From Patrick Hatch:
“Our existing tax base for the corporate income tax is in deep trouble,” Professor Garnaut told the Melbourne Economic Forum on Tuesday. “It’s subject to egregious avoidance or evasions, with two of the main instruments of avoidance being arbitrary use of interest on debt to reduce taxable income and, more importantly, arbitrary use of payment for import of services as deductions.
“You have a lot of what must be fundamentally some of the most profitable enterprises in Australia paying no corporate income tax.
“Google and Microsoft and Uber, they manage to generate very large sales in Australia … but somehow make no profit from it because of payment for intellectual property, payments for services.”
Cutting rates while broadening the base is a step in the right direction. But the broader base has to offset the rate cut, so that tax revenues are not depleted.
One of the oldest tricks in the tax avoidance industry is to set up a structure where A receives a deduction for an expense while the receiving party (B) is either tax exempt or is resident in a tax haven, and does not pay tax on the income. The effect is to substantially reduce tax payable by A.
Disallowing all deductions would unfairly penalize legitimate transactions. A simpler method would be to require A to collect a withholding tax on the payment to B (or B provides a tax file number showing that the income will be taxed in Australia) else the deduction by A will be disallowed.