Action is needed over tax avoidance, not big talk

That Labor’s corporate tax policy has been so vociferously attacked by the business lobby proves it is on the right track

The usual suspects, the Business Council of Australia, the Australian Chamber of Commerce and Industry and the Minerals Council of Australia, all emerged on Monday like sprinters out of the starting blocks with their inevitable PR offensive. Any suggestion that big business pay more tax, let alone its fair share, is savaged mercilessly.

Treasurer Joe Hockey had led the charge in Parliament, claiming, typically, that the Opposition’s plan to tighten the thin capitalisation rules would cost jobs. This is pure, unfounded scaremongering. It might be a small first step but at least Labor has a plan, an it is carefully costed.

Contrast this with the government’s sneaky cave-in on Section 25-90 before Christmas, another $600 million gift to multinational tax avoiders. Overturning these tax breaks on foreign debt was a Labor initiative too, quashed by a craven government keen to curry favour with the business lobby.

Sadly, this latest fury over the thin cap rules plays straight into the hands of the corporate tax fraternity. The debate has been confined to a political barney over relatively small and highly complex tax issues. We, too, were highly critical of Labor’s policy this week, but for not doing enough. At least they are doing something. They deserve points for that.

If the business lobby were acting in the national interest rather than the narrow interests of some of its major funders, it would show leadership by splintering on the issue of tax. This is not a level playing field. Those who don’t shift profits though Singapore or the Cayman Islands are at a disadvantage to those who do. Those companies who pay their fair share ought to distance themselves from the big avoiders.

If any proof were required of the hollow rhetoric on the subject of multinational tax avoidance by the business lobby, look no further than the various peak body submissions to the upcoming corporate tax inquiry. We have dealt with the BCA submission, which is weak.

However, the submission from the Minerals Council of Australia is far worse. As a manifesto in sheer manipulation, it warrants examination.

On December 18 last year, the Minerals Council (which speaks principally on behalf of foreign-controlled multinational mining companies) released a report prepared for it by Deloitte Access Economics titled, Minerals industry tax survey 2014.

This is the fourth year that Deloitte has lent its name to the report about which it states the “MCA recognised the importance of industry analysis and reporting of tax data for the purpose of current and future tax debates”.

Deloitte also includes a fairly standard disclaimer advising readers that the report was prepared for the internal use of the MCA and should not be relied on by anyone else. This is sound advice, particularly for those involved in the debate on multinational tax avoidance because Deloitte’s report, while sounding plausible, is fundamentally flawed. Based on past experience, Deloitte should also have been aware that, as in past years, this flawed report was destined for immediate public release by the MCA.

There are four issues with the report. First, Deloitte misrepresents royalties as a tax. It then conflates those royalties with corporate income tax to talk about a “total tax take”. Why would they do that? What is the purpose of such misrepresentation? Why didn’t the MCA commission Deloitte to simply explain how much income tax its members have or haven’t paid and why? Would it be to conceal the low level of income taxes some of its members actually pay – which deliver a side benefit of overstating their member’s contributions to the Australian economy?

It would have been more informative for the purposes of tax debates for the MCA to have done some comparisons between its Australian listed members and its foreign multinational members who appear to be short pricing their Australian product sales to other related subsidiaries in so-called trading centres like Singapore. The MCA’s foreign multinational members don’t want you to know about the billions of dollars in taxes they have dodged and continue to dodge in Australia or the nominal taxes they pay on the billions of profit they have transferred to Singapore and other tax haven subsidiaries.

Australians need to be very clear about what royalties actually are, because the directors and senior executives of Australia’s foreign multinationals (most of whom don’t live in Australia) seem to have developed a habit of directing their Australian subsidiaries to spin a story to Australian governments and the Australian public about their “contributions” to the Australian economy by lumping royalties payments with income tax and other miscellaneous taxes and then declaring this basket of apples and oranges to all be tax contributions.

At least the MCA report excludes miscellaneous taxes – GST and payroll tax and so forth (though its member Glencore does include these in its submission) but the inconvenient truth is still that royalties are a raw materials cost. Royalties are not taxes.

To use NSW as an example, the Mining Act provides that property in a mineral passes to the holder of a valid mining lease as soon as the mineral is severed from the land. However, in the absence of a valid mining lease, property in the minerals extracted generally remains vested in the Crown.

The NSW government makes the following statement on its Department of Trade and Investment Resources and Energy website: “Mineral resources in NSW are mostly owned by the Crown. This means that the royalties and economic benefits from mining contribute to the provision of services to the people of NSW. A royalty is the price charged by the Crown for the transfer of the right to extract a mineral resource, the price (royalty rate) is prescribed in legislation.”

When the MCA’s members (who are lawfully authorised) have exercised their rights to extract minerals, the royalties they pay are clearly a purchase price paid to the Crown in relation to the transfer of ownership of such resources.

In some countries (the US, for instance), most land ownership extends to subsurface rights, so persons wishing to extract minerals from the subsurface of such land must either acquire ownership of the land or pay a royalty to the private land owner for all subsurface minerals extracted.

