Halting the Havens
Australian Petroleum Production & Exploration Association
Biennial Taxation & Commercial Conference
17 November 2017
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We often say that the apple doesn’t fall far from the tree. But for some multinational firms, their tax affairs often do.
In May 2013, Apple’s chief executive Tim Cook was being grilled by US Senators about the nature and structure of his company’s tax affairs.
Those Senators were scrutinising a complex corporate structure, and how Apple had come to amass billions of dollars of largely untaxed profits offshore. The current figure put on profits Apple has hoarded offshore is said to be around US$128 billion.
Mr Cook’s retort to the subcommittee was “We don’t depend on tax gimmicks… We don’t stash money on some Caribbean island”.
As New York Times reporters Jesse Drucker and Simon Bowens noted after the release of the Paradise Papers: “True enough. The island Apple would soon rely on was in the English Channel”.
Apple’s journey to Jersey started when, after international pressure, the Irish government began to crack down on the type of tax structure Apple had employed.
Prior to the crackdown, if Irish tax authorities were satisfied that a company was “managed and controlled abroad”, they were not liable for much tax. The loophole for Apple emerged because US tax law holds that subsidiaries need to be incorporated in the US to be tax residents.
As Ireland began to change its laws, Apple sought assistance from the Bermuda-based, and serendipitously named, law firm Appleby to help them find a haven for their tax affairs. Appleby’s stationary is adorned by the slogan “The Right People. The Right Places”.
Like many in the room, my life is better for the invention of the iPhone and the iPad. I still think one of the greatest university graduation speeches ever given is Steve Jobs’ 2005 Stanford address, in which he said:
‘..death is very likely the single best invention of life. It is life's change agent. It clears out the old to make way for the new. Right now the new is you, but some day not too long from now, you will gradually become the old and be cleared away.. Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma – which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice.’
It’s about as close as a business executive has ever come to poetry.
I continue to be a fan of the company Steve Jobs once ran. But I want Apple to succeed based on product innovation, not tax innovation.
Alas, as a result of the extraordinary Paradise Papers leak to the German newspaper Süddeutsche Zeitung, and shared with the International Consortium of Investigative Journalists, we have a glimpse at how firms such as Nike, Google, Amazon and Facebook use shell companies and tax havens.
The shenanigans uncovered by the Paradise Papers, the Panama Papers, the US Senate subcommittee, the Australian Senate Economics References Committee, and tax advocacy groups – to name just a few - are not always illegal.
But what is legal is not always moral or economically sound. For example, a concentrated market can become even more distorted if an incumbent has tax advantages a potential new competitor does not have access to. Public health and education services are threatened by the erosion of the tax base by tricky tax tactics. Aggressive tax planning can erode public confidence in the tax system itself. After all, one reason most of us pay the taxes we owe is that we believe we live in a society where our fellow citizens do the same. Bad apples can spoil the whole barrel.
Let’s put it plainly: there are a lot of crooks in tax havens. Gabriel Zucman, an economist at University of California, Berkley, estimates that around four-fifths of money in offshore bank accounts is there in breach of other countries’ tax laws. Tax havens are used by drug-runners, extortionists and money-launderers. They are used to hide the proceeds of fraud, corruption and tax evasion.
Tax havens make it frighteningly easy for firms to divert profits onto their sunny tax-free shores. Last year, reporters compiled a five-step guide, showing how to establish your own secret firm in a tax haven.
The process takes 10 minutes, costs about $2,000, and guarantees anonymity. Annual fees can be steep, but the start-up process is almost trivially simple. As the reporters put it, it’s “not unlike booking an international plane ticket or an overseas hotel”.
Tax havens have been estimated to hold at least $7 trillion in assets, costing the global economy hundreds of billions in lost taxes every year. Cayman Islands has fewer people than Bendigo, but more foreign-owned deposits than Japan. Head to the Caymans waterfront, and amid the diving shops, you’ll find Ugland House, a building that stands as the registered office address for more than 18,000 companies. I’m guessing most of you don’t share your company headquarters with 17,999 other companies.
Gabriel Zucman is at the forefront of research into the use and abuse of tax havens. In a recent study, he found offshore wealth held by Australians was approximately 6 per cent of GDP (using 2007 data). In today’s prices, that would mean over $100 billion in assets held offshore by wealthy Australians.
And we know that these people are not just wealthy – they are super-wealthy.
