Source: New places to play in Gungahlin
Jeremy Hirschhorn, Second Commissioner, Client Engagement Group
Panel discussion at the Thomson Reuters SYNERGY Conference
Sydney, 13 March 2025
(Check against delivery)
Macro trends in taxation of large corporations
Thank you for the opportunity to speak on today’s panel on the topic of preparing for tax change, particularly in the context of large corporations, whether domestic or multinational.
I would like to start with 2 very important provisos: firstly, I’m reminded of the old adage, to be very cautious before making predictions, especially about the future. And secondly, that these are the observations of an administrator – the bricklayer, not the architect – and certainly not with the intention to be suggestions on policy or the merits of future policy directions.
Today I will touch on the following 5 topics:
- context as to the status quo in Australia
- which country gets to tax a multinational’s profits?
- increased focus on the uncertain topic of ‘tax certainty’
- transparency giving confidence to other participants
- the ‘fifth pillar’ of third-party data.
Some context as to the status quo in Australia
The Australian setting is, in some ways, an ideal one for a tax administrator. We have a general population with financial and economic literacy and a keen eye for where something is fair, or it isn’t, particularly when it comes to paying tax. Because most Australians honestly pay the tax that is due (perhaps not always enthusiastically or exuberantly, but recognising the benefits of our social compact), they are very focused on making sure that other participants, particularly the rich and powerful, are also making their contribution. This is reflected in our ‘tax gap‘ analysis, which estimates that the Australian system is collecting about 93% of the tax legally due and payable. Australians also demand fiscal responsibility from their Governments.
The Australian social compact is based on an expectation Government will play a significant role in social matters, especially in health, disability services, aged care, and social security. Political differences mainly go to the level of this role, rather than its existence. There is also an expectation that Governments will show discipline and strive for balanced budgets over the economic cycle – to sustainably pay for the above!
In the last 2 years, the Government has achieved a surplus, supported by historically high employment and commodity prices (and the tax that flows from these), and our largest taxpayers have contributed significant levels of corporate tax to Federal Government revenues (even after taking into account franking benefits). This revenue goes a long way to support the priorities for spending by the Government of the day.
Taking a longer-term perspective, the nature of the Australian economy is that the level of corporate tax collections has been relatively high as a percentage of GDP compared with many other developed countries, perhaps due to the relative immobility of much of the corporate activity in Australia (such as mining). This means that any reduction in corporate tax rate would require a very significant increase in overall corporate investment to be revenue neutral. As such, Australian Governments, given the community’s expectation of fiscal discipline, have historically found it challenging to dramatically pivot away from the existing corporate tax base.
Which country gets to tax a multinational’s profits?
One current area of flux is the question global tax policy makers have been collectively thinking about for a number of years: in a global economy, who gets to tax corporate profits?
We’ve seen a macro trend over the decades to reduce taxes in market jurisdictions (unless there was a physical presence), with reductions or elimination of withholding taxes, custom duties and tariffs. (And as an aside, the flip side of this macro trend is the focus of companies on optimising supply chains and transfer pricing, and tax administrations on challenging transfer mis-pricing). This trend has arguably been partially offset with the conversion of sales taxes to value-added taxes (VATs) which implicitly tax some value generated offshore. More recently, VATs have been bolstered to apply to imported ‘business to consumer’ (B2C) services and B2C low value goods (rarely captured under the superseded sales tax and customs duties regimes).
In the global economy of 2025, the model of economic participation with limited physical presence in a jurisdiction is increasingly prevalent, and this puts strain on market jurisdictions’ tax collections. From a tax administration perspective, this has been exacerbated by the international tax system effectively allowing significant profits to be booked in neither the market jurisdiction nor the ownership jurisdiction (where the underlying intellectual property driving value was developed), in combination with corporate tax rate competition (often by previously comparably taxed, but now lowly taxed, jurisdictions).
