting a deliberate tax exemption set up so that flower, veg and fruit producers in the CI could sell to the (much larger market of the) UK without excessive burden?

  8. Roger Greenwood

    I so want Tim Worstall . .

    . . . to sound like Tim Harford.

    1. Tim Worstal

      Re: I so want Tim Worstall . .

      As it happens, as to spoken accents, we're not that different. Indeterminate English BBC I suppose....there's a couple of bits of me around on iPlayer and NPR if you're really, really interested (or entirely bored of real life).

  9. James 47

    Are there any numbers re the volume of trades done from within ISAs?

  10. Pellinor

    One thing I wonder about with the Article 5 permanent establishment rules is whether Amazon warehouses are simply acting as storage or for delivery.

    Yes, they do some storage: great wodges of stock are pile up there. They also serve as the starting point for deliveries. But in between there is a load of activity around making up the orders, packing them, and labeling them. Is that within the exemption? I'm not entirely sure.

    If I could be bothered I'd go back and have a look at those industrial buildings allowances cases about whether breaking bulk and packaging are "processes" for IBAs purposes. If they are, then they'd fall within the exemption if the processing were to be done by another enterprise, but not necessarily if done by the owner of the goods.

    Actually, having a look at Lexis Nexis (other providers of legal information are available) I note that last year Next Distribution were arguing that there was a process, but the First Tier Tribunal found that what was done was not uniform enough for there to be a "process" for IBA purposes (which seems a bit unfair, but hey ho). So if there is enough bespoke stuff being done by Next to elevate the work above a mere process, then arguably if Amazon is in a similar situation it would follow that as (in the hierarchy of work being done) picking-and-packing is more than just a process, it is also more than just storage. Which could take Amazon out of the PE exemption, and give them a hefty UK taxable presence.

    Not that I know enough about the detail of any of these cases to be definitive, of course.

    1. Brewster's Angle Grinder Silver badge

      Amazon's logo looks like a golden shower is in progress

      Yeah, I think Amazon's warehouses are covered by the "taking the piss" exception. And I also think you should be working for HMRC's legal team.

  11. Duncan Macdonald

    Abolishing a treaty is easy

    Either party to a two way treaty can abolish it without need for cooperation from the other party (renegotiating it to change the terms however IS more difficult).

    If the bilateral treaties were abolished then the taxation position would be determined solely by local law.

    1. Anonymous Coward
      Anonymous Coward

      Re: Abolishing a treaty is easy

      But the treaty can contain penalties for withdrawal, meaning backing out can have consequences. Also, if one party backs out from the treaty, the other party doesn't have to obey it, either, which can have consequences of their own. For example, what if the two nations have differing notions on the location of taxation, such that you end up double-taxing because each country bears legal claim?

      1. Anonymous Coward
        Anonymous Coward

        Re: Abolishing a treaty is easy

        Again, any penalties come down to enforcement. America says get screwed to Ireland or Lichtenstein etc on the grounds of tax avoidance what's their response? Complain to the WTO? Just like in the playground the biggest bully gets to set the rules. America will stomach the rules for as long as it suits them. Think about it - Apple, Google etc avoid every other countries taxation and wait for a repatriation holiday where a low enough rate is offered. US taxes money at a lower rate but there's a whole lot more of it as they're likely going to get a slice from everyone else's pie.

        1. Charles 9

          Re: Abolishing a treaty is easy

          Can't they just lock American business out instead? Americans may be the bully, but Ireland and Lichtenstein are sovereign within their own borders, meaning they get to make the rules.

  12. LucreLout

    A rethink is overdue

    The fundamental issue is that governments around the world haven't been able to keep pace with technology. The days of buying what you need at the corner store, while working for a locale mployer are gone, and they aren't coming back (Sorry Greens).

    Now I can buy training from America, drink wine from Australia while following the course on a laptop made in China, eat cheese from France between gobfulls of vino, and dump the lot in the bog the following morning while wiping my ass with toilet paper from Poland. Where exactly does the UK add any taxable value? It doesn't. While cases like Amazon & Google may look a little like tax abuse, they are following the law as written.

    Tax revenues will fall over time as mobility of effort and product increase. I might live in the UK, but if I remote into a server in America and work there for a company based out of Bermuda, where is the income earned? Tax lawyers might say the UK, but what if I stuff in an intermediary between me and the Bermudan entity, one based in say BVI. The BVI company recharges me to the Bermudan enterprise for £550/day while paying me minimum wage. Lots of countries will claim the value is added in their location and so that is where tax becomes due (intelligence in the UK, margin in BVI, computation in USA, value in Bermuda). They can't all be right.

    Lets refocus on sales for a moment. I buy a Kindle from Sarl, delivered to the UK. I then fly on holiday to Spain and buy a book published by a German through the Kindle via Amazon sarl. Who is entitled to tax what and why? Now consider that I instead fly to Thailand and buy the book there. Does the EU forgo the taxes willingly, and who is actually remitting the VAT/GST/WTF to Thailand?

