How Albanese is tighten up on tax-dodging multinational companies

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.”

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It's time to dig deep - but not deeper than the taxman expects

I have a request to make of all Australian taxpayers: please give more to charity because you’re making me look bad. Like a cheat, in fact. I’ll explain shortly, but first, a self-interested public service announcement. Hurry, hurry, hurry. You have only the rest of this week to make a tax-deductible donation if you want to get some of it back in your next tax refund.

June 30, the biggest day of the year for the nation’s accountants, is fast approaching. It’s also the most important time of year for the nation’s charities. If you’ve ever made a donation to any of them, I bet they sent you a letter in the last few weeks reminding you how good it would be if you did so again ASAP.

But, as we were reminded by a strategically placed story last week, this is likely to be a bad year for charities. Why? Because in a cost-of-living crisis many of us decide that charity begins at home.

According to polling by academics at the University of Queensland, 78 per cent of people have reduced their donations because of the crisis facing their own budgets.

This is particularly bad timing for those charities that help people having trouble affording food and other necessities, such as the Salvos. The demand for their services has jumped for the same reason people are finding it harder to give. (Yes, the Salvos have “reached out” to me lately. And as I did myself in my uniformed youth, they waved a collection box under my nose.)

Perhaps it’s the accountant in me that makes me particularly attracted to donations that are tax-deductible. As everyone soon learns, you can’t make a profit out of tax deductibility. You can only reduce a cost.

But I like it because it lets me send a bit of taxpayers’ money in a direction chosen by me, not the politicians. The pollies mightn’t give a stuff about the wellbeing of refugees and asylum seekers, but I do. And to some small extent, I can make them kick the tin.

Also last week, purely by chance, I’m sure, we were reminded that, though Australians like to think of themselves as generous, we’re actually tighter than people in other English-speaking countries. Even the Kiwis are more giving than we are.

Which brings me to my beef about donations. Now, I’ve long been a defender of the Tax Office. It does an important job in making sure we pay as much tax as we should. One reason I got out of accounting was because I decided the only interesting part of it was giving tax advice, but I didn’t want to spend my life helping the well-off avoid doing their duty to the community.

But a few weeks ago, I got a letter from the Tax Office, via the myGov website, naturally, that was the strangest I’ve ever had from them. And it really pee’d me off.

The standard form letter said they’d happened to notice that my claim for donations was a lot higher than other people’s, and they were just wondering whether I might possibly have made some mistake.

They hoped I knew you could only claim for donations to outfits that had been awarded tax deductibility. And they hoped I knew I shouldn’t be claiming for any donation for which I couldn’t produce a receipt.

If, on reflection, I realised I had made some terrible “mistake”, I was free to amend my return and thereby, they hinted without saying, avoid possible further investigation and penalty.

But, failing that, there was no suggestion I do anything about their veiled accusation, except, presumably, sit there shivering, waiting for the taxman’s knock on the door.

It may be true, as coppers always say, that if you’ve done nothing wrong you’ve got nothing to fear, but that doesn’t stop you resenting an unwarranted insinuation that you’re dishonest.

What gets me is that, knowing my claim was large, I would have happily included a detailed list with my return, but the taxman made no provision for me to do so. Nor, when he sent his accusatory letter, did he invite me to explain or substantiate my claim.

And I get the feeling that the taxman’s algorithm just found an outsized number and dispatched a letter without further consideration. Did he know that I always make a big claim? Did he allow for the likelihood that people on high incomes can afford to be more generous? Did he note that I’d been a tax agent for many years and so didn’t need reminding of the rules?

Well, I know the taxman doesn’t want to be burdened by any extra information from me, but I’ll give him a heads-up anyway. My claim for this financial year won’t be as big as last year’s, but the one for next year will be a whopper. I’m thinking of setting up a charity of my own. All above board, naturally.

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My new hero, Mathias Cormann, now valiant for truth

I find it hugely encouraging. Don’t know if you’ve heard the glad tidings but, on his road to Damascus – or, in this case, Paris – our own Mathias Cormann, former senator and minister for finance, has experienced a miraculous conversion. He’s gone from persecutor of those who care about climate change to being a leader of the cause.

