Reform of International Corporate Taxation †MyAssignmenthelp.com

Question: Discuss about the Reform of International Corporate Taxation. Answer: Introduction: In this letter, an advice is being provided in response to your query relating to Diverted Profit Tax. The letters cover the impetus for the introduction of Diverted Profits Tax in Australia, will evaluate with the traditional canons of taxation and observe the DPTs necessity for the problem of Diverted Tax by the big multinational organisations with a contrived arrangements made by them for reduction of tax liabilities for the company in Australia. Lastly, it can be observed the efficiency of measure of DPT in other countries who have implemented the same for solving the problem in their own countries[1]. It is important to understand the DPTs (Diverted Profits Tax) context for which this tax and laws were enacted. In the process of solving this serious problem of diversion of profits from Australian soil to other countries who have low tax rates through contrived arrangements made by the multi-national organisation with other corporation or its unit in that country[2]. Base Erosion and Profit Shifting means a process of planning of tax arrangements that utilizes the loopholes in tax rules of the country to make the profits earned by the company to disappear for tax purpose. This might be done through shifting of profits to another location where the operations of the company has no activity or very low activity but tax rates are very low. This has resulted in the company is paying little corporate taxes. Big multi-national corporations do this generally in diverting profits from Australia[3]. This is being observed in current years big corporate like Apple, Google, Starbucks, etc. Al l are structuring their financials and arranging for diverting profits to pay lower tax to the Australian Government. In United Kingdom, they have introduced the Diverted Profits Tax to tackle the arrangements that are made in the profit shifting at the international level. The Australian DPT has aimed in broad variety of structured arrangements involving royalty arrangement, offshore service, a few leasing arrangement, etc. The impetus of bringing the new DPT (Diverted Profits Tax) in Australia that charges a tax of 40% on profits that is a fine on the diverted profits that are artificially done by the multinational corporate entities in Australia. The Australian Government is firmly dedicated for ensuring that multi-nationals compensate its reasonable share of tax in Australia[4]. The Australian government is working in direction of ensuring that multi-nationals are giving appropriate amount of tax by collaborating with the OECD (Organisation for Economic Co-operation and Development). The Government has taken firm steps for combating the problem of diversion of profits by introducing the Diverting Profits Tax and before this tax; Australia has previously implemented the MAAL (Multinational Anti-Avoidance Law). The objective of the DPT is to enhance the competitiveness of the taxation system of Australia to maintain growth and investments in Australia. This has an another objective of preventing the avoidance of corporate tax and make certain that the fairness is in place and level playing fields are provided to all the organisation. This has another objective to guide the transformation of the international framework for tax together with the agreed items in OECD BEPS action plan. This tax will make sure that the multinationals are giving the proper sum of tax for the profits earned to the Australian Government[5]. The Diverted Profits Tax is charged only if the multinational organisation has a $ 1 Billion Turnover at global level and has more than $ 25 Million Turnover in Australia. Subsequently, this multinational will have to pay DPT when that multinational organisation has arranged with related party outside of Australia for lowering the tax payable amount that to be paid to the govern ment as tax. Proposed operation of Diverted Profit tax The operations that are proposed in Diverted Profits Tax are as this is applicable to those multinationals who have a turnover of $ 1 Billion in global level and in the Australian level if more $ 25 Million of Turnover then this DPT will be applicable this is given under Section 177H of ITAA, 1936. The DPT is not done by self-assessment like income tax but the liability for DPT will arise when the ATO (Australian Taxation Office) provides the assessment for DPT[6]. The Australian Taxation Office will inform the taxpayers that whether they are subject to the DPT. After the assessment for DPT, the taxpayer