Tax in a Digital World: Australia Weighs In

Australia is asking some big questions about the future of its corporate tax system. A new Treasury discussion paper offers a cogent review of some of the most important issues facing the country’s tax authority in the era of digitalization. And you can bet that other major players in the world economy are thinking along the same lines.

While the report doesn’t offer policy recommendations, an appendix discusses “design considerations for an interim measure,” and includes discussion questions such as “What nexus would highly digitalized businesses need to have with Australia?”

It’s the tax status of such businesses that forms the core concern of the report. What counts as a highly digitalized business? The paper cites three characteristics identified by the Organization for Economic Cooperation and Development (OECD):

• Cross-jurisdictional scale without mass, which enables such businesses to play an economic role without any, or only limited, physical presence.
• Reliance on intangible assets, such as brand names, patents, trade secrets and algorithms.
• Data, user participation and network effects. For example, search engines gather user data to sell highly targeted advertising. The value of a network service may increase exponentially as the number of users grows.

The ability of multinational enterprises to maintain a significant economic presence in Australia, while paying relatively little tax, is not a new challenge, the report notes. However, “increasing digitalisation and increasingly mobile intangible assets intensify this challenge, particularly in sectors of the economy most affected by digital disruption,” resulting in significant erosion of the tax base.

The paper emphasises Australia’s participation in the G20/OECD Base Erosion and Profit Sharing (BEPS) initiative. It also calls for discussion of a range of proposals within the Australian context, including changes to taxing rights to include user-created value and to better reflect the worth of intangibles.

For a section-by-section summary of the report, see this Deloitte article.