Rumours of the death of multinational tax avoidance are greatly exaggerated


Michael West, University of Sydney

The Australian government took out newspaper ads earlier this month boasting of unequivocal victory in the fight against multinational tax avoidance.

It is no small irony that taxpayers have forked out for this bald-faced lie. “Multinational corporations earning Australian dollars now pay their fair share of Australian tax,” decreed the ad.

The Australian government advertisement falls a long way short of telling the whole truth about multinationals’ tax.
Commonwealth of Australia

Hardly. While it is true that the Australian Tax Office (ATO) and the federal government have reaped more income tax from multinationals this year than they had earlier anticipated, this is a fight that has only just begun.

Were it not for increasing community awareness of multinational tax avoidance – the world’s biggest rort – and rising concern over tax fairness, things would be worse. So the positive perspective is that, yes, inroads are being made via the diverted profits tax, the ATO’s tax avoidance task force and the multinational anti-avoidance law, which was enacted late in 2015.

Tax Office people privately confide, too, that another A$2 billion may drop this year. That’s A$2 billion on top of earlier expectations – A$1 billion from tightened enforcement and another A$1 billion from “behavioural” factors: better behaviour by some multinationals, in other words.

As the swathe of December year reports have flowed through this month and last, it is evident that some companies such as Google and Facebook have been paying more tax, albeit slightly more and still well short of reasonable amounts.

Same old tricks

Others, such as oil giants Exxon, Shell and Chevron, digital players Booking.com, Airbnb, Expedia and eBay, and assorted others such as American Express are up to their same old tricks. We are presently analysing Big Pharma, a sector that is swimming in taxpayer subsidies thanks to the Pharmaceutical Benefits Scheme (PBS) and then has another bite of the cherry via transfer-pricing shenanigans as well.

To a couple of serial offenders, Goldman Sachs and News Corporation. The 2016 financial statements for “Goldies”, as the Giant Vampire Squid is affectionately known in financial markets, are utterly inadequate.

For a start, they are not even consolidated, so don’t provide a true picture of the profitability of Wall Street’s famous, or infamous as many would put it, investment bank. Its head entity in Australia, Goldman Sachs Holdings ANZ Pty Ltd, discloses revenues of just US$24 million, the same as the prior year and well shy of the US$45 million booked in finance costs. Then the profit and loss statement shows an income tax “benefit”, yes benefit, of US$2.4 million, compared with last year’s benefit of US$18.5 million. There was a bottom-line loss in both years.

On this, it would appear that Goldman has paid zero tax in the past three years in Australia. Travelling along to the cash-flow statement, though, they disclose US$286 million was paid in tax last year (down from tax received of US$8.5 million). But when you get to the notes to the accounts it shows an income-tax benefit of US$2.4 million.

All of this is meaningless, of course. As the accounts are not consolidated, they don’t disclose what has been going on in the whole group. Further, tax may have been paid in Hong Kong, the domicile of the immediate parent, or elsewhere.

The usual feature of high finance charges and large related party loans are there, not to mention “service fee expenses” with related parties. Merchant banks such as Goldman Sachs, being banks, get away with a lot on the tax front.

Our very own Macquarie Bank had a keen reputation for tax structuring until it got pinged by authorities three years ago. In 2008, it even recorded a tax rate of 1.7% after a jumbo “tax arb” transaction, a currency swap so successful that it delivered a profit of A$850 million in Asia and a matching loss in Australia.

So a billion-dollar profit bore almost no tax.

At least Macquarie pays homage to financial accounting standards and doesn’t file a pitiable and arguably non-compliant set of accounts like Goldman. ASIC could issue an edict tomorrow, if it had the courage and a burst of energy, decreeing that any multinational company operating in Australia had to file proper “General Purpose” accounts.

Feeling the heat

This brings us to the entity formerly identified as the nation’s number one “tax risk”, Rupert Murdoch’s News Corporation. That mantle has probably gone to Chevron now. After being rapped over the knuckles by the Senate Inquiry into Corporate Tax Avoidance two years ago, News has begun to pay more tax: A$110 million last year.

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The main ruse was to create A$7 billion in “goodwill” in 2004 via a string of related party transactions and then to rip out A$4.5 billion in profits to the US.

