By far the majority of the paper is an explanation of international tax framework including an analysis of a country’s right to tax and the operation of tax treaties, together with a discussion of international business environment is changing including the rise of the digital economy, the increasing importance of intangible property and the manner in which a global supply chain operates.
From this background, the issues paper raises three questions. They are:
- Is it a matter of concern to Australia that another country is not exercising its right to tax?
- Is there sufficient evidence of Base Erosion and Profit Shifting in Australia?
- What should be Australia’s priorities in the short term in dealing with five 'key pressure areas' identified by the OECD which could broadly be described as:
- anti-avoidance measures
- thin capitalisation
- the digital economy and intangibles
- the use of hybrids.
On anti-avoidance measures, the issues paper acknowledges the general anti-avoidance rule changes currently before Parliament, but could give rise to a broadening of the rules to cover foreign taxes.
On transparency, there is a separate issues paper dealing with the potential disclosure by the Commissioner of large corporate revenue and tax payment information. Query whether this could be extended to tax information concerning revenue outside the Australian net.
On thin capitalisation, the paper mentions, possibly with a degree of Federal Budget foreshadowing, that other OECD countries have tightened thin capitalisation rules.
The digital economy and intangibles is certainly an issue not conducive to a short term solution or one where Australia goes it alone.
This leaves the use of hybrids which is a shorthand for international mismatches in entity and instrument characterisation. This may well be the main focus of the Scoping Paper due in June.
In the meantime submissions are due by 31 May 2013 on the Issues Paper. This is certainly a space to watch and to consider your current international structure.