As we count down Australia’s Top 40 Tax Dodgers, it is time to respond to critics, flesh out the method behind the rankings and find what has emerged, the trends: secrecy, and black spots in reporting, .
Why are the likes Origin Energy and Pfizer not in the Top 40? Why not Qantas? Where is Rupert Murdoch’s News Corp, or Google, Facebook, eBay and Apple? They may be yet to come, or not, but an explainer is now needed as valid questions are being asked of the methods deployed for ranking tax avoiders.
Why, for instance, is Pomi at Number 13 when the $9.2 billion in total income generated by its director, the low profile but large trader, may be trading turnover, not revenue in the traditional sense. Why is Pomi there when it paid the statutory 30 per cent tax rate?
There has been credible criticism of the Top40, criticism which is good for the public debate on tax fairness, criticism we must now address. All feedback is welcome and we reiterate the invitation for the companies themselves to engage. A few have already.
Methodology
To methodology. There are so many ways to rank tax avoiders but there had to be a process for the Top40; a process which spurned subjectivity and stuck closely to Tax Office transparency data, or the tax lobby would have shot the rankings down in flames.
The methodology is therefore published beneath every ranking. Suffice to say that these rankings are an organic process; they will change over time as the methodology develops further to measure aggressive tax behaviour and as the new guard of global digital giants are incorporated.
The likes of Mirvac – a majority of whose income derives from trusts may drop off the list – as may Travelex and Pomi, whose “total income” may represent trading turnover in forex and financial markets respectively.
We don’t know this because we have no more information than is publicly disclosed. So we have run with the official data for the three years available, ranking companies by highest “total income” and lowest tax payable. The raw numbers take precedence over the tax rate.
Hydrox will certainly fall away. This is a clear-cut case of genuine tax losses.
Bear in mind the list has been compiled – and its methodology decided – in league with top tax lawyers, accountants, ex-Tax Office people and two former multinational company executives observing. This is not a journalistic frolic. It is not a straw poll in a newspaper, or a “listicle” composed for the purpose of clickbait.
It is designed to draw serious public debate and community awareness about tax avoidance, and all companies are invited to respond. Their responses will be appended.
Tax rate is the side-show, cutting taxable income the main act
To deal with the Pomi issue. Pomi paid a tax rate of 30 per cent but still very little tax. But there are no public financial statements so there is no way of working out what income actually is, how it was derived. As stated, we suspect Pomi may drop off the list as more worthy contenders are included or as more details emerge.
To lend further perspective to the issue of companies paying a high tax rate but very little actual tax, let’s say EnergyAustralia and its auditors from PwC- who are due to emerge further up the list – booked $2.3 million in taxable income on their $24 billion in total income over the three years from 2014 to 2016.
Let’s say they then paid 30 per cent tax on this $2.3 million in taxable income. They will have disclosed tax payable to the Tax Office of $770,000. They will have looked good by reporting a 30 per cent tax rate but, nonetheless, the real tax avoidance will have occurred between the $24 billion which poured in the door from energy customers and the tiny $2.3 billion reported in taxable income.
EnergyAustralia lobbies for government leg-up while cheating on tax
The tax rate therefore is virtually inconsequential. It is the raw numbers which count.
In fact, EnergyAustralia actually booked $51.8 million in taxable income, not $2.3 million, and still paid zero tax – a tax rate of zero – but that is not the point. These numbers are relative. The real tax avoidance was done by wiping out taxable income.
Any tax lawyer or tax accountant who is not shackled by pro-tax lobby ideology will tell you – despite the hue and cry in the Murdoch press, the AFR and the business PR groups – that the real tax games, the big money games, are played before the taxable income line. The Tax Office will tell you the same.
How so? Variously, costs are bulked up, every possible tax deduction is deployed, interest is raked out to foreign associates via loan payments, other income is funnelled offshore via “service fees”, intellectual property payments, and swaps and other derivatives.
There had to be an objective process in constructing this list. The other point made in the course of deciding methodology was legal risk. We had advice that there was a risk of being injuncted by naming a company at the top of a list about tax dodging – at least in the initial phase of this undertaking – so it was preferable legally to stick closely to the Tax Office data.
Reputational sensitivities are clear. Look no further than the backlash by Qantas, the Prime Minister’s Office, the Business Council of Australia, and their media allies over the coverage of corporate tax by ABC journalist Emma Alberici.
As an aside, Qantas has form. Thanks to massive tax losses, it has legitimate reasons for not paying tax for ten years, but, as shown here in a forensic analysis of its accounts, the airline is no saint either.
Further to the matter of tax losses, there are other contenders on this list who could also claim unfair treatment in the rankings because they had made bona fide losses and when losses are made, tax is not payable.
Hydrox is the classic example. This was the entity which housed Woolworth’s disastrous foray into hardware superstores.
Therefore it is likely that, as we develop the methodology further to account for bona fide tax losses, legitimate avoidance and total turnover rather than a traditional revenue measure, the likes of Hydrox and perhaps Peabody will drop off the list.