is needed 60 days to build representation to rectify the factual issues that is given in the interim assessment of DPT. After 30 days, ATO will provide the final assessment of DPT at the completion of representation phase. The payer of tax is required to pay the sum of the DPT assessment within 21 days. All through the period of review, if the Australian Taxation Office regard as the sum for DPT charged is inadequate. Then ATO might give a supplementary assessment of DPT for up to 30 days proceeding to completion period to enforce a supplementary charge of DPT. Completion of the phase of review, the payers of tax has a period of 30 days for lodging an appeal by the process of court[7]. The evaluating the Diverted Profits Tax with the help of traditional canons of taxation that is given by Adam Smith in 1776. This is evaluating system that checks the essential qualities or characteristics that a proper tax system must possess. There are four canons of tax that the taxation system is evaluated on are following: This point provides that the taxation burden is properly spread equitably among all the taxpayers. This states that a good tax system must give a chance to everyone to pay the taxes as per the capability of the individual as a result sacrifices of the all payers of tax will be equal. The DPT has provided that this will be applicable on SGE (Significant Global Entities) that the multinational establishment has a $ 1 Billion Turnover at global level and has more than $ 25 Million Turnover in Australia. This penalty tax of 40% on profits the sum transferred to related party transactions without backing of proper or substance that the lowering of tax payment on the profits produced in Australia. The DPT has given many powers to ATO (Australian Taxation Office) who ensure that equity is maintained in collection of the tax and no biasness are not in process. This is equity is properly maintained with the backing of proper rules in the DPT system that ensures equity[8]. This point states about the rules and regulations must be certain of a tax law that an individual have to pay by following a perfect process with following the rules and not arbitrary. The criteria of applicability of the DPT are also properly mentioned. The payment time, manner and procedure must be plain and clear to the taxpayers. The Diverted Profits Tax has a clear system that states clearly about the rate of tax that is 40% on profits and this applicable to SGE (Significant Global Entities) only. The period of review, assessment, and payment, all procedures are clearly mentioned that brings certainty in the tax system of DPT. As in this DPT has proper system of notification, representation, final issue of the assessment of DPT, a period for review and an appeal process[9]. All this has summed up in improving the certainty in the procedure. The efforts of the government have given the DPT system to have a proper certainty provisions in the bill. This point provides that implications that the collecting cost of the tax must be minimum as possible. The tax system that has a huge cost of administration and abnormal delay in assessment for tax must be avoided in all cost. The Diverted Profits Tax has a complicated procedure and rules that makes the compliance for the taxpayers inconvenient to follow. The difficulty in the part of the officials of the government might delay the assessment of the tax, this increases the cost of administration, and efficiency is reduced. The complicated procedures have adverse effect on the efficiency of the whole process of the tax compliance of the Diverted Profits Tax. This increase in the cost of compliance is due to delays and complications in the procedure of paying of the assessment sum of the Diverted Profits Tax[10]. In context to procedural perspective of United Kingdom has a duty of notifying the taxpayers that they are subject to potential application of the Diverted Profits Tax but in Australian DPT do not have this provision. The process of DPT of United Kingdom has efficient procedure than the DPT of Australia. This point clearly states about the tax system must be collected in a way that it gives the maximum convenience not only for taxpayers but also for the officials of the government. In other words, this can stated as the process and system must be simple and painless. The Diverted Profits Tax has complicated procedure that makes the life of taxpayers difficult and makes the process complicated. The compliance procedures are not easily understandable by the taxpayer that results into non-compliance of the few rules of the DPT. Simplicity helps in following the rules properly. United Kingdoms Diverted Profits Tax is simpler than Diverted Profits Tax of Australia. This problem is well addressed by Australian government by providing a PCG (Practical Compliance Guideline) that is issued in the month of February 2018. This is good attempt from the government end for simplifying of the rules that can be understood by every taxpayer[11]. Diverted Profits Tax as a reasonable and necessary response The Diverted Profits Tax is justified in few aspects as this has helped Australia to tackle the problem of base erosion and profit shifting (BEPS). The measures have put Australia in forefront in dealing with the avoidance of corporate tax. The Australian DPT has aimed in broad variety of structured arrangements involving royalty arrangement, offshore service, hybrid/financing instruments, a few leasing arrangement and intellectual property transfer arrangements. As Australia has taken firm steps like MAAL and DPT for the preventing the diversion of profit from the Australian soil. This is properly backed by procedures that are firm and dedicated in solving this issue. However, in few aspects, the DPT bill of Australia is truly more difficult on the payers of tax in various important sectors than the DPT bill of UK. The United Kingdoms Diverted Profits Tax was enacted in 2015 as this one of the stimulation for both DPT and MAAL (Multinational Anti-Avoidance Law). The comparing the DPT of Australia and DPT of UK, we can observe that the most of the areas the version of Australia are more complicated than the United Kingdoms version for the taxpayers. As by comparing, we can observe that there total 26 common matters within that, there are 19 that are substantive in nature and there are 7 that deals concerning the matters of procedure. Among the 26 subjects detected, 14 are more complicated in DPT of Australia than UKs DPT. However, there are also 3 more difficult issues of UKs DPT than the Australias. There are also various other countries that has implemented the Diverted Profits Tax other than Australia are UK in 2015, France who is in process of passing the DPT bill and New Zealand who has a few uncertainty on this DPT bill[12]. It can be observed from above that, this has solved the problem of diversion of profits but this is complicated for the taxpayers to comply the rules of the DPT in Australia. Australia have taken appropriate steps but the rules are difficult to follow for the taxpayer that need to be solved. This has increased the compliance cost of the tax. This has made the government to issue a guide named as Practical Compliance Guide on the month of February 2018. This shows that Australia is dedicated in solving the issue that is labelled as BEPS (Base Erosion and Profit Sharing). The effectiveness of Diverted Profits Tax is good but this has better chance to improve more by educating the taxpayers with the help of PCG (Practical Compliance Guide). Reference Avi-Yonah, Reuven S. "Three steps forward, one step back? Reflections on google taxes and the destination-based corporate tax." (2016): 69-76. Barnes, Peter, Linda Galler, and Paul Oosterhuis. "TEI Roundtable No. 13: Ethics and Tax Planning."Tax Executive69 (2017): 41. Cooper, Graeme S. "Implementing BEPS, or Maybe Notthe Australian Experience One Year On."New Zealand Law Review2017, no. 2 (2017): 145-174. Dudley, Ryan. "BEPS Implementation in the US-Now Comes the Hard Part."Int'l Tax Rev.26 (2015): 30. Dunne, Joanne. "The MAAL and the diverted profits tax-a comparative."Taxation in Australia51, no. 1 (2016): 21. Graetz, Michael J. "Bringing International Tax Policy into the 21st Century." (2016). Lanis, Roman, Ross McClure, and Mark Zirnsak. "Tax aggressiveness of alcohol and bottling companies in Australia."Canberra: Foundation for Alcohol Research and Education(2017). McClure, Ross, Roman Lanis, and Brett Govendir. "Analysis of Tax Avoidance Strategies of Top Foreign Multinationals Operating in Australia: An Expose." (2017). Picciotto, Sol. "Indeterminacy, complexity, technocracy and the reform of international corporate taxation."Social Legal Studies24, no. 2 (2015): 165-184. Picciotto, Sol. "The UK's diverted profits tax: an admission of defeat or a pre-emptive strike?."Tax Notes International77, no. 3 (2015): 239-242. Self, Heather. "The UKs New Diverted Profits Tax: Compliance with EU Law."Intertax43, no. 4 (2015): 333-336. Yang, Harry Hanqing, Dermot Cahill, and Edwin T. Hood. "Corporate Profits Tax Avoidance: How the Double Irish Impedes Global Social Progress and Removes the Prosperity Base Needed for Future Generations." InTaxation in Crisis, pp. 103-118. Palgrave Macmillan, Cham, 2017.