Multinational companies are getting a ‘free ride on the efforts of others’ by not paying their fair share in tax, according to assistant federal treasurer, David Bradbury.

The federal government is planning a tax crackdown on companies including US tech giants Google and Apple.

Mr Bradbury, speaking at a conference in Sydney yesterday, said that multinationals that failed to pay their fair share of tax were benefiting from government-funded infrastructure, human capital and institutions. If they went unchallenged, multinationals threaten to erode Australia’s corporate tax base.

The Australian Tax Office (ATO) will have unprecedented power to restructure cross-border transactions to claim more taxes. Estimates suggest that despite Google generating an estimated $1 billion in revenues, the company paid just $74,000. Google says it paid more than $780,000 – which still seems fairly low.

Many multinationals are known to employ a strategy known as the ‘Double Irish Dutch Sandwich’, whereby revenues are routed through a company setup in European states, with funds flowing via Europe and through Ireland. The strategy takes advantage of loopholes in Ireland’s tax laws, and generous tax laws in some European countries.

Governments around the world are trying to capture more revenue from multinationals. In the UK, there was widespread community outrage after news emerged that coffee chain Starbucks had paid just £8.6m in tax in 14 years, and nothing in the last three years. Companies are increasingly operating in multiple locations, and taxation systems are failing to cope with the rise of digital transactions.

Rio Tinto Limited (ASX: RIO) has criticised the government’s plan, saying it could backfire, and end up costing the government revenue.

The news comes as China looks to halve the tax rate paid by its domestic iron ore producers, in an effort to drive down prices and maintain local supply. That has implications for our iron ore exporters including Rio, BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Atlas Iron Limited (ASX: AGO).

The Foolish bottom line

With other countries, including the UK and the US looking to increase their tax revenues, it appears to be a good time for governments globally to cooperate to clamp down on multinational tax avoidance schemes.

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Motley Fool writer/analyst Mike King owns shares in BHP Billiton. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.


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