Zucman also teamed up two other researchers, Annette Alstadsæter and Niels Johannesen, to study how tax evasion affects inequality. The paper used micro-data from large profile leaks including the Panama Papers and the HSBC Switzerland leak, and matched it to macro data from Norway, Sweden and Denmark.
Their findings were stark: that tax evasion rises sharply with wealth; a phenomenon random audits fail to capture. On average about 3% of personal taxes are evaded in Scandinavia, but this figure rises to close to 30% in the top 0.01% of the wealth distribution.
Offshore wealth is similarly distributed in both data sources, and extremely concentrated: about 80% of offshore wealth belongs to the top 0.1% richest households, and about 50% to the top 0.01%.
Just to be clear – half of the dosh in tax havens is owned by the top 1/10,000th of the population.
The study only looked at some of the offshore assets, but it’s fair to suppose that we can measure the iceberg by looking at its tip. After all, it is highly unlikely that a large fraction of it belongs to households in the bottom 99% of the wealth distribution. Offshore private banks typically require customers to have a minimum amount of financial assets to invest. You won’t pass the million-dollar investment threshold if you’re not a multi-millionaire.
It goes without saying that for Australia to be a leader in tackling multinational tax avoidance, our investigators need to be properly resourced. Alas, the Coalition has slashed thousands of staff from the tax office since 2014. The Turnbull government is big on announcements, but their measures are mostly cosmetic: more Revlon than revolution.
The people in this room think hard about tax every day. You know that the integrity of the system rests on people feeling faith that everyone is paying their fair share. That sometimes things can be legal – yet push the bounds of being ethical.
You know how critical it is to get tax policy right: to strive towards the goals of equity, efficiency and simplicity.
Labor’s concern about multinational tax fairness doesn’t stem from a fear of foreigners. Quite the opposite – we believe that unless the rules are fair, we won’t be able to maintain strong support for openness.
One of the central challenges of our age is this rise in right-wing populism. We've seen not only the British Brexit decision and the rise of Donald Trump, but also right-wing parties in Germany and Austria and Hungary making the argument that those countries would be better off retreating from the global economy.
By contrast, Bill Shorten and Penny Wong have been spending time engaging with South Korea and Japan. Chris Bowen, Jason Clare, Matt Thistlethwaite and Penny Wong have just launched an important policy called FutureAsia, about how a future Australian Labor Government would engage with our region.
For my own part, I released a short book last month. Published by Penguin and the Lowy Institute, it’s called Choosing Openness, and argues in favour of trade, migration and foreign investment, and the policies needed to support them.
Foreign investment helps create opportunities that would not have otherwise existed. Australia’s sugar production industry was kickstarted in 1855 by the Colonial Sugar Refinery, now known as CSR. Australian manufacturing was boosted when Schweppes opened a bottling facility in 1877, when Kodak set up its first film plant in 1908, when Heinz began canning baked beans in 1935, and when 3M started producing in 1951. During the twentieth century, a variety of foreign automotive firms built cars in Australia, including General Motors, Ford, Chrysler, Leyland, Toyota, and Nissan. The era of Australian vehicle production was driven by foreign investment.
Today, foreign firms have established themselves atop a range of Australian industries. In Melbourne, defence firm Lockheed Martin is opening a Skunk Works research facility, focusing on quantum computing, hypersonics, and robotics. In your sector, foreign investment by Royal Dutch Shell, Japan’s Inpex, and US firms such as Chevron and ConocoPhillips is the main reason Australia is set to become the world’s largest liquid natural gas producer by 2020. A corollary of this, as the Reserve Bank has pointed out, is that most of the profits will flow offshore, meaning that the main benefit to Australians in the future will come through any taxation revenue that is collected from the projects.
In economic terms, the case for foreign investment is that it fills the gap between domestic savings and domestic investment. In 2016, that gap was $44 billion, about one-ninth of total domestic investment ($400 billion).
What would happen if we ended all foreign investment? One possibility is that total Australian investment would fall by about one-ninth. In other words, one in nine new roads might not be constructed; one in nine solar farms might not be installed; one in nine buildings might not be erected, and so on.
The other way Australia could cope with the removal of foreign investment would be through higher savings. The typical household would have to cut consumption by $4500 per year if we wanted household savings to replace foreign investment.
Either of these outcomes – a one-ninth drop in total investment or a $4500 cut in annual household spending – would have a dramatic impact on the lives of most Australians. As a recent study concluded: ‘restrictions on capital inflow would reduce the wellbeing of Australians’.