Until very recently, the focus of much international tax discussion was on providing additional (but carefully limited) taxing rights to market jurisdictions (and limiting incentives to book profits in intermediate untaxed or low taxed jurisdictions). Possible solutions being discussed included extending the coverage of VATs, the implementation of Digital Services Tax (DSTs), and the OECD’s pillars work. However, there is now a new countervailing argument that taxation by the market jurisdiction should be severely limited and taxation (or not!) of corporate profits should be reserved to the ownership jurisdiction.
This debate is fundamentally driven not just by economic concepts, but by national interests and cultural views as to the role of taxation and what is fair. Multilateral consensus may be increasingly difficult, but bilateral arrangements are also challenging in an interconnected world, making this a delicate dance for governments from a policy perspective, as well as administrators.
I note that the increased capability and use of AI if anything exacerbates this trend and tension, and also raises new tax technical, policy, practical and economic questions. For example, can a market country tax the value generated by (mobile) robots (even if it wants to) or is the value in the data and the physical data centres, and can a country tax that?
Increased focus on tax certainty – but is the concept of tax certainty itself uncertain?
Often there is a (simplistic) proposition that we need increased tax certainty. It is beyond today’s scope to explore in detail, but I wanted to briefly reflect on what ‘tax certainty’ means from different perspectives. My proposition is that there is a balance to be struck between the ‘certainty’ meant and desired by each stakeholder, and that the ‘certainty’ of one stakeholder group (including the tax administrator!) cannot be excessively privileged over others.
For Governments, tax certainty at the very least means broad predictability of the tax base for the country to pay for recurrent programs the community expects the Government to adequately fund, like healthcare, law enforcement and education. As well, governments require certainty that new tax policy settings won’t create unintended market distortions or taxpayers seeking out arrangements for the purposes of tax (usually avoidance) that they otherwise wouldn’t. Putting it another way, tax policy should not be inadvertently defined by unintended loopholes. The retention of ‘tax sovereignty’ is also critical to any Government.
For taxpayers, there is a desire for ‘tax legislative certainty’ and ‘tax administration certainty’ (often blurred together). A well-designed system will ideally provide as much technical certainty as possible as well as certainty in the administrator’s view of the law, allowing taxpayers to correctly anticipate their obligations, and take informed positions consistent with their risk posture where their analysis of the law might differ from the administrator’s. It includes some sense of a ‘statute of limitations’, that (most) matters will be finalised within a reasonable time. It also means that, in the event of a dispute, there is confidence that there is access to an independent legal system. Often there is an element of ensuring that there is not double taxation of the same profits in different jurisdictions. As an aside, I would suggest that ‘double inclusion’ (where the profits are taxed, but only at nominal rates, in one of the jurisdictions) is not the same as ‘double taxation’. I would also add that, in my experience, there remains significantly more ‘double non-taxation’ in the international tax system than ‘true’ double taxation.
Another (often overlooked or discounted) element of tax certainty for taxpayers is ‘tax setting certainty’, i.e. that longer-term settings are relatively stable (although noting the need for every Government to retain tax sovereignty). Over the last decades, we have seen ‘favourable instability’ in the sense of a macro trend towards reductions (sometimes dramatic reductions) in corporate tax rates globally (and even in Australia, where it is sometimes forgotten that the top corporate tax rate was almost 50% 40 years ago). Arguably this has provided windfall gains to already deployed capital on long term projects.
The corollary is that a company should be cautious in assuming ‘setting stability’ in modelling possible investment in a country that has an attractively low corporate tax rate (or has other incentives), but is running unsustainable deficits. At some stage that country is likely to be forced to change either its spending or its taxation. Therefore, in making capital deployment decisions, investors should consider more than the current fiscal settings, but also how a country may seek (or be forced) to change those settings in future: and even if the changes do not directly change the taxation of the enterprise, they may affect its employees or customers, resulting in other pressures on the enterprise’s profitability.
A revenue authority or administrator needs the ability to check and, if need be, challenge affairs of taxpayers to ensure tax law is complied with. On the other hand, a tax administrator will be acutely sensitive to any concept of tax certainty (or measures to provide ‘tax certainty’) which can be used as a practical shield for aggressive tax planning.
