Australia's crackdown on Google over taxes may scare away investors

Australia faces an uphill battle to capture a greater share of tax revenue from multinationals such as Google and needs to work with its trading partners to avoid scaring away investors with an image as a high tax nation, tax lawyers and specialists say.

Australia has announced a crackdown on tax practices that big firms use, legally, to shift income to countries with low tax rates such as Ireland and the Netherlands.

Britain and Germany are also looking at ways to make sure multinational companies pay what they view as a fairer share of taxes and they are urging the G20 group of developed nations to work together to protect tax revenues.

Some tax specialists argue that Australia's proposed measures, which follow several major changes in Australian tax regulation over the past 18 months, may discourage foreign companies from investing in the country.

"What is starting to happen is that Australia is being increasingly seen as a high sovereign risk country on taxes," said Paul Stacey, tax counsel at the Institute of Chartered Accountants.

The government has drafted proposals that include rules to prevent profit shifting, as well as setting up a think-tank to review the strategies that multinationals use to reduce their tax bills.

"This review will only increase that perception," Stacey said.

Revisions of the proposals will go to parliament early next year after a consultation period.

They follow a series of tax changes including the doubling of withholding tax for non-residents, a ruling to tax a greater share of private equity firms' profits, and a 30 percent tax on mining profits that was watered down by the government after fierce opposition from the mining industry.

Similar concerns about Australia's reputation surrounded the Australian Taxation Office's chase of tax dollars from offshore private equity firms, which was sparked by U.S.-based TPG Capital Management LP's profit on the $2.4 billion public sale of retailer Myer Holdings.

Although private equity investment in Australia has slowed with the economy, it has not stalled as critics had warned.

Total investment in Australia's $30.5 billion buyout industry fell 24 percent in the year to June, according to industry lobby group the Australian Private Equity and Venture Capital Association.

"While some investors will not be happy with tax changes in Australia, what may appeal to them is the economic climate of the country," said Niv Tadmore, partner at Clayton Utz.

While the economy is expected to slow as Chinese demand for resources eases, it remains resilient after weathering the financial crisis better than any other major developed country.

'Double Irish Dutch sandwich'
In a highly unusual speech on November 22, Australia's Assistant Treasurer David Bradbury took aim at Google Inc, describing in detail the strategies it has reportedly used to minimise corporate tax payment.

"It is not my usual practice to mention companies by name," he said.

Google's tax structures, he said, included a so-called "Double Irish Dutch Sandwich", in which income was routed to Ireland, a royalty paid from the Irish unit to a Dutch subsidiary, and then repaid to a second Irish holding company controlled in Bermuda, where there is no corporate tax.

Documents filed with the Australian corporate regulator show that Google's Australian subsidiary paid A$781,471 in tax last year, or about 0.004 percent of revenue, on a net loss of A$3.9 million.

Google Australia's revenues come from service agreements with its U.S. parent company and units in Ireland and Singapore, rather than directly from Australian customers.

"While the day-to-day dealings of Australian firms advertising on Google might be with Google Australia, under the fine print of contracts Australian firms sign with Google, they are actually buying their advertising from an Irish subsidiary of Google," Bradbury said.

Media reports have said the revenue from Google's Australian advertising would be worth more than A$1 billion.

A spokesman for Google said in an e-mailed statement that the company complies with all Australian tax laws.

The success of governments' tax campaigns against the multinationals is seen hinging largely on whether they can work together.

"It is very important that Australia engages with its counterparts overseas on this reform," said Stacey, of the Institute of Chartered Accountants.

"Otherwise you end up with a nation-state squabble over how to divide up the pie. If Australia increases its tax revenue from a single transaction, that means some other country will get less tax out of that transaction," he said.

He said major nations would need to minimise corporate dealings with low-taxing jurisdictions, such as Ireland and Bermuda.

Another tax expert believes that governments will prevail in their battle to capture more tax revenues.

"Those companies like Google and Amazon and Apple have had a very good run for a number of years, and this run is going to stop now. They will start paying more tax," said one adviser to big firms, who declined to be named because he was not authorised to speak to the media.

© Thomson Reuters 2012