As we said in my Salvo youth, there is much joy in heaven over one sinner that repenteth. I bet Brother Scott’s joy is unconfined.

And it’s clear from Cormann’s first speech as Secretary-General of the revered Organisation for Economic Co-operation and Development that he’s seen the light on a lot more than climate change. Indeed, the new man is exhibiting a distinct air of wokefulness. He’s now valiant for “stronger, cleaner, fairer economic growth”.

Speaking to a meeting of the OECD’s 37 rich and wannabe-rich member-country Council at Ministerial Level last week, Cormann said: “We need to continue to overcome the immediate health challenge, including by pursuing an all-out effort to reach the entire world population with vaccines.

“This is not just an act of benevolence from advanced economies. It is about sustained virus protection for all of us and about giving ourselves the best chance of a sustained recovery.”

Enlightened self-interest. I love it.

Cormann hasn’t changed his tune on chasing down slippery multinational tax avoiders. “It is very important we [the OECD] continue to lead the global fight against tax evasion and multinational tax avoidance and to ensure that digital businesses and all large businesses pay their fair share,” he said.

“We need to complete this work, including by facilitating agreement on an appropriate minimum level of global taxation and by minimising the profit-shifting that has accompanied the digitisation of our globalised economy.” All well and good.

On other matters, where I come from, there was nothing we enjoyed more than hearing some reformed Trophy of Grace testifying to his former wicked ways. As finance minister, Cormann led the Coalition’s repeated cuts to our overseas aid budget which, as a poor country with a big debt, we were told, we could no longer afford.

The reborn Cormann sees it differently. “We [the rich OECD countries] must also continue to strengthen our development co-operation. Low-income countries need our co-operation more than ever – to ensure access to vaccinations, to trade, to financing to help them deal with the climate challenge,” he said.

Cormann, you recall, was one of Tony Abbott’s lieutenants in abolishing Labor’s (already watered-down) minerals resource rent tax and its “price on carbon”.

At the time we were led to believe Julia Gillard’s carbon tax was the reason the retail price of electricity had risen so steeply. Turned out it was just a small part of the story. Prices stayed high.

But, in any case, new insight has come to Cormann in a blinding flash. “Market-based economic principles work,” he now sees. “Global competition at its best is a powerful engine for progress, innovation and an improvement in living standards.”

True, he admits, competition can be uncomfortable. “It can lead to social disruption which, collectively, we need to better manage.” Love that new thought that we ought to do more things “collectively”. Doesn’t quite roll off Cormann’s tongue, but he’s getting there.

“We need to ensure access to high quality education, upskilling and reskilling to ensure everyone can participate and benefit. We need the necessary social supports for those who struggle,” he said.

Amen to that. No hanging the unis out to dry during the pandemic. No spending a decade starving technical education of funds.

On climate change, he tells us that “more and more countries are committing to net-zero emissions as soon as possible and by no later than 2050.

“The challenge is how to turn those commitments into outcomes and to achieve our objective in a ... way that will not leave people behind.”

It’s easy to be cynical. In my youth, working in a big private-sector bureaucracy and watching people fighting their way to the top, I formed the view that many people were happy to adjust their views to fit their new role in the organisation.

When, with much assistance from the Morrison government, Cormann was travelling the world canvassing support for the top OECD job, many environmental groups were loudly opposing his candidacy. They failed to anticipate the fluidity of his views.

In my limited contact with the man, I found this Rocksolid Roarer of the Right friendly to the point of charming. Remembering how successful he was at getting crossbench Senate support for the government’s controversial measures – and at so little cost to the exchequer – I think he has just the right qualities to succeed in bringing the OECD’s divers members to agreement.

And, after all, he wouldn’t be the first person lately to realise that the climate worm has turned and fossil fuel’s days are ending.