Transparency giving confidence to other participants
Another element of ‘tax certainty’ is that the broader citizenry has confidence that all taxpayers, especially the largest ones, are meeting their obligations and do not have unfair access to concessions or loopholes. Transparency is critical in providing this certainty and confidence.
I’ve spoken before about how important transparency is, and I might expand on it now, particularly how it touches each segment of taxpayers. Australia has had a significant focus in recent years in increasing transparency across the tax system.
The first increase we’ve seen is in transparency to the public by companies around their specific tax affairs. This is seen in several avenues, both through the ATO’s reporting (such as the corporate tax transparency report), and by companies themselves publishing information on their websites (for example under the Board of Taxation Voluntary Tax Transparency CodeExternal Link).
Secondly, we’ve seen an increase in transparency to the public by tax administrators as to the health of the system overall. Through the ATO’s tax gap program, we publish reports on the estimated difference between what we expect to collect and the estimated full amount that would have been collected if every taxpayer was fully compliant with the law. In 2023–24 we released 8 different reports on our observations for income tax and GST, especially regarding larger taxpayers, including settlement statistics for public and multinational businesses. We also publish information on our super guarantee compliance results, our resolved objections from taxpayers, and figures regarding help given to individuals and small businesses experiencing vulnerability.
Thirdly, the ATO has increased transparency to taxpayers on our administrative view on key circumstances and tax settings. We do this because it’s important taxpayers across all segments can have confidence in how the ATO will view their arrangements and won’t be pursuing them for compliance issues in the future. Although challenged by some as somehow ‘extra-legal’, we consider that taxpayers are unambiguously better off if they know the ATO’s risk parameters – although taxpayers might not agree with our parameters, they must be better off being able to make an informed risk-based decision than operating in the dark!
Fourthly, we are providing tax assurance reports to large taxpayers so that they know how they are viewed by the ATO, for example through our justified trust program. This is supplemented by ‘population level’ statistics as to tax behaviours of the ‘peer group’. This means that large taxpayers have much more knowledge of where they stand with the ATO, as well as relative to others.
As the community expectation of transparency increases, and more taxpayers place importance on showing their compliance to internal and external stakeholders, I would posit that we are likely to see not only an increase in the volume of transparency across all of the aspects above, but also a standardisation and integration of currently disparate measures.
Third-party data – the ‘fifth pillar’
Under traditional analysis, there are 4 pillars of tax compliance: registration, lodgment, payment and correct reporting. Increasingly at the ATO we are ‘splitting out’ third-party reporting (i.e. reporting on the tax affairs of others) as a ‘fifth pillar’ in its own right.
What has become increasingly critical in a modern tax system is reliance of the system on third-party data provided by large corporations (ideally the ones now showing high levels of compliance!) which fuels how taxpayers of all size interact with their tax obligations.
Third-party data gives administrators the ability to feed information into the system that makes complying easier, and importantly, not complying harder. More and more information like interest and dividend income, standardised investment trust data, salary, health insurance data and information about contractors, are all going directly into tax systems. This trend will continue, and we’ll see the classic concept of ‘self-assessment’ (at least for those with simpler affairs) being gradually replaced with ‘assisted assessment’ where taxpayers are provided a comprehensive picture of their own data which they then largely simply confirm.
Modern tax administrators, therefore, will be asking for new data sources from companies holding relevant information, and tax systems will increasingly be defined around the fifth pillar of third-party data, rather than vice versa.
Conclusion
All this speaks to the relative health of Australia’s tax system, and while the ATO will always primarily focus on its purpose, which is to collect the taxes due so that Government can provide the services that the Australian community requires, the questions and challenges that stem from further abroad are important to ponder in ensuring our resilience and effectiveness in an uncertain world.
Thank you once again for the opportunity to appear on this panel and for your attention, and I look forward to responding to your questions and observations.