Does the G7 tax deal place pressure on Australia to reduce the company tax rate?
Tax Law - 18 Jun 2021
One of the biggest changes to the global taxation system was flagged last week after the G7 (US, Japan, Germany, UK, France, Canada, and Italy) agreed upon a global minimum tax rate of 15 per cent.
Representing nearly all of the world’s largest economies excluding China, this in principle agreement ensures that the global ‘race to the bottom’ in corporate taxation is now nearing an end after close to three decades.
This deal is seen as part of a crackdown on the tech giants, forcing large multinationals to pay tax in countries they sell their goods and services in. This is most notably targeting tech giants such as Amazon, Google, and Facebook. It is also seen as a starting point to address issues around tax havens and tax rate ‘undercutting’ that was implemented to pay off debts incurred over the past 18 months due to the COVID19 pandemic.
This will then feed into the broader conversations that the Organisation for Economic Cooperation and Development (OECD) is co-ordinating with 139 countries for a global tax regime. This is a major step towards a somewhat standardised international taxation system that is designed to enable countries to capture more of the revenue derived from business activities in their jurisdictions.
While this consensus on the global tax rate is seen as positive by the Australian government, there could be unforeseen issues caused by these changes.
In the Australian context, there could be pressure on the Morrison government to cut the per cent company tax rate based on this decision. The 15 per cent ceiling is far lower than Australia’s tax rate that ranges from 25 – 30 per cent. This could erode the country’s tax base as companies move their taxable operations to jurisdictions with less regulation and compliance obligations.
In the race for global capital, talent and investment, this could leave Australia severely exposed and seen as uncompetitive for business. This means that investment in new industries, projects, and companies could stall due to the incentives being misaligned.
The 30 per cent tax rate, combined with other elements like thin capitalisation rules, and stringent transfer pricing, combine to create an environment with one of the highest business income tax to GDP ratios among the OECD nations.
However, the overall positives with this arrangement outweigh the negatives in terms of a global tax system where investors attach less weight to tax outcomes. Rather, the focus could be on elements like rule of law, political stability, resources, educated populations, lifestyle, and infrastructure. These are all areas that Australia scores strongly in.
That’s why we believe that it is important to see how this plays out before the Australian government makes any changes. We need to act in a manner that maintains our competitiveness and attractiveness as an investment destination but need to support these changes. Potentially, under a global minimum tax regime, businesses could pay more tax in Australia and offshore. But the changes may leave the country better off overall. As an organisation that is passionate about tax, this is without doubt, one of the major pieces of change that has occurred in our lifetimes. It has major implications but ultimately, we are leaning towards a system where there is an agreed-upon tax threshold as we recognise the importance of revenue-raising in creating fairer and more equal societies – particularly in the context of the developing world.
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