GLOBAL TAX ON MULTINATIONALS

THE WOODWARD PROTOCOL

TAXING MULTINATIONAL CORPORATIONS

Obtaining a fair share of tax from the huge multinational corporations (MNCs) currently is a matter of great concern. Action in this area is currently spear-headed by the Organization for Economic Co-operation and Development (OECD), acting on a request from the G20. Their project examines Base Erosion and Profit Shifting (BEPS) of the huge multinationals – how income and expenses are shifted to low tax countries.

SOME TAX PLEASE

WELL PERHAPS A LITTLE

WHAT IS THE COST? IS THERE AN ANSWER?

The OECD has estimated that tax authorities could be losing between US$100 to US$240 billion annually in tax revenues because of BEPS activities. Our presentation examines the nature of the problem, and offers a new and very practical method to achieve the desired result (The Woodward Protocol – WP). The WP proposes radical but fair changes to current (archaic) taxation law, which can be implemented quickly and practically, and without the continuing and never-ending horse-trading resulting from amending the old taxation principles

THAT’S NOT

MUCHIT’S ALL LEGAL

THE TRADITIONAL TAX MODEL FOR INDIVIDUAL COUNTRIES

The traditional tax model requires: INCOME- Gross Income earned in that year. Less EXPENSES – Expenses incurred in that year, including Cost of Goods Sold and overhead expenses. Equals NET INCOME The Net Income is then taxed at the tax rate or Rates applicable in that country.

INCOME

EXPENSES

NET INCOME

TAX PAYABLE

LAWYERS & ACCOUNTANTS

PLEASE STUDY

CAREFULLY

THE LAW

THE MINIMISATION OF TAX CHALLENGE

The MNCs operate in many countries – many in virtually every country of the world. However, world-wide tax rates vary enormously.

In addition, some countries may offer specialconcessions and incentives to attract MNCs to carry out business activities in theircountries – e.g. no – or low tax start-up periods.

LET’S GET GOING

TO BERMUDA

THE MULTINATIONAL TAX GAME – CURRENT TAX YEAR

How does the MNC manoeuvre more accounting profit out of high-tax countries (HTCs) into low-tax countries (LTCs)? A)Interest Transfers. Supply funds to the business in the HTC from a branch in a LTC and charge high rates of interest on these funds. B)Royalty Payments. Locate ownership of the intellectual property (IP) in a LTC, and charge a substantial royalty or licence fee to the HTC for use of the IP. C)Transfer Pricing. Where actual goods are being sold in the HTC, make sure the goods are supplied at the highest price arguable from a LTC. Strategies are given names: “The Dutch Sandwich”, “The Double Irish”, “The Bermuda Black Hole”, “The Singapore Sling”, “The Swiss Leaks”.

BAD LUCK

LAWYER SHIELDTAXMAN

THE MULTINATIONAL TAX GAME – TAX INVERSION

The USA has an additional problem. It taxes the world-wide profits of its companies with a credit for foreign tax paid. However, these are not taxed until the profits are repatriated. Because of this, not only do the MNCs not repatriate profits, but in recent years, many have changed the corporation’s legal domicile to a lower tax nation. The Woodward Protocol outlined here is proposed to levy a fair rate of tax on current year earnings, but would have important consequences for the problem of tax inversion.

TO USA

BYE BYE !!

TO BERMUDA

COUNTER ATTACK BY TAX AUTHORITIES

The key points of the 15 actions recommended by the OECD: Preventing “treaty shopping” used by companies to move profits around. Standardised country-by-country reporting by companies Limiting interest deductibility and denying exemptions for payments in other jurisdictions Transfer pricing guidelines There will be greater exchange of information so that tax authorities can see where profits are being moved. In addition, the UK has a legislative project dubbed the “Google Tax”. Australia has a new Multinational (Tax) Anti-Avoidance Law.

WE’RE TAXMEN

LET’S PLUG THESE LEAKS

THE FUTURE BATTLEGROUND

All of the above look to force MNCs to disclose through country-by-country reporting how profits are shifted between jurisdictions. However, all of these measures are based on current law and propose additions to such law which involve negotiating and haggling to minimize profits shifted to LTCs. And there remain questions about how quickly or slowly obtaining the country-by-country information is likely to occur.

LAWYERS & ACCOUNTANTS

WE’LL FIGHT YOU ALL THE WAY

WE’RE GETTING MORE TAX

TAX MEN

IS THERE A LOGICAL, FAIR ALTERNATIVE?

Instead of being locked into the traditional country-by-country tax approach, the WP instead argues that it is fair to view the world-wide activities of each MNE. Their world-wide success is vitally dependent on sales – no sales, no profit. So if their Australian company generates say 5% of their world-wide sales, the WP argues that 5% of the MNE’s worldwide net income relates to the Australian sales, and that Australia has a moral right to tax this net income.

