The government’s company tax cut win a triumph of politics over economics


Brett Govendir, University of Technology Sydney and Roman Lanis, University of Technology Sydney

Now that the first stage of a cut to the corporate tax rate has been passed by the Senate it’s clear the benefits are more political than economic. The cut may signal to the world that Australia wants to be competitive on corporate tax, but it won’t make much of a difference to our largest businesses and multinationals. The Conversation

Company tax cuts have been on the government’s agenda since the 2016 budget, when the cuts were announced. Ultimately, the plan was to reduce the corporate tax rate from 30% to 25% by the 2026-27 financial year for all companies.

The government has secured a cut to businesses with a turnover of under A$50 million, with companies with a turnover of less than A$10 million receiving a reduction in their tax rate (to 27.5%) this financial year. But the second stage of the tax cut is still to be passed, that would give a cut to businesses with a turnover of A$100 million in 2019-20.

The impact is all in Australia’s image

Arms of multinational companies often pay a much lower effective tax rate when compared to their parent company. Until politicians across the globe can agree how to ensure companies pay tax on local earnings, which appears unlikely in the near future, tax rates will remain a signal to multinationals on where to base their business.

The tax cuts have been strongly supported by big companies and even more so by the Business Council of Australia. A major reason put forward by the business community is the need to stay competitive in a global environment.

Our major trading partners such as the United Kingdom and United States are planning to drastically reduce their corporate tax rates and countries such as Ireland (12.5% on corporate trading profit) and Singapore (by 2018 20% capped at $20,000) already have very low corporate tax rates in place. Multinational corporations have the ability to profit shift to lower taxing jurisdictions.

For instance, a multinational can employ tax accountants to structure ownership of intellectual property in a low taxing jurisdiction and reduce gross income by license fees, or via debt loading to a parent company. Tax avoidance is often siphoned through a non-reporting subsidiary, so these accounting tricks occur without the glare of public scrutiny. In other instances multinationals have been able to completely bypass Australian tax by booking revenues overseas.

How it will affect accounting for Australian companies

When you look at what a tax cut might mean to Australian companies, it’s not hard to envisage how a tax cut tied to a specific revenue level creates incentives for accountants and lawyers to exploit new thresholds.

Accounting research from the United States shows companies do take into account tax when considering how to report their profits. For example, a typical strategy is to delay recognising an expense that belongs in the current year, until the next year.

This is usually to make it seem like the company has increased its profits, making it appear better to shareholders. However there have been no studies specifically relating to how companies might do this in relation to revenue (what the Australian government is considering for the tax cut).

At any rate, the net rate of tax on Australian company profits is considerably lower than the current 30% (or the new 27.5%) company tax rate. According to our calculations it should be around 11.3%. This is lower than the company tax rate in other similar economies.

There’s also something unique to Australia which means private companies pay less tax and that’s dividend imputation. This is designed to eliminate the double taxation of dividends in the hands of Australian shareholders.

Since it’s introduction in 1987, dividend imputation has provided strong incentives for firms to pay the full statutory tax rate on all reported profits. The tax paid on dividends flowing to Australian shareholders of Australian companies is reduced by an amount equal to the tax already paid by the corporation, this is known as imputation credits. A shareholder’s marginal tax rate, and the tax rate for the company issuing the dividend, both affect how much tax an individual shareholder owes on what is called a fully franked dividend.

Companies that pay fully franked dividends in Australia, pay on average over 10% additional tax on the same level of earnings than companies not paying franked dividends. Approximately 62.3% of imputation credits are utilised by resident shareholders.

The average effective tax rate of Australia’s largest private companies are much lower than that of the largest public companies (most of which pay fully franked dividends). You can see this in the table below which shows the effective tax rates calculated by two separate studies.

https://datawrapper.dwcdn.net/3Hvfs/2/

One of the studies by the union United Voice looked at the ASX200 companies and the otherby lobby group GetUp examined the largest private companies operated by foreign multinationals.

The corporate tax rate does figure in investment decisions of Australian companies and foreign companies wanting to do business in Australia. However, the rate of corporate tax is at best a second order effect in influencing the decisions of foreign companies. Therefore, the gains from the government win in the Senate appear to be more political than economic.

At best the tax cut may somewhat reduce the burden on smaller Australian companies, albeit at a significant cost to the budget, without impacting the largest Australian and foreign multinationals. Although prospects for further tax cuts for the big end of town (which has a greater impact on the economy) are unlikely in the next five to 10 years without Senate crossbencher support.

Brett Govendir, Lecturer, University of Technology Sydney and Roman Lanis, Associate Professor, Accounting, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

Australia and the G20


The link below is to an article that comments on the G20 meeting in Australia and the current situation for Australia in the G20.

For more visit:
http://www.smh.com.au/business/theres-plenty-at-stake-for-australia-when-the-g20-gathers-here-20140221-337j1.html

Scholars: John Calvin was America’s ‘Founding Father’


More than a thousand attendees are expected to gather for a four-day conference to celebrate John Calvin’s 500th birthday, reports Michael Ireland, chief correspondent, ASSIST News Service.

As America prepares to celebrate Independence Day this July 4, Vision Forum Ministries will be hosting the national celebration to honor the 500th birthday of John Calvin, a man who many scholars recognize as America’s “Founding Father.”

The event — The Reformation 500 Celebration — will take place July 1-4 at the Park Plaza Hotel in downtown Boston, according to a media release about the event.

“Long before America declared its independence, John Calvin declared and defended principles that birthed liberty in the modern world,” noted Doug Phillips, president of Vision Forum Ministries.

“Scholars both critical and sympathetic of the life and theology of Calvin agree on one thing: that this reformer from Geneva was the father of modern liberty as well as the intellectual founding father of America,” he said.

Phillips pointed out: “Jean Jacques Rousseau, a fellow Genevan who was no friend to Christianity, observed: ‘Those who consider Calvin only as a theologian fail to recognize the breadth of his genius. The editing of our wise laws, in which he had a large share, does him as much credit as his Institutes. . . . [S]o long as the love of country and liberty is not extinct amongst us, the memory of this great man will be held in reverence.'”

He continued: “German historian Leopold von Ranke observed that ‘Calvin was virtually the founder of America.’ Harvard historian George Bancroft was no less direct with this remark: ‘He who will not honor the memory and respect the influence of Calvin knows but little of the origin of American liberty.’

“John Adams, America’s second president, agreed with this sentiment and issued this pointed charge: ‘Let not Geneva be forgotten or despised. Religious liberty owes it much respect.’

“As we celebrate America’s Independence this July 4, we would do well to heed John Adams’ admonition and show due respect to the memory of John Calvin whose 500th birthday fall six days later,” Phillips stated.

Calvin, a convert to Reformation Christianity born in Noyon, France, on July 10, 1509, is best known for his influence on the city of Geneva, the media release explains.

“It was there that he modeled many of the principles of liberty later embraced by America’s Founders, including anti-statism, the belief in transcendent principles of law as the foundation of an ethical legal system, free market economics, decentralized authority, an educated citizenry as a safeguard against tyranny, and republican representative government which was accountable to the people and a higher law,” the release states.

The Reformation 500 Celebration will honor Calvin’s legacy, along with other key Protestant reformers, and will feature more than thirty history messages on the impact of the Reformation, Faith & Freedom mini-tours of historic Boston, and a Children’s Parade.

The festivities will climax on America’s Independence Day as attendees join thousands of others for the world-renowned music and fireworks celebration on the Esplanade with the Boston Pops Orchestra.

Report from the Christian Telegraph