In Australia, while some private ownership of subsurface rights exists (native title, for example), subsurface rights are generally separated from surface rights and the subsurface minerals are owned by the Crown on behalf of all the people of the state (or Australia in the case of uranium). The Crown, through its revenue department, administers the collection of royalties, including private royalties, but Australian royalties do not suddenly become taxes simply because they are payable by the MCA’s members to an agency of the Crown representing the Australian people as owners (including private owners).

Royalties are a cost of production. They are no different to payments made by manufacturers to acquire ownership of the raw materials they use in the process of manufacturing final products. Manufacturers don’t attempt to describe their cost of raw materials as a tax. Miners involved in exploiting American mineral resources don’t attempt to lump their royalty payments with taxes either. It is only organisations like the MCA and, in particular, the foreign multinationals they represent, that seek to describe one of their raw material costs (royalties) as a tax.

Another flaw in Deloitte’s MCA report is its claim, which foreign multinationals are particularly fond of spinning, that the royalties MCA members pay are part of their contribution to the Australian economy. Prima facie this sounds plausible, but just whose contributions are they really?

MCA members paying royalties to the Crown get fair value in exchange for their payments, so there is no gift or levy that might fit the dictionary definition of a contribution. MCA members have merely exchanged one economic resource owned by them (cash) for an alternative economic resource (minerals severed from the land).

There was no change of net assets on MCA members’ balance sheets. There was no loss of a MCA member’s economic benefits that resulted in a transfer of economic benefits to Australians, so how are these royalty payments a “contribution by MCA’s members”?

Having purchased their minerals from the Crown, the MCA’s members then seek to sell their acquired assets for a profit. It is only if their sale of Australian-sourced product results in an increase in net assets in Australia will the MCA’s members be in a position to make a “contribution” (out of their Australian profits). In the case of foreign multinationals, the contribution to Australia mostly depends on the amount of income tax they ultimately pay in Australia, but multinationals often don’t like declaring profits in Australia and use a multitude of techniques to transfer them out, thereby dodging Australian income tax.

The MCA will no doubt protest that the Australian economy benefits from their members’ royalty payments, but would a manufacturer such as Holden be credited with having made a contribution to the economy for having purchased Australian-made materials and component parts or would we credit the Australian resident supplier of those Australian-made materials and component parts. It is the Australian supplier of Australian products that should be credited with the economic contribution. Contributions from MCA members come only out of a loss of any economic benefits which they transfer from their balance sheets to Australians.

This is not to say that the payments of royalties by MCA members do not tend to result in contributions to the Australian economy. State governments (and private royalty owners), having converted zero cost base assets to cash and to the extent they have spent in Australia rather than invested or spent their cash assets elsewhere, are the ones who really contribute economic benefits from their own balance sheets into the Australian economy.

The governments of Australia invite and authorise the MCA’s members to facilitate that asset conversion process on behalf of the Australian people in expectation that they will also make a contribution to the economy (taxes) out of their profits. The MCA’s members may be facilitators, but the extent to which they are contributors is misrepresented by the report. Perhaps governments should reconsider and even revoke licences of those who fail to contribute to Australia the full extent of tax on their Australian-sourced profits.

A third issue with this paper is its apparent bias towards the interests of foreign multinationals. They would appear to be the only ones who benefit from the idea of conflating royalties and income tax to disguise the relatively low levels of income tax they pay.

Australian-listed companies who are members of the MCA and who are paying their share of income tax should be questioning why the MCA is using their contributed funds to produce a report that is likely to disadvantage them.

By avoiding tax in Australia, foreign multinationals, which are supposedly engaged in “trading” through tax havens like Singapore, are likely to use their price advantage to unfairly compete against Australians paying their rightful amount of Australian taxes.

Tax dodgers are reducing the ability of Australian miners to contribute, so the negative effect on the Australian economy is multiplied. Perhaps the aggregate “contribution” of some of the MCA’s members is closer to zero, or even worse.

The fourth issue with this paper is that Deloitte (one of the Big Four accounting firms), which owns Access Economics, has put its name to a document that is based on arguments which conflict with the concepts embodied in Australian and international accounting standards.

The fundamental and straightforward differences between taxes and royalties are well-known, particularly to consultants who specialise in tax and general economic advice work. The same can be said in the context of what constitutes a “contribution” in terms of the concepts embodied in those accounting standards.

There must surely be a question about how Deloitte rationalises its role to uphold the requirements of accounting standards. Perhaps the simple answer is that you get what you pay for. If so, by publishing the material supplied, the MCA undermines the debate and debases its and its members’ credibility.

Although it is partnering in the ECAP scheme with the ATO and big corporate clients – this is the scheme to outsource tax compliance work to company auditors – Deloitte’s work for the Minerals Council demonstrates it can hardly cope with even the basic conflict of interest between its duty to uphold accounting standards and the advice it gives its corporate clients.