TAX MEN

NO SALES IN OUR COUNTRIES, NO

PROFIT HERE

IT ISN’T FAIR

CONSOLIDATED

WORLDWIDE

ACCOUNTS

THE ACCOUNTING PRINCIPLE OF CONSOLIDATION

To measure the combined world-wide performance of the MNC, consolidated world-wide accounts (CWWAs) already are produced (and audited). They are readily available on the internet. In the process of consolidation, intercompany transactions are eliminated. For example, the high interest expense paid by the Australian company is offset against the matching high interest income received by the Bahamas company; this transaction has not added to or subtracted from the MNCs world-wide net income In short, the consolidated world-wide accounts of the MNC are calculated to show what real world-wide income (sales to non-related customers) have been achieved by the MNC, against which are offset all the world-wide expenses paid to external non-MNC suppliers. The effect of the “Double Irish” and the “Singapore Sling” have disappeared.

TAX MEN

THANKS! NOW WE KNOW

YOUR REAL PROFITS

BUT THOSE HAVE ALWAYS BEEN THERE

WORLD-WIDE CONSOLIDATION AND THE REAL COST OF SALES

The exciting result of consolidation is that all of the transactions shifting income and expenses between the companies owned by the same MNE in different jurisdictions are eliminated and become irrelevant. We now have a figure for the actual world-wide sales of the MNC to external consumers. Comparing this to say Australian sales, we can say that Australian sales contribute say 4% to the world-wide sales. We also have a figure for the world-wide expenses of the MNC paid to external suppliers, as a percentage of sales.

TAX MEN

IT DOESN’T MATTER HOW YOU SHUFFLE INTERNALLY

MORE LAWYERS & ACCOUNTANTS

WHAT-NO DOUBLE IRISH??

NO BERMUDA BLACK HOLE??

THE WOODWARD PROTOCOL (WP)

The Woodward Protocol argues that the Australian sales are a vital part of the MNC’s world-wide profitability, convertible to a mathematical percentage of world-wide sales. It then says, a fair measure of the net income generated by these Australian sales would be to deduct that same mathematical percentage of the world-wide consolidated expenses. For each MNC, from its consolidated world-wide accounts (CWWAs) there will be for each financial year a Consolidated Expense Percentage (CEP) for each financial year.

TAX MEN

OUR SALES ARE 4% OF YOUR TOTAL-WE’RE TAXING YOU 4% OF YOUR NET PROFIT

IT”S NOT FAIR WE DON’T WANT TO

CHANGE

IT”S NOT FAIR WE DON’T WANT TO

CHANGE

ADJUSTMENT OF THE CONSOLIDATED EXPENSE PERCENTAGE (CEP)

Each jurisdiction will be free to calculate its own Adjusted CEP (ACEP), based on the CWWA but adjusted if required for principles of taxation peculiar to that country. For example, in Australia, capital gains tax is levied in the year that the capital gain is crystallised through sale or other disposal. The CWWAs will contain income and expense items mirroring increases and decreases in the fair value of assets and liabilities, not normally taxable or deductible in Australia in that year if no disposal occurs. It is likely that the Australian taxation authorities would decide on a method to adjust for (eliminate) changes in fair value when calculating the ACEP for a particular company. TAX MEN OK, WE WILL

MAKE MINOR ADJUSTMENTS

BUT THAT WON’T HELP MUCH

BUT THAT WON’T HELP MUCH

A NEW TAXING METHOD – THE WOODWARD PROTOCOL (WP)

The WP proposes a conceptually simple system by which the profits of a MNC will be taxed in a particular jurisdiction:- The income of the MNC will be the income generated in that jurisdiction. The allowable expense will be the ACEP as adjusted for that jurisdiction applied to the income. Income tax will be the corporate tax rate of the jurisdiction applied to the difference between income generated in that jurisdiction and the notional expense calculated as in b) above, less any quasitax already paid (e.g. withholding tax on royalties, interest etc.).

PLEASE PAY TAX ON 12% OF YOUR

SALES HERE !!

THIS IS TERRIBLE IT’S

GOING TO BREAK US

WORLD-WIDEPROFIT ON SALES 12%

TAX MEN

IT’S TERRIBLE WE SHOULDN’T HAVE TO PAY

THAT MUCH

WE’RE ONLY GETTING WHAT’S

FAIR

A MASSIVE TAX IMPACT

As examples of what might result: Google It has been suggested Google generated AU$1 billion in sales in Australia in a recent year but paid less than AU$1 million in tax (less than 0.1% of sales). In 2014, Google had a CEP of 78.58% in its CWWA. Applying the Woodward Protocol to Australian sales of approximately AU$1 billion, income tax payable in Australia would be 30% of AU$214.2 million, equal to AU$64.26 million, (compared to approximately AU$1 million actually paid) (potentially 6.45% of sales).

