How can we make companies pay their fair share?

The Tax Justice Network and United Voice has just released new research showing many companies in the ASX 200 have an effective tax rate well below the Australian standard. I joined Jonathan Green on Radio National's Drive program to talk about how we can ensure that companies pay their fair share of tax. Here's the transcript:





SUBJECT/S: multinational profit shifting; corporate tax avoidance

JONATHAN GREEN: This may not come as a shock, but it seems that some of our biggest companies are paying the least amount of tax. The latest evidence comes in a report from the Tax Justice Network, and it’s a report supported by the United Voice union. Dr Andrew Leigh is the Shadow Assistant Treasurer and he joins me now, Dr Leigh – welcome.


GREEN: We all know that businesses try to minimise their tax, but this survey suggests that one third of top Australian companies pay less than 10 per cent. Is that extent a surprise?

LEIGH: Certainly there is a challenge with what's known as multinational profit shifting which a lot of developed countries are facing at the moment. It arises because increasingly a lot of production is being globalised and we're increasingly becoming a service economy. So it's easier for accountants to move the nominal country in which production takes place around to a low tax jurisdiction. A lot of countries are now working out how they can crack down on multinational profit shifting.

GREEN: So do we have particular vulnerabilities?

LEIGH: Australia – as a small, open economy – is particularly vulnerable to this. One of the things that Labor did last year, in our final year in office, was for Wayne Swan and David Bradbury to sit down and put together a multi-billion dollar package of measures to crack down on multinational profit shifting. What was disappointing to me was that when the Coalition came to office, they didn't say 'well, what's the next thing we can do beyond this?' Instead, they began to wind it back. So they shrunk the size of that package by $1 billion, effectively losing $1 billion of revenue which went back to multinationals in the form of extra tax breaks. 

GREEN: And yet we hear about this a lot in terms of the agenda of the G20, that this is something which is front and centre. So we're having a leading role in that discussion at least.

LEIGH: I'm disappointed in terms of the G20 that Australia is not playing more of a leading role in its domestic agenda. Joe Hockey is continuing the conversation about multinational profit shifting, but other countries would look at what he's actually done and say that the only thing he's done since coming to office is to give tax breaks back to multinationals. He’s also suggested that he's not going to go ahead with transparency measures which would see the largest 200 firms report their tax paid, and not to join the so-called Early Adopters Group of countries on the Common Reporting Standard. So at every turn we've seen Joe Hockey make decisions which side with the big end of town rather than with increasing the revenue base and making sure that everyone pays their fair share. 

GREEN: Most of us have no choice about the amount of tax we pay – it's taken out of our pay packets. And yet we have the likes of James Hardie and Westfield Retail Trust paying no tax at all. How can this not be a significant political issue?

LEIGH: It's certainly been an issue that I've been banging on about since I took over the job of Shadow Assistant Treasurer. I think it's absolutely fundamