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

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

Exporting taxation to China

The second theoretical reason is the obvious underlying claim here that profits made by selling to people in Australia should be taxed in Australia.

But that simply isn't the basis of the international tax system. OK, maybe it should be, but the fact is that neither the theory nor the practicality of it work that way. Corporation tax is to be paid, in theory, where the economic activity that created the profit took place, which isn't just where the sales took place.

If it were, then of course all that value from the Pilbarra iron ore mines should be taxed by the Chinese government, which wouldn't go down at all well in Australia. The profits from those Hunter Valley reds would also be taxed in whichever country people imbibe them, and quite obviously that's not the way that those profits are taxed.

The third problem is one of practicality. The basis of corporate taxation is the creation or not of a “permanent establishment”. Have one of those, as a specific legal person (so there is a difference between Apple Oz Retail and Apple Oz Ltd, if even either of those exist), and you are subject to the corporation tax laws of the jurisdiction in which you have set up.

Then there is some apportionment of the profits made to that local tax jurisdiction. If you don't have a PE, then you don't get caught in that tax net and that place doesn't get any moolah.

Things could be changed, of course, but it's not going to change just because Joe Hockey proposes a change to Australian law. Maybe it shouldn't be this way, but that really is just how it works.

These rules also date from before WWII, when international taxation was first standardised under the auspices of the League of Nations. This has followed on into the standard OECD template for double-taxation treaties.

Here is the one between the UK and Australia (just because I know where they list such treaties).

This is the version signed in 2003 – they're updated every few decades by the countries involved. And here's the list of what does NOT create a permanent establishment which makes sales subject to the local corporation tax:

Notwithstanding the preceding provisions of this Article, an enterprise shall not be deemed to have a permanent establishment merely by reason of:

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or collecting information, for the enterprise; or
(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.

That is how, for example, Amazon isn't paying corporation tax on the profits made by delivering in the UK. Because those warehouses are specifically for the delivery of goods: that doesn't create a PE.

The practicality point here is that every country has a couple of hundred or so of these treaties with the other 200 or so countries around the world, all structured in pretty much the same manner.

To change this basic framework of how international taxation works, you would need to change all of those, because, like visas and the like, taxation treaties are reciprocal.

That's 40,000 treaties that would need to be renegotiated, to bring this concept of the territoriality of the sales into that local corporation tax net.

It's for this reason that Osborne's diverted profits tax is going to fail at the first serious legal hurdle it meets. As will this part of Hockey's proposal.

Charging consumers GST if they live somewhere where GST should be paid? Sure, knock yourself out. Don't try to collect it when trying would cost more than what could be collected? Seems eminently sensible. Try to overturn the theoretical and practical bases of the international taxation of corporate profits by unilaterally changing the law? Perhaps not, eh?

It's going to take rather more effort than that, even if the change itself were desirable. ®

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