Meantime, the rankings serve to generate debate; are the tax loss regime and corporate tax deductions too generous? Should there be reform to capture companies such as Amazon, Amcor and the oil majors, whose perennial acquisitions and exploration programs mean they perpetually avoid paying income tax?
When a sale is not a sale – Origin Energy’s unreal unrealised gain
This brings us to the matter of who will take their place too. As the ATO data is based on size of revenue reported – and as the likes of Google, eBay, Booking.com and other digital players – have been booking the bulk of their Australian revenue straight offshore rather than recognising it here – the raw data is misleading by omission, effectively concealing the tax avoidance of the fastest-growth companies in the world, egregious tax avoiders, the digital new guard whose monopolies now dominate globally.
These will be incorporated in our work in due course – as will the “good guys”, those corporations who contribute most to Australia’s tax base.
TRENDS
A number of trends have emerged now that more than half of the Top 40 has been published.
1. The Big Four global accounting firms audit all the companies for which we have found audited accounts, or paid ASIC for the world’s most expensive public information.
2. Secrecy, the great weapon of the multinational tax avoider, is a significant factor. In the case of investigating Vennor Investments, the phone number ran dead, it was impossible to find any public information apart from paying ASIC search fees, and this is a multinational building products company.
When finally finding its financial statements in the ASIC register, we discovered a raft of related party transactions which siphoned profits offshore.
The other point on secrecy is that very few multinationals publish their financial statements on their websites, and there has been a strong trend towards lower disclosure – that is, towards only filing “Special Purpose” financial statements rather than “General Purpose”.
3. The majority of the tax avoidance is accomplished by wiping out taxable income, not by paying a low tax rate on taxable income. There are three ATO disclosures we have to work with: total income, then taxable income, then tax payable.
It is between the total income and taxable income lines where the costs are booked, interest payments are made to offshore associates, and so on.
4. There has been criticism that we use the terms “total income” and “taxable income” instead of revenue and pre-tax profit. Again, this is credible criticism but again we are merely using the exact terminology used by the Tax Office.
It is a fair point that this can be misleading, as “income” is a fuzzy term which could mean sales at the top line or earnings after costs. However, there are distinctions between what companies report for accounting purposes (to ASIC) and for tax purposes (to ATO).
5. Discrepancies in the numbers. Often we find the audited accounts filed with the corporate regulator throw up different numbers to the ATO figures. Sometimes, tax appears to have been paid or is payable in the ASIC reports but not in the ATO data.
Goldman Sachs, for instance, shows no tax paid and very little revenue disclosed in its ASIC reports but revenue reported to ATO is far higher. There are a number of factors at play here, including which companies form part of a tax consolidated group, and in the case of Goldman, the reporting is simply shoddy, failing to consolidate at the top of the corporate tree in Australia.
We won’t finesse all this, just report it when differences occur, and try to faithfully reproduce the ATO data, and for that matter the ATO language too in regards of “income”.
6. To the issue of trusts. It is also fair criticism that – as tax is payable not by a trust but by its members – that trusts should not be on this list. Indeed, they are likely to drop off the list as methodology for dealing with new economy stocks develops. Indeed Mirvac is a relevant example but it may not be entirely undeserving as it failed to pay tax for three years even on its taxable income.
Moreover, and this is a key point of trusts; one of the most, if not the most, compelling reasons to use a trust structure is to scive out of tax. Stapled securities for instance, the likes of Sydney Airport, have been identified by the ATO for aggressive tax practises. And when it boils down to it, most members will be super funds who pay at the marginal rate of 15 per cent so, as a sector – and a very large sector it is – trusts, via their members, probably pay less than half the corporate tax rate.
7. Different entities. Many multinationals report more than one entity on the Transparency List. Where possible – sometimes the data is unclear – we will mention each one and/or a consolidated picture which reflects the entire stable.
The case of Swiss Re at Number 40 is a good example. The biggest entity paid no tax but other entities did. Again, we won’t finesse this too much. If a company is very large, listed in the ATO data and pays no tax, it will be ranked, as will the other entities. The pattern with these multiple reporting groups is that the larger entity often pays less tax than the smaller entities. No doubt their tax people structure it this way for obvious purpose.
TAX STARS
We will publish a “Good Guys” list following the Top 40 Tax Dodgers which will showcase Australia’s biggest and best corporate taxpayers. It should be said though that there are few “cleanskins” when it comes to tax and, advised by the Big Four, most multinationals verge over the boundary of good behaviour into Part IVa territory, rolling the dice on the basis the Tax Office won’t sue and justifying aggressive tax practices onn the basis of “tax competitiveness”. The ancient principle of “Hey, but they do it too” prevails.
While the ATO data is of a reasonable timeframe now, three years, there are still companies and sectors which have made legitimate losses which perhaps should not be on the list as it evolves. Spotless and Healthscope are examples of financial difficulties but the classic example is Hydrox Holdings which was the company which housed Masters, the Woolworths’ disastrous foray into hardware superstores.
It is a fair bet Hydrox and its accountants can lay a firm had to the heart and say, with the utmost rectitude, they never got the chance to pay tax, having just blown up billions of dollars of Woolies’ shareholders’ money in short order.
Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.