News is still deploying this “repatriation of capital” subterfuge to this day. This practice may be legal but it is unethical. The creation of “internally generated goodwill” could be described as suspect in the least. A “magic pudding” was the way former University of NSW accounting academic Jeffrey Knapp labelled it.

Over the ten years to 2015, Rupert Murdoch’s companies paid income tax equivalent to a rate of 4.8% on A$6.8 billion in operating cash flows, or just 10% of operating profits.

The basic numbers for the past two years are: A$110.5 million tax on revenues of A$3.1 billion and profit of A$156 million. In
2015, it was A$109 million tax paid on revenues of A$2.95 billion and profit of A$287 million.

They are still aggressively debt loading, however, or giving themselves loans from overseas so they can rip out interest before paying tax. The critical numbers are A$2.6 billion in related party borrowings on which they paid A$130 million to themselves in related party interest charges offshore. Overall, debt jumped from A$2.4 billion to $4.3 billion.

A A$411 million loan to Foxtel, which News owns with Telstra, remains. The interest rate on this loan is 10.5%, more than double what the average wage earner pays on a mortgage. This is another ruse to avoid tax.

All in all, it’s a better effort from News, but the evidence on multinational tax avoiders is in. There is improvement, but still a very long way to go.


The ConversationThis column, co-published by The Conversation with michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative between The Conversation and the Sydney Democracy Network. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of Sydney

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

New tax treaty will close loopholes that allow multinationals to avoid tax


Miranda Stewart, Australian National University

Australia, with another 70 countries, has signed a multilateral treaty to create more coherence in fighting tax avoidance by large multinational corporations. The Multilateral Convention to Implement Treaty Measures to Prevent Base Erosion and Profit Shifting, or BEPS Convention, aims to close loopholes in the international tax system that result from differences in individual country tax systems.

Countries are fiercely protective of their own tax sovereignty and claim the right to set their own company tax rate and base. But this can result in lower company tax around the globe, as multinational enterprises can move capital investment to lower tax jurisdictions and take advantage of tax havens to reduce their global tax bill. This latest treaty will help to overcome this problem.

Since the global financial crisis, nearly a decade ago, the G20 countries have tried to reform international tax with a Base Erosion and Profit Shifting (BEPS) project. Australia has been a strong supporter of the BEPS project since it started, including as chair of the G20 in 2014.

This project resulted in 15 actions that were endorsed by the G20 in 2015. The signing of this tax treaty implements action number 15 to amend existing tax treaties to limit international tax planning.

The other BEPS actions aim to strengthen enforcement, remove inconsistencies in national tax rules, enforce disclosure of corporate tax profits in havens and encourage sharing of tax information between country revenue agencies.

Australia can’t go it alone on international tax

International tax cooperation remains critical and this BEPS Convention enables an anti-abuse framework to be embedded in Australia’s treaty network.

In the last century, countries around the world have negotiated bilateral tax treaties, producing a network of thousands of treaties. Australia alone has about 45 bilateral income tax treaties.

The main goal of bilateral tax treaties has been to prevent double taxation of international business where it operates in more than one country. But the terms of tax treaties can also be used to minimise tax. For example, a company may have significant business sales in a country – like Google in Australia – but under a treaty rule, it may not be treated as having a business presence there.

How does the BEPS Convention amend tax treaties?

Without this multilateral convention, it could take decades for countries to renegotiate these bilateral tax treaties. Where countries sign up, the new rules will take effect as soon as each country has ratified the convention.

The BEPS Convention is the first ever multilateral tax treaty that modifies substantive tax rules. Even the speed of signing the BEPS Convention is unprecedented: from treaty mandate to signature has been only 18 months. Most multilateral treaties take much longer, such as the Trans-Pacific Partnership, which has been in negotiation for more than nine years (and may not ever be agreed).

A leading British tax lawyer observed that the BEPS Convention is “not tax peace in our time”. But it is still significant.

The convention inserts a new anti-abuse rule which states that tax treaties are not to be used to abuse national tax laws, if a taxpayer uses a treaty rule for the principal purpose of reducing its tax liability in a country. The convention will also make changes to prevent mismatches in treaty tax rules and to end the artificial avoidance of a business tax presence in a country, for example by using a separate company to do its operations under a contract.

