Why isn’t the ATO enforcing transfer pricing arrangements?
In estimates I proposed to the ATO that similar to limits on debt deductions there should limits on other expenses claimed by multinational companies operating in Australia.
I’ve posted previously how Pfizer claim 93 cents in the dollar in Australia when their world wide expense is 60 cents. Similarly Facebook claim 95 cents in the dollar in Australia when their world wide expense is also 60 cents.
By claiming higher expenses here in Australia they minimise profits and therefore reduce the amount of tax they have to pay. I.e. they engage in tax avoidance.
The ATO didn’t answer my question accurately as there are already transfer pricing rules in the tax act that prevents foreign companies from overcharging expenses into Australia.
The benchmark for transfer pricing should be the worldwide operating profit ratio.
Unfortunately I got cut off again by a Labor Senator which is a shame because this issue is extremely important.
Not just from a base erosion point of view but from an ability of an Australian based company to compete with Foreign companies within Australia.
Economics Legislation Committee
25/06/2024
Estimates
TREASURY PORTFOLIO
Australian Charities and Not-for-profits Commission
Senator RENNICK: I’ve asked previously about shifting profits offshore. Last time it was Pfizer; they made an operating profit ratio of seven per cent over the $1.4 billion, I think. Since that last set of estimates, we now have found out that Facebook, who has $1.34 billion in revenue, only declared a profit of $47 million here in Australia. So their operating profit ratio was five per cent when their worldwide operating profit was 40 per cent. In the thin cap provisions, you have a worldwide gearing ratio whereby you don’t allow an Australian subsidiary of a foreign multinational to load up with too much debt, which is a very good idea. Do you think you should do the same with operating profit ratio? For example, if Facebook had a worldwide profit ratio of 40 per cent—that is, they’re only paying 60 cents on the dollar in costs—but here in Australia they’re loading up with 95 cents on the dollar, could we look at having an operating profit ratio to prevent profits being shifted offshore?
Mr Hirschhorn: I might talk about it from an administration perspective, even though you have cast the question as a policy question. Under the international framework at the moment, Australia gets to tax the activities which occur in Australia. We don’t get to tax the parts of the value chain which are offshore. So, for a multinational digital company with a lot of research and development and a lot of the work being done offshore, we don’t get to tax the profit attributable to that. We get to tax the profit attributable to what people do in Australia. That is supported by the multinational anti-avoidance law, which was brought in to stop people artificially avoiding having a permanent establishment in Australia, which is the basis of taxation under the current framework. In Australia, if you think about the distribution profit of an importer of, let’s say, pharmaceuticals or computer equipment, we get to tax the distribution profit, not the research and development or the manufacturing profit. We’ve set out some practical compliance guidelines, which are public, that set out where our expectations are for a normal importer of such services. Concurrently, there is a discussion going on at the OECD around—
CHAIR: I’m sorry, Mr Hirschhorn. I’m going to have to you ask you to conclude your answer so I can go to Senator Roberts.
Mr Hirschhorn: Senator Rennick, I’ll just say that under the current framework we get to tax what is done here and, for the current regime, the results that we get in terms of the profits we tax here are significantly higher than those achieved in many other jurisdictions.
Senator RENNICK: Just very quickly—
CHAIR: Senator Roberts.
Senator RENNICK: That $1.3 billion in revenue—is that paid here to Australia?
Mr Hirschhorn: I can’t really comment on individual companies.