Benediction from the Apostle Mathias: “Protecting ourselves from competition and innovation does not stop it from happening elsewhere – it just means that, over time, those who find themselves behind those protective walls fall further and further behind.”

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Business is busier dividing the cake than making it grow

The developed world’s economists have been racking their brains for explanations of the rich countries’ protracted period of weak improvement in the productivity of labour. I’ve thought of one that hasn’t had much attention.

Productivity isn’t improving as fast it could be partly because of the increasing number of our brightest and best devoting their efforts to nothing more productive than helping their bosses or customers game the system.

That is, helping them find ways around our laws – tax laws, labour laws, even officially supported accounting standards for how profits should be measured and reported.

What put this into my mind was all the kerfuffle a few months ago when Labor announced its plan to abolish refunds for unused dividend franking credits.

When Paul Keating introduced dividend imputation in 1988, unused credits weren’t refundable. Only in 2001 were they made so by John Howard. At first, the cost to the budget of this minor concession was tiny. Over the years since then, however, the cost has blown out extraordinarily.

Why? Because a small army of accountants, lawyers and investment advisers started advising their clients (many of whom can’t use their franking credits because they pay no tax on their superannuation payouts) on how to rearrange their share portfolios to take advantage of the new refund.

Thus did they turn a small concession into a hugely expensive loophole. Scott Morrison’s claim that Labor had overestimated the saving to be made by closing the loophole rested on his since-refuted assumption that it had failed to take account of the way the small army would respond by further rearranging their clients’ portfolios.

But that’s just one example. The truth is that helping their customers steal a march on the government is one of the main services the entire investment advice industry uses to justify its fees and commissions.

A particular favourite is helping people with loads of super turn the cartwheels necessary to frustrate the means-test rules and still get a part pension.

Some tax agents help their clients pad out their work-related tax deductions so the punters’ tax refunds are big enough to have the agents’ fee deducted without them feeling much pain.

For years, starry-eyed economists exulted in the phenomenal growth of the banking and financial services sector on the grounds of all the financial innovation going on.

Post the global financial crisis it’s clear much of the innovation was no more productive than finding new ways to minimise tax or get around financial regulations. And, of course, all the advances in “risk management” turned out to be more about slicing, shifting and hiding risk than reducing it.

It’s an open secret that our compulsory super system leaves employees open to hugely excessive fee charging, as layer upon layer of “advisers” clip each other’s tickets and send the bill to the mug savers.

The banks’ volume of trading of currencies, securities and derivatives in financial markets exceeds by many multiples the amount required to service the needs of their real-economy customers – or even to keep markets “deep” (able to process big transactions without shifting the price much).

The banks are just betting against each other - meaning much of the bloated financial sector’s activity isn’t genuinely productive.

And now there’s the “gig economy” – Uber, Airbnb, fast-food delivery services and all the rest.

They represent a strange amalgam of genuine innovation – using the internet and smart phones to bring buyers and sellers together much more efficiently than ever before – with a lot of terribly old-fashioned tricks to get away from the tax, labour and consumer protection laws faced by their conventional competitors.

"Oh no, the people who drive cars, ride bikes or do odd jobs at our behest aren’t our employees. Gosh no. So if they don’t pay their tax, make super contributions or insure themselves, it’s nothing to do with us."

Note that even if all the cost saving extracted from the hides of these poor sods was passed on to customers, it would still be less a genuine efficiency improvement than a mere income transfer from unempowered workers to consumers, most of whom are not in need of a free kick at other people’s expense.

Now, it’s true most of the practices I’ve described are perfectly legal. And many people have convinced themselves that if it’s legal it must be moral. But they can’t have it every way: it may be legal and even moral, but what it’s not is particularly productive.

For many years business people loved to lecture the rest of us about the need to grow a bigger pie, not squabble over how the pie was divided.

Turns out a surprising amount of business activity involves ensuring their slice is bigger than yours. If so, don’t be surprised productivity improvement is slow.

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Turnbull changes tune for a lower-taxes election

Q: When is a move to increase tax collections not a move to increase taxes? A: When it’s an “integrity” measure.

