You won’t hear them shouting it from the rooftops, but multinational tech companies were the big winners on Budget night, effectively given a free-pass to shift billions in fast-growing cloud sales offshore to avoid tax obligations in Australia.
New measures introduced by the Treasurer on Tuesday evening are supposed to close loopholes that have made it too easy for foreign companies to “aggressively minimise” – or to “avoid” – paying tax on income earned in Australia.
Joe Hockey’s so-called Multinational Anti-Avoidance Law, unveiled during his budget speech, was also supposed to “level the playing field.” They are meant to ensure that local companies which pay the appropriate level of taxation in Australia are not put at a competitive disadvantage compared to foreign companies that do not.
Regardless of Mr Hockey’s intention to stop revenue shifting and level the playing field, for the technology sector at least this proposed legislation will have the opposite effect.
It is Christmas come early for the powerful multinational tech lobby, and will entrench a systemic rort that is hollowing-out Australia’s home-grown technology sector.
This is a terrible policy, and one that can only have been crafted by a government that does not believe Australian companies can compete with offshore rivals in this sector.
Incredibly, it is a bet against Australian innovation, giving foreign companies a ridiculous head-start in any competitive bid in this country.
Local companies will simply find it harder to compete against foreign interests that don’t pay local tax.
Perversely, the law will also discourage foreign technology firms from investing further in their Australian subsidiaries. From providing better and more technical support services.
The cherry-on-top of this weirdly backwards-arsed proposal is that it provides a (hopefully unintended) incentive that will encourage successful Australian companies with offshore subsidiaries – and offshore revenue – to shift their tax domicile to another part of the world.
That is, Australian-headquartered tech companies that do the right thing and pay tax locally right now may be forced to restructure for tax purposes. In other words, to become a foreign multinational.
The Multinational Anti-Avoidance Law is supposed to stop complex arrangements around things like related-party loans, or service contracts between subsidiaries. Much of it focuses on what can reasonably be claimed as local activity for tax purposes.
From January next year, the legislation puts in place measures to ensure that when Australian customers deal with an Australian subsidiary of a foreign company – or a local entity that is integral to the customer’s decision to enter into the contract with that foreign company – those sales are recognised as Australian income. That therefore tax is owed on profits from these economic activities undertaken in Australia.
So far, so good. Further, it says that where a company is found to have rorted the system, they will be charged double the original tax owed.
All this great stuff is undone, however, in explanatory notes which states that the draft law specifically excludes cloud services from being captured by this new regime.
It is as if this legislation were written by the very powerful and under-radar multinational tech lobby – the very group it is supposed to be capturing. And there is a good chance that this is precisely what happened.
Far from closing a loop-hole, this law effectively sanctions billions of dollars in taxable income earned in Australia being sent offshore.
The explanatory notes also declare that a foreign company that sells complex enterprise software in Australia, and which employs highly-skilled staff in Australia who assist with customisation and high-level customer support, must pay tax on local revenues.
No word on how cloud-hosted enterprise software is treated. But it is fair to say that this law does nothing to encourage foreign firms investing in their Australian operation, or indeed investing in their own customer service.
We know already that Australian providers operate at a competitive disadvantage compared to foreign firms in the provision of technology services. We know that successful Australian companies have already restructured for tax purposes because of this issue – and the legislation proposed in the budget entrenches this competitive disadvantage.
It is sadly hilarious that the Treasurer should give a shout-out to local startup heroes Atlassian during his Press Club address on Wednesday. Atlassian employs 1,100 people globally – more than in Australia – and is valued in the billions of dollars.
It is a phenomenal startup success, “12-years-in-the-making” as one of its founders Mike Cannon-Brookes has said. It is also a company that restructured its global operations for tax purposes, shifting its domicile offshore.
This is nothing against the Atlassian crew. Atlassian’s is an incredible story of growth, wealth-creation and raw success that we wish Australia could repeat 20 times over – right up to the part where the company finds it necessary to disconnect (for tax purposes) from its ‘home’ market.
Mr Hockey knows Atlassian well. He attended a sit-down with the Atlassian crew recently to take advice on what the startup sector needs to thrive in this country (including a discussion on tax.) Atlassian hosted a similar session with Labor’s shadow Treasurer Chris Bowen.
Atlassian is a company founded in Australia, but which restructured for tax purposes to shift its primary domicile outside of this country. Now the company is now dispensing tax advice to the Australian Treasurer.
The Multinational Anti-Avoidance Law is dreadful policy that will encourage other successful Australian technology companies to similarly restructure for tax purposes, simply to enjoy the same benefits that this law bestows on foreign companies.
Surely something is broken. It is unreasonably damaging to government revenue, and it is damaging to the local industry.
Do you know more? Contact James Riley via Email.