The idea in a nutshell: As the Mossack Fonseca (Panama Papers) scandal shows us, governments find it hard to tax companies, given existing international legal and tax structures. Against that background, and a rising public deficit the Australian government insists on cutting tax for corporations. Not only does that not make sense, it hides a bigger issue….
Getting companies to pay tax is an old and known problem
Governments in the G20 been targeting tax avoidance since the Global Financial Cricis. Unfortunately, they haven’t made much progress. Globally, companies legally avoid more than $1.1 trillion last year. The advice all comes from the same global accounting practices. The Top 4 accounting firms, which advise both the government on tax reform and 98% of the companies which earn more than $1bn a year, conservatively, legally avoid global tax responsibilities of more than $1 trillion per year. Similar research suggest that tax avoidance costs the Australian government alone $50bn a year.
The big companies are brazen about it
It seems every day there is a new story in the press linking another company to tax avoidance. As most people know, tax avoidance is legal. Tax evasion is not. Between the two extremes are companies who game the rules using legal ‘tricks’ to a level that the average man in the street would think unreasonable.
First among those seem to be the household name internet companies. The Head of Product at Google actually explaines what governments could do improve their income from tax. Similarly inscouciant, Facebook simply does not submit tax documents requested by the US Department Of Justice, as the timeline approaches the statute of limitations for the crime they are understood to have committed. In simple terms, they’ve been accused of behaving legally when it comes to entering their tax submission and are just not responding in the hope that they will get away under a different type of legal loophole.
The problem is systemic. Tax laws were developed to deal with taxing manufacturing in the Industrial Revolution and haven’t adapted enough since. As value in the world ecomomy moves to services and IP, tax rules become easier to get around.
Transfer Pricing is the most famous example of how companies to it. Different offices of the same company sell each other components and services at rates which magically make profits end up in low tax zones.
Suggestions on how to fix the problem include:
- Treat all of the different entities of a company as one legal company.
- Reduce tax rules – and loopholes.
- Implement a tax on revenues.
- Offer a ‘fair play’ reward to encourage companies to avoid behaving in morally irresponsible ways by offering them a lower tax rate.
- Split up the big auditing and tax advice companies
So : Talk of corporate tax cuts in Australia is mind blowingly inappropriate.
Given that this is a known issue, it seems incredible that the Australian government and the opposition both suggested a drop in the corporate tax rate in the run up to the 2016 election.
BEPS (Base erosion and profit sharing) offers hope
BEPS is one proposed solution to international tax avoidance.
It’s an OECD policy specifically targeting companies which shift their profits to low tax environments.
Fundamentally, it requires better reporting which, it is hoped, will help governments spot those taking advantage of the system. Unsurprisingly, companies suggest the newly proposed rules are too onerous.
In fairness, the 2016 Australian budget also contained measures to address ‘diverted profits’ (also known as the Google Tax.) It should be noted though that allowing corporate tax cuts, however bonkers, is not mutually exclusive with tighter avoidance controls. Even if the corporate tax cuts do go through, the Australian government can still insist corporates actually pay what’s due.
There are specific issues leading to countries failure to tax, the solutions to which have been proposed above. The root problem is that there are a plethora of international organisations lacking coordination, some of whom want to undercut the others (act as low tax zones) to line their own coffers.
What hope, there is in BEPS that there is seems complicated by the current economic environment. Brexit and the rise of Donald Trump all reflect disenfranchised people, looking for someone to blame for their lot.
In my view it would be far more effective to have a real discussion in Australia about the reason we are seeing such unjust social outcomes. $50bn, the amount it is proposed that big companies are avoiding, represents a 20% cut of total Australian tax revenues in 2020. Just think of the public investments that could be made if the problem was addressed effectively. Frankly, it’s great that, since Mossack Fonseca, these ideas are being discussed. The shame is that they are not being discussed enough and that most people do not understand the real situation.
Instead of turning the boats around and voting for Pauline Hansen, we should be blaming big businesses for not paying.
Ultimate responsibility sits with us. We have the power to divert our attention form misunderstood immigration problems and focus on the real issue: The companies we use and trust most, which we reply on to provide the information and transparency we need in life are not paying their fair share. They do not deserve a tax cut.