Bah Humbug! Is it unseasonable to mutter Scrooge’s immortal line from Dickens’s A Christmas Carol? Not, I suggest, if you have been following the recent debate about cracking down on multinational tax avoiders. By now, you should know the ‘righteous’ line about multinationals ‘not paying their fair share’.
In the heat of all this moral outrage, it is still timely to remember that tax avoidance is actually legal. Tax evasion is not. No one has suggested, even scandalously, that multinationals are engaged in a giant and evil plan of tax evasion; rather, it’s a plaintiff whine that they are not paying enough tax here, and are consequently rorting us, the decent people of Australia.
Humbug, really, given that our tax reform debate for what has so far been called a conversation is stridently acrimonious, politically partisan, and is being captured by vocal vested interests. Clearly, we want someone else to pay the increased taxes we need to be paying but don’t want to pay by way of increased or broadened GST, increased capital gains, and superannuation taxes.
So, let’s get those big tax-dodging multinationals to make up the shortfall in taxes that we cannot bring ourselves to pay, but we want to maintain our current spending programs in health, education, and welfare. We wish to enjoy a national lifestyle we increasingly cannot afford.
And which multinational can we vilify here? Well, the current worst of the tax-dodging multinationals is Apple (but could be Google, Microsoft, Uber, McDonalds, Amazon, eBay, AirBnB, BHP Billiton, or Rio Tinto – take your pick). But Apple scored recent headlines by its admission that it paid ‘only’ $85 million in tax here on local sales of $8 billion.
Perhaps these companies could have – should have – increased their tax contributions here, but gross sales are not gross profit. It could even have been a gross loss – no tax at all for us – like that reported by giant ExxonMobil which, despite revenues of $9.6 billion, made a tax ‘loss’ last year.
We believe e-commerce is fabulously lucrative, and its intellectual property unburdened by having to dig or make things.
Popular pressure propelled by Sam Dastyari’s Senate enquiry into multinational tax avoidance prompted the government to enact late last year the Multinational Anti-tax Avoidance Law (MAAL). It came into effect on 1 January this year.
Quoting from the government’s press release, “when we catch companies cheating, they will have to pay back double what they owe, plus interest”. The reality is that noone is likely to be caught, since noone knows how much additional tax, if any, will be raised. And why is this? Simply the loophole is larger than Lake Burley Griffin; there are no rules on source of income. Simply, if you cannot determine what is taxable income, then how can you tax it?
Any solution requires international cooperation, such as through the OECD’s proposed transfer pricing reporting standards. These are designed to reform global tax rules on an international basis, but at this time the proposal is still just talk, although the UK, unable to wait, impatiently implemented its own ‘diverted profits’ tax in 2015. In response, Google UK promptly ‘volunteered’ $265 million in payment of back taxes. MAAL is not in the same legislative league.
Sadly, MAAL is political window dressing – humbug – at best a prompt to multinationals to cooperate and be transparent in their business operations here and abroad. And then MAAL only applies to companies with global revenues in excess of $1 billion, although we are told there’s at least a 1000 of them. To date, there is little evidence of cooperation; in fact, there’s been a long history of non-cooperation with the Australian Tax Office (ATO).
You may recall the recent frustration revealed by the Australian Tax Commissioner at a Senate enquiry with the “delay and obstruction” approach taken by multinationals when asked to explain their profitable tax-minimising ‘operate here and bill overseas’ model. Their reluctance to cooperate with our requests, howsoever nicely made, showed they were ‘stooging’ the system by failing to provide details of their profits and of how much tax is paid and where, or even the simplest details as to their business structures
The ATO is really an accessory to this cultivated commercial delay, since it cautiously does not issue tax assessments until all information is to hand. So what do you think any taxpayer sent a ‘please explain’ letter would do? Profitably prevaricate, of course.
The Commissioner does, however, have an effective remedy – simply to issue a Tax Assessment. He can think up a creative ambit figure of tax owing, send a demand to the taxpayer, and see what happens. The taxpayer will most certainly respond, providing all the information justifying its claimed tax position. As every tax agent will tell you, the tax man does not have all the details about you – you do. It’s up to you to dig those details out of your files. Remember the mantra ‘keep your receipts’?
This ‘shoot first’ system has worked exceptionally well with small individual and corporate taxpayers who hasten to justify their stated tax position, or hastily open negotiations for a financial settlement.
So why would such a system not work too with multinationals? Publicly, the Commissioner has said he intends doing that more often, and, in a couple of recent cases, having done just that shows the response of multinationals to be no different from that of any other kind of taxpayer served with an assessment.
Orica failed to satisfy the ATO and a Federal Court that its interest deductions were not a ‘scheme’ to derive a tax benefit. Orica USA borrowed funds at 2% per annum, lending them to Orica Australia at 9% pa. Chevron (“we are not tax dodgers”) , paid $248 tax on a $1.7 billion turnover, copped an amended $269 million tax bill (which it is appealing).
Showing such resolve has the unintended advantage, too, of prompting large companies into dialogue with the ATO, an illustration perhaps of the infamous line, ‘shoot one and terrify a thousand’. Allegedly, the effect has been to encourage increasing numbers of multinationals to open their books to ATO audit, and coincidentally to leave increased profits here as tax.
But back to humbug. How effective can the ATO be when it recently lost 3,000 of its employees? It should be recruiting talented staff and funding expansion from the additional revenue it recovers from the taxpayer. While the ATO is the country’s biggest litigator, it needs resourcing to conduct taxpayer audits. Many tremble at the prospect of an ATO audit.
And then there are the major accounting firms ‘embedded’ in the ATO, tasked with functions ranging from giving advice to management and enforcement. “Hold on”, I hear you say, “not the same big firms who also advise the multinationals on how to pay less tax?”. Is it churlish to suggest there may be an unhealthy potential conflict of interest here?
If I think MAAL is humbug, this was confirmed when I read that Kelly O’Dwyer, the Assistant Treasurer, is considering protection for whistleblowers who divulge the secrets of multinationals’ accounting. We know multinationals are not eager to cooperate and be as transparent as we might like, and we also know we can’t raid their Bermuda or New York offices to seize incriminating records. But does it really come down to this, that MAAL investigations are reliant on whistleblowers?
It seems highly unlikely that a foreign whistleblower will oblige, let alone a local who has no protection either (or, even with ‘protection’, is thereafter rendered permanently unemployable). Is it humbug to suggest the reason there is no current protection is that politicians hate whistleblowers who usually whistle from the government or its agencies? Companies are more adept at being covert and keeping their secrets than government.
Keeping that in mind, what should the response of multinationals be to MAAL? A quick check of tax adviser law firm Clayton Utz’s website encourages these companies to prepare: engage if necessary in “counterfactual” situations, “restructure” if necessary, lower any “tax motive thresholds”, and importantly, “have robust supporting documentation”, and ensure “you act consistently” with your documentation. Not just forewarned, they are forearmed.
The multinationals are ready. Are you, Mr Tax Commissioner?