CANBERRA: Australia Government will shortly release a discussion paper on the Australian tax system. It will be the first step towards the much anticipated tax white paper. International factors should figure prominently in the white paper — specifically, how to ensure that Australia has a resilient tax system given the challenges of globalisation.
Treasury Secretary John Fraser recently said our tax system looks ‘remarkably like it did back in the 1950s – but our economy looks very different’. How true.
Among the most significant changes are the internationalisation of the Australian economy, and the influence of technology. Australian exports and imports as a share of GDP have increased from 30% in the early 1960s to around 45% now. But this figure does not do full justice to the extent to which Australian business and consumers operate across national borders and participate in the global economy.
The integration of economies and a global rather than a national approach to doing business is challenging our tax system.
For example, the underlying principle of corporate tax is that firms pay tax where economic activity takes place. This was fine when goods were entirely produced in Australia. However it is not so clear when inputs – both goods and services, such as R&D, advertising, marketing and intellectual property rights – are sourced from many countries. Increasingly, this involves companies operating production across many national borders. When there are such intra-company operations it can be difficult to determine the value-add and tax liability in each jurisdiction. Companies can readily manipulate prices in intra-firm operations.
The Government has countered with transfer pricing rules which seek to apply an arm’s length principle to value related party trading. But this is increasingly difficult when intangibles, such as unique intellectual property rights, are a major part of the production process. As a guide to the rising importance of intangibles, in 1978 the asset distribution of S&P 500 companies was 95% tangible assets, 5% intangible. In 2010, the breakdown was 20% tangible and 80% intangible.
