Australia to miss out on tax top-up from multinationals as Trump ends OECD reform

Australia Broadcast Center

5 days ago

Australia could miss out on significant revenue from US multinational companies operating here, after the G7 "caved" to Donald Trump, says the man who spearheaded negotiations on a global minimum tax rate.
The Organisation for Economic Cooperation and Development's (OECD) former director of tax, Pascal Saint Amans, says Australia will no longer be able to apply a top-up tax if a US firm pays less than a 15 per cent tax rate.
It comes after the US president undid more than a decade of progress towards multinationals paying their fair share of tax, striking a deal to exempt America from a worldwide corporate tax floor.
In 2021, about 140 countries, including Australia, signed up to the Organisation for Economic Cooperation and Development (OECD) "Global Minimum Tax" deal, a plan that's been years in the making.
These countries had, in principle, agreed to a set of rules for a 15 per cent global minimum tax.
This was aimed at helping countries like Australia collect more tax from digital tech giants like Google, Apple, Microsoft, Facebook, Amazon and others by applying that minimum tax rate.
The implementation of the law in Australia was expected to increase receipts by $370 million and increase payments by $111 million over the five years from 2022-23.
But neither the US nor China implemented the tax rules. And, to convince US President Donald Trump to drop his threat to impose a "revenge tax" in a major spending bill, G7 countries agreed to exempt US companies from the rules.
"What is clear is that [G7] countries have caved," argues Pascal Saint-Amans, who spearheaded the negotiations that culminated in the tax agreement worldwide.
Mr Saint-Amans says the deal protects American companies.
"The significance of it, the magnitude of it, is still unknown — to be seen. But the new system is unfair, discriminatory against non-US companies and, by itself, it kind of undermines the global minimum tax."
Mr Saint-Amans says the rules were supposed to stop a race to the bottom.
He says they would have applied to all multinational enterprise groups with an annual global revenue of at least EUR 750 million ($1.34 billion).
But now it will be much harder for tax administrators, including the Australian Taxation Office (ATO), to tax US companies that operate in Australia.
While Australia has avoided implementing a Digital Services Tax, it has been taxing foreign digital companies in other ways.
Australia collects 10 per cent goods and services tax, or GST, on digital services provided to Australian companies, including streaming platforms and app subscriptions.
The ATO has also been pursuing several multinationals using its Diverted Profits Tax (DPT) legislation powers.
Known unofficially as the "Google tax", the DPT was introduced under former Liberal treasurer Joe Hockey, and allows the ATO to hit companies it deems to be engaging in "contrived arrangements" with a 40 per cent tax on all profits.
Mr Saint-Amans said the ATO would now need to make sure that investments by multinationals in Australia "are not sheltered in the intermediary countries where you would have very low taxation".
While there are still "tax loopholes", the one silver lining, he says, is that "we're no longer facing what the world was facing prior to the OECD work".
"The international tax architecture needs to be revised, to better tax digital companies," he said.
"But overall progress has been made. We're no longer in the case where you're a multinational company, [and] you pay taxes nowhere. … the days of zero tax are coming to an end."
He says even the Trump administration recognises that there should be some form of minimum tax applied.
"The minimum is not the same for the US and for the rest of the world. But there is some principle of a minimum tax," he said.
Mr Saint-Amans says because of preferential tax treatment for US companies, the G7 tax backflip could cause Australian companies to move their headquarters to the US — or at least contemplate it.
"And this is exactly what we will have to watch and monitor in the coming weeks and coming months."
Now Australian startups are questioning the value of staying here.
Maria Baker is the founder of Nobody's Princess, a startup that sells women's snow gear to markets globally, including in the United States.
She says the situation disadvantages local startups and causes them to rethink whether they should keep their brands local.
"Regardless of whether you're a big business owner or even just a consumer, it is frustrating to see essentially the rich getting richer."
Ms Baker's business is based in Melbourne, and she is now considering moving offshore.
"Do I actually have to go to the US and set up my business and be a US-based business?" she asks.
"I'd rather not do that because I think there's this really big beauty about being an Australian business and, you know, putting an Australian brand on the stage."
Anish Sinha is the co-founder and chief operating tech of startup, UpCover, which tailors insurance for small businesses.
The company was founded in 2019 and has raised almost $20 million in debt and equity.
Mr Sinha says insurance is "a highly regulated space, and we play by the rules".
"We pay our fair share, and we expect others to do that as well, and so hearing about something like [the tax backflip] makes us feel like the big end of the town is not willing to pay their fair share."
He says many Australian founders look to sell into the US market because it's the largest market in the world.
He says there's still a lot of "regulatory uncertainty and flux" in the US, so he's not made the decision to move headquarters just yet.
But the tax situation "does impact how we look at being headquartered in one country or another".
"It impacts how we ultimately look at competitiveness long-term," Mr Sinha said.
"It determines how our customers think about us being based in one geography or another. And we would want our business to be favoured by the tax jurisdiction we're based in."
Tax experts are concerned that Australia could lose more revenue now that US multinationals are exempt from the global tax deal.
Jason Ward, principal analyst at the Centre for International Corporate Tax Accountability and Research, says the OECD global minimum tax was meant to set a floor to eliminate a race to the bottom and to set in place a system where every company everywhere was paying at least some tax.
"It was set at a very low rate, which is 15 per cent, but that was the rate that was needed to bring the world on board. And really it was the Biden administration that really broke the loggerheads on this," Mr Ward said.
"It's a terrible caving into Trump's demands here, and really unnecessary, and a major step backward for international tax reform.
"Trump is essentially running a protection racket for larger US multinationals that most people already know are the most aggressive in dodging their tax obligations on the profits, the vast profits they make in Australia and around the world."
He noted Australia had already passed legislation to implement Pillar 2 — or the global minimum tax — and there was an expectation that this would bring in some revenue.
"This basically sends a clear signal to the likes of US big pharma companies, US big tech that 'It's okay. Trump's got their back'. And so this is not collecting extra tax for people in the United States. This is basically giving US multinationals a free pass to dodge taxes in the United States and in Australia and around the world."
Mr Ward says with the G7 tax backflip allowing the US to pull out of global negotiations, "we're going to see a trend towards these global discussions happening at the United Nations level".
"We're well advanced in terms of the development of the UN tax convention," he said.
"And I think we're going to start seeing a lot more regional action to shore up the global tax systems to make sure that multinationals don't continue to steal the funding that we need to fund our healthcare, our hospitals, our public schools, education, and the infrastructure that we all need.
"I think countries need to stand up and protect their own sovereignty and their own rights and collect the tax revenues that are due from multinational profits in their own jurisdiction."
The Tax Justice Network's Mark Zirnsak also fears "Australia is likely to miss out on revenue that it otherwise would have counted on".
"It also just creates an unequal playing field again further where these companies who are not paying taxes get an unfair advantage over companies who are doing the right thing and paying the taxes as they should be paying them," Mr Zirnsak said.
He says Australia should now join the move to set up a UN tax convention.
"This is where the action now needs to move to," he said.
"It will work on a two-thirds majority for substantive matters, so it won't be possible for certain individual countries to derail or block it.
"The other thing we probably need to keep in mind is that the Trump administration only has one more term and if there were to be a change in US administration, we might find a far more cooperative administration that thinks it is actually in the interest of everybody to have a more reasonable and fair tax global system."