Why billions of tax dollars end up offshore

ANALYSIS: Despite some action from both Labor and Coalition governments, multinationals are still using accounting tricks to avoid paying Australian tax.While politicians in Canberra bicker over whether or not to cut company tax, or whether it’s acceptable for effective income tax rates to rise through bracket creep, glaring leaks in the tax base remain unplugged.

The rule of thumb in Australian tax law is that the wealthier you are, the easier it is to avoid paying what the headline tax rates say you should pay.

And some of the wealthiest entities are the local arms of multinational corporations, who continue to laugh all the way to their Caribbean banks.

This is a decades-old problem, and not just for Australia, which is why the OECD has been pushing a set of ‘common reporting standards’ that, if adopted by member nations, will make it much harder to legally shift profits and tax liabilities into low-tax jurisdictions.

Change is in the air

Labor’s first attempt at clamping down on legal tax avoidance, legislated in 2013, was expected to recover $1.1 billion in revenue from multinationals including Google, Glencore and Chevron.

The incoming Abbott government, though dragging its feet on joining an early adopters group of nations implementing the common reporting standards, did progress the cause a little.

It boosted the ATO’s resources in this areas, tightened rules on companies structuring themselves so as to appear thinly capitalised in Australia, and introduced mandatory reporting of companies’ previously murky tax affairs.

Not to be outdone, Labor has used its time in opposition to release an even more stringent policy, fully costed by the Parliamentary Budget Office, which aims to claw back $7 billion from these slippery titans over four years.

Two-trick ponies

The two main ways corporations avoid paying Aussie tax are known as ‘debt loading’ and ‘profit alienation’.

The first involves borrowing huge sums from another company owned by your parent multinational. That company charges very high interest on the loan, meaning that when that interest bill is deducted from the Australian entity’s profits, there’s not much left to tax.

The second involves paying to use intellectual property that ‘belongs’ to other companies within the same multinational group. Again, the cost the Australian arm has to pay the overseas arm is huge, and deductible against local profits.

Progressive progress

Adding to the case for tougher laws, progressive activist group GetUp released on Wednesday a study quantifying how much further the clampdown should go.

The study, which GetUp commissioned from tax boffins at the University of Technology Sydney, sees an opportunity to chase even more revenue than Labor’s policy.

The study has compiled figures on corporations’ effective tax rates, and the difference between what is paid and what ought to be paid – which it calls the ‘book-tax gaps’.

It finds that the biggest tax gaps by volume exist in the energy sector, where the scions of big oil and gas corporations paid an average effective tax rate of 20 per cent (the real company tax rate is 30 per cent), and cost the taxman $2.7 billion in 2013/14.

The next slipperiest sector was technology, electronics and media (like Google), which expatriated $2.2 billion more than the ATO would like, giving an effective tax rate of 7.6 per cent.

Apple, however, paid 29.96 per cent on its Australian earnings.

And last in the volume stakes, but the winner when measured on effective tax rate, were big pharmaceuticals – the average rate being 5.7 per cent, and the tax foregone being $465 million.

GetUp accompanied the release of the report with the graphic below, with handy suggestions as to where such re-captured revenue could be spent.

It’s worth noting, too, that the $5.36 billion total is over two years, not four years as with Labor’s $7 billion plan.

Over four years, GetUp’s proposal is worth about $11 billion.

When this kind of tax ‘increase’ is discussed – as with the 2010 mining tax, for instance, or Tony Abbott’s debt levy – global corporations are quick out of the blocks to warn they’ll take their capital and go home. And without imported capital, Australia would be a much poorer place.

Most of that is bark, not bite. A company making extraordinary returns on its capital in Australia, if asked to pay a full 30 per cent company tax, is still making very healthy and attractive returns.

And if they just break even, or lose money in a year … why they’ll pay no tax at all, just like everyone else.

Every dollar multinationals avoid paying (or every wealthy tax-minimiser for that matter) has be found through a tax system that is increasingly reliant on income tax.

And the lion’s share of income tax is paid by the breadwinners of everyday families – people who are simply not wealthy, or devious enough to wriggle out of their tax obligations.