To push governments to resolve tax disputes, the convention inserts an arbitration clause into treaties. If two countries cannot resolve a treaty dispute, then after two years (and if no court case is on foot), it will go automatically to an independent arbitrator who can make a decision that binds the governments and taxpayer. Its controversial and many countries may not agree to arbitration but Australia has signed up to it.

Australia has adopted most of the BEPS Convention measures, as being consistent with its current tax treaty policy. But many countries, including Australia, will need to enact domestic legislation to bring the convention into law.

Once countries sign up, the treaty changes will take place immediately – this could amend as many as 30 of Australia’s treaties.

The future international tax architecture – but without the US?

The BEPS Convention was signed by more than 70 countries. This includes leading signatories such as China, Germany (the current G20 Chair), the United Kingdom, France and Japan and also several low tax financial centres like Singapore and Ireland. But the United States did not sign.

The US failure to sign is hardly surprising. It comes one week after President Trump withdrew the US from the Paris Climate Agreement. It’s another example of the US retreating from multilateral cooperation on issues affecting all nations.

The US also did not sign the Tax Administrative Convention, now with 111 country members, which provides the legal basis for the country by country exchanges of information about global profits for billion dollar companies, including with the Australian Tax Office. Instead the US insisted on “going it alone” with its Foreign Account Tax Compliance Act, or FATCA regime, which demands foreign countries provide data on US citizens.

Many US tax treaty provisions are in line with the BEPS Convention. But surely that misses the point of multilateralism in tax or any other field of global concern. Instead, we see China is taking a leading role in multilateralism. It is unclear what the US stance will mean for international tax in the longer term. However, this treaty will give some help to other countries aiming to tax global profits of US multinationals, including Google, Apple and Uber, while those companies lobby for the US to reform its own company tax laws.

The ConversationThe pace of international tax change is usually glacial and most country co-operative efforts go nowhere. The BEPS Convention provides, for the first time, an international legal architecture for future multilateral tax reform.

Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

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

Full response from the AiGroup for a FactCheck on how Australia’s top tax rates compare internationally



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original.

Sunanda Creagh, The Conversation

In relation to this FactCheck on the AiGroup’s Innes Willox’s statement that Australia has “one of the highest progressive tax rates in the developed world”, a spokesman for the AiGroup sent the following sources and comment: The Conversation

Innes was referring to top marginal tax rates. Data for 2016 show that Australia has a relatively high top marginal tax rate (49%) but not the highest among OECD countries (Sweden is top, at 60%). The rub is that our top marginal rate cuts in at a relatively lower level of income than most other OECD countries (2.2 times our average wage).

Chart created by AiGroup using OECD data.
AiGroup/OECD
Chart created by AiGroup using OECD data.
AiGroup/OECD

The spokesman also sent a screenshot from an OECD report titled Revenue Statistics 2014 – Australia:

A screen shot from the OECD report Revenue Statistics 2014 – Australia.
OECD

Sunanda Creagh, Editor, The Conversation

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

FactCheck Q&A: does Australia have one of the highest progressive tax rates in the developed world?



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The AiGroup’s Innes Willox, speaking on Q&A.
Q&A

Kathrin Bain, UNSW

The Conversation fact-checks claims made on Q&A, broadcast Mondays on the ABC at 9:35pm. Thank you to everyone who sent us quotes for checking via Twitter using hashtags #FactCheck and #QandA, on Facebook or by email. The Conversation


Excerpt from Q&A, May 15, 2017. Quote begins at 0.50.

Look, we just need to keep in mind that we have one of the highest progressive tax rates in the developed world at the moment. – Innes Willox, chief executive of the Australian Industry Group, speaking on Q&A, May 15, 2017.

When Q&A host Tony Jones asked if wealthy people should pay more tax, the AiGroup’s Innes Willox said that Australia already has one of the highest progressive tax rates in the developed world.

Is that true?

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Checking the source

When asked for sources to support Innes Willox’s statement, a spokesman for the AiGroup clarified that Willox was referring to top marginal tax rates.

The spokesman referred The Conversation to OECD tax statistics, and two charts built using that data, saying that:

This shows that Australia has a relatively high top marginal tax rate (49%) but not the highest among OECD countries (Sweden is top, at 60%). The rub is that our top marginal rate cuts in at a relatively lower level of income than most other OECD countries (2.2 times our average wage).

