As the ways we do business continue to evolve, aided by disruptive technologies and globalisation more generally, our tax framework is often slow to respond. This is in large part because it is built upon traditional and well-understood tax principles formed around the way business was conducted in the early part of last century.
Now, however, we find ourselves in the midst of the so-called ‘sharing economy’ and a climate in which perceived disruptive business practices are becoming the new normal. The pace of change is only accelerating, but policymakers are rising to the challenge.
Increasingly, they are introducing measures that signal a shift away from the traditional model of simply taxing the supplier of goods and services towards a framework focused on imposing tax based on where the economic substance is located or the consumption is taking place.
Some recent examples of measures introduced in Australia that are specifically designed to counter disruptive business practices include:
- The Multinational Anti-Avoidance Law (MAAL) – This is designed to combat arrangements where a foreign entity supplies goods or services to Australian consumers but does not do so through an Australian presence. The MAAL may be applied where:
- there is a related Australian entity carrying out material functions (e.g. marketing and negotiating contract terms between consumers and the foreign entity);
- the foreign entity derives income under the arrangements that is not attributable to an Australian presence; and
- there is a principal purpose of reducing Australian tax.
- The Diverted Profits Tax (DPT) – The DPT is a 40% penalty tax rate where Australian tax paid is reduced by diverting profits offshore in contrived arrangements between related parties by reference to where the economic substance resides.
- GST on inbound digital sales and low value goods – Previously, foreign suppliers of digital products and services (e.g. movie downloads, e-books) and low value goods (i.e. less than $1,000) fell outside the Australian GST net, either because no supply was made in Australia or the cost of collection on import of the goods was too high. These measures mean that GST is now payable in respect of such things imported by Australian consumers. Importantly, in dealing with disruption caused by electronic distribution platforms and the difficulty in collecting tax on a myriad of foreign sellers, the legislature simply targeted the operator of an electronic distribution platform (e.g. App Stores, Amazon), typically large corporates with deep pockets, who are now liable for the GST on deemed taxable supplies instead of the actual foreign seller.
The rise of the sharing economy has also made policymakers pause. One such example of this is the Australian Treasury’s establishment of the Black Economy Taskforce (BET), which was designed to develop an innovative, multi-pronged policy response to combat the black economy in Australia.
From the BET emerged a consultation regarding a ‘sharing economy reporting regime’. The associated consultation paper identified participants in the sharing economy as including not only those selling their goods and services online, but also the ride sharing or short-term accommodation services facilitators, or application software operated by the platform provider.
According to the consultation paper, a consistent feature of sharing economy platforms is that the supplies and payments are facilitated by the platform.
The lack of transparency for tax authorities of the income being generated through such platforms is flagged as a concern for efficient tax collection, but the centralised nature of the platforms is also viewed as an opportunity to implement a reporting regime that would be focused on the platform providing the data regarding payments to participants. However, one must ask how long it might take for such a regime to morph into withholding obligations imposed on the platforms.
The precedent, though, has been set – when collection of tax on the actual supplier is difficult, target the distribution platform.
As businesses and the technology they employ evolve, it is reasonable to expect that this trend towards developing and administering a tax framework focused on imposing tax based on where the economic substance is located or the consumption is taking place will continue – not just in Australia, but globally.