The overwhelming purpose of this year’s budget has been to portray the Turnbull government as committed to lower taxes – not like those appalling Labor Party people, who want to whack up taxes everywhere.

Hence Scott Morrison’s seven-year plan to cut personal income tax at a cumulative cost of $144 billion over 10 years.

The government’s determination to push on with cutting the rate of company tax for big business is further proof of its commitment to lower taxes.

Trouble is, Malcolm Turnbull’s true conversion to the Down, Down Taxes Down party is rather recent.

Go back to his previous pre-election budget, in 2016, and he was busy increasing taxes to help pay for his 10-year phase-down in company tax.

If you remember, that budget copied Labor’s plan for four years of huge increases in tobacco excise, introduced the Coalition’s version of Labor’s major cutbacks in super tax concessions to high-income earners, introduced its own version of a tax on multinational tax avoiders and a “tax integrity package” establishing a tax avoidance taskforce.

Turnbull also explored the possibility of doing something to match Labor’s plan to curtail negative gearing, but finally decided that doing nothing would make easier to portray Labor as the high-taxing party.

Coming to last year’s budget, the government stuck with its company tax cuts, but still needed revenue. ScoMo announced a new tax on the five major banks and, from July 2019, an increase in the Medicare levy from 2 to 2.5 per cent of taxable income, to cover the rapidly rising cost of the National Disability Insurance Scheme.

This budget included another tax integrity package, which extended the special reporting requirements on payments to contractors and improved the “integrity” of GST payments on property transactions.

Now this year’s budget. This time a “black economy package” involving “new and enhanced enforcement” and further extension of reporting requirements on payments to contractors.

That’s not to mention a once-off draw-forward of duty on tobacco, “better targeting” of the research and development tax incentive, “ensuring individuals meet their tax obligations” and “better integrity over deductions for personal super contributions”.

All told, these “integrity measures” are expected to raise almost $10 billion over four years – though remember that when the tax man (or Centrelink) estimates that a new crackdown on the crackdown will raise $X billion, we have no way of knowing whether that guess proved to be too high, too low or spot on. Hmmm.

That $10 billion compares with the first-four-year cost of the personal tax cuts of $13.4 billion. But something the media has judged far too conceptual to adequately report is the decision not to go ahead with the 0.5 percentage point increase in the Medicare levy.

Deciding not to do something you hadn’t yet done adds to zilch, doesn’t it? Not if you’ve ever heard of opportunity cost. Nor if you know how budgets are constructed. The change of tune worsens the budget bottom line by $12.8 billion over four years – almost doubling the budgetary cost of the actual tax cuts.

It’s not hard to see why Turnbull lost his enthusiasm for securing the funding of the disability scheme. Bit hard to claim to be the champion of lower taxes when, with the other hand, you’re putting ’em up. (Just as long as the punters don’t notice your third hand adding to the tax system’s “integrity”.)

Equally debatable is ScoMo’s claim to be the scourge of bracket creep. Since the disaster of its first budget cured the government of any real desire to cut government spending, its main strategy for returning the budget to structural surplus has been to sit back and wait for bracket creep to do the job for it.

Had the government been travelling better in the polls that might still be its budget-repair strategy, rather than throwing the switch to fanciful fiscal forecasts.

But with bracket creep pushing up tax bills every year since the last tax cuts in 2012, beware of ScoMo playing a three-card trick: cuts that should be regarded as the partial restoration of past bracket creep being packaged as protection against future creep.

As ScoMo’s three-step, seven-year tax plan now stands, the huge proportion of taxpayers still earning less than $87,000 a year would get a tax cut of $10 a week to compensate them for all the bracket creep they will have suffered during the 16 years to 2028-29.

Don’t get me wrong. I think we should be paying higher taxes to cover the ever-better public services we unceasingly demand. The actions of both sides of politics say they agree with me. It’s just their words you shouldn’t believe.

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Morrison's peculiar tax cuts designed to hide the truth

As a boy I was interested in magic tricks, reading lots of books and learning to do a few. It taught me two terms that have proved invaluable to me as an economic journalist: “prestidigitation” and “sleight of hand”.