You can read his full response and see those charts here.

Is it true? Not exactly

Looking at OECD data, Australia’s highest marginal tax rate is higher than the OECD median. Out of the 34 OECD member countries in this data set, Australia ranks 13th for the top marginal rate of tax, meaning 12 countries have a higher top marginal rate, and 21 countries have a lower top marginal rate.

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However, a straight comparison like this can be misleading. More than half (19) of the OECD countries impose “social security contributions”. The OECD defines social security contributions as “compulsory payments that confer an entitlement to receive a (contingent) future social benefit”. It notes that they “clearly resemble taxes” and “better comparability between countries is obtained by treating social security contributions as taxes”.

When social security contributions are taken into account, Australia’s “ranking” in terms of top marginal rate of tax drops to 16 out of the 34 OECD member countries – making it still higher than the OECD median top marginal rate, but not by much.

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The other point noted by the AiGroup spokesman was that Australia’s top marginal tax rate applies at a relatively low level of income compared to most other OECD countries.

Australia’s highest marginal tax rate applies to taxable income above A$180,000, approximately 2.2 times Australia’s average wage. The AiGroup spokesman was right to say this is relatively low, with the majority of OECD countries (20 out of 34) applying their highest marginal tax rate at income levels higher than Australia (that is, at income levels higher than 2.2 times the average wage).

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However, it is worth noting that based on the latest Australian Taxation Office statistics, for the 2014-15 tax year, only 3% of individual taxpayers fell into the highest tax bracket.

Where Australia does rank amongst the highest in the OECD is the percentage of total tax revenue that is derived from individual income taxation.

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In 2014, 41% of Australia’s taxation revenue came from income taxation on individuals. This is the second highest in the OECD (the highest being Denmark at 54%) and significantly higher than the OECD average of 24%.

Verdict

The statement made by Innes Willox that “Australia has one of the highest progressive tax rates in the developed world at the moment” is an exaggeration.

Australia ranks 13th in the OECD for the top marginal rate of tax, and 16th if social security contributions are taken into account.

However, Australia does rely more heavily on personal income tax (when compared to other taxes) than all but one other OECD country. – Kathrin Bain


Review

I agree that the statement is an exaggeration. 13th out of 34 is higher than the median, but it would be equally true to say that more than one-third of the OECD countries have a higher personal marginal tax rate than Australia.

It is always problematic to try to compare tax data across different countries. Although the OECD does try to make the data comparable the differences between tax and welfare systems can lead to misleading comparisons.

It is generally well known that certain Scandinavian countries, such as Sweden and Denmark, have a very high marginal tax rate. However those countries also tend to have a different approach to social and welfare spending. Australia does not have a dedicated social security tax: pensions and income support are paid from general revenue. This structural difference in the tax-transfer systems does limit the comparison.

Australia does have a high reliance on personal income tax, and the top marginal rate is higher than the median OECD level. Although the top marginal rate is relatively low at 2.2 times the median wage, the fact that only 3% of the population are in the top bracket says that we, in fact, have a relatively flat tax structure, with most taxpayers in lower tax brackets. – Helen Hodgson


The Conversation FactCheck is accredited by the International Fact-Checking Network.

The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. Read more here.

Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.

Kathrin Bain, Lecturer, School of Taxation & Business Law, UNSW

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

Shifting the tax burden to middle-income earners will undermine jobs and growth


Patricia Apps, University of Sydney

The government’s idea of raising the Medicare levy, while also removing the 2% budget deficit levy on incomes above A$180,000, is less “transformational” and more signature Liberal policy. It shifts the tax burden towards middle income earners, as opposed to Labor’s plan to direct higher tax rates towards higher income earners. The Conversation

Rather than introducing a simple flat rate rise of 0.5% in the marginal tax rate across all taxpayers, the government has chosen to increase the Medicare levy. The reason lies in the fact that the levy contains the equivalent of a low-income tax offset due to the phasing out of the low-income exemption.

For example, in the current financial year, the thresholds for the phasing out of the Medicare levy exemption is A$21,665 for singles and A$36,541 (plus A$3,356 for each dependent child/student) for families. At these thresholds, tax rates rise by the rate of the withdrawal of the exemption, which works out to be 8% (calculated as 10% less the 2% Medicare levy rate).

