Australian School of Business UNSW Australia Business School Tax Complexity Conference Prato September 2014 Complexity – a necessary evil Michael Walpole.

Australian School of BusinessUNSW Australia Business School

Tax Complexity ConferencePrato September 2014

Complexity – a necessary evil

Michael Walpole

•“Complexity” means

•Complexity of language; difficulty of concepts

•Volume of rules; number of interrelated provisions

•Complexity is a problem

•Costs of compliance – learning; research; advice

•Non-compliance – inadvertent

•Compliance – ‘creative’

•But

•Some complexity is desirable

•Some complexity is necessary

Costs of compliance

• Education costs

• Time costs

• External advice

Non compliance

•Fatigue – too hard to correctly comply

•Confusion – inadvertent non-compliance

•Exploitation of gaps hidden by complexity

• Would exploitation occur anyway?

Recent tax scandals

•Starbucks•UK since 1998, 753 outlets, sales since 1998 worth > £3 billion•In relevant period paid only £8.6 million in income tax•In the three years preceding the news report it reported no tax profit•It reported financial profit•Funded with debt•Interest rates higher than McDonalds and KFC•Key features

• Standard loan financing and transfer pricing• Not illegal• Not successfully challenged by HMRC

Recent tax scandals

•Google•2012 transferred US $9.8 billion to Bermuda shell Company ‘headquartered in local law firm’•“avoided US$ 2 billion in “worldwide taxes”’•2011 paid UK income tax US$9.6 m on earnings US$ 4.1 billion•Irish sub collects revenues from advertising sold in UK & France•Royalties from Irish Co to second Irish Co [“Double Irish”]•Royalties then paid via Netherlands sub to Bermuda with DTA advantages [“Dutch Sandwich]•Key features

• Standard royalty transfer• Advantages found in the DTAs• Not illegal• Attracted attention of UK French and Italian authorities – but ?

Recent tax scandals

•Apple•Global avoidance of tax as well as within the USA•Office in Reno (“Braeburn Capital”), Nevada (0% corporate tax rate) which “collects and invests its profits”•“avoided millions of dollars in taxes in California and 20 other states”•Use of the Nevada subsidiary is representative

• use of subsidiaries in low tax jurisdictions = reduce the company’s effective tax rate globally to 9.8% on US$34.2 billion of reported profits

•For international tax arrangements: see Ting in BTR •Did not use Double Irish Dutch sandwich•Contest between US Co. residence by place of incorporation and Ireland’s (then) Co. residence by central management and control•Key features (international)

• Standard Co. residence conflict• Standard transfer pricing • Not illegal

“It’s not rocket science”

•Better analogy is game of chess

•Fuelled by international competition for investment $

•And corporate appetite for profit/return to shareholders

Anti avoidance response

•Necessary to curtail via GAARs and SAARs

• limitations expressed – GAARs do not cure fundamental flaws

• GAARs can add complexity

•Even GAARs can be dodged e.g. former S African s 103

• Tax avoidance intention (rebuttably) assumed if there was “avoidance or the postponement of liability for payment of any tax, duty or levy imposed by this Act or any previous Income Tax Act or in the reduction of the amount thereof”

• Argument raised that trust scheme was to avoid Estate Duty & Donations Tax (different statute)

• Amendment added “or any other law administered by the Commissioner,”

• Too great simplicity leads to avoidance

• (Or was this just a drafting error?)

Other problems with simplicity (1)

•The Hong Kong story• Flat tax albeit low rate• Avoidance• Incidence• Low yield

• Alternative revenue sources needed• Lack of services

• What choices does a society make?

Other problems with simplicity (2)

• If simplicity leaves gaps•Lack of certainty

• Volume of rulings and • subordinate regulation

•Over reliance on discretions•Over reliance on the Courts to pencil in detail

Sources of complexity

•Clarification

• Australian GST examples

• Meaning of “food” for human consumption

• Financial supplies

• Detail boggling but effective

•Simplification• Examples

• Australian consolidation rules• Australian Small Business CGT concessions (esp) for

discretionary trusts • Ironic situation

•If complexity leads to fulfilment of policy outcomes – complexity is warranted

Discussion