Despite generating approximately $600 million to $1 billion in revenue in Australia during the 2018 calendar year, Netflix Australia paid only $341,793 in Tax. That equates to no more than a 0.05% effective Tax rate.

This is a reminder of how the tech giants of the world are avoiding the application of Australian corporate Tax rates on revenues effectively being generated here whilst technically remaining compliant with Australian and international law.

The response from these tech giants and Netflix being 'We comply with Australian and international Tax law'. Right there lies the issue and exposes the fact that not only Australia but also many other foreign countries, have found themselves lagging behind the rapid development of technology and the digital economy.

The Australian Government has introduced recent Tax reforms targeting Australian and international compliant structures. So it begs the question, how effective are these reforms? Whilst Australia can introduce measures, legislation and interpretation of Tax law when it comes to multinationals potentially avoiding paying Australian Tax, unless other countries follow suit, their effectiveness becomes limited.

So how do the likes of Netflix, Google and Facebook pay such little Tax in Australia you ask. It comes down to the concepts of 'fixed place of business' or 'physical presence'. These concepts form part of a much broader concept that is, permanent establishment. And whilst each foreign Tax authority defines this concept in its own right, where a business has a presence in two countries, reference shall be made to the relevant double Taxation agreement / treaty ('DTA'). Each DTA is drafted based on the Organisation of Economic Co-operation and Development ('OECD') guidelines and altered in accordance with the respective countries.

The OECD has proposed an overhaul of the Taxation system for multinational companies. This move could result in the likes of Google, Netflix, Facebook, and Amazon, to fork out Taxes in countries where they do not in fact have a physical presence.

The proposal was released last month and is expected to be finalised by the end of 2020. It aims to deliver greater Tax certainty for both Taxpayers and administrators through a three-tier profit allocation mechanism that will apply to digital firms, whether digital or own profitable brands.

What does all this mean? If your business has any form of international presence, be it physical, digital or even in the 'cloud', you may very much be in the spotlight of the Australian Taxation Office.

If you believe these recent developments may impact your business, we encourage you to get in touch with one of our key contacts below.