Predictably, The Australian newspaper bucketed the recently released Tax Justice Network’s latest report – the one questioningly titled, Who Pays For Our Common Wealth?. The Report alleges widespread tax avoidance by Australia’s top 200 companies, with the additional alarming advice that some of them successfully avoid paying any tax at all.
This Report, said The Australian acidly, was a ‘hatchet job’ and a ‘reputation tarnishing’ tirade. An incensed Judith Sloan called it, ‘plainly misleading and error-ridden’ cobbled together by ‘various rent seekers’, a ‘motley crew’, she called them, ‘who don’t pay tax’. She named these various ‘rent seekers’ as including the ACTU, Oxfam, World Vision, the Uniting Church (yes), and – wait for it – Social Policy Connections. Ah, at last national prominence, a lump rising in my throat at the thought of SPC being judged by the company it keeps.
Judith’s beef was that people in glass houses shouldn’t throw stones, drawing, I think, an invalid comparison between dedicated not-for-profit organisations and those dedicated solely to profit-making. Judith did not mention that her own employer, News Corp, paid zero tax in Australia. Would that then make Rupert the ‘rent-seeker’ or the ‘leaner’ in Judith’s lexicon?
A close reading of the Report does show that it is not above criticism. It sought to calculate an ‘effective tax rate’ (ETR) by looking at how many of the ASX Top 200 listed companies actually pay the headline corporate tax rate of 30 per cent on their declared profits. Almost all didn’t, and the explanation is simple: they are able to claim legitimate deductions such as depreciation on assets or debt interest paid, or tax is simply paid elsewhere. The Report also confounded companies with listed trusts. Listed trusts don’t pay tax; that tax liability is passed on for payment to their owners, the unit holders. Non tax-paying listed trusts comprise 10% of the ASX listings.
The Report is also predicated on the fashionable but sanctimonious assumption that companies have some additional moral obligation that we as individuals do not have – to pay more tax than necessary. To my knowledge, noone has suggested that, for moral reasons, you or I should not claim in full our legitimate work deductions, or our negative gearing entitlements, or superannuation deductions. Forget the corporate legal fiction; companies really are people too.
The ETR turned out to be a surprisingly high 23 per cent, which incidentally makes Australia the second highest company tax-collecting country by GDP in the OECD.
Controversially, then, one might argue that the Australian company tax rate be lowered (while broadening or increasing the GST rate) if you think the current rate of 30 per cent is making Australia’s companies less competitive internationally. Ken Henry argued that a 1 per cent fall in the company tax rate would result in a 1 per cent rise in workers’ wages, his assumption being that workers were ‘paying’ for our high (by world standards) corporate tax rate.
You may also detect a correlation between the current corporate tax rate and what the Tax Justice Network Report says – that nearly 60 per cent of the companies examined had subsidiaries in locations with comparatively lower tax rates (colourfully called tax havens or secrecy jurisdictions).
The Report did not allege there was rampant tax evasion (illegal), but instead widespread tax avoidance (legal). It pays to remember that countries compete with each other in a kind of downward tax race to attract companies to set up an entity or more within their borders. The bait offered is to pay little or no tax, and it’s really a perverse example of market forces at work. Low- or no-tax countries are not all low-lying idyllic atolls, but frequently countries with larger economies, notably Ireland.
Say your company has succumbed to the lure and taken the bait, setting up a subsidiary in (or, as James Hardie did, moving its head office to) some mailbox or serviced office in one or more of the many appealing tax havens on offer, what then, other than being able to call yourself a multinational?
Your subsidiary will have to transact with its fellow Australian subsidiary or parent. You can do that by selling ‘overpriced’ goods and services to the higher-taxed Australian company. The profits and tax then flow back to the offshore haven. It’s aptly called ‘transfer pricing’, and the Australian Tax Office is finally clamping down on what amounts to a shifting of profits between entities and companies to minimise or avoid tax.
Currently, the ATO has Chevron in the Federal Court, where it is alleging Chevron used a system of loans and related party payments worth billions to reduce its Australian tax bill by $258 million. Chevron is defending, but the case is a warning to other companies to follow ATO guidelines closely (in a recently published ‘draft’) on transfer pricing, and to be alert to the penalties for non-compliance. According to the ATO, about 20-25 per cent of the Australian economy happens between related parties, worth $280 billion.
You might have observed a couple of difficulties with the ATO’s effort to rein in transfer pricing. Australia alone cannot solve this problem. It’s an issue of global compliance, requiring international cooperation, accompanied by ‘leaning’ in the real sense on the tax havens and low-taxing countries to act responsibly and transparently. Coincidentally, this overdue international tax regulation requiring country cooperation – not country competition – is high on the agenda of the G20’s November meeting in Brisbane. At last, countries have woken up to the revenue-draining losses they are suffering.
Of course, too, transfer pricing schemes are easily traceable if a company produces goods. You can calculate the cost of their production, and the like. What about intangibles such as copyrights and intellectual property? Apple and Google should leap immediately to mind with their computer software and technologies. These are harder to trace than physical goods, even more so, given these companies have gone to the level of being virtually stateless.
Consider US Google. It set up a subsidiary in Ireland, which for a ‘buy-in-price’ licensed the rights to Google search and advertising technology. The US tax man accepts the Irish subsidiary as a dual resident company, so nothing more to worry about from the US. In Ireland, the subsidiary is regarded as a resident of Bermuda, since that is where the subsidiary’s ‘mind and management’ is supposedly located, according to pixie Irish tax law.
The Irish subsidiary then licensed its technology rights to a Dutch subsidiary, which in turn licensed them back to yet another Irish subsidiary – the one actually collecting the rivers of revenue. The result of all this transfer pricing and profit-shifting between entities means tax is assessed and payable in Bermuda – or would have been if Bermuda had a corporate tax rate; it has none.
This Irish magic is delightfully termed the Double Irish Dutch sandwich. This patently artificial scheme of arrangement that grossly minimises or avoids tax altogether is legal but immoral, since it goes well beyond ‘one-off deductions’. Outlawing such outrageous contrived schemes requires international cooperation. To date, that has been absent.
The next time you make a payment to Google, it will be to its Irish company. There’s no transfer pricing involved, since you are contracting with Google Ireland and not Google Australia, and there’s nothing the ATO can do about it. In an online purchasing universe, transfer pricing is itself becoming a relic. What about our tax treaty with Ireland? Unsurprisingly, the Irish are keen to keep their bits of Google, and are less than keen to renegotiate an out-of-date tax treaty.
Is regulating such universally rampant tax avoidance quite futile, leaving us desolately to mouth moral entreaties to companies that they please share a little more tax with us? No. India and its courts are stridently challenging multinationals, saying any involvement by them in their country is sufficient to create a permanent connection, and the profits are to stay in India. And the Indian Government is prepared to legislate retrospectively and claim that profits from past years are taxable. In Australia, our sacred cow is that tax laws are never retrospective.
Spurred by the Tax Justice Network report, the Senate has asked 40 of Australia’s biggest companies to front and explain their tax affairs. The Green senators have additionally invited Google and Apple.
It is not known if Judith Sloan will represent her employer or whether Rupert will front this questioning. And then, let’s see what comes out of the G20 meeting – whether there really is the promised ‘shirt-fronting’ or rather ‘shirking’.