Corporate tax reform stalls while government axes welfare

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As the government takes the long-handle to penalty rates, family benefits and climate-change funding – while dangling a $50 billion package of tax cuts in the direction of its big business party donors – it is worth bearing in mind that a third of Australia’s biggest companies pay zero tax.

Another third pay virtually zero tax, a feeble fraction of their profits.

Meanwhile, corporate tax reform has stalled. In the wake of the 2015 Senate hearings on multinational tax avoidance, the government introduced new legislation. One amendment, yet to be acted upon, requires multinationals to file proper financial statements, or “General Purpose” financial statements, so they can’t as breezily conceal dubious tax deals thanks to skimpy disclosure.

‘Special purpose’ approach by accountants hides corporate secrets

A second amendment is a simple transparency measure. For two years straight, the Tax Office has required large companies to make public their revenue, pre-tax profit and tax expense.

It is now on a list, published annually, and the most recent list came out in December. Now, with two years of data, patterns are beginning to emerge. Above all, it is clear that tax avoidance is rife among big companies, particularly multinationals operating here.

Just on the issue of transparency, most of the companies we are dealing with here are not listed on the Australian Securities Exchange. Those which are listed on the ASX – such as BHP, Rio, the banks and Telstra – typically pay a lot more income tax than the multinationals on the Tax Office list.

This has everything to do with transparency, and this is why transparency, indeed further transparency reform, is absolutely critical for the future of this country.

ASX companies have to file public accounts, these are General Purpose accounts, rather than the shifty “Special Purpose” variety favoured by multinationals.

The non-ASX companies on the list mostly file inadequate financial statements, they mostly pay far less tax, and if a stakeholder wishes to purchase these accounts he or she will have to pay the corporate regulator the highest search fees in the world. Therefore, these so-called “public financial statements” are not really public at all. They are inaccessible due to price.

Investigation: ASIC fees highest in world, even before data sale

Visibility and disclosure serve as a deterrent to tax evasion and tax avoidance. They ensure better corporate behaviour. So much more needs to be done.

The latest batch of data filed by the ATO under the recent transparency laws shows more than 600 companies paid zero tax on $330 billion in income. Only 600 companies on the list of 1900 actually pay the statutory 30 per cent corporate tax rate. And even then, most pay a fraction of what they should.

It would seem pointless and unfair therefore to lavish these companies with tax breaks, as is the government’s intention, when they already fail to pay their fair share. After all, 20 per cent of zero is the same as 30 per cent of zero.

The more pertinent question is: what can be done about this epidemic of tax dodging by the world’s largest companies? Transparency is the first thing. Then there are loopholes which ought to be closed.

A good deal of the tax mischief comes down to companies claiming deductions against their income. Did these 600 companies which paid zero tax claim 100 per cent of their total income, their revenue, in tax deductible expenses?

A large amount it would appear. In most cases a large proportion of pre-tax profit will have been ripped out by “service agreements” with associates in tax havens. Transfer pricing too accounts for large licks; and much will have been siphoned offshore in dividends on equity (Exxon), interest on loans to related parties (William Hill and Glencore) and royalties on intellectual property (IKEA and Big Pharma).

The most obvious message to emerge from the ATO figures is that income is suspiciously high when compared with net profit. Bear in mind that it is the aim of multinationals to make as little taxable profit in Australia as possible.

Therefore bulking up costs in Australia and funnelling profits offshore to lower tax jurisdictions is de riguer.

They all do it, though some are far more aggressive in their tax structures than others and many claim tax deductions in Australia for work carried on overseas.

A good example of this would be IBM, whose Sensis bungle put it in the spotlight. IBM Australia, when asked if it was claiming deductions for the Sensis work “offshored” to Asia, declined to comment.

Multinational expenses: it’s all show

According to engineer and financial analyst Martin Lowry, who has crunched the ATO numbers, an extra $40 billion could be raised if the government was to end the lurk of companies claiming deductions for their offshore operations and put a ceiling on tax deductible expenses.

“Some of these 600 companies have offshored many of their core operating functions – IT, HR, payroll, accounts, purchasing, procurement – into Asia but seem to be claiming a tax deductible expense in Australia for these costs incurred overseas,” says Lowry. “This means Australian taxpayers are subsidising overseas employees.”

