Taxation Law

Running head: TAXATION LAW
Taxation Law
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1TAXATION LAW
Introduction:
Tax avoidance is generally referred to companies that are enters into the transaction
having no economic significance and only has ultimate objective of reducing taxes. This is
considered illegal in Australia under the part IVA of the ITAA, these circumstances can be
considered difficult to prosecute and exist under the grey area of the taxation law that
generally requires judicial determination1. Corporate firms enter into the aggressive tax
scheme mainly to balance the costs and benefits. The main benefits involved in corporate tax
aggressiveness is to reduce to the tax liability and effective tax rate that can provide positive
signal to the investors that ultimately reduces the costs of equity capital.
The multinational companies place themselves in the unique position to indulge in tax
aggressive strategy because they are big in size and they are considered highly profitable.
Multinational companies usually reflect a lower level of debt in their capital structure and
have business operations across international borders that produces foreign income streams.
The multinational companies group is made of several entities across the number of tax
jurisdiction and majority of the multinational companies have one subsidiary as the tax
haven.
Discussion:
Under the globalized economy it becomes vital to have rules that ascertains whether
the income that is earned by the company must be subjected to tax in foreign or in Australia2.
The corporate tax system of Australia is remained dependent on the concept of income and
1 McClure, Ross, Roman Lanis, and Brett Govendir. "Analysis of tax avoidance strategies of
top foreign multinationals operating in Australia: An expose." (2017).
2 Berg, Chris, and Sinclair Davidson. "" Stop This Greed": The Tax-Avoidance Political
Campaign in the OECD and Australia." Econ Journal Watch 14.1 (2017): 77.

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residence to ascertain which activities are held for taxation in Australia. Mostly, businesses
that are considered tax residents of Australia will be required to pay tax on the profits that are
sourced in Australia. Profits would be usually sourced in Australia where they are attributable
to income producing labour, capital or assets that are located in Australia3. These companies
may be subjected to tax on income on the passive income that is earned in foreign country
with the credit provided for the foreign tax paid.
Income derived from the business activities that are taken in offshore country is
usually exempted from tax in Australia. This design makes sure that Australian business that
are operating in the overseas offshore can compete on the playing ground with the foreign
business. A company usually treated as Australian tax resident where the company is
incorporated or where it has the central management and control in Australia and its voting
power is controlled by the shareholders that are residents of Australia4.
A non-residents business that has the Australian permanent establishment will be
typically subjected to Australian tax on the Australian sourced income but it is not treated for
taxation purpose on the income that is earned from the foreign business activities or overseas
sourced passive income5. A non-resident business will generally have the Australian
3 Legrand, Tim. "Structure, Agency and Policy Learning: Australia’s Multinational
Corporations Dilemma." Learning in Public Policy: Analysis, Modes and Outcomes (2018):
215-241.
4 Haines, Anjana. "Australia gets even tougher on tackling MNE tax
avoidance." International Tax Review (2017).
5 Amiram, Dan, Andrew M. Bauer, and Mary Margaret Frank. "Tax avoidance at public
corporations driven by shareholder taxes: Evidence from changes in dividend tax

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permanent establishment where the business activities in Australia are considered sufficient
enough to constitute the local fixed place of business. This framework is generally
supplemented by the Australia’s withholding tax regimes based on which Australia levies tax
on the outbound payment of royalties, interest and dividends that are sourced from the
Australian operations.
Comparatively, the overall level of taxation in Australia is below the average of other
high income countries in the OECD. The latest figures that is from the 2015 represent that the
ratio of total taxes to GDP in Australia was 28.2 percent of GDP whereas the other OECD
averages around 34.3%. This puts Australia at the twentieth place out of the thirty-five
nations with low tax to GDP ratios being the lower income nations6. The main reason for
relatively lower of tax in Australia is because the government does not collect the social
security contributions and Australia is ranked last on that measure. Not only Australia has the
lower burden of tax but the overall burden of tax for Australia has been constantly declining
from 27.1% to 25.6% in 2010.
The Australian taxation system suffers from the tax base erosion through the digital
disruption. There are two major instances of digital disruption has been noticed in Australia
that comprised of ride sharing and accommodation services. As per the static analysis it is
concluded that the new entrants market share erodes the Australia’s company tax base where
profits are highly recognized as generated from the foreign jurisdiction7. The digital economy
policy." The Accounting Review (2018).
6 King, Margot. "Offshore hubs: Developments in multinational corporate tax anti-
avoidance." Australian Resources and Energy Law Journal 35.2 (2016): 142.
7 Ting, Antony, and Kerrie Sadiq. "More than naming and shaming needed to stop corporate
tax avoidance." The Conversation (2015).