The trick is to draw the audience’s attention towards something else so they don’t notice you palming the coin or grabbing the rabbit you’ll supposedly produce from your top hat.

Politicians and their spin doctors are always trying to divert our attention from some embarrassing stuff-up, but it’s come to something when a treasurer produces a budget as tricksy as Scott Morrison’s effort last week.

His description of his three-step, seven-year tax cut, why it’s needed, and what it would achieve, were all calculated to mislead. Each part of his claim that it would bring about “lower, fairer and simpler” taxes is open to dispute.

The peculiar design of his cuts gives prominence to his immediate but modest cuts for “low and middle income earners”, while playing down the much more valuable cuts going later to the well-off (including a certain economic journo – in year seven I’m looking at a saving of $7225 a year).

If you’re out to bamboozle, it’s easy to do it with numbers. Income tax is complicated because it involves your income being taxed in slices, with the rate of tax on each slice getting progressively (note that word) higher.

At present, the tax rates start at zero for the first $18,000-odd of annual income, then 19 per cent for the next $19,000-odd, then 32.5 per cent for the next $50,000, 37 per cent for the next $93,000 and 45 per cent for everything over that total of $180,000.

Many people imagine the rate they pay on the last slice of their income (their “marginal” tax rate) is the rate they pay on all of it but, clearly, their overall average rate of tax will be much lower.

People on more than $200,000 would see no reduction in their marginal tax rate of 45 per cent. Their eventual saving of a flat $7225 a year comes from all the increases in the size of the slices that are taxed at lower rates than their marginal rate.

Morrison claims his plan is fair because lower income-earners would enjoy the biggest percentage reductions in their tax bill. People earning $30,000 a year would get an 8.3 per cent reduction in their tax over the seven years, he says, compared with a 2.5 per cent reduction for those on $200,000.

This is true, but it’s just playing with percentages. You’d hope the Treasurer was sufficiently numerate to understand that even a small reduction in a small amount will be a higher percentage than a much bigger reduction in a really big amount.

There was a time when the cover price of this august organ was raised from one penny to two. You could call that a 100 per cent increase but, even in those days, a penny wasn’t a lot of money.

What matters when comparing your tax cut with mine is not the percentage reduction in the tax we each pay, but the amount of each person’s tax saving compared with the amount of their income. As a tax economist would put it, what matters is the percentage-point change in someone's overall average rate of tax.

Turns out the average tax rate of someone on $30,000 would fall from 8 per cent to 7.3 per cent. They’d save an average of 0.7¢ for each dollar of income.

Someone on $200,000 would see their average tax rate fall from 33.6 per cent to 30 per cent, a saving of 3.6¢ for each dollar of income.

On incomes up to $100,000, the saving varies around 1¢ in the dollar, then rises steeply up to the peak of 3.6¢ at $200,000. That’s fair?

But Morrison is happy to justify the much better deal he wants to give very high income-earners. He repeats a favourite complaint of the rich, that the 3 or 4 per cent of all taxpayers on the top marginal tax rate pay 30 per cent of all the income tax raised.

This is classic fiscal sleight of hand. For a start, it ignores that the tiny band of tax martyrs also earn a huge share of the total income. More than 18 per cent. But that’s just their taxable income, after they’ve done all they can to minimise it.

The economist Saul Eslake reminds us that the martyrs account for more than 22 per cent of all taxpayers claiming net rental losses on negatively geared properties, and for more than 13 per cent of total losses. They account for 64 per cent of the annual value of realised capital gains, only half of which is taxable.

Another part of the illusion is that the rich whingers want us to forget that personal income tax is just the biggest and most visible of our taxes. It accounts for only half of all the federal tax we pay, and when you add in state taxes its share falls to 40 per cent.

Most of those other taxes, particularly the GST and sin taxes, are “regressive” – the poor lose a higher proportion of their income than the rich. Take account of the other 60 per cent of tax collections and our top earners aren’t as badly treated as ScoMo wants us to believe.

