Transfer pricing rules the ‘core’ of the problem: Deakin tax expert

A Deakin University tax expert has called on the Government to strengthen existing double tax treaty agreements to curtail the practice of foreign companies siphoning untaxed profits from Australia. 

Deakin University senior lecturer Dr Adrian Raftery said that publication today of the accounts of Apple's local arm highlighted the issue that Australia has with the current transfer pricing rules.

"It is time for the Government to stand up and do something about these transfer pricing rules – that is the 'core' of the problem, not Apple or other multi-national companies," Dr Raftery said.

"They (the multi-nationals) are only doing what they are legally entitled to within the current regulations."

Financial statements filed with the Australian Securities & Investments Commission (ASIC) shows that Apple paid $80 million in Australian tax last year – just 1.3 per cent of their gross turnover of $6 billion. 

"It is outrageous to think that so little tax could be paid by multi-nationals in Australia," said Dr Raftery, author of 101 Ways to Save Money on Your Tax – Legally!

"How do you explain that to the average Joe and Mary who pay every dollar in tax they are required to on their employee wages?"

Dr Rafter said it was considered a common strategy for large multi-nationals to place their intellectual property, such as brand names, in a company domiciled in a tax advantaged country.

"That foreign company will then charge the local operation a fee for the use of that intellectual property plus other management services," he said. 

"In most instances, the fee transferred is tax-free and reduces the regional net profit, and as a consequence, the income tax that is paid locally. 

Dr Raftery said any attempts to introduce a turnover tax to negate this practice may have undesirable consequences as it would adversely affect most Australians. 

"Another tax on sales or turnover would simply be the GST (Goods & Services Tax) in disguise."

Instead Dr Raftery proposes a more workable solution would be to strengthen current double tax treaty agreements that Australia has around the world, particularly with countries that have generous tax systems, such as Ireland.

"We tax dividends paid to foreigners at 15 per cent and just 10 per cent for interest and royalties payments," he said.

"So why don't we also have a catch-all provision that ensures non-resident withholding tax is charged on all payments, including management and service fees paid, to foreign related parties?

"One thing I am certain of is these multinational companies would be paying a lot more locally if the tax rate overseas was 50 per cent."

Dr Raftery said it was not just Australia who was missing out on taxing income derived in its country but shifted elsewhere.

"The United States have lost billions, probably trillions, in tax revenue in the last decade alone from multi-nationals siphoning untaxed profits offshore via generous transfer pricing rules," he said.

Dr Raftery was also bemused with budget funding cuts to the Australian Taxation Office (ATO) in light of these practices by foreign-owned companies.

"All of the experience and expertise has been ripped out of the ATO when we should be investing more resources to address this serious (transfer pricing) issue," he said.

"If we forgo an extra one billion in tax revenue, it is quite simple that the Government can't spend one billion on services such as roads, hospitals and education."

About Dr Adrian Raftery

Adrian is the course director for financial planning at Deakin University and is a Fellow of the Institute of Chartered Accountants, a Certified Financial Planner, a CPA and a Chartered Tax Adviser.  Adrian is the author of 101 Ways to Save Money on Your tax – Legally! and is a Director of Dr Super Strategies.