Yet if the public doubt that multinational firms will pay their full share of tax, it will be difficult to maintain public support for openness. Multinational taxation is a particular issue in industries that are highly capital-intensive, such as technology and mining. If the profits mostly go offshore and the employment impact is limited, then tax becomes one of the main ways that the community can directly benefit. While competition between countries is usually healthy, the race to the bottom in company tax rates can be distinctly unhealthy – particularly when firms use accounting tricks to shift profits to the lowest-tax country.
On multinational tax and tax havens, Labor has been leading the policy debate.
We didn’t wait for the Paradise Papers leak.
Well before the Panama Papers, in Government, we delivered the transfer pricing laws that were fundamental in the Australian Tax Office’s recent transfer pricing victory in court, and the lion’s share of the $4 billion in liabilities raised by the ATO against multinationals – laws the Coalition voted against.
That, of course, didn’t prevent the Government from trying to take credit for those victories, rolling out an $8 million “information campaign”.
You may have seen the flash advertisements featuring ball bearings and wooden tracks that have, and still do, run across national television, radio, print and online. They can seem a little less quaint when you remember that you’re paying for them.
Why did they do it? Treasury’s testimony to Senate Budget Estimates (in writing) earlier this year stated:
Research has shown the general population and small businesses indicated that the tax system was seen to be structured so that multinationals and big businesses were not contributing their fair share, meaning that the population and small business were taking on an unfair burden. The research also indicated there was little or no knowledge of the Government’s tax integrity measures.
With net national debt now exceeding $330 billion, the general population might reasonably ask why the Turnbull Government is borrowing millions of dollars to spend on partisan taxpayer funded ads.
While the government is focused on its ad campaigns, Labor is working hard on policy development.
In March 2015 – less than halfway through our first term in Opposition – Bill Shorten, Chris Bowen and I announced a policy suite on multinational tax that closed debt deduction loopholes and would deliver billions to the budget bottom line.
The government has dismissed it. Indeed, they sometimes boast about how they won’t touch these loopholes.
In May of this year, Labor announced one of the world’s most comprehensive Tax Haven Transparency packages.
As Justice Louis Brandeis put it, sunlight is the best disinfectant.
Labor’s reforms include:
Public reporting of country-by-country reports. This would require the Australian Taxation Office to make country-by-country reports (excerpts) publicly accessible; high level data on how much tax is paid in jurisdictions in which the firm operates, the number of employees, and related material.
To those who say this can’t be done, I’d simply answer by pointing out that the European Union have already moved on public country-by-country reporting, with some sectors operating under the European Union tax transparency regime for years, while the United Kingdom is able to release such reports publicly under regulations. Some major Australian firms already report country-by-country tax on a voluntary basis.
Australia has implemented laws requiring multinational corporations with revenues over $1 billion to have to submit country-by-country reports. There is no requirement for these reports to be made public. Public disclosure would make country-by-country reporting much more useful to developing countries, other businesses, shareholders, civil society, academics and journalists.
Whistle-blower protection and incentive/rewards – Labor would provide protection for whistleblowers who report on entities evading tax to the Australian Taxation Office. Individuals who highlight tax evasion collect a share of the penalty collected.
The Turnbull Government, whilst releasing some draft whistleblower reforms, has not committed to the important role of rewards. The US and UK have existing reward/incentive measures in their tax enforcement, and the UK program has been prominent in recent years, in part due to growing community concerns about tax avoidance.
Implement a publicly accessible registry of the beneficial ownership of Australian legal entities, including trusts. Labor would fully implement the G20 principles Australia signed in 2014 and ensure transparency over who ultimately owns a company, rather than just who is listed on company paper-work.
The Financial Action Taskforce found Australia’s beneficial ownership regime to be ‘partly compliant’ regarding companies, and “completely non-compliant” regarding legal arrangements, that is, trusts. Trusts are regularly cited in the use of tax havens, adding an extra layer of opacity to many firms’ arrangements.
Labor would amend Government procurement process requirements such that the Australian Government tender process requires all companies to state their country of domicile for tax purposes. This would not prevent firms from tendering – rather, it acknowledges that the public who are funding such work are entitled to know the firm’s tax domicile.
And importantly, Labor will require mandatory reporting of a specific ‘material tax risk’ - tax haven exposure - to shareholders.
