The issue of international tax evasion was directly referred to in the 2016 budget and it played a role in the July Australian election campaign.
Treasurer Scott Morrison said in his 2016 budget speech: “Everyone has to pay their fair share of tax, especially large corporates and multinationals, on what they earn here in Australia. The Turnbull Government has been listening to the Australian people on this issue and is taking action.”
He is not alone among treasurers in discussing tax avoidance on a global scale. Nationally and across borders, governments and international organisations are responding to public calls for action on tax avoidance by high wealth individuals and multinational enterprises by enhancing cooperation.
In Australia, a high-profile Senate inquiry into tax avoidance has called evidence from major companies as well as from the Australian Tax Office (ATO) and will report in September 2017. Similar inquiries have been held in other countries including the U.S. and France.
This is partly in response to the extraordinary work of the International Consortium of Investigative Journalists, which has been driving debate with its explosive Lux Leaks expose in 2014 and the Panama Papers revelations that began in May. The information highlights the use of tax havens to hide assets and accounts of high wealth individuals. The Panama Papers continue to make waves as more data is released, including about the secret companies and assets of high-profile leaders and business people from African countries.
Efforts are now being made to halt international tax avoidance at a multilateral level. The first Inclusive Framework meeting of the OECD-G20 and other interested countries on multinational tax avoidance wrapped up in Kyoto, Japan at the beginning of July. It was part of the OECD-G20 base erosion and profit shifting (BEPS) project which started in 2013 and for which Australia sought to lead the way during its G20 presidency in 2014.
BEPS refers to accounting strategies that allow multinational companies to shift profits around so that money earned by a subsidiary in a particular country does not show up in that subsidiary’s accounts; thereby allowing the subsidiary to declare a loss and be exempt from paying company tax in that country.
The Inclusive Framework now includes more than 80 countries on an equal footing, seeking to work together to deal with corporate tax base erosion and profit shifting. Asian countries have been slow to get involved; the Kyoto meeting was the first to include countries such as Papua New Guinea, Pakistan, Bangladesh, Hong Kong and Singapore.
In keeping with these multilateral agreements, Australia has implemented country-by-country reporting, effective from January 1, 2016, which requires multinationals with income of $1 billion or more to report their international group revenues, profits and taxes by jurisdiction. To date, 44 countries have signed a multilateral agreement to share country-by-country reports.
Australia is also one of the first countries to mandate public reporting of company tax. Earlier this year, this allowed the Commissioner of Tax to report total income, taxable income and tax paid for the 2014 tax year for listed companies with income of $100 million or more, and resource companies and private companies with income of $200 million or more.
The first report showed that nearly a third of Australian multinationals paid no tax in 2014.
In response, some large companies, such as Rio Tinto, have published reports on taxes paid. All Australian resource companies will have to do this in future under the Extractive Industries Transparency Initiative, which Australia joined in May 2016. By contrast, some Asian companies – such as those of Hong Kong billionaire Li Ka-shing, named in the Panama Papers – are under serious investigation for evading Australian tax.
In addition to cooperating with other countries, Australia is going it alone with new anti-abuse rules and will increase protection for tax whistleblowers in Australia – tacitly recognising the importance of the Panama Papers.
The Diverted Profits Tax proposed in the 2016 budget is a hefty 40 per cent impost on the profits of multinationals that are shifted to an offshore company taxed at less than 80 per cent of Australia’s tax rate. The rule could capture profits diverted to Singapore (16 per cent), Hong Kong (17 per cent), Ireland (12.5 per cent) and even Britain, which now has a tax rate of 20 per cent. Business is not pleased; the American Chamber of Commerce has criticised the proposed tax, arguing that it may “imperil” U.S. investment into Australia.
As countries build cooperation to halt multinational tax avoidance, tax competition continues and company tax rates are still trending downwards. The Turnbull Government has proposed the Ten Year Enterprise Tax Plan to lower the company tax rate from 30 per cent to 25 per cent by 2026. The tax cut aims to encourage “investment, raise productivity, increase GDP and over time raise real wages and living standards”.
A company tax rate cut is not an economic growth saviour. But the difficult question for Australian policymakers is not “should we cut the rate?” but, in a global economy, “Can Australia really take a different path to the rest of the world—and for how long?”
Miranda Stewart is director of the Tax and Transfer Policy Institute and a professor at the Crawford School, at the Australian National University. She is also editor of the blog, Austaxpolicy.com.
This article was first published by the Australian Institute of International Affairs on August 4, 2016.