Friday, December 12, 2014

A New Tax on overseas purchases is unproductive and lacks vision.



Christmas time is the retailers golden time to shine; promotions earlier in the calendar year pale in comparison as the golden child of retail presents front and centre from late November to mid January. Some retailers have been known to make 50%+ of their annual profits in the Christmas period. Christmas is also the time of giving – and it appears local Australian retailers might have provided overseas retailers with a late season free kick.

Last week leading Australian retailer Solomon Lew (chairman of Premier Investments – a group who also owns and operate stores such as Portmans, Peter Alexander and Smiggle amongst others) –stated that a move by Australia Post to work with overseas retailers to ship to Australia was a “free kick for overseas suppliers”. However it might be Mr. Lew’s comments that will be the biggest free kick for the overseas retailers.

Whilst Australia Post work with an opportunity to grow their parcels business on the back of the eCommerce boom, the underlying concern for Mr. Lew is that the $1,000 NO GST threshold still applies on overseas purchases. However; every time a major retailer bemoans the GST threshold it receives a front-page news highlight reel that reminds the Australian consumer that cheaper goods exist overseas and just in time for Christmas & New Year shopping periods.

Mr Lew’s comments on the overseas GST threshold are not new – nor is he alone. Messer’s Brooks, Harvey and Zimmerman have sung a chorus for GST threshold reform since 2011 and despite a productivity commission reporting in 2012 stating that a reduction in the threshold would actually cost more than it would receive, the chorus continue to sing.

When the retailers initially started the campaign for change in 2011 the Australian Dollar was flying high – sitting at or above parity. The high Australian Dollar continued right up until this year; today the Aussie dollar sunk to a 4 year low. The low Australian dollar makes it less appealing for overseas purchases, so at least as the campaign has continued, the retailers might have possibly learned a more appropriate time to voice their opinion. Regardless of timing, no government has expressed a strong desire to for GST reforms for imported goods. With the fall of the Australian dollar you may think proponents calling for new tax might look for opportunity rather than old-fashioned protectionism. 

If Australia’s major retailers had invested their energy in innovation - their prospects would be looking better today. The business leaders calling for a new tax are the same that have been slow to embrace the online opportunity. Major US retailers such as Macy’s & Nordstrom were forced by the market to change and adapt while their counterparts in Australia dragged their feet.

Despite which side of the GST fence you sit, there is an argument we Australians should all unanimously agree “Tax avoidance and the failure of the current law to collect GST on services by corporations such as Google, Apple and Facebook is a huge concern and has a larger impact to our economy”.

Lets focus on Google for example. Google is the largest receiver of marketing money in Australia – yet pays a pittance in tax – as offshore billing for a local service, followed by further money movements reduces the total tax bill of the global giant. Small business  & medium businesses that send similar amounts to the tax office find news of companies like Google tax contribution very disturbing.

How do we as Australian taxpayers accept this situation? We reward it by continually using the plethora of Google products.

The total amount of advertising billed by Google Australia is estimated to be in excess of a billion dollars; however the tax paid to the Australian Government is under 10 million dollars! How can this be? A service was provided to Australians by an Australian entity and in Australia!

As Australia struggles to identify savings to fund much needed programs for the country – Google acts like Scrooge McDuck swimming in his money pit.

Australia is not alone with this conundrum. Other countries where Goolge has a significant presence also suffer the pain of missed tax revenue – USA, UK, France and Germany and others join us. Google bills its Australian AdWords via Google Ireland – neatly avoiding the need to charge and collect GST. The fee from Ireland is in turn paid to a Dutch subsidiary, which then sends it back to an Irish holding company with headquarters based in Bermuda where the weather is nice and there is no corporate law.

Many western laws around the globe have struggled to keep pace with the digital world and this example of mass corporate tax avoidance is no different. Australians need to be united on this front. After all it’s us who miss out on the benefits consumption tax was designed to deliver. Regardless of political preference or GST threshold opinion, this is something we should be focused on.

A first step is to require the companies to collect GST on their services. This system already operates in the UK in regards to VAT. It is traceable via electronic data, as opposed to physical intervention (border bureaucracy with no net benefit and that will eventually be dismantled).

Journalist Mark Jones from the Financial Review and I raised this issue in February 2007 as an urgent taxation issue facing the new economy.  Fast forward 8 years and nothing has changed to make companies like Google, ebay, Facebook and others to collect GST on payments made to monster ecommerce companies.

This is a smart adjustment to current GST laws to collect the money electronically that will collect billions effectively into the future.

Australia weathered the storm of the GFC largely shielded by China’s unsalable appetite for our minerals and our economy was in good condition; with debt forecast now well into the future, Australia must think and act globally.  A potential food and services focus of Australian products to Asia sits on our horizon, as do other export opportunities including services and tourism. 

Whist Australian debt rises we need to look towards changes to the tax system to provide low cost collection and improve productivity, not the opposite.

As continued globalization and access to new technologies, cross border trade represents a great opportunity for Australia. The Australian competitive future dictates that we remove trade restrictions and friction points to make us competitive.

Why build a new bureaucracy that creates red tape and has a major effect of slowing down our borders?

Lets focus on requiring foreign companies to collect GST as a starting point and then look at ways to have them pay a fair company tax that will require a G20 approach. 

The big retailers should stop stepping over dollars to pick up cents and as the GST threshold is discussed again in the media – “let’s change the topic and the focus on the real elephant in the room”.

Phil Leahy
CEO
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