The number one weapon of the multinational tax avoider is secrecy. Together with tougher enforcement, transparency laws enacted three years ago have brought billions of dollars into Commonwealth coffers. More disclosure is vital, writes former Tax Office official, Martin Lock. Lock also questions tax breaks on offshore loans which spur the toxic practice of “debt-loading” where foreign companies rake out millions in interest payments on loans from their associates overseas.
When it comes to corporate tax avoidance, there is a question no-one asks: what valid reason can there be for public companies to have tax secrecy?
Tax secrecy was designed to protect an individual’s privacy: it’s not for the world to know my or your financial affairs.
Public companies aren’t by definition private, and they are not people. So, why tax secrecy for them? The argument presumably is that disclosing what’s in their tax returns could and would undermine their economic competitiveness and, by extension, the efficiency of capital markets generally.
How so? Where’s the evidence? What particular information in a return would do that? Let’s invite the arguments, the examples, the explanations, and let’s test them.
I suspect there are no valid arguments. It’s all about concealing tax avoidance, not protecting business competitiveness. When companies grudgingly had to yield to laws compelling them to publish their executive remuneration, the capital markets didn’t collapse. Besides, there’s already a wealth of information in annual reports disclosing company goings-on, so what exactly is inside a tax schedule that needs to be so jealously guarded from public eyes?
I can’t think of anything. It’s not as if tax returns disclose a company’s secret chemical formulas, business models or planned takeovers. Moreover, it’s contrary to the interests of economic and market efficiency for companies to gain a competitive advantage through manipulating their tax bills. So what are the valid arguments?
Another point of course is the tax laws themselves. Multinationals would not be debt-loading their Australian subsidiaries if they had to pay a standard 30 per cent company tax rate, instead of the present 10 per cent or less withholding tax, on the derived interest. And if they debt-loaded anyway, it wouldn’t matter.
For some reason, unknown to me, the tax rules for equity are less generous, which is why multinationals intra-fund with debt not equity.
Though the tax rate on unfranked dividends paid to a foreign company can be as little as 5 per cent, or even zero, that low rate applies only under particular treaties. Unlike with interest, a full 30 per cent withholding rate applies to unfranked dividends paid to a tax haven-domiciled company, not a ridiculous 10 per cent.
The stock-standard argument for low tax on interest is ‘to encourage foreign investment into Australia’ because Australia allegedly can’t raise sufficient capital itself (not, it seems, even after more than 200 years of settlement).
But where’s the evidence of this inability? For what kinds of investment do we need this mountain of foreign capital, in which industries and from which investors, and why doesn’t the same argument apply to equity investment?
If the debt investors are those in manufacturing, they’ve mostly disappeared. I don’t think they’re in housing and construction. Mining? If it’s retail, would the ‘investors’ suddenly ditch Australia if they had to pay tax on interest?
Or would they just pass on the cost to their customers? And how many of the so-called needed “investors”, corporate or otherwise, are just predatory financial engineers, speculators, rent-seekers, Macquarie-Bank types and corporate raiders and vultures?
How much investment is from unrelated lenders genuinely looking for a higher after-tax return, and how much is just corporate group, in-house, money-shuffling by another name, economically no different to equity except for the tax advantage?
A fortune in capital that we allegedly can’t and have never been able to raise ourselves is locked away in Australian super fund deposits, invested overseas. If that money were invested here instead, the questionable argument about the need to raise foreign capital might fall away.
Martin Lock is a former head of withholding tax at the Australian Taxation Office