The charms and challenges of tax policy: TTI leader Bob Deutsch shares his insights
Professor Bob Deutsch, CTA was fascinated by tax when he was a student at Cambridge in the 1980s. Well there’s a conversation-stopper.
“Strange I know!” laughs Deutsch, Senior Tax Counsel at The Tax Institute, and former Deputy President of the Administrative Appeals Tribunal.
What sparked his interest most in the subject was the policy approach to its revenue-raising power.
“I think tax is so important because everything we want and need from our government depends to varying degrees on their capacity to raise tax, and raise it with integrity and continuously.”
Tax policy uncertain
But there’s not much on the policy front now, with no reform on the horizon.
Since Labor’s defeat at the last election, tax policy has become very uncertain, says Deutsch.
“If Labor had won the election last year we would have had a fairly clear agenda as to what was going to happen to tax. We knew a lot about their policies and that was part of their undoing!
“With the coalition I think it’s all really pretty much up in the air. I don’t think there’s too much certainty about where tax is heading.”
The government may be lacking in policy but there are some big revenue pockets it’s targeting.
One of them is the Black Economy. “I think that’s high on the agenda. I suspect they’ll be announcing some additional measures … in the next Budget on the Black Economy.”
Tax avoidance by the multinational companies is another one for the agenda.
“I think there’ll be continuing focus on international transactions because there’s still a perception, at least within the community, that there’s a lot of avoidance going on in the multinational, international space.”
Deutsch is of the view that measures on multinational tax avoidance, such as the Diverted Profits Tax introduced by the Turnbull government will be enforced “more rigorously” by the ATO.
“Whether the government can do anything in addition to all that I’m not sure, but digital services tax is clearly a big area and it’s one where the government will be focusing its attention and getting that right.”
There is an international move to introduce a global initiative on digital services, but this government is not willing to wait out that process, he explains.
Digital services tax
“So, we will have our own version of a digital services tax I suspect.” says Deutsch, and not without the TTI putting forward a submission to the Board of Tax in this area.
“The outcome will be likely a combination of what we’ve presently got, which is an incorporation test and a central management and control test. But how that’s massaged together is what the government will have to work out. It’s going to be some sort of transaction tax that we’ll end up with.”
A number of countries, including France and the UK, have already introduced digital services tax (DST), but not without response from the American President.
“New Zealand’s policy has come under a lot of pressure from Trump, who’s threatening them with all sorts of tariffs. And we know, he’s not averse to imposing such things!”
Tariffs and trade wars as stick
Deutsch said that America is the biggest global player that’s causing a “ruckus” at the moment.
“I think that there’s a lot of anxiety for corporates created by tariffs and trade wars.
“It’s almost as if all that is history, because it’s been overtaken by the coronavirus and other things, but … that’s going to be an ongoing issue, particularly if Donald Trump is re-elected, I think he will continue to use that as a weapon to ensure that other countries do the right thing by America.
“The DST is a classic example of where he’s using it in that fashion.”
Deutsch is concerned that there are a number of areas allied to tax where America is a bit of an outlier. America is still not a member of IFRS, he says, so this creates problems, and they spin off into tax, such as the recording of information and the way it’s presented.
“So, I think America’s behaviour and how it’s going to look after 3 November is really important for Australia and the world, because a lot of what happens in the tax space internationally is dictated by America and their lack of involvement in some of the global initiatives. So that’s something to watch.”
ATO to go hard on pricing arrangements
Transfer pricing is going to continue to be an issue for corporates, forecasts Deutsch.
“It’s not going away – the tax office has had a huge win in Chevron, and a huge loss in Glencore, two of the most recent cases. I doubt if they’re going to lie down and accept the outcome in Glencore. They’ll be challenging other companies in relation to their pricing arrangements, where they don’t think they’re appropriate – that’s going to be a large threat for corporates in particular,” says Deutsch, citing Rio Tinto’s ongoing arguments that he predicts won’t lessen in the next few years.
Simplify taxes? Love to
Where Deutsch would love to have a hand in policy is in simplifying some of our inanely devised taxes.
“Tax is really important because of everything we want to do in terms of social services. So, I think raising revenue is vital. But I think it needs to be done in a simpler way than the hellishly complicated way that we do it, often for no really good, sound reason.
“The classic example of that is corporate tax rate, there is no policy explanation for why we’ve got to where we have with that. [It] is in my view a total fiasco. It’s tax policy gone mad.
“You’ve always got to look at the income companies earn to determine the rate. The fact that It takes about 25 minutes to explain it, that’s absolutely absurd in policy terms. Having these different rates, depending on the size of the company is just nuts.
“I think the rate should be reduced to 25% flat. If we’re then concerned it’s not raising enough revenue at the corporate level which I’m not, then you can address the tax base.”
Any other targets for change? GST. And Deutsch wants to preserve the rate, but extend the base.
“Why is it that a rich person who buys wagyu beef doesn’t pay GST, but a poor person who buys a Big Mac does. And that’s the way the system works. The latter is a prepared meal, subject to GST, but the former isn’t. To my way of thinking that’s absurd.
“I think we should expand the GST base to cover as much as possible including basic food, basic health, basic education [but keep exports GST-free to remain internationally competitive] and then there should be a generous ongoing compensation package for the lower-paid that could be related to the pension, the youth allowance or Newstart.”
He’s estimates that many billions of additional dollars could be raised, and he’s done the maths.
The future is …
“I think if we don’t do something about all these issues, we’re going to be in a constant battle to raise enough revenue,” says Deutsch. And just when it was all sounding pretty dire, laughter hit the air.
“But most countries would love to have our problems!”
Virginia Ginnane, Marketing Content Specialist at Thomson Reuters interviewed Professor Bob Deutsch with Ian Murray-Jones, Senior Tax Writer at Thomson Reuters.
The Tax Institute’s Tax Summit was held in Sydney from 11-13 March. Professor Robert Deutsch gave his keynote address on 12 March.
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