This proposal would be a ‘nudge’ in having companies include reputational risk and the involvement of shareholders as part of their tax risk management practices
Companies would be required to disclose to shareholders as a ‘Material Tax Risk’ if the company is doing business in an international material tax risk jurisdiction (i.e. a known or suspected tax haven). There is no current legal requirement to do so currently.
The proposal would amend the Corporations Act to require disclosure of dealings in ‘international material tax risk jurisdictions’ to shareholders. The Australian Tax Office would issue guidance on the types of activity, and detail, businesses are required to disclose.
A list of these jurisdictions would be maintained by the ATO and issued as a guidance note to inform companies’ corporate governance regimes. It would be similar to the design of the European Union’s proposed EU-wide ‘blacklist’.
Jurisdictions featured on a draft EU list include: Andorra, Liechtenstein, Guernsey, Monaco, Mauritius, Liberia, Seychelles, Brunei, Hong Kong, Maldives, Cook Islands, Nauru, Niue, Marshall Islands, Vanuatu, Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Grenada, Montserrat, Panama, St Vincent and the Grenadines, St Kitts and Nevis, Turks and Caicos, and the US Virgin Islands.
Aside from existing disclosure requirements relating to company financial positions or operations, public policy considerations are part of the Corporations Act.
For example, Section 298 of the Corporations Act 2001 has a mandatory requirement that a company’s annual report include a Directors’ Report. Section 299 requires that the Directors’ report include:
“if the entity's operations are subject to any particular and significant environmental regulation under a law of the Commonwealth or of a State or Territory--give details of the entity's performance in relation to environmental regulation”
The Government and some vested interests have already begun their scare campaign about our transparency proposals. We’ve even had accusations that Labor’s reforms – which are eminently sensible for anyone who believes information is fundamental to open and functioning markets – are a harbinger of Australian iron curtain.
To assuage any outstanding red scares, I’ll turn to former BlackRock managing director Morris Pearl, who now chairs the Patriotic Millionaires group in the US that “public policy solutions that encourage political equality, guarantee a sustaining wage for working Americans, and ensure that millionaires, billionaires, and corporations pay their fair share of taxes”. In short, Pearl wants to save capitalism from the cronies.
As an investor, one who has been entrusted with helping to safeguard other people’s money over many years, I value the high degree of disclosure required from American public companies. Corporations and the world in which they operate change every day, so investors need to know the risks their money faces…
Incredibly, even though the blowback against egregious tax practices is a substantial risk to multinational companies and a significant threat for shareholders, it is often impossible for investors to determine how healthy a company really is and whether or not the profits are merely a reflection of aggressive tax planning…
With companies engaging in high-risk tax avoidance, the investing public needs more information, clearly expressed. Investors should, at a minimum, be given a list of all countries in which a company operates, the revenue and earnings attributed to each country, and the amount of taxes paid in each. There might still be disputes but at least investors would be working from the same numbers.
The transparency policies I’ve outlined are not a panacea. They do, however, complement and reinforce strong tax laws and the shutting of loopholes.
Firms operating in Australia through tax havens are on notice that a Shorten Labor Government will open the shutters and let the sunlight in.
Many firms, who are already doing the right thing, will welcome greater transparency.
Those who are doing things their customers wouldn’t support might need to rethink their approach. As the global head of Appleby’s corporate department wrote in an email to his senior partners three years ago: “for those of you who are not aware Apple are extremely sensitive concerning publicity”.
I’ve spoken plainly to you today because I believe you have the right to understand Labor’s specific tax policies. As Australia’s Opposition, we do the nation no favours if we try to obfuscate, dodge and deceive our way into office.
That’s why you’ve seen Bill Shorten’s opposition produce more policies than any other opposition in decades. From trade policy to fiscal policy, vocational training to the NBN, we are committed to outlining our fully costed plans to the Australian people. As respected economics commentator Peter Martin recently noted ‘The policies are not all to everyone's liking, but at least they are set down on paper. Unless things change, this time next year we will be faced with a choice between a government that makes things up as it goes along and a government in waiting that knows what it wants to do.’
Labor’s vision is of an Australia that is more open, more equal and more engaged with the world. We want to raise living standards for everyone – not just the fortunate few.
We appreciate the chance to engage with your sector, as I did in July when I spent a day speaking with management and staff at Chevron’s Gorgon Project on Barrow Island.
Thank you for the opportunity to speak with you today. I look forward to continuing the conversation.