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Reserve Bank spells out company tax choices to politicians

The pollies can't help themselves. When the Reserve Bank heavies make their regular appearance before the House of Reps economics committee, the main game is to get the governor to say something that favours your side of politics and gives the finger to the other side.

So, when Dr Philip Lowe and friends appeared before the committee a fortnight ago, the Liberal chair of the committee, David Coleman, saw his chance to get Lowe to repeat his remarks in favour of cutting the rate of company tax to make it internationally competitive, remarks that drew headlines of Governor Slams Labor in the national press.

Sorry, Lowe had seen this game before, and wasn't playing. He'd switched to "analytical" mode. In truth, he was backing off at a rate of knots.

Tax, he said, is one of the considerations that internationally mobile capital takes into account when deciding where to do investment, but only one.

"There are a lot of other factors as well," Lowe said. "The kind of legal and political environment, human capital [how well-educated our workers are] and all the other things we value in this country."

Corporate tax rates had been edging down around the world, but in the post-crisis environment some countries had seen lowering the corporate tax rate as a potential strategic advantage to attract business from elsewhere, so we heard governments talking about 15 and 20 per cent rates, he said.

"I think you could argue … that, from a global perspective, this is not actually that useful, because the lowering of the corporate tax rate from one country to another just changes the location of investment and does not increase aggregate [global] investment.

"I hear some economists saying that in a perfect world we would have a common global corporate tax rate, so business would decide where to locate based on the strategic and comparative advantages and not on corporate tax.

"But that is not the world we live in."

So the analytical choice the Parliament faced was to respond to this international competition or to say, "No, we are not going to respond to that because we have other advantages that [make] people want to invest in Australia", he said.

"Australia has other advantages, and the tax system is supposed to deal with issues other than attracting investment – there is equity and fairness and other considerations," he said.

Soon it was time for another Liberal, Scott Buchholz, from my ancestral home of Beaudesert, to try his luck with the assistant governor economic, Dr Luci Ellis. Sorry, no luck.

"If you are a primarily locally oriented corporate entity, you have dividend imputation and it is more or less irrelevant what the corporate tax rate is from the perspective of people who wish to invest in your firm," she said.

"That is also true for the very large pool of superannuation savings that we have in this country."

So the benefit from cutting the company tax rate was limited to its ability to attract investment from foreigners.

But not all foreign capital was equally valuable. Foreign direct investment, she implied, was more valuable than portfolio investment involving "purchasing of existing securities or existing assets [such as businesses]".

Direct investment was where, if the decision to cut the rate was put off, this could "potentially be more damaging to an economy" but – here comes the two-handed economist – "investors think about more than just differential tax rates when they are making foreign direct investment decisions".

"Also," Ellis went on, "you have to remember that many multinational corporations do have the capacity to decide where the revenue [they earn in Australia] is recognised".

"To the extent that there are transfer-pricing alternatives to where you locate your income, it is not clear to me that [the level of our company tax rate] changes people's decisions about whether Australia is a good place to have some business. It might change which government gets the revenue.

"You could imagine that it would become increasingly attractive for multinational firms to seek to locate their revenue recognition in lower tax havens.

"But there are already very low tax jurisdictions where [multinationals] can do that, and we still see investment happening in [this] country.

"I cannot imagine a scenario where a few more countries moving in this direction [of cutting their rates below ours] results in the entirety of that activity moving outside Australia's borders," Ellis said.

What a comfort it is that, while our politicians do little more than try to score points off each other, our econocrats are still capable of laying out the choices we face.

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Shorten gains tactical advantage over Turnbull

Various of the tax changes the Coalition government is taking to the election are things it earlier said it wouldn't do. And various of the tax changes it now says it wouldn't dream of doing are things it earlier dreamt of doing.

What's more, various of the tax increases it ended up copying from Labor – the further swingeing increases in the excise on tobacco, the crackdown on multinational tax shirkers and the cutbacks in superannuation tax concessions for the wealthy – it had earlier criticised Labor for doing.

