By MILLIE MUROI, Economics Writer
Earlier this week, a crucial piece of legislation made its way through parliament. It didn’t receive a lot of fanfare, but it’s a long-overdue tweak to our tax system.
You probably know companies such as Amazon, Apple and Microsoft. They’re multinational corporations that make hundreds of billions of dollars in profit every year, some of it right here in Australia – and probably from you as a customer.
Yet, the taxes they pay are not always proportional to the profit they’re pocketing. That’s something laws passed earlier this week seek to change.
Apple raked in an income of more than $12 billion in the 2022-23 period, according to the government’s transparency report. But it only paid 1 per cent tax on that income. How is that possible?
While the company tax rate in Australia is 30 per cent for most businesses with a turnover of $50 million or more, firms can reduce their taxable income and, therefore, the amount of tax they pay.
Some deductions are fair and reasonable: for example, claiming deductions for day-to-day business expenses including materials you need to supply a good or service. Other strategies are … questionable.
A business like Apple may not be breaking the law, but it can take advantage of different tax rates across the world.
Australia’s company tax is among the highest in the world. According to the Organisation for Economic Co-operation and Development, we were only trumped by one country: Colombia, where companies paid about one-third of their income in tax.
By contrast, countries such as Hong Kong, Singapore and the United Arab Emirates have much smaller company tax rates, making them attractive tax havens. Companies can sneakily shift their income to these countries or use cunning tactics to play the system to their favour.
Former economics professor turned Assistant Minister for Competition, Charities and Treasury Dr Andrew Leigh says the share of multinational companies’ profits passing through tax havens has soared. Back in the 1970s, virtually no multinational profits went through tax havens, he says. “Now it’s up to about 40 per cent.”
Stronger reporting requirements and wider availability of data have made it easier to spot when a company is skirting the rules, acting as a deterrent for businesses hoping to fly under the radar with sneaky tactics.
And in 2017, the Australian Taxation Office found itself in a legal battle in the ongoing crusade against companies paying less tax through loopholes in the system, coming out on top against resource giant Chevron.
The Federal Court ruled against Chevron’s use of an arrangement called related-party finance – commonly used by multinationals to reduce the tax they have to pay in Australia.
It’s where the local entity of a multinational firm borrows funds from its offshore counterpart, which sets much higher interest rates than would usually be reasonable. That interest flows back to the offshore part of that company and allows the Australian branch to claim higher tax deductions because interest payments can be a tax-deductible expense.
Chevron’s Australian subsidiary had taken a $4 billion loan from its US parent company to develop Western Australian gas reserves. This added to the local subsidiary’s debt pile, but allowed it to sidestep Australia’s 30 per cent company tax rate, with those interest payments instead being taxed in the US where the corporate tax rate was lower. In 2017, Chevron had paid no company tax in five of the previous seven financial years.
The Federal Court eventually ruled Chevron’s Australian subsidiary should not be allowed to claim interest on its borrowings from the rest of Chevron Group as if they were two standalone companies. In the 2022-23 period, Chevron paid more than $4 billion in tax.
However, Mark Zirnsak, secretariat for the Tax Justice Network, says that ruling has not closed the loophole entirely. Instead, he says Chevron got too greedy. “It’s still legal to claim the interest rate payment to yourself like Chevron did,” he says. “What the ATO contested was the rate of interest.”
Get it? If Chevron had just charged itself a standard rate of interest – similar to a bank – there would have been no issues.
Related party finance is just one of the many tricks multinationals use to dodge the Aussie taxman.
There’s also something called “transfer pricing” which companies such as mining giant BHP have been penalised for. For years, BHP was selling Australian iron ore and coal to its Singapore operation. Now, there’s nothing wrong with that – except that BHP was then selling these commodities for much more from its Singapore marketing hub to other nations.
Since Singapore has a much lower corporate tax rate, BHP was reducing its tax bill despite the coal and iron ore originally coming from Australia.
This week, the Australian government finally joined the growing army of countries – more than 135 so far – that have agreed to a global minimum tax of 15 per cent: A company with more than $1.2 billion in global revenue must pay at least 15 per cent tax across its global operations. Otherwise, the countries they’re doing business in can now get a bite of its untaxed profits.
This is supposed to deter companies from creating artificial structures in low or no-tax territories, such as the Cayman Islands, in a bid to avoid paying taxes in places where they actually do their business.
It’s also supposed to prevent a “race to the bottom” where countries compete for the lowest company tax rates to attract businesses. How? Because if countries charge company tax rates below 15 per cent, then other countries can impose “top-up” taxes.
Australia, for example, can now apply a “top-up tax” on a multinational operating in Australia if that multinational pays less than a 15 per cent tax rate wherever it does business globally.
Zirnsak says the 15 per cent rate is too low, but a positive change for now.
“The Biden administration would have liked to push it higher, and the Europeans were pushing for it to be lower, so at the end of the day, 15 per cent was a compromise,” he says.
“It’s no longer going to be a game where you can simply try and cheat the governments of the countries you’re actually doing business in through your artificial legal structures and working with governments that are happy to assist you in tax avoidance and profit.”
Leigh says the next step for the government is to crack down on tech giants, which have been more difficult to pin down. That’s partly because of the virtual nature of their services which has made taxing them properly an elusive exercise globally.
Of course, it’s a long-overdue change, and there’s lots left to do. But shifty multinational taxation tactics are being squeezed out.
It’s not just the big guys playing sneaky games. But as Leigh says, the local cafe you bought your coffee from today probably doesn’t pay an accountant exorbitant amounts to figure out how to minimise their tax.
“They don’t sit down at their weekly planning meeting and decide which country they want to pay tax in to minimise their tax.”
