Why Joe Hockey's Oz tax proposals only get five out of 10

He wants to export taxation to China, as well as production

Worstall on Wednesday I was fascinated to see El Reg's report on the new proposals to change the Australian tax system, as put forward by Joe Hockey.

It's a strange mixture: half is the very sensible plugging of a hole in the tax regime, while the other half shows shocking ignorance of the basis of another part of the international tax system.

The second part of the above means that the proposed changes simply aren't going to work, just as Osborne's diverted profits tax in the UK isn't going to work.

At least, not without everyone agreeing to entirely change the way that the international system of corporate taxation works. And since we've been doing it this way since the days of the League of Nations, good luck with that.

On the closing of the digital goods GST loophole, this is entirely sensible. GST is a consumption tax (i.e. it is supposed to bear down upon the consumer). Thus, consumers in a particular jurisdiction should pay it.

At present, Australians who get their music to bounce to them from an offshore retailer don't have to pay it, and they probably should. So, the solution is to move to something like the EU system, where every retailer charges VAT at the rate of where the consumer is. (Note that this system has only just been extended to digital products – it's always been true for physical goods.)

This is also akin to the way the US system seems to be moving, where online retailers (for both physical and digital goods) will have to collect the sales tax rate of the jurisdiction of destination.

There is complexity here: in the US there are tens of thousands of different rates around the country, as different states and the counties and cities within them are able to levy or vary their own taxation rates. So they do, but there are people who compile databases of this and it's not all that difficult to get this to work as a software solution.

The same is true within the EU (with a much smaller number of variations) and presumably an international version wouldn't be that difficult.

It also makes sense that there's an exemption for low-value shipments, as trying to collect tax on small and fiddly amounts costs more than the revenue received. Of course, some might take the piss (Channel Islands retailers selling into the UK, for example), but take care of that if and when they do.

So far, so sensible. But then Hockey rather falls off the edge with his desired changes to the corporation tax system. There are three reasons for this: two rather theoretical, one more practical.

The first of those theoretical reasons is that all this tax dodging that everyone presumes is going on is not in fact tax dodging – it's tax delaying.

Sure, Apple sells into Oz with all the profit stacking up in Ireland or Singapore, as do Google, Facebook, Microsoft and the rest. That means that Oz doesn't get some tax on the profits made from those sales. Singapore and Ireland don't tax them either, but that's not the end of the story. The aim of a company is to make profits that the shareholders can cash in and consume as beer 'n' burgers.

To do that, the money has to be taken back into the home tax jurisdiction of the company, at which point the US will tax it. So the tax is paid to someone else. It's delayed, but it's still paid in the end.

We might argue that they'll never bring the money back onshore, but this means that the capital value of the company increases. So when shareholders sell stock (the only way they can cash in, as dividends aren't being paid from those profits not repatriated), then they'll pay income or capital gains tax on that increase in value.

The tax system really does get its slice, eventually, whatever else happens. Who gets the revenue and when they receive it can change, but there really isn't the possibility of tax avoidance here.

 

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