Today BRR Media speaks with Philip Diviny, who’s a Partner in the Taxation team with Middletons and he’s based in Melbourne.  Welcome back to BRR Media Phil.

Hello David.

Phil when Google recently reported a tax bill of some $74,000 despite an estimated Australian revenue of $1.1 billion in 2011, many commentators criticised the fairness of our tax system, and in particular the issue of transfer pricing came under attack.  Is this a transfer pricing issue?

Not really David, transfer pricing is about making sure that each country gets an appropriate share of the profit that a global enterprise makes for the functions that are performed in that country.  So if you don’t perform a lot of functions in that country you don’t get much of the profit.  Now with a company like Google and with many of the internet and technology companies their major asset, their major function is their intellectual property and that won’t be located in Australia it will be located off shore and so it’s that jurisdiction where the intellectual property is housed that’s going to get allocated the majority of the profit under the transfer pricing rules.  So simply trying to address the Google issue if you like, under the Transfer Pricing Rules is not going to work. 

So when does a foreign multinational or a humble online business for that matter, need to pay Australian tax; what’s the test?

I guess there’s two scenarios, firstly if the company has got an Australian subsidiary then that subsidiary will be subject to ordinary Australian corporate tax at 30% on whatever the profit is that’s made by that subsidiary, and the Transfer Pricing Rules can step in to give an arm’s length price to the transactions that that subsidiary conducts with its off shore related parties.  The second scenario is where the off shore company has what’s called an Australian permanent establishment and an Australian permanent establishment is not a separate legal entity from the off shore entity, but it’s a presence in Australia and that can be constituted in a number of ways, most commonly it will be having a representative office in Australia, but it also might be by having substantial equipment in Australia or having what we call a dependent agent in Australia.

So is that test still an adequate type of test in this age of eCommerce?

Well those sort of rules I guess were devised when the world was centred around manufacturing and not eCommerce.  So you know the whole concept of having substantial equipment or having an office right, is more relevant to the old economy than the new, because in the new economy you could be operating anywhere without having that sort of physical presence that the traditional tax rules require.

Well it does seem that the Government at the moment is tackling as a bit of a transfer pricing issue with the House of Reps passing a new Transfer Pricing Bill just on 19^th of June, so what is that Bill designed to achieve?

Well I guess this debate about the technology companies has been going on contemporaneously with the Government changing the Transfer Pricing Rules anyway, so on the 19^th of June they passed a Bill through the House of Reps that aims to make our transfer pricing rules more like the OECD Transfer Pricing Rules and these amendments were brought in to overcome the decision in the SMS case which cast doubt upon the validity of the OECD standards in Australia.  Now essentially what these new rules will do is to mandate the OECD standards in Australia and it will take away the emphasis I guess on pricing a particular transaction between an Australian company and its off shore associates and look more at what we call a profit methods in transfer pricing.  So that is an allocation of the global profit made by a multinational according to the functions that are performed in the Australian jurisdiction.

Well so it doesn’t sound really like the changes were really tackling this online enterprise shifting economy so I guess to that end what changes should we be making or any law reform needed to tackle the new economy?

There’s a couple of things to be done.  The first thing is to revisit the treaties that we have and the whole concept of a company having to have an Australian permanent establishment before it is subject to Aussie tax.  Now that idea of having a permanent establishment is necessary for us to tax any off shore enterprise that’s located in a country with which we have double tax agreement.  So Australia’s prohibited from taxing say a US company on its business profits, unless it’s got an Australian permanent establishment and an Australian permanent establishment in terms of a fixed place of business is obviously not necessary for these technology companies.  So maybe what we need to do is look at those treaties and bring in more of a rule based on the location of the customer rather than the location of the business operation and that will help to assist this issue where a company is getting substantial revenue off a particular jurisdiction but locating very few functions there.  The other thing that can be looked at is whether Australia can get an appropriate share of tax revenue out of the GST system by imposing some sort of GST or turnover tax on these sort of companies, and we’ve seen that debate I guess with the importation of physical goods, so people buying you know fashion and other retail goods over the internet and the debate that’s come about saying that GST should be imposed on a lower level of imports than is currently the case.

We’ll certainly keep a very close eye on that debate and look forward to see if I guess your thoughts do make its way into the political debate or the tax debate and thanks for your time today Phil.

Thanks David.

That was Phil Diviny, a Partner in the Taxation team at Middletons in Melbourne.  Listeners if you have any questions for Phil about this interview please send a message using the panel on your screen or you can otherwise email through to law@brrmedia.com and we’ll forward your query.