Partly because of its change of leader, the Coalition has had trouble deciding what it will or won't do. But also, I suspect, Malcolm Turnbull is the kind of leader who tends to make up his mind in semi-public, weighing the pros and cons before deciding which way to jump.

Labor, on the other hand, made up its mind early about its key policies. That's partly in response to the public's reaction against Tony Abbott's extreme negativity while in opposition.

It's also because, lacking much to offer in the personality department – and anxious to counter memories of division and instability in the Rudd-Gillard-Rudd years – Labor decided to be the first Opposition since John Hewson and his phonebook-sized Fightback! program to make itself a large target not a small one.

It's been announcing policies for about a year and talking incessantly about its "positive policies" on 100 topics.

The broader point, however, is that the parties aren't nearly as far apart as it suits them to have us believe during election campaigns, when they're whipping up partisan feeling and trying to convince us the choice we make between them will determine whether the economy heads for heaven or hell.

What in recent months we've observed more clearly than usual is the parties manoeuvring for advantage in this year's election campaign.

Most of us have highly stereotypical, caricatured views of the parties' respective strengths and weaknesses.

The Liberals, being the party of the bosses, are better at running things, particularly the economy. They're better at keeping inflation and interest rates low (except that, at present, they're probably too low). They're better at keeping the budget on track, avoiding wasteful spending and excessive taxation.

Labor, being the party of the workers, is better at ensuring wages and working conditions are reasonable. It will do more to keep unemployment low. Being less of a monetary taskmaster, it will do more to ensure government spending on health and education is adequate.

Or so we imagine.

The goal of the parties' manoeuvring is to ensure the main issues over which the election is fought are those that suit their perceived strengths relative to their opponents'.

When an issue arises that favours your opponents, you neutralise it as quickly and quietly as possible – even if that involves going against your stated values.

When, for instance, Abbott tells us of his implacable opposition to higher taxes, so Julia Gillard tries to "wedge" him by proposing a 0.5 percentage-point increase in the Medicare levy to help pay for the national disability insurance scheme, hoping he'll oppose it, he quickly agrees to the increase.

Since the media know election campaigns are about conflict – not about making sure your audience understand what the pollies are doing to them – this two-party conspiracy to raise our taxes is never mentioned again.

Bill Shorten may not have Turnbull's good looks, but I suspect his long experience in the union movement makes him better at political tactics.

Turnbull's vulnerability is that he's easily portrayed as a rich man – Mr Harbourside Mansion – who's out of touch with ordinary Australians, and is in politics to deliver for the Libs' big business backers.

There's a spate of stories about the banks mistreating their customers, so Labor promises a royal commission into banking. Turnbull says that would be quite unnecessary, especially since we already have that ferocious attack dog the Australian Securities and Investments Commission on the job.

What's more, though he's been cutting the commission's funds until now, now he'll increase them.

Who do you think won that skirmish?

At a time when young people are being priced out of home ownership, Labor promises to act against negative gearing. Turnbull thinks of doing something similar, but decides against it. He's defending negative gearers, claiming Labor would cause house prices to collapse.

Who do you think won that skirmish?

There's a spate of stories about big foreign companies paying next to no tax in Australia. Labor promises new taxes to catch them. Turnbull follows suit. What's more, though he's been cutting the Tax Office's funds until now, now he'll increase them.

Because Labor is, as we're always being told, the tax-and-spend party, it has proposed some big tax increases to be paid by smokers, foreign companies and rich superannuants.

It proposes to use the proceeds mainly to restore the funding to health and education cut by the Coalition.

Turnbull copies Labor's three tax increases, but uses the proceeds to help pay for a tiny tax cut for the top quarter of income-earners and a 10-year phased cut in the rate of company tax which, he claims, will do wonders to generate "jobs and growth".

The public believes companies should be paying more tax, not less. Who you think jumped the right way on that one?

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Why Turnbull's Google tax would be reasonably effective

So, Malcolm Turnbull and Scott Morrison are introducing a "Google tax" to ensure multinational companies "pay their fair share of tax in Australia". Really? You could be forgiven for being sceptical.

