Chevron is just the start: modelling shows how many billions in revenue the government is missing out on


Roman Lanis, University of Technology Sydney; Brett Govendir, University of Technology Sydney, and Ross McClure, University of Technology Sydney

The federal government could collect billions more in royalties and tax revenue if it changed the rules on debt loading and adopted alternative royalty schemes in dealing with oil and gas giants, new modelling shows. The Conversation

Our modelling, funded by lobby group GetUp, found that over the four-year period from 2012 to 2015, Chevron’s average effective interest rate was 6.4%. However, it has been steadily reducing from 7.8% in 2012 to 5.7% in 2015.

We estimated that if Australia adopted a similar approach to Hong Kong to eliminate debt loading abuse, United States oil and gas giant Chevron would have been denied A$6.27 billion in interest deductions, potentially increasing tax revenues by A$1.89 billion over the four-year period (2012-2015).

The issue of debt loading abuse was highlighted last week when the full bench of the Federal Court dismissed unanimously Chevron’s appeal against the Australian Taxation Office (ATO), ordering the company to pay more than A$300 million.

Chevron Australia was using debt loading, where, compared its equity, it borrowed a large amount of debt at a high interest rate from its US subsidiary (which borrows at much lower rates). It did this in order to shift profits from high to low tax jurisdictions.

Based on Australia’s existing “thin capitalisation” rules, there is a maximum allowable debt that interest deductions can be claimed on, in a company’s tax return. Companies can exceed this debt but the interest charges must be at “arm’s length” – at commercial rates.

Chevron’s size and financial strength allow it to negotiate very competitive (low) rates on its external borrowings and this was the main issue in the Federal Court case. As the court has now ruled on what constitutes a reasonable interest rate for inter-company loans, this benchmark will likely be adopted by the ATO.

It can now approach and enforce this benchmark in similar disputes with confidence that companies engaged in debt loading will want to settle rather than engage in a costly court battle.

What the government could save from addressing debt loading

Chevron’s tax avoidance measures meant the interest rate, adjusted for maximum allowable debt, varied only slightly from their effective rate. Our modelling showed that if the ATO had applied the thin capitalisation rules to Chevron’s accounts each year over the four-year period, it would’ve reduced Chevron’s interest deduction by A$461 million and potentially generate an additional tax liability of A$138 million.

We modelled a scenario where Chevron Australia’s interest deductions were limited to the group’s external interest rate, applied to its level of debt. This would have reduced in the interest deduction by A$4.8 billion over the four year period, potentially generating A$1.4 billion in additional tax revenue.

We also worked out what would happen if Australia applied the debt loading rules Hong Kong does currently. Hong Kong disallows all deductions for related-party interest payments, making abuse of the system difficult. According to the latest ATO submission to the Senate tax inquiry, investment in the extraction of Australian oil and gas is almost entirely in the form of related-party loans.

Chevron Australia’s debt is entirely made up of related-party loans. If the Hong Kong solution was operating in Australia, we found that Chevron would have been denied A$6.275 billion in interest deductions, potentially increasing tax revenues by A$1.89 billion over the four-year period.

We also looked at ExxonMobil Australia, which also has high amounts of related-party debt (98.5%), and the Hong Kong solution would have denied ExxonMobil A$2.7 billion in interest deductions, potentially increasing tax revenue by more than A$800 million for the same period.

Changing the PRRT for more revenue

Our report also includes an analysis of the potential for additional revenue from replacing the Petroleum Resource Rent Tax (PRRT) with resource rent systems used in the US and Canada. Oil and gas sales have increased from an average of A$5.96 billion per year between 1988 and 1991, to an annual average of A$33.3 billion between 2012 and 2015, indicating the huge growth in this sector.

We modelled what would happen if the US and the Alberta, Canada, royalty schemes were applied to Australian production volumes and realised prices, to compare returns to those achieved by the PRRT.

The US royalty scheme charges a flat percentage royalty on production volumes, priced at the well-head. The royalty rate was progressively increased in the US from 12.5% to 18.75% between 2006 and 2008.

Based on the data from Australian production volumes and realised sales prices, the US royalty scheme could have potentially raised an additional A$5.9 billion in revenue for Australia since 1988, or A$212 million per year.

However, over the period from 2010 to 2015, the additional revenues would have been almost A$2.5 billion per year. This is because of both the decline in the PRRT revenues, relative to price and volumes, and the increase in the royalty rate in the US.

However, while the US scheme would raise more than the PRRT, the Alberta royalty scheme would raise substantially more revenue than both of these schemes. The Alberta scheme is progressive in nature, meaning the royalty rate increases with the realised price, similar to income levels and personal income tax rates.

The Alberta scheme has been amended many times and the current scheme only started in January 2017, so the full effects of this scheme will not be evident for some time. However, based on the data from Australian production volumes and realised sales prices, we calculate the Alberta royalty scheme would have raised an additional A$103 billion in revenue since 1988, or an additional A$3.7 billion per year.

As the scheme was only implemented this year, these results may be unrealistic, but are indicative of the level of revenue that could be raised. Over the period from 2010 to 2015, the additional revenue would have been A$11.3 billion per year.

The modelling done for our report considers just two multinational corporations, their use of debt loading and the PRRT. Now we can can hope for more revenue collection from many of the multinationals operating in Australia, as a result of the recent Federal Court ruling.

Critically, too often corporations are able to work within Australia’s tax rules to avoid paying for operating here, by constantly arguing they can’t develop business in Australia unless there are tax breaks. Our modelling demonstrates governments need to ensure corporations benefiting from the use of Australia’s resources are contributing the same as they do in other jurisdictions.

Roman Lanis, Associate Professor, Accounting, University of Technology Sydney; Brett Govendir, Lecturer, University of Technology Sydney, and Ross McClure, PhD Candidate, casual academic, University of Technology 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.