At the public hearings of the Economics References Committee into Corporate Tax Avoidance (the Committee) on 1 July 2015, Senator Edwards asked a very good question of a witness: “Is the system fair”?
While Senator Edwards was asking this question in relation to corporate income tax, we think this was a good and timely question for two reasons.
First, as highlighted in the Re:think tax discussion paper, fairness is one of the three core principles of a well-designed tax system. To be most effective Australia’s tax system need not only be fair, but it must be perceived as being fair. It is our reflection that the Committee is already influencing these perceptions.
Second, it causes us to consider what 'fair' in the context of a multinational enterprise actually means.
It is our submission that a fair system will ensure that Australian companies are properly rewarded for the work they perform in the Australian market. The rewards will be commensurate with the value the Australian companies add.
Looking to product sales within Australia, be it as a percentage of global sales or by comparison to global product pricing or manufacturing costs, will not necessarily reflect the value created by the Australian company within the Australian market, particularly for those Australian companies that rely heavily on intellectual property funded and developed overseas to generate sales in the local market.
It may well be that the profit outcomes achieved by a distribution company in Australia will not equal the outcomes achieved by an intellectual property holder overseas, but that doesn’t mean that the outcome is not fair to Australia.
While there will no doubt be many recommendations from the Committee, it is our hope that one outcome will be to ensure that Australia’s taxation, education and research and development policies remain directed towards supporting the development and retention of valuable intellectual property in Australia.