TAX MEN

IT’S TERRIBLE WE SHOULDN’T HAVE TO PAY

THAT MUCH

WE’RE ONLY GETTING WHAT’S

FAIR

TAX MEN

IT’S TERRIBLE WE SHOULDN’T HAVE TO PAY

THAT MUCH

WE’RE ONLY GETTING WHAT’S

FAIR

A MASSIVE TAX IMPACT

Apple It has been suggested Apple generated AU$6 billion in sales in Australia in a recent year, but paid less than AU$40 million in tax. In 2014, Apple had a CEP of 70.73% in its CWWA. Applying the Woodward Protocol to Australian sales of AU$6 billion, income tax payable in Australia would be 30% of AU$1756 million, equal to AU$526.86 million, (compared to AU$40 million actually paid).

A MASSIVE ECONOMIC IMPACT

Slide 2 quoted an OECD estimate that presently there could be 4 percent to 10 percent of global corporate revenues, or US$100 to US$240 billion in additional tax, being lost annually.However, bear in mind that all of these existing proposals are aimed to reduce profit-shifting. Their implementation will no doubt still leave a goodly proportion of net income in low/no tax jurisdictions.In contrast, the Woodward Protocol principle will very substantially limit the impact of net income shifted to low/no tax jurisdictions, and quickly and effectively increase tax payable significantly above the OECD figures.

THIS MAKES A REAL

DIFFERENCE TO RUNNING OUR

COUNTRY

TAX MEN

HOW DIFFICULT OR EASY TO IMPLEMENT? LEGISLATIVELY

Implementation of the WP in a particular jurisdiction will require drafting completely new tax legislation applying to MNCs. While this might appear a major task, in fact the principle involved is relatively straightforward.In contrast, the BEPS measures of the OECD call for concerted world-wide legislation.To combat profit-shifting, there will almost certainly be never-ending tinkering with the law to combat new ways of profit-shifting.Because the WP negates the effect of profit-shifting, this aspect of the perpetual battle should become far simpler.

WE LIKED THE OLD ONES BETTER

NEW TAX LAWS

HERE ARE THE NEW TAX LAWS

HOW EASY OR DIFFICULT TO IMPLEMENT? PRACTICALITY

The current Australian and proposed OECD measures place a major focus on obtaining country-by-country reporting, to detect BEPS activities and then to haggle with MNCs about these.No doubt MNCs will only reluctantly comply (after challenging legislation). Even then, there will be never-ending horse-trading about appropriate adjustments.In contrast, MNCs are already producing Audited CWWAs readily available to all (financial years will need to be aligned).With CWWAs already available, the WP should result in faster implementation, major increases in tax payable, and far less ongoing argument.In fact, the impact of the tax increase might be so huge that implementing countries might allow a phasing-in period.

IT’s NOT FAIR YOU’VE MADE ME

SAD

WE LIKE THE NEW LAWS. NOTHING MUCH TO ARGUE

ABOUT

POLITICAL CONSIDERATIONS

There would seem a strong incentive for almost all countries world-wide to base their taxation of MNCs on the WP. The possible exception is the USA, which is bound to see this as an attack on the profitability of their hugely successful technology MNCs. The USA has stated that it will not agree with any part of the OECD’s BEPS measures which might cannibalise its tax base.Whether the USA agrees or not, it is open to the consumer countries to state that if the MNCs wish to access the consumers in their countries, the MNCs must submit to the WP method of taxation.

OTHER COUNTRIES

WITHOUT OUR SALES, YOUR

IDEA WOULD BE WORTH LESS

INTELLECTUAL PROPERTYCOUNTRY of ORIGIN

THE IDEA STARTED HERE-

WE WANT MORE TAX

TAX-SHARING TAX REBATE

The WP effectively collects tax on the whole of the real net income resulting from sales in the consuming country, in that jurisdiction.As such, there may be no separate return on ownership of the intellectual property (IP), and no additional tax payable to the country of origin of the IP. As a concession to the argument that there should be some return (royalty or licence fee) for ownership of the IP, an individual jurisdiction might offer a sharing tax rebate based on the following principle:-Rebate Percentage (RP): This would likely be set at different rates for different MNCs.Effective Tax Rate Percentage (ETRP): This would be the effective tax rate in the country of origin, compared to the effective rate in the destination jurisdiction.Tax Rebate Percentage (TRP) = RP x ETRPThe purpose of including ETRP in the calculation is to eliminate any incentive to nominate a low- or no-tax jurisdiction as the country of origin.

INTELLECTUAL PROPERTYCOUNTRY of ORIGIN

WE’D LIKE MORE

OTHER COUNTRIES

MAYBE WE’LL AGREE TO REBATE

YOU 10% OF THE TAX DUE HERE

PROTECTION OF THE IDEA

An application has been made for an Australian provisional patent (No 2015904487) on the mathematical formula involved, to provide some protection for the idea. Obviously the originator of the idea would appreciate some compensation for developing and publicising the idea, particularly in view of the massive difference in current tax revenues which the WP could easily and quickly produce. Regardless of whether this results, the originator considers the current situation completely unacceptable. Current approaches to rectify the situation are far more complex and difficult to implement, and do not get to the heart of the problem.

THE PRINCIPLE IS FAIRPLEASE SUPPORT US BY SPREADING THE WORD

CONTACT JOHN WOODWARD jwaust@bigpond.net.au

+61 418 987300