03/11/22

AUSTRALIA: Tax crackdown on multinational subsidiaries selling to government.

As published on themandarin.com.au, Thursday 3 November, 2022.

Multinational giants hiding behind paper-thin local subsidiaries to shield revenue and profits sent offshore to bypass the Australian Taxation Office will soon need to show their hand when bidding for government work.

In a key reform to the procurement system that has been years in the making, new tax-transparency requirements that will commence from 1 July 2023 will force public companies in Australia to disclose where their subsidiaries are based.

Large multinationals will also need to disclose “certain information on a country by country basis” and their approach to tax, and tenderers for “large government contracts” will need to disclose their country of tax domicile.

“The publication of this data provides the community with a better understanding of how much tax large corporates pay. Improving transparency is important to ensuring that multinational companies can be held to account,” assistant minister for competition, charities and treasury Andrew Leigh said.

The term “large” is somewhat subjective.

According to the ATO’s advice to business, the requirement is for “tenderers for Australian government contracts worth more than $200,000 to disclose their country of tax domicile, by supplying their ultimate head entity’s country of tax residence.”

That threshold will exclude many sole traders and contractors presently running their own contraction payroll via the procurement system, but it’s low enough to scoop up pretty well every corporate selling to the government.

The projected extra income is an exceptionally modest $250 million over the forward estimates, possibly set as a minimum baseline so as not to spook a phalanx of lobbyists threatening to sack local employees if they are required to pay tax.

“Australians expect everyone in our tax system to pay their fair share,” said Stephen Jones, assistant treasurer and minister for financial services.

“Today’s transparency report helps the public and the government understand how the system is working and where the gaps are. We invested in increasing tax compliance in last week’s budget and this data will help us target that additional funding.”

The software and managed services sectors are two of the areas known to have been minimising taxable income for decades thanks to the opaque practise of transfer pricing where a multinational mothership sells intellectual property to a subsidiary at an inflated price to absorb taxable profit.

Most software operates on profit margins of at least 30%, with the extra export markup to Australia typically 20% for enterprise systems.