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Comparison of Australian taxation system Abstract A fundamental shift is occurring in the thinking of revenue authorities across the leading developed countries. The fear of lost revenue from international tax avoidance is giving way to the fear of lost revenue from non-competitive international tax systems. It is almost unheard of for the Deputy Secretary of the U. S. Department of the Treasury to state, as he did recently, that the sad truth of U.
S. international tax rules is that they no longer service the national interest of the U. S. 1 He called for changes that can best make U. S. business more competitive internationally. Germany and Sweden have already enacted or foreshadowed changes to their international tax systems.
The U. K. has recently stated that its objective is to make Britain the best place in the world for multinationals to locate. If the revenue authorities of those countries seek be more competitive, it is an absolute necessity for Australia. There is a concern, however, that apart from a few concessions, the Australian government in its present review of international tax arrangements will not embark on serious reform of Australia's outmoded system. This would be a mistake, for the time is right for well-thought-out changes.
Introduction A fundamental shift is occurring in the thinking of revenue authorities across the leading developed countries. The fear of lost revenue from international tax avoidance is giving way to the fear of lost revenue from non-competitive international tax systems. It is almost unheard of for the Deputy Secretary of the U. S. Department of the Treasury to state, as he did recently, that the sad truth of U. S.
international tax rules is that they no longer service the national interest of the U. S. 1 He called for changes that can best make U. S. business more competitive internationally.
Germany and Sweden have already enacted or foreshadowed changes to their international tax systems. The U. K. has recently stated that its objective is to make Britain the best place in the world for multinationals to locate.
If the revenue authorities of those countries seek be more competitive, it is an absolute necessity for Australia. There is a concern, however, that apart from a few concessions, the Australian government in its present review of international tax arrangements will not embark on serious reform of Australia's outmoded system. This would be a mistake, for the time is right for well-thought-out changes. Government Position In October 2001, the Australian government, in its paper "Securing Australia's Prosperity" committed itself to the reform of Australia's international tax regime.
The white paper "Removing Tax Barriers to International Growth" ("White Paper") made the following comment on the government's paper: That paper represents a major commitment by Government, potentially of strategic importance for Australia's direction, to realign Australia's tax laws to Australia's long-term objectives and desired position. This commitment should not be underestimated. With the focus of the Prime Minister and Federal Treasurer squarely on these issues, there is potential for major much-needed reform. Subsequently, Australian Treasurer Peter Costello said: "I want Australian companies to grow and remain headquartered in Australia. I want them to be internationally competitive and that is a big part of driving the review of international tax arrangements. " On August 22, 2002, in releasing the consultation paper "Review of International Taxation Arrangements" the Treasurer said: "[t]he review will build on the Government's achievements to date to give Australia an internationally competitive system. " The Consultation Paper issued by the Commonwealth Department of Treasury ("Consultation Paper") provides: To maintain Australia's status as an attractive place for business and investment, the tax system needs to continually adapt to the increasingly integrated global business environment. Australia also needs to be responsive to international trends and developments in other countries' tax systems, particularly those countries - such as the United States, Japan, certain European countries and New Zealand - which are a major source or destination of capital, and those countries which compete with Australia for investment and business.
The first recommendation of the White Paper was an internationally competitive holding company regime. In other words, the Australian Government should focus urgently on creating internationally attractive holding company tax regimes for parent holding companies-an environment to encourage the parent holding companies of Australian-based international businesses to remain centred in Australia; and conduit holding companies-an environment to attract foreign-owned businesses to locate their regional headquarters and other activities in Australia. Many Australian companies, large and small, well or just established, carry on business overseas. An internationally competitive tax system is important for each of them. Carrying on business overseas has commercial risks not faced domestically. It is fundamental that these risks are not increased by an Australian tax system that imposes inefficient barriers, costs, or taxes.
Treasury The success or failure of the present review of Australia's international tax system will most likely depend on the views of the Australian Treasury. It will take either the short-term cost approach and resist any change that might be a cost to revenue, or long-term view and constructively lead the reform, which over time will increase revenue. For the future of Australia, the long view should be taken. Objective In considering the way forward, Australia needs to focus reform where it is most needed - Australian business. Few multinationals are likely to relocate to Australia in the foreseeable future, and for every regional headquarters relocating there, many more Australian businesses are competing overseas. Australia should concentrate on a vigorous Australian business and not have a tax system that gets in the way of competing overseas.
The measuring stick of any proposal should be: how likely is it to make Australian business more competitive overseas? Priorities In designing an internationally competitive tax system for Australia, it is first necessary to start with the objective of making Australian business more competitive overseas and then to prioritize the areas for change. The first priority should be the removal of those tax barriers that make Australia noncompetitive. These are largely anti-avoidance provisions that over time have become "anti-focused. " The second priority should be the provision of measures that facilitate Australian companies paying, in total, a competitive global tax rate, while maximizing the Australian tax share of total worldwide taxes paid. The third priority should be to examine the alternatives for reducing the tax disadvantage to shareholders of investing overseas and to establish a timeframe for implementation of the most suitable alternative. In short, to encourage international businesses to locate in Australia, and to ensure that the international and regional headquarters of businesses are retained in Australia, the government needs to remove the noncompetitive barriers imposed by the international tax rules.