    Competition for those tax revenues will increase, as will the costs of collecting them (enforcement), and that means the cost of government has to decrease. Either governments get used to doing what they do now far more efficiently, or they have to determine which services they cut. It would be better for society as a whole if they start this now while things are just warming up, because 20 years from now this level of avoidance will all seem like a drop in the ocean.

    1. Salamander

      Re: A rethink is overdue

      Simple - you charge consumption taxes. In your example, you will be using an internet connection to connect to the server in America. The UK government simply taxes you on the data transferred and received. They will call it the data usage tax. If you use a VPN, then you will have to pay an additional tax on the VPN data - the VPN usage tax.

      Want more? How about a bank account tax? £50 a year or 0.5% of the average value held in the account over the year, which ever is greater.

      Governments will simply move to taxes that it is hard to get out of. Certain forms of consumption are easily measured and attributed and hence can be easily taxed.

      1. Charles 9

        Re: A rethink is overdue

        The trouble with those kinds of taxes is that they can just move the business under the table. With no records and so on, how will the taxes be enforced properly?

  13. Anonymous Coward
    Anonymous Coward

    Sales tax

    shouldn't a sales tax be levied where an item is sold? if a book is sold by a Luxembourg SARL, the sale was in Lux., if an apple is sold in Ireland - in a greengrocers - then the sales in Ireland. Question is what happens when the are no physical goods: if Apple sells an app to a UK subscriber roaming in Spain, where did the sale take place? Why not just charge VAT at the point of sale, with that point of sale being the incorporated base of merchant? Don't bother trying to collect based on buyer address, as the buyer isn't actually the one adding the value in the value-added tax thing?

    1. Charles 9

      Re: Sales tax

      Because the sellers have the ability to re-home in tax havens, meaning everyone loses.

  14. crayon

    "On exactly the same basis that Joe Hockey is arguing that something designed by Americans in America, built by Chinese in China (an iPhone for example) should have the profit taxed where it is sold in Oz."

    Australian ore is sold (and taxed) in Australia then shipped to China. If the entity receiving the ore in China then resells it within China any profits (made by that entity, not the mining company in Australia) will quite rightly be taxed by China. So how exactly does China get to tax a mining company in Australia?

    What Apple, Google, Starbucks and others have done is structure themselves so that local sales offices generate very little net income (ie taxable profit), most of the potential profits are sent to a tax friendly HQ in the form of "marketing", "royalties" and other such tax avoidance devices. These kinds of loopholes which deprives the people/government of the host countries of tax income needs to be closed. Maybe Hockey's proposals addresses this (I haven't read it and I don't know), however it doesn't change the fact that Australian ore, sold to China, is already taxed by Australia at the point of sale which is Australia. Nothing in the proposals (even though I haven't read it I can categorically rule out such a ludicrous notion) will suddenly allow China to tax an Australian company for profits on sales made in Australia.

  15. bep

    Not to mention

    The dodgy mark-up and mark-down pricing some of these companies have been indulging in which can only be interpreted as an attempt to evade Australian tax on goods sold in Australia.

    1. Charles 9

      Re: Not to mention

      Here's the rub. How do you carry through without threatening another country's sovereign power? That's always been the big problem with tax havens. Short of war, how do you make the tax havens stop being tax havens?

      1. Mark 65

        Re: Not to mention

        You answered your own question dude. You essentially threaten, or do, kick the shit out of them. Whether that be physically or by entirely removing them from the financial system and physical trade through sanctions.

  16. david 12 Silver badge

    USA CGT, Tax treaties

    The standard Capital Gains Tax rate in the USA is 15%. And it is forgiven at death. No, you don't even have to balance it out or do anything complex. But you don't have to wait until then -- you can also wipe out the CGT by converting the asset to a pension. Or if your income falls low enough so that you need the money, you can just sell out -- CGT doesn't apply if you aren't paying income tax.

    Or any of a score of other lurks. There are a thousand different taxes in the USA, and a thousand different exemptions to match.

    Tax treaties are worked out to be reciprocal. It's not going to break anything to have carve-outs for income that is not taxed in any country. It may, in some cases, not even require changes to tax treaties. In other cases, well, this is a G20 international agreement, and like he said, tax treaties are being continously re-negotiated.

  17. Colin Tree

    Transaction tax

    Is it time to review how all taxes are collected. Multinationals are making a joke of the whole international tax system. It has to be re-organised by all countries in cooperation before all governments go broke.

    Tax funds transferred in any transaction instead of taxing the goods or services, wages or profits.

    Tax both sides of the transaction - both the credit and debt, then international transactions will share taxes to both countries. Forget tax refunds, just make a sensibly low tax level which raises sufficient to pay for government expenditure. Adjust the tax level to balance the economy, simple.

    Everyone pays, no-one dodges tax.

POST COMMENT House rules

Not a member of The Register? Create a new account here.

  • Enter your comment

  • Add an icon

Anonymous cowards cannot choose their icon

Other stories you might like