Lowry notes that 600 companies paid tax on 10 per cent or less of their total incomes, by claiming 90 per cent or more of their income in tax deductible expenses. This, he calculated, equates to a further loss in tax receipts to government of $30 billion.

Limiting tax deductible expenses, as recommended by the Finance Department, “would raise an extra $40 billion for health, education, infrastructure and much needed and fairer GST distribution to the states.

“Also, this ATO data indicates that the cost to drop the company tax Rate by 1 per cent, from 30 per cent to 29 per cent of taxable income, would cost $2.1 billion in the first year, not $10 billion which is the figure being published in the media.

“The reason it is only A$2.1 billion, directly relates to the number of companies not actually paying their current tax obligations.”

How Adidas and its auditors managed to file their accounts late for 16 years

Summarising the ATO data published online for both 2014-15 and 2013-14 years, Lowry found:

· Around one-third are paying zero company tax on total and taxable incomes (many of the entities are trust structures which means it is incumbent upon the members of the trust to pay tax, not the trust).

· The average percentage of tax payable with respect to total incomes is an extremely low at 2.35 per cent (taxing revenue at 3 per cent therefore would raise more money than taxing “profits” at 30 per cent).

· The average percentage of tax payable with respect to taxable incomes is only 23.52 per cent to 24.81 per cent, far lower than the upper end of individual PAYG tax rates.

· Taxable incomes, on average, are only 10 per cent of total incomes.

· Deductions available to large corporations are not available to small companies or PAYG taxpayers.

· Australian PAYG taxpayers are subsidising foreign investors. The playing field is not level.

Despite the new transparency regime, Martin Lowry says it is obvious the government has failed to crunch the numbers itself.

“There was absolutely no mention of this damning data in either the 2016 Federal Budget or the 2016 MYEFO report”.

  • Neale Murden

    Franking credits on dividends paid to shareholders means that the final rate of taxation on company profits is probably far less than the headline rate of 30%. This is due to the marginal tax rate of many shareholders, such as retirees, being less than the company tax rate – resulting in franking credits being refunded to those persons. Shares held through superannuation funds, which are substantial, are apparently taxed at 15%, rather than 30%, again resulting in franking credit refunds or offsets. The final rate of taxation on company profits may be substantially less than anyone is estimating, but, I doubt that there is any reliable data on this.

    • Michael West

      Very good points Neale. Also raises the question of how much tax is paid by trust members (say Sydney Airport) in Caymans etc. I should raise franking credits in the next piece.

  • Sally Ann Chapman

    Wish more folks would read your articles. Always makes the important points that are not included in the usual ‘spin’ regarding ‘budget repair’. Thanks.

  • martin lock

    Only foreign shareholders, not Australian resident shareholders, stand to benefit from a cut in Australia’s company tax rate. Foreign shareholders include not just foreign individuals but also foreign companies, such as overseas-headquartered multinationals. If Australia’s company tax rate were cut by say 5%, Australian shareholders would have their franking credits cut to the same extent, meaning their overall tax bill would go increase, or their overall refund reduce – a nil sum game. (The same is true for Australian super funds holding Australian company shares: an overall nil sum game for their members.) This won’t happen to foreign shareholders,however, since they don’t come under the franking credit system; any cut in the company tax rate is simply a bonus for them, a bigger dividend. Also, to the extent the Australian company retains and re-invests its profits rather than distributes them, it too would benefit from a tax rate cut by pocketing the additional after-tax amount.

    As for companies claiming overseas costs against their Australian taxable revenue, the current law doesn’t generally discriminate on the basis of where costs arise, so long as they are ‘attributable’ (???) to that income. The problem is that multinationals often have vast networks of global operations, so that often it will be extremely difficult to challenge their claim that an amount of overseas expenses ‘in fact’ pertains to the revenue of their Australian subsidiary or branch. Even deciding where revenue itself is earned can be hard, such as with IT providers operating in the digital space.

  • Simon Thompson

    just found your site (yet to contribute). Excellent work, thanks. I am a follower of Get Up, but even from the first two articles, I can see the depth of your research. You also avoid the emotive language and hype. Really appreciate the enlightening articles, I look forward to more, and I am certainly promoting you on FB.