Beating Google at its own tax game

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Australians are being robbed – every minute of every day.

The exact amount is unknown but no-one should argue that a figure of around $5 billion to $10 billion per year that is lost to the Australian Taxation Office when offshore tax havens, price gouging and tax minimisation are used.

Technology is at the heart of the systems being employed by international multinationals to rip off Australia and it is time for Australian business to learn how to use technology to fight back and hope that at some point the government might get on board.

How is it done?

Businesses that master technology gain an advantage that permits them to employ complex off shore corporate structures and various practices with the goal of minimising tax and controlling markets.

Three examples of how technology can be employed by business to gain an advantage include the use of off shore companies, price gouging and market segmentation.

1.     Market segmentation. International multinationals use advanced technology to divide the world into zones so that different prices can be charged in each zone. Examples include DVD region codes, and geoblocking.

2.     Price gouging. It should not surprise anyone to learn that there is an Australian zone where prices for imported goods are extortionately high.

3.     Tax Havens. Google Australia expected to pay about $74,000 in corporate income tax in 2011 despite local revenue being about $1 billion - less than 100th of a per cent of local revenue in tax. Bewildering? Not really. Most international multinationals use tax havens (a nation that offers low taxes, no regulation and refusal to divulge company and account information to other nations) and favourable corporation and taxation laws to minimise tax.

What is the government and business response?

Australian’s have benefited by local companies fighting back against international multinational price gouging and one highly visible example has been the use of parallel importation to reduce the cost of movies and music. In May 2012 JB Hi-Fi commenced parallel importation of computer games and this led to computer game prices falling from more than $10 per game to about $30 per game.

Every success in the fight against international multinational price rip-offs has come at a cost and the battle is not over. The fight has now opened on another front with international multinationals fighting back by using trademark and copyright laws to limit or prevent parallel importation.

Public outrage over high IT prices forced the Australian government to commence an inquiry into IT pricing.  After a day of questioning the Microsoft, Adobe and Apple representatives, MPs at the inquiry implied that the answers provided were “evasive”.

Technology to the rescue

While consumers have found ways to circumvent geoblocking, businesses still need to harness technology to replicate the low-cost approach used by international multinationals. Here are three things that they can do.

1.     Corporate Structure. The first step is to reorganise – and you may need advice from a lawyer or accountant familiar with setting up offshore companies and Australian trusts. You will also need advice on what business transactions can be legally funnelled through the tax haven.

Recently an international investigation into tax havens uncovered the extent to which individuals and organisations are using them to hide wealth. The investigation received a hard disk anonymously that contained 2.5 million records relating to more than 120,000 companies and trusts in 10 offshore jurisdictions.

The Washington Post investigation highlighted that the typical approach is to have a company in a tax haven that is managed by a local representative – cost $3000 – and a trust in Australia – cost $1000. This means that your Australian business is one step removed from revenue flows that come back to Australia. The offshore company should be used for all international purchases. The report also provided details of several major international banks that provide legitimate banking and credit card facilities for tax haven companies.

Technology can now be used to reduce the costs associated with running off shore companies and to automate product, customer management and financial processes.

2.     Separate E-Commerce system. The next step is to create a website that uses an Australian ‘.au’ domain (‘.au’ domain names can only be registered by Australian residents with an ABN or Australian companies) and this website is used to advertise your products and services.

Use the tax haven company to create a website with an international web hosting company and use a ‘.com’, ‘.net’, ‘.biz’ or another domain like ‘.tv’. This website is used for the ecommerce system and customers are transferred from the ‘.au’ website to this website to make a purchase and because this ecommerce website is offshore customers don’t pay GST. There are a number of companies that provide this capability through hosted systems for about $30 per month.

3.     Reduce management costs. International website, ecommerce, accounting and website hosting costs would be no more for the tax haven company than for an Australian business – with prices starting at about $1000 per. There are companies such as Netsuite that offer integrated websites that include product, customer management and financial solutions. 

Is it illegal ?

Using a tax haven is not illegal and it is unlikely that the use of tax havens will be outlawed anytime soon.

In 2010 Myer, a bastion of Australian retail, setup an international retailing website overseas and commenced shipping goods purchased by Australian customers from a warehouse in Shenzhen, China to avoid the GST. Shenzhen is located next to Hong Kong, a major tax haven. Bernie Brookes, the Myer chief executive at the time stated: “if we can’t beat them, we’ll join them”.

If you can’t beat them join them

The Washington Post has also provided a guide to Tax Havens which portrays tax havens in a negative light – but if tax havens are so bad why is one-third of the world’s wealth residing in tax havens today?

Any funds that you want to transfer back to Australia from the tax haven bank account would go to your trust account and this account would be used to purchase your house, car, travel, food, pay school fees, etc. This ensures that your personal income is minimised.

There are many hundreds of thousands of family trusts in Australia so it is unlikely that any government is going to act to reduce the tax effective nature of them.

Forcing Canberra's hand

Recently, the Organisation for Economic Co-operation and Development flagged the idea that Australia should raise GST. Why do this when there are tens of billions of dollars to be had by plugging some of the loop holes that get used by international multinationals every minute of every day.

A financial transaction tax on any online purchase that does not include GST to be administered with assistance from the credit card companies and banks would significantly reduce the rivers of gold flowing out of Australia annually - about $4.2 billion in 2011 (this is figure is expected to be about $20 billion in 2013) and this approach removes the need for increased customs involvement and costs.

This approach to increasing tax revenue has been under discussion by the Australian Taxation Office for several years.

In September 2012, Margy Osmond, the chief executive of the Australian National Retailers Association, said that a productivity commission report on online shopping GST changes ''states a clear case for change'' and called on the federal government to ''act quickly''.

Sorry, but the government has received advice from the multinationals that run and own this country… their not happy with the idea.

Introducing GST and an upfront company withholding tax on all online purchases, including for purchases from non-Australian companies, would significantly boost government coffers. US states commenced collecting GST from on all online purchases in mid-2012 and many more states have moved down this path to stop the loss of taxation revenue.

It’s also time to wind back the 50 years of hand-outs to international multinationals that have led to Australian corporation and taxation laws that reward unscrupulous companies. The IT price gouging by international multinationals should be the ‘straw that broke the camel’s back’ and every effort must be made to level the playing field.

The proposition in this article is that if all Australian businesses adopt the approach taken by international multinationals and minimised their tax to the point where the Australian government becomes destitute then there is an increased probability that the government will terminate the pointless committees and inquiries and take positive action to secure Australia’s future and protect Australian consumers and business.

Mark Gregory is a Senior Lecturer in Electrical and Computer Engineering at RMIT University. Please seek proper legal and financial advice before acting on the infomation provided in this article.