Silicon Valley technology giants sell billions of dollars of products in Australia, but are largely able to escape Australia's relatively high 30 per cent corporate income tax through aggressive - but ostensibly legal - tax planning.

The Financial Review has reported that Apple shifted an estimated $8.9 billion in untaxed profits from Australia to Ireland over the past decade. Apple subsidiaries in low-tax countries like Ireland and Singapore charge high licensing fees to Apple Australia, which has the effect of reducing profits in Australia and increasing them in foreign countries where taxes are lower.

The Coalition government and Labor opposition have made tackling this perceived p lem a key political objective, and US tech firms are being scrutinised by intensive Australian Tax Office audits.

Apple reported more than $6 billion of sales in Australia but paid only $80 million in local income tax last year. It has been the poster child for the political and media campaign against the tech giants.

Google reported its 2013 Australian tax as $7 million on $46 million profit, but that excludes an estimated $2 billion worth of revenue it earns through advertising on its search engine.

By purporting not to have a "permanent establishment" in Australia, the companies can legally pay low tax on local sales.


Mr Stack, a former private sector tax lawyer, argued that most of the economic value-add by US tech firms, such as R & D, was undertaken in the US and that, under agreed international standards, income tax should be imposed based on the value-generating activities in a country.

"The fact that a company has significant sales in a country doesn't necessarily mean that the value-generating activities are in that country," he said.

Nevertheless, Apple is still siphoning billions in funds via tax-minimisation structures in low-tax countries, meaning the US is also missing out on revenue.

If countries like Australia seek to tax the fleeing money, there will be less potential revenue available for the US Treasury. The US could also lose money from having to give tax credits to US companies for foreign tax paid.

Organisation for Economic Co-operation and Development members are trying to negotiate clear rules on base erosion and profit-shifting (BEPS) by multinationals.

The US Treasury is advocating for other countries to impose value-added taxes (VAT), like the 10 per cent GST levied in Australia on the digital sales.

"We have consistently argued at the OECD that VAT solutions are more appropriate for taxing sales of goods and service in a country than income tax principles," Mr Stack said.

A major driver of the international tax arbitrage appears to be the outdated US corporate tax system, which imposes a high rate of 35 per cent. The US taxes worldwide corporate income when offshore profits are repatriated, unlike most other territorial tax systems, which apply only to domestic income. The US laws incentivise digital firms to stash money in tax havens.


Countries including Australia and the UK have been pushing for the OECD to change the permanent establishment and transfer pricing rules so that they can tax digital companies more.

The US has resisted bending too far. The head of the Australian Treasury's revenue division, Heferen recently told a parliamentary inquiry it was challenging to achieve international agreement.

So Australia and the UK are pursuing their own initiatives, including the Cameron government's diverted profits tax, dubbed the "Google tax", that took effect this month.

US business groups say the unilateral moves by Australia and the UK could spark a fight between revenue authorities over taxing rights.

"There is a real risk double taxation occurs if countries go their own way," US Council for International Business international tax counsel Carol Doran Klein said.

Mr Hockey and UK Chancellor of the Exchequer George Osborne also announced at the conclusion of the G20 finance ministers meeting in Washington this month that they would set up a working group to develop initiatives to address diverted profits. The group is open to other countries to join.

The US does not intend to join the group and instead will focus its attention on the broader OECD discussions. The US is worried that the sudden Australia-UK initiative may undermine the OECD project.

"G-20 countries are working together to develop international standards in the context of the OECD BEPS project, and it is critical that participating countries not pass laws that disregard the agreed-upon standards," Mr Stack said.


Mr Stack has been in dialogue with senior Australian Treasury officials to communicate the US government's views, Canberra sources said.

Mr Hockey has privately told OECD secretary-general Angel Gurria that Australia is committed to working within the OECD framework but wants to work on more immediate p lems that the Paris-based group is not working on. Mr Hockey's office declined to comment.

Mr Hockey's budget plan will be similar to the first limb of the UK's measure by tightening the permanent establishment rules through a specific anti-avoidance rule.

Unlike the UK law that took effect just before the British election, Australia is unlikely to rush into making a final decision on beefing up transfer pricing laws for money siphoned to companies overseas.

The government's tax announcement is set to be consulted on and to leave enough flexibility to incorporate the OECD's blueprint due to be released in October and implemented by governments from 2017.

Australian officials are mindful of the UK's diverted profits tax, which US tax lawyers say does not comply with OECD rules and potentially violates international treaty obligations.

Catherine Schultz, vice-president for tax policy at the US National Foreign Trade Council, said it was really disconcerting to have "Australia follow the UK down that rabbit hole".

Labor and Liberal senators clashed with US technology executives about their low local tax bills and siphoning of profits to tax havens at a heated hearing in Sydney this month.