Timid, worse than Donald Trump but better than the Coalition. That’s the verdict on Labor’s policy to combat multinational tax avoiders. Although large corporations have been subsidised through the pandemic like never before, they will still now enjoy years of tax-free profits thanks to gaping holes in Australia’s tax system. Callum Foote consults tax law experts.
“Australians shouldering $1 trillion in public debt racked up by the Morrison Government have been losing out on funds that should be available for vital services like Medicare, aged care and child care because multinational companies have been using tax havens and tax avoidance schemes to avoid paying tax in Australia.” That’s Shadow Treasurer Jim Chalmers talking up Labor’s policy to combat multinational tax avoiders.
He’s right of course. The wealth of billionaires and large corporations has soared during the Pandemic, yet despite massive government subsidies, and now rampant price rises, these very corporations to which Chalmers refers will pay little tax thanks to gaping holes in tax laws. How does Labor’s policy stack up? Are Chalmers and co good for their word?
A long time coming
Australia’s 1950s taxation treaties haven’t been meaningfully updated in decades, permitting international companies to avoid paying a large amount of tax in Australia. As part of its election campaign pitch, Labor has announced a tax policy.
There are some reasonable measures; they have had “a bit of a go” at addressing the problem of multinational tax avoidance, but have left plenty of wiggle room to keep big businesses happy.
Double Non-Taxation is where a company is able to exploit the differences in the tax treatment of a host of complicated business transactions between two or more countries to avoid paying tax in either.
These are sophisticated structures concocted by tax lawyers and advisers over decades, which international organisations such as the OECD have been trying to shut down for almost as long.
Labor’s plan raises the heat, a little, on large corporations’ use of double non-taxation arrangements and aims to net $1.9bn over 3 years. This is about 0.1% of total tax revenues; small in one sense; but significant nevertheless.
For comparison, RoboDebt collected $1.8bn unlawfully and Australians spend $2.2bn on child support annually.
Global 15% tax ignores elephant in room
Labor’s first policy idea is to join the 15% minimum tax rule proposed by the OECD.
Simply, this rule says that if a corporation pays less than 15% tax in an offshore tax haven, it will have to pay the difference here in Australia.
The 15% rule is the OECD’s headline measure under its Global Anti-Base Erosion Model Rules (GloBE) model to combat global corporate tax avoidance. It has been accepted, but not implemented yet, by 137 countries.
However, Labor has cleverly ignored the elephant in the room: Australia has the most generous rule on using old tax losses in the OECD.
In Australia, companies can use old tax losses to offset new profits indefinitely, until they’ve all been used up. Hence Qantas, for instance, has been able to pay almost no income tax for years despite making billions, in the good years, in profits.
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In many other countries tax losses have a time period where they expire and cannot be used any more to offset against profits. That would be handy right now as pandemic losses will be used for years to avoid tax, even though the government has delivered enormous subsidies to companies. Again, Qantas is a case in point.
By not capping the amount of time that tax losses can be used, the 15% rule has limited use in Australia. If a company is forced to pay to match Australian tax to reach the 15% corporate tax rate threshold, it can use this additional tax cost to offset future tax.
While aligning Australia with the OECD standard, Labor is hardly sticking its neck out in a bold policy sense.
Another OECD idea: 30% limit on interest
Labor’s second idea also comes from the OECD; limiting tax deductions for interest payments to 30% of profits. OECD says this counters “one of the most simple of the profit-shifting techniques available in international tax planning.”
Companies in international groups often lend money to one another and set the rate of interest that they want their partner company to pay.
One way that companies in high tax jurisdictions limit the tax they have to pay is by paying very high interest rates to their fellow countries in low tax jurisdictions. This effectively offshores a large chunk of the profits made in places like Australia by sending that money straight overseas.
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There are many examples of this occurring in Australia. We have covered the big ones for years; companies such as Chevron, Shell and Energy Australia.
Australia already has an interest limitation rule in place which the Coalition claims is already enough.
The current rule limits the amount of debt, but allows the interest rate to rise and fall within an arms’ length range. The OECD’s rule is smarter, it simply says “we don’t care how much you owe or how much you charge – you can only use debt to reduce your profits by up to 30%”.
The US was quick off the mark to enact the 30% rule, under Donald Trump in 2017. In July 2020, 860 pages of regulations were added, as industries lobbied hard for special deals. Labor be warned: this is going to be contested by the Big End of Town; your donors.
So Labor policy again is ultra conservative, more generous to business even than Donald Trump, particularly when it comes to miners and fossil fuel producers.
How so? The OECD rule allows companies to artificially inflate their profits for calculating the 30% limit. Under the OECD rule, companies are allowed to ‘add back’ the amounts they are allowed to claim simply for holding assets (as most infrastructure intensive projects and digital media giants do – known as depreciation and amortisation).
Under the rule, adding back means you can claim higher interest. The US has gone in harder and only allowed adding back till 2021 yet Labor plans to allow it going forward. In other words, both major parties in Australia have been trumped by Trump on both interest deductions and timeframe for claiming tax losses. Both of these are enormous avenues for tax avoidance.
Finding beneficial owners
Labor’s third plan is to construct a register of beneficial owners, controllers and profit takers. This is a transparency issue. More importantly, it collects business information used to better design tax and foreign investment rules. This work has already commenced but it needs to be finished and it needs to be useful.
Politicians know how easy it is to disguise their business interests. The parliamentary register asks them to disclose beneficial ownership and calls on them to act in the spirit of the rules.
But it’s not hard to establish a chain of trusts where the beneficial interest sits somewhere irrelevant; say a nephew a niece or a lawyer. And where the control of the business – and gains from carrying on the business – go where the real owner/controller wants them to go.
MWM argues for look-through rules which ask: who controls the controllers? Who’s getting the gains? And who gets the economic benefit of disposing of the business?
It’s naïve to think that might just be some beneficial owner sitting behind a shelf company in the Cayman Islands.
There are a couple of other proposals: including requiring government tenderers to disclose where they have put their tax domicile and ideas to reveal participation in tax havens.
The Verdict?
Pretty good but timid by Labor. Electorally safe. Not dramatic enough to disturb the Big End of Town and corporate donors into an outcry, and safe enough politically to keep Liberal Party strategists from bothering with a scare campaign
The question is, will the whole package be enacted, watered down, or caught in interminable consultation or committee reviews requiring two Labor terms?
Labor’s softly-softly approach shows that it learned its lesson from targeting franking credits and negative gearing at the last election. It’s now third-time cautious, frightened by the experience of losing a prime minister – Kevin Rudd – to a scare campaign orchestrated by the fossil fuel lobby’s Minerals Council of Australia over the 2012 Mining Tax proposals.
This time it’s not going to innovate; instead, it’s going with the OECD’s plan to counter international tax avoidance, but pushing the pace a little, moving more quickly than the Coalition might, and into areas where the Coalition has said it will not go.
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Callum Foote was a reporter for Michael West Media for four years.