Anthony Albanese and Jim Chalmers still have a bit of work to do to catch up with Tony Abbott and Joe Hockey, but only when it comes to corporate tax avoidance. Callum Foote reports on budget measures to crack down on the biggest scam in town.
In sheer dollar terms it is the biggest rort in the world. Multinational tax avoidance. Billions of dollars a year siphoned out of Australia alone, parked in tax havens, hidden on the hushed advice of Big4 tax advisors and blue chip law firms.
No wonder Treasurer Jim Chalmers has had some fighting words to say on the subject of multinational tax avoidance; the question is, will the action match the words? Despite years of mouthing on about it as something they ought to do, politicians of both stripes – same deal in the UK and elsewhere by the way – are yet to invoke even the simplest of transparency reforms.
We are talking about a Beneficial Ownership Register – basically, just a list to reveal who actually owns a company. Too hard apparently.
It might seem counter-intuitive, even bizarre, given the scurvy reform credentials of the Coalition, but the most significant reforms to multinational tax avoidance have been struck by the former Abbott and Hockey regime. Yes, they were dragged kicking and screaming into it by the damning findings of the 2015 Senate Inquiry into Corporate Tax Avoidance, by rising demands in the community for action to address the tax shenanigans of Google, Uber, News Corp, Exxon, Shell and myriad others.
But they did do something, it was arguably the most effective reform of the Coalition’s 9 years in power. The transparency reforms and other measures delivered not just billions of dollars in revenue to the Tax Office but led to a change in corporate behaviour. Tax dodging was no longer exotic or slick, it was just another scam.
So Chalmers has injected some good initiatives to combat corporate tax avoidance into this year’s Budget. The big question is, by the time the big business lobby and the Big4 architects of tax dodging – EY, Deloitte, KPMG and PwC – get to hammering the government in back-room meetings, will the Budget measures be watered down to nothing?
Billions, after all, are at stake.
Chalmers and Labor are proposing to tighten “thin cap” rules around using too much debt to reduce tax. They are also espousing transparency measures to raise a bit more revenue, measures hailed as a “game-changer” by tax reform advocates such as Jason Ward of the Centre of International Corporate Tax Accountability and Research (CICTAR).
The proposal, unveiled in the Budget this week, requires multinational companies with a global consolidated income of at least $1 billion to provide “country-by-country reporting” starting on July 1, 2023.
According to Ward:
Increased transparency and other multinational tax reforms will encourage an end to abusive tax schemes – which deprive governments of revenue to fund essential public services – and begin to level the playing field for local businesses that pay a fair share and contribute to communities where profits are generated.
This type of reporting is designed to show when multinational corporations shift profits from Australia and other high-tax jurisdictions to tax havens. Ward says the benefits of Australia’s unilateral move on this reporting reform are likely to benefit other countries more than Australia but nonetheless address the scourge of global corporate tax avoidance.
To say, however, is one thing, and to do is yet another.
The relevant passage from the Budget Papers (2):
The Government will require:
- large multinationals, defined as significant global entities, to prepare for public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation, for disclosure by the ATO,
- Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile and,
- tenderers for Australian Government contracts worth more than $200,000 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence). This measure is estimated to have an unquantifiable impact on receipts and to increase payments by $5.1 million over the 4 years from 2022–23.
Australia has just become the world leader in multinational tax transparency with an under-reported Budget measure that would force multinational corporations to publish country-by-country tax information.
Reacting to the announcement, Alex Cobham, chief executive at the Tax Justice Network, said:
“Australia showed true leadership today by being the first country to cast away the anonymity shamelessly granted to corporate tax abusers and require multinational corporations to come clean about their taxes.
“Australia loses over $US5 billion in tax every year to multinational corporations shifting profit into tax havens – that’s more than the amount the government will spend on the newly announced childcare package over the next five years. Multinational corporations will no longer be able to cook their books without everybody seeing it.”
But looking at the actual Budget measures, there is not much meat on the policy bone, yet. Point 1 (above) says “certain tax information”, so we don’t know what and how much of what needs to be disclosed. Then there is the issues of whether large corporations will even comply once their tax advisory wizards have sought every loophole possible.
Show us your subsidiaries
Australian public companies will also be required to disclose how many subsidiaries they have and where these subsidiaries have tax residency.
Any company that receives contracts from the federal government worth more than $200,000 will also be required to disclose their parent company’s tax residence.
Another significant proposal is that the tax package will limit the deductions that multinationals can claim for intangibles, such as intellectual property, that are held by companies based in tax havens with a corporate tax rate of less than 15%.
The use of intangibles in tax minimisation is how tech giant Microsoft has been able to minimise its global tax bill by tens of billions of dollars a year, according to Ward.
Along with public country-by-country reporting, the tax package contains proposals that would limit debt deductions by amending the acceptable tests and deny deductions for payments related to intangibles held in low-tax jurisdictions.
Together, the three proposals are expected to increase receipts by $970 million and increase payments by $17.2 million over the next four years. A separate set of proposals would extend the Australian Taxation Office’s compliance programs targeting personal income tax, the shadow economy and the tax avoidance taskforce.
Ripples around the world
Labor’s move to implement much-needed transparency reforms for multinationals will occur before the European Union’s similar, but watered-down, policy takes effect this year.
According to Ward, this information has global implications because while the ATO already had this information, “governments across the global south have no access to that information. Now governments in Kenya, Nigeria, and Bangladesh can see where Microsoft is reporting sales, paying or not paying taxes.”
The new reporting standard will also help investors and those interested in multinational tax avoidance, such as yours truly here at MWM.
Now that Australia has taken the first step, tax transparency advocates are lobbying for similar measures to be introduced in the US.
“Australia’s leadership on the issue of global tax transparency should act as a call to action for other nations, including the United States, to enact best practices in tax transparency consistent with the standards promulgated by the Global Reporting Initiative,” said Ian Gary, executive director of the Washington-based Financial Accountability and Corporate Transparency (FACT) coalition.
While it is yet to be seen what sort of coordinated lobbying effort multinational corporations will pressure the federal government with, Jason Ward of the Centre of International Corporate Tax Accountability and Research remains “cautiously optimistic” that the appropriate reporting standards will be upheld.
Before the measures are lobbied and legislated, it is hard to get too excited, say other observers. Proof of “Australia’s leadership” will be in the pudding, the pudding of money actually raised. For now, although the measures are undoubtedly a step forward, Labor is tinkering at the edges of corporate tax scamming.
In rejecting outright a windfall tax on fossil fuel corporations now wildly profiteering from soaring coal and gas prices, Labor has missed its big chance both for meaningful, substantial tax reform, and to address the years of coming deficits and the debilitating impact of surging power prices on Australian consumers and businesses.