Does the Coalition really want to crack down on their generous mates at the big end of town? And, even if they do, how do we know a Google tax will work?

My sceptical mind (professionally trained by 40 years of living and breathing politicians) can see it all.

Big business had become disillusioned with Turnbull who, like Tony Abbott before him, had balked at increasing the goods and services tax. On no, is he a dud, too?

Turnbull knew he had to deliver "reform" for the big end of town and a cut in the rate of company tax was what it had its heart set on.

Further, he knew he had to have a project to be getting on with, a reason we needed to re-elect him, a way he could be seen to be doing what we expect of governments: adding to jobs and prosperity.

But polling shows most voters don't think cutting company tax is a good idea. Those blighters should be paying more, not less. What about all those internet companies defiantly telling a Senate committee they pay every cent they're legally required to? What about the Panama Papers?

My sceptical mind sees Turnbull realising that, if he wanted to get away with cutting company tax, he'd have to balance it by doing something big on multinational tax avoidance.

I know, let's copy the Brits' diverted profits tax, and not discourage the media from calling it the Google tax.

Look up the government's "tax integrity package" in the budget papers, and your scepticism deepens. It contains eight measures, but six of them only rate an asterisk, denoting that "a reliable estimate [of the revenue expected to be saved] cannot be provided".

The diverted profits tax is expected to raise a mere $100 million a year, and not start doing so until 2018-19.

So how come we're being told the package will raise a net $3.3 billion over four years? Because all the money will come from establishing a new "tax avoidance taskforce" and hiring hundreds more people to audit "large corporates and high wealth individuals".

Hang on. Isn't this something the government could and should have done years ago? Hasn't it actually been cutting Tax Office staff until now?

Right. Got all that? Now get this: although much of that scepticism is no doubt justified – especially in terms of motivations – I'm convinced the crackdown on multinational tax avoidance is genuine, that it started a couple of years ago, and that the new diverted profits tax is likely to be reasonably effective in collecting more revenue.

The fact is that – no doubt in response to pressure from voters and their own difficulties finding the revenue to cover all the spending they want to do – the developed countries have finally got serious about countering tax avoidance by the "transnational corporations" (including some headquartered in Oz) that have come to dominate global commerce.

This requires a high degree of co-operation between countries, and this was initiated by the G20 a few years ago, using the services of the Organisation for Economic Co-operation and Development.

During our year in the G20 presidency, Joe Hockey and Treasury became heavily committed to the organisation's BEPS – base erosion and profit shifting – project, pushing it along and vowing to set a good example to others.

A key part of the project is the "country-by-country reporting requirement" which requires big multinationals to report details of their profits, sales, employees, assets and income taxes paid in each of the countries in which they operate.

They should do this in their home country but, if they don't, any country in which they operate can demand the full report and share it (confidentially) with the other countries involved.

We put our end of the BEPS agreement through Parliament last year. Once this arrangement gets going it will greatly improve national tax authorities' ability to counter transfer pricing.

The Brits got impatient and introduced their own diverted profits tax, which involves the taxman making an estimate of the amount diverted, without the benefit of the detailed information that will soon be available. Their new tax took effect in April last year.

There are plenty of campaigners against multinational tax avoidance and they weren't impressed by the Google tax, just as they were disappointed with the final report on the BEPS project.

By now, however, they've decided the tax is reasonably effective. And Amazon has announced that it will avoid the diverted profits tax by paying ordinary tax on its retail sales in Britain rather than booking sales through Luxembourg.

That's an important point. Our version of the tax, which would apply from July next year, would be levied at the penalty rate of 40 per cent, rather the present big-company rate of 30 per cent.

So it's designed not to raise tax directly, but to encourage multinationals to avoid it by paying the right amount of ordinary company tax. Our expected collections of only $100 million a year would come just from the slow learners.

Fortunately, sometimes it's possible for our pollies to do the right thing for the wrong reasons.

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