Budget Deficit and Tax Avoidance
Withholding Tax Anomalies
Overseas companies are currently charged a 10% Withholding Tax on services supplied to Australian companies such as
Royalties
Management Fees charged to Australian subsidiary companies
Engineering and design services
Executive search fees
Corporate advisory services
Many more similar services
The anomaly is that the Australian company that pays for these services is allowed a 30% tax deduction thus gaining a 20% differential as compared with the 10% Withholding Tax paid by the overseas company.
It would be more equitable if the Australian company incurring these charges was only allowed a deduction of 33.333% which would equate to the 10% withholding tax paid by the overseas company.
The principle behind adopting this policy is that the Australian economy should not be subsidising the cost of these services and it may also encourage Australian companies to source these services locally.
Withholding Tax on interest paid on overseas borrowings
With Australian banks, financial institutions and Corporations borrowing from the overseas money market we have the same anomaly where the Australian borrower claims a 30% tax deduction as compared with the overseas lender only incurring a 10% Withholding Tax. In fact, where the overseas loans on a “no income tax basis” the Australian borrower pays the 10% Withholding Tax and claims a 30% deduction on the interest plus the Withholding Tax.
On the principle that the borrower should not have any tax advantage as compared with the overseas lender the interest paid deduction should only be allowed at 33.333% of the interest paid.
This approach would create problems in the mining and petroleum industries that have undertaken massive capital investment to develop mines and infrastructure for the petroleum and CSG development. The interest on existing borrowingswould have to be allowed on the full rate whilst construction is continuing and if this is a continuing problem once the project begins to earn export revenue perhaps the differential could be recovered by an equivalent tax on exports.
Foreign Companies loans to Australian subsidiaries
The recent Senate enquiry into tax avoidance by multinational companies revealed some examples of the methods used to minimise company tax in Australia. Companies set up a Finance Subsidiary in a tax haven such as the Bahamas and borrow funds at a low rate of interest. These funds are then loaned to Australian subsidiaries at interest high rates in the range of 9% to 11% thus shifting profits into a tax free haven whilst their Australian subsidiary claims a tax deduction of 30% on the high interest paid bringing their Australian profits close to zero. These types of tax avoidance schemes are currently being used by News Corporation and the Chevron Oil Group.
Labor’s proposals to withdraw tax advantages on Novated Car Leases
The Coalition’s policy of not allowing this legislation to proceed should be revisited. If such a policy represents a tax rort for a privileged few it should be withdrawn. It would have made some sense if the Act was only applied to Australian assembled cars but that opportunity has passed by with the impending closure car manufacturing in Australia.