In the case of a two-child family, this means an 8% rise in the marginal tax rate at an income from A$43,253, to an upper income limit of A$51,803. If a Medicare levy increase of 0.5% were introduced in the current tax year, the upper income limit for the higher marginal tax rate would rise to A$54,066.

In combining a rise in the Medicare levy with the removal of the budget deficit levy, the government is therefore proposing a rise in marginal tax rates across a wide band of middle incomes and a marginal tax rate cut for the top.

This direction of tax reform is a continuation of the incremental shift in the overall tax burden towards middle income earners over recent decades. And because the threshold for the Medicare levy exemption is based on family income, the reform will reinforce the move towards higher effective tax rates on low income second earners in a family.

This shift in the tax burden from top to middle income earners, and to middle income families, will undermine aggregate demand and, in turn, “jobs and growth” in the future.

In contrast to the government’s policy, Labor’s policy limits the rise in the Medicare levy to incomes above the top two bracket points and retains the budget deficit levy. Raising taxes on top incomes is not only a fairer policy, but a more efficient one in the conventional economic sense.

The impact of taxes on hours worked declines as earnings get higher, and has close to no effect on the hours worked by those with top incomes. And by avoiding higher taxes on second family earners, Labor’s policy should have a less negative effect on second earner hours of work and therefore the tax base.

The government’s and Labor’s tax reforms therefore represent very different policies.

Patricia Apps, Professor of Public Economics, Faculty of Law, University of Sydney

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

Imposing GST on low-value imports doesn’t level the playing field


Kathrin Bain, UNSW

The government wants to extend GST to imported online goods under A$1000, effective from 1 July 2017, with Treasurer Scott Morrison stating it will “establish a level playing field for our domestic retailers”. But the proposed legislation doesn’t do this. Rather, it unfairly imposes GST on goods purchased from overseas sellers, that wouldn’t be subject to GST if purchased from an Australian seller. The Conversation

The government also hasn’t cleared up how the collection will be adequately enforced. Without appropriate enforcement, collecting more revenue from this tax seems unlikely.

Currently, low-value imports (those with a customs value of A$1,000 or less) are exempt from GST. If the legislation is passed, overseas vendors who sell more than A$75,000 of low-value goods to Australian consumers would be required to register for GST, and collect and remit GST on low-value goods to the ATO.

Those imports will continue to be stopped at the border with any GST, customs duty, and associated fees paid to Australian Border Force by the importer before the goods are released.

For sellers of low-value goods it will mean that an overseas supplier of both low and high value goods will be subject to two separate tax regimes. The requirement to collect GST will apply only to low-value goods.

Online marketplaces and mail forwarding services

The new law will also apply to online marketplaces such as eBay and “redeliverers” – businesses that forward goods to Australia from overseas companies. For goods purchased through an online marketplace, the marketplace rather than the seller will be treated as the supplier. Similarly, if low-value goods are delivered to Australia by a redeliverer, they will be considered to be the supplier for GST purposes.

While extending the GST to these goods is meant to level the playing field between overseas and Australian vendors, treating the online marketplace or mail forwarder as the supplier of goods is inconsistent with the treatment of domestic transactions.

As eBay has stated in their submission to the Senate Committee: “eBay is not a seller. eBay is a third-party online marketplace that simply connects buyers and sellers”.

For Australian vendors who sell items on eBay, it’s the individual seller who is responsible for collecting and remitting GST on products they sell (if they are required to be registered). A seller who uses eBay, but isn’t carrying on an enterprise or does not meet the A$75,000 turnover threshold, isn’t required to be registered and would not be required to collect GST on their sales.

However, the proposed legislation does not treat overseas vendors in this way, by treating online marketplaces and mail forwarding services as the supplier of goods. The Treasurer stated that:

Including online marketplaces ensures that only a limited number of entities need to collect the GST, rather than the multitude of small, individual vendors making supplies through these online marketplaces that compete with Australian retailers here in Australia.

With all due respect to Scott Morrison, he seems to have missed the point that small, individual vendors should not (if their turnover of low-value goods into Australia is less than A$75,000) be required to collect GST merely because they use an online marketplace.

EBay has gone as far as stating in their submission that: “Regrettably, the Government’s legislation may force eBay to prevent Australians from buying from foreign sellers”. This is because they would not be able to comply with the requirements imposed under the new legislation.

Compliance concerns

Despite the legislation being intended to come into effect on 1 July of this year, it is still unclear how the new system will be adequately enforced.

At the moment, information displayed on international mail declarations doesn’t indicate whether the overseas supplier is registered (or required to be registered) for GST. It also doesnt say whether GST has been collected, and whether it is being correctly remitted to the ATO. Even if this information was readily available, it’s not clear how the ATO would deal with non-compliant entities.

If it was determined that GST had not been charged and collected by the overseas supplier of the low-value goods, there is nothing in the proposed legislation that would allow the GST to be collected from the importer (instead of the supplier) when the goods enter Australia. However, attempting to enforce an Australian tax debt against a non-compliant overseas vendor would be a complex, costly, and likely fruitless endeavour.

Consumer advocate group Choice has expressed concern that the government would use powers under the Telecommunications Act to block the websites of non-compliant entities. However, Scott Morrison has indicated that the government has no intention of using this power.

Concerns regarding enforcement have been echoed in a number of submissions, including the Taxation Institute of Australia and Amazon. Both highlight the fact that lack of enforcement may simply encourage Australian consumers to purchase goods from non-compliant overseas entities that are not charging GST.

By treating online marketplaces and mail forwarding services as the supplier of goods, the proposed legislation does not treat overseas vendors in the same way as domestic vendors. The tax will only be effective if the system for collecting GST on imports can be adequately enforced. Without appropriate enforcement, high levels of compliance seems unlikely. A lack of compliance will continue to leave Australian retailers at a disadvantage, with only minimal increase in GST revenue.

Kathrin Bain, Lecturer, School of Taxation & Business Law, UNSW

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

FactCheck: do 679 of Australia’s biggest corporations pay ‘not one cent’ of tax?


Fabrizio Carmignani, Griffith University

… 679 of our biggest corporations pay not one cent of tax. – Australian Council of Trade Unions (ACTU) Secretary Sally McManus, address to the National Press Club, Canberra, March 29, 2017. The Conversation

Speaking at the National Press Club in Canberra, Australian Council of Trade Unions (ACTU) Secretary Sally McManus called for an increase to Australia’s minimum wage and criticised the Fair Work Commission’s recommendation to cut Sunday and public holiday penalty rates.

McManus said that “679 of our biggest corporations pay not one cent of tax”.

Was that claim correct?

Checking the source

When asked for sources to support McManus’ statement, a spokesman for the ACTU pointed The Conversation to a media report and to the Australian Taxation Office (ATO) Report of Entity Tax Information for 2014-15, and provided this response from McManus:

According to the most recent ATO Tax Transparency Report, 679 companies with more than $100 million in income paid no tax in Australia in 2014-15.

The list includes such household names as Walt Disney, Sydney Airport, Qantas, Origin Energy and News Australia.

These companies can collectively be considered to be amongst the biggest operating in Australia – both in terms of income, and the prominent position they enjoy in the public eye.

Some of them are not Australian owned, and they may pay tax in other jurisdictions. However, they all operate in Australia, generate revenue from the spending of Australians and utilise existing infrastructure – like roads and ports – that were paid for by Australians.

So there’s something deeply unfair about a system which allows them to not pay any tax in Australia.

The ACTU also provided The Conversation with a spreadsheet listing the corporations it said had paid no tax.

Is that figure right?

The best source for information on how much tax Australia’s biggest corporations pay every financial year is the ATO. The ATO’s Report of Entity Tax Information – the same report the ACTU referred to in their response – is produced annually and shares information taken from the tax returns of:

  • Australian public and foreign-owned corporate entities with total income of A$100 million or more
  • Australian-owned resident private companies with total income of A$200 million or more
  • entities with tax payable under the petroleum resource rent tax, and
  • entities with tax payable under the minerals resource rent tax.

The report includes each company’s name, total income, taxable income, and tax payable.

For the purpose of this FactCheck, the relevant information is the tax payable by each of these companies. By looking at this data, we can see which companies didn’t pay tax in 2014-15, the most recent financial year for which this information is available.

How many companies don’t pay tax?

There are 1,904 companies included in the ATO’s 2014-15 report. Of those, 678 – or 36% of the companies listed – had no tax payable.

My count – 678 – is slightly different to McManus’s count of 679, and to the figure the ATO quoted on its pie chart here (the ATO has since corrected its report to reduce the number of nil tax payable taxpayers by one to 678).

The ACTU provided The Conversation with a spreadsheet listing the 679 companies that, in their view, paid no taxes. When I compared my count with the ACTU’s, I noted the ACTU included a company that I did not, a company named Tal Dai-Ichi Life Australia.

In the report I downloaded from the ATO website, Tal Dai-Ichi Life Australia is recorded as having total tax payable of A$56,171,148 for the 2014-15 financial year, so it shouldn’t be included in the count of companies that paid no tax.

Nevertheless, the difference is obviously minor. McManus was essentially correct.

Why do some companies pay no tax?

In general, there are two reasons why corporate companies pay no tax in Australia.

The first is that some companies are not making any profit. The concept of “total income”, which is used to identify the companies included in the ATO report, relates to revenue – not profit.

So, a company can have income (or revenue) of more than A$200 million, but that doesn’t automatically mean it has made a profit. Its losses or outgoings may outweigh its income. Only companies making a profit have to pay taxes.

Many of the companies that didn’t pay tax in 2014-15 were those in the energy/natural resources and manufacturing sectors – two sectors that were experiencing a downturn in that year and where profit margins were shrinking.

Proportion of entities with nil tax payable, by industry segment, 2013–14 and 2014–15.
ATO corporate tax transparency report for 2014-15

The second reason could be tax avoidance or profit shifting. These situations arise when companies take advantage of the international tax system to reduce the amount of tax to be paid. For instance, companies may set up complex ownership arrangements that allow them to redirect profit to countries with lower tax rates.

While not necessarily illegal, these situations are closely monitored by the ATO to ensure that Australia receives its correct share of tax under international tax rules.

Verdict

Sally McManus’ claim that “679 of our biggest corporations pay not one cent of tax” was essentially correct. According to ATO records, 678 of Australia’s biggest corporations didn’t pay tax in Australia in 2014-15.

McManus’s figure of 679 included one company that did have tax payable in that financial year. But in percentage terms, the difference between 678 and 679 is negligible.

It’s important to note that when a company doesn’t pay tax, it doesn’t necessarily imply tax avoidance or profit shifting. A company might not be paying tax because it isn’t making a profit, even if its total income (that is, revenue) amounts to more than A$100 million or A$200 million. – Fabrizio Carmignani


Review

This is a sound FactCheck.

The ATO’s annual corporate tax transparency reports can provide useful insights to inform public debate regarding how effectively our tax system is working.

As the author rightly points out, the information must be used with caution. There are legitimate reasons why a company with substantial income does not have to pay income tax. For instance, it may make a loss in that particular year, or has substantial carried forward losses from previous years.

Or, as the author has also rightly noted, tax avoidance may be the reason why a large company is not paying any income tax. – Antony Ting


Have you ever seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.

Fabrizio Carmignani, Professor, Griffith Business School, Griffith University

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What economists and tax experts think of the company tax cut


Jenni Henderson, The Conversation

Prime Minister Malcolm Turnbull and the Treasurer Scott Morrison are still trying to sell their plan to cut the company tax rate to 25% by 2026-27. The current rate is 30% and has been since 2001.

The tax cut was introduced in the 2016 federal budget. The government indicated small to medium businesses turning over less than A$10 million would pay a company tax of 27.5% initially. The company turnover threshold for the tax cut would then increase over time from A$10 to $25 million in 2017-18 to A$50 million in 2018-19 and finally A$100 million in 2019-20.

But before any of this happens, the government needs to convince the senate crossbenchers to pass the legislation. It seems the government hasn’t won over tax experts and economists with this policy, here’s some articles that explain why.

Don’t expect an instant wage increase

In a national press club address Malcolm Turnbull justified the tax cut by saying, “company tax is overwhelmingly a tax on workers and their salaries.” It follows that cutting it would increase salaries right?

However there’s a whole lot of decisions businesses need to make before they even consider raising wages. It’s not just as simple as the government makes out, as professor John Freebairn from the University of Melbourne notes:

Individuals benefit from lower corporate tax rates with higher market wages. But the higher wage rates will take some years to materialise, and the magnitude of increase attributed to the lower corporate tax rate, versus other factors, is open to debate.

Businesses would need to consider the savings of international investors, what resources the business might need, what the return for investors would be on these. All of this before it would consider a wage increase for its workers.

The enlarged stock of capital, technology and expertise per worker becomes a key driver of increased worker productivity. In time, more productive workers are able to negotiate higher wages. Via this chain of decision changes, employees benefit from the lower corporate tax rate.

Any modelling on how much a tax cut could be worth to our economy is up for debate

Modelling is sensitive to whatever assumptions the government makes and these assumptions can be oversimplified. ANU principal research fellow Ben Phillips points out that tax reform like this inevitably has winners and losers and is influenced by powerful lobby groups.

In thinking about tax reform it is important to keep in mind that the gains from modest tax reform are not likely to be a revolution in Australia. The models themselves only estimate relatively small gains from tax reform.

Here’s a little something to bear in mind when hearing any figures thrown around on how much a company tax cut could be worth:

Over the past 25 years Australia’s living standards have increased by around 60% whereas the sorts of gains estimated from tax reform are expected to be little more than 1 or 2%. It remains important that in securing such modest gains we don’t ignore fairness.

The benefit to the domestic economy won’t be that big

The idea behind the cut is that companies will be motivated to provide jobs and other economic benefits because they are receiving a tax break. In theory this kind of tax should boost the economy in the long term, but as John Daley and Brendan Coates from the Grattan Institute explain it’s not that simple.

In Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax.

The Grattan researchers point out that if companies pay less tax then they might reinvest what they save, but in practise most profits are paid out to shareholders. So the tax cut won’t have much of an impact on domestic investment.

They also pick holes in the Treasury’s modelling on the tax cut’s boost to Gross National Income (GNI).

Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.

It doesn’t make much of a difference

Another argument for cutting Australia’s company tax rate is to deter companies from shifting their profits to other countries where the tax rate is lower. Recently President Trump promised to cut the United States federal corporate tax rate from 35% to 15%.

Antony Ting, associate professor at the University of Sydney notes most countries have been reducing their company tax rates over the past two decades. This hasn’t changed the incentive for multinationals to avoid taxes.

The tax-avoidance “success” stories of multinational enterprises such as Apple, Google and Microsoft suggest this argument is weak. The fact is that the profits these multinationals shift offshore often end up totally tax-free.

A FactCheck by Kevin Davis, research director at the Australian Centre for Financial Studies, reviewed by economist Warwick Smith, says there’s no point to comparing Australia’s company tax rate with other countries anyway.

Australia’s dividend imputation tax system means that any comparison of our current 30% rate with statutory corporate tax rates elsewhere is like comparing apples and oranges.

Small and medium businesses actually lose out

Due to the way the proposed company tax cut is structured, foreign investors get a windfall while local employers including small and medium businesses cop a cost because they remain uncompensated.

Economist Janine Dixon from Victoria University modelled how the cut would play out.

Local owners of unincorporated businesses are taxed at their personal tax rate. Because of Australia’s dividend imputation system, Australian shareholders in incorporated business are also taxed at their personal rate, not the company tax rate.

She explains that 98% of small businesses (employing four or fewer people) are wholly Australian owned and because of this are indifferent to the cut, but 30% of large businesses (employing more than 200 people) have some component of foreign ownership.

An increase in foreign investment is generally understood to be a driver of wage growth. This is the basis for the argument that at least half of the benefit of a cut to company tax flows to workers… We find that benefit to foreign investors will exceed the total increase in GDP. In the domestic economy, benefits to workers will be more than offset with a negative impact on domestic investors and the need to address additional government deficit.

Other things are just as important

Even if some businesses are keen for a tax cut, meaning more money in the kitty, it’s how these businesses spend this money that counts.

Jana Matthews from the Centre for Business Growth at the University of South Australia says many CEOs are uncertain about what to do in order to grow their business and are fearful of making the wrong decisions.

We need to focus as much attention on the management education of founders, CEOs and MDs [managing directors] of medium-sized companies as we do on providing them with more money. Once they learn how to grow their companies, they will definitely need money to become the engines of growth, and they will certainly hire more people, creating the jobs we all want.

The Conversation

Jenni Henderson, Editor, Business and Economy, The Conversation

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

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