Timing The government has already taken the first successful steps to make Australia's international tax system more competitive, including lowering the corporate tax rate, modifying the controlled foreign corporation (CFC) and foreign investment fund (FIF) rules in regard to investments in the U. S. , and negotiating a protocol (September 27, 2002) to the 1982 income tax treaty with the U. S. The timing of the changes-removing anti-competitive tax barriers-should occur by June 30, 2006. Besides, Australian companies paying a competitive global tax rate-an ongoing process and should commence by June 30, 2006. In addition changes in examining the alternatives for reducing the present tax disadvantage to shareholders of investing overseas should first be the subject of detailed revenue costing and then the realistic options should be the subject of consultation.
In this way, practical, realistic alternatives are on the table. The time for introducing the change may be over several tax years. Revenue Constraints In designing a new system, reference must be made to the government's revenue constraints. But these constraints must be kept in perspective-they should not be an excuse for tinkering. For example, the constraints should not affect the first priority: removing anti-competitive tax barriers.
Any tax collected from the noncompetitive provisions is tax that should not be collected. There is no meaningful loss to revenue in not collecting tax from provisions that should not exist. There are revenue considerations in implementing the second priority: facilitating Australian companies paying, in total, a competitive global tax rate. It must be recognized, however, in weighing the costs and benefits, that this priority is about gaining revenue that otherwise might be lost and increasing the tax base from the entities concerned. This is now being recognized worldwide, and has been demonstrated in Australia, with the drop in the primary corporate tax rate.
The third priority-examining the alternatives for reducing the tax disadvantage to shareholders of investing overseas-involves dividend imputation that is well entrenched in the Australian system. Determining the cost of options to remove the present tax disadvantage is necessary before a rational debate can occur on alternatives. The revenue-achievable alternatives need to be detailed first so that the best realistic alternative is selected. Providing an Internationally Competitive Tax System Australia's tax system will not become competitive unless there is a determined and well-thought-out approach to a new system. First of all, in order to provide an internationally competitive tax system Australia should examine what the relevant Australian competitors are doing, select the competitive features of the competitors's ystem's, both present and planned, that are most suitable for Australia, and improve on the selected features by fine-tuning the provisions for the new system.
What Are Australia's Competitors Doing? From the critical point of view, the U. S. is not normally regarded as a tax competitor of Australia-rather, Australian business is attracted to the U. S.
despite all of the difficulties with its tax system. But even the U. S. Treasury is publicly questioning the cost to revenue of having a non-competitive tax system and stating that it must focus on the changes that can best make U.
S. business more competitive internationally. We are only now hearing the first murmurings in the U. S. for change, but the Bush Administration can be expected to be accelerating the pace. The U.
S. will no doubt look to what has occurred with competitive tax systems, such as those in Germany, Ireland, the Netherlands, Singapore, Sweden, and the U. K. Each of these countries has reformed, or is presently examining, its system to retain and attract international tax business. The Australian rules are more draconian than the U. K.
and U. S. rules, and likely represent the most extreme measures applied anywhere in the world. However, in 1999, as a step to make Australia more competitive, the government amended the CFC rules to provide a qualified exemption for investments in real estate investment trusts (REITs) in the U. S. that meet certain conditions (Income Tax Assessment Act 1936 (Australia) (ITAA), s 356 (4 A).
This government initiative has proven successful. Conclusion The success or failure of the review of Australia's international tax system will be measured by how the new system stacks up against those of its leading competitors. The measuring stick for all systems will be whether the particular system makes domestic business more competitive internationally, not whether it has the toughest anti-avoidance measures. What makes business more competitive internationally is not simply giving business what it wants. Rather, a well-reasoned framework is required that has the underlying objective of making Australian business more competitive overseas, with focused anti-avoidance measures.
Tinkering around the edges, placating the few, and proclaiming reform is not just a poor alternative, but the loss of a real opportunity. References: Kenneth Dam, 2002. U. S. Department of Treasury (Tax Council Legislative Lunch, Washington, D. C. , October 8, 2002); remarks available in BNA Daily Tax Report, October 9, Tax Core.
Menger and Woywode, 2003. Two Steps Back-Proposals May Have Far-Reaching Consequences for Foreign Investment Into Germany, " February, 14 JOIT 36. 2003. BNA Daily Tax Report, January 6, page S- 13. Hughes, 2000. The U. K. 's Controlled Foreign Companies Legislation-A Very Real Threat, Tax Notes International, June 5, page 2527.
O'Donnell and Peter-Szerenyi, 2003. Repeat of U. S. Tax on Dividends-More (and Much Less) Than Meets the Eye, April, 14 JOIT 57. Michael Longes, Doug Allan. 2004. Australian international tax reform.
Chartered Accountants Journal of New Zealand. Wellington: Dec. Vol. 83, Iss. 11; p. 32 Ernest Chang, Jane Michie, Andrew Mills, Richard Vann. 2004. Australia's New International Tax Rules Promote Simplification and the Competitiveness of Australian Companies. Tax Management International Journal. Washington: Aug 13, Vol. 33, Iss. 8; p. 451
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Research essay sample on Tax System Anti Competitive
