When chairman Peter Costello emerged to defend the Future Fund’s dozens of tax haven entities in the aftermath of the Lux Leaks scandal, he was correct in pointing out that these murky structures were not designed to avoid tax in Australia.
They are designed to avoid paying tax to other governments.
Thanks to the power of vested interests, there is a lack of leadership in the tax field.
Costello cited the doctrine of “sovereign immunity”, whereby the state cannot commit a legal wrong and is immune to civil and criminal prosecution. This is arguably a valid point but the sovereign state should also be held to a higher standard of corporate behaviour, so that private corporations might follow its example and refrain from deploying devious schemes to skive out of their legal and civil obligations.
Thanks to the power of vested interests, there is a lack of leadership in the tax field. Not only is the government compromised by its tax havens, but so are the four big audit firms compromised by their tax policy advice to government on one hand and their tax avoidance advice to large clients on the other.
Then there is the business lobby, whose peak body emerged recently with its latest advice to government on tax reform.
Some sympathy might be accorded the Business Council of Australia. Its membership – the chief executives of the nation’s largest companies – embraces both the “lifters” and the “leaners”. Side by side with the lifters, such as the banks and supermarket giants, are the leaners, such as Google Australia, Sydney Airport and News Corp.
Lifters BHP and Rio are there with leaner Glencore, and lifter Caltex Australia with leaners Shell and Chevron. Leaner facilitators are there in large numbers: PwC, Ernst & Young, Deloitte and KPMG, and law firms Ashurst, Freehills, Mallesons and Clayton Utz, alongside banker facilitators UBS and Deutsche.
How they can speak credibly with a unified voice stretches the imagination.
But they do. Wesfarmers chief Richard Goyder, for example, came out rather heroically in public to decry tax avoidance, as did Gerry Harvey, who is not a member. Otherwise there has been a dull silence, despite the gravity of the matter for all Australians.
The suggestion from the BCA’s latest manifesto on the subject, “Future of Tax”, is that the country’s crisis in foreign multinational tax avoidance will somehow go away simply by lowering the corporate tax rate.
While they somehow manage to frolic around the elephant in the fiscal room, their answer for the country’s woes, as usual, seems to reside in cutting workers’ wages and conditions and increasing the GST.
The following analysis is largely the work of a contact who is an expert in multinational financing but who wishes to remain anonymous.
The Future of Tax paper is described by the BCA as the first in a series of papers to be issued in the lead-up to the Commonwealth Government’s tax white paper process. It will form part of BCA’s proposed platform for discussion. It appears to cherry pick elements of the Henry review, which suit its members even though Henry’s paper was intended to provide a balanced, holistic approach to reform.
It makes a worthwhile contribution to the debate in many respects but reflects a strong bias in favour of market fundamentalism.
The Henry paper also advocated lower corporate tax rates, of 25 per cent, but its assumption for transition is that the current tax system is working as intended. Henry recommended a reduction in the corporate tax rate occur over the short to medium term. He cautions that this is subject to economic and fiscal circumstances.
The BCA paper makes no mention of tax avoidance by foreign multinationals and excludes discussion of the problem. Its apparent assumption is that the government has an expenditure problem but does not have a revenue problem.
It could therefore be deduced that the BCA might lobby to exclude the subject of multinational tax avoidance from the agenda of the Senate inquiry into tax avoidance slated for next year. The parliamentary inquiry was announced in the wake of coverage by Fairfax Media of multinational tax avoidance – and of a report by the Tax Justice Network on the tax minimisation of Australia’s largest companies.
While the corporate income tax rate in this country is at the high end of the scale internationally and might indeed be a factor that could discourage investment by corporations, the paper appears to assume that lower taxes and regulation will automatically encourage investment.
The BCA paper attempts to cover the impact of tax rates on competition but fails to address the unfair advantage that tax avoidance has in competing with entities that pay their Australian tax obligations in full.
Google’s offering to Australian advertisers, for example, might present many potential technical benefits, but the pricing of its offer is able to undercut other media forms because Google has been allowed to get away with paying no income tax in Australia on its Australian-sourced advertising revenue. Harvey Norman and other furniture retailers are at a similar disadvantage against Ikea. There are numerous other examples that are of significant cost to fair competition in Australia and the Australian government’s revenue base.
Multinationals continue to undercut the market because their group’s real profit is derived from getting away with transfer pricing most of the margin through low tax regimes or tax havens leaving the group in a better after-tax position.
If foreign multinationals were obliged to deal on a true arms-length basis and pay tax in Australia they would be forced to compete fairly with Australians. With fairer competition, Australian citizens and governments would retain more of the wealth they generate, create more jobs for Australians and leave the nation better equipped to sustain or improve economic growth.
Were the BCA advocating in the cause of all business in Australia, let alone for the beleaguered individual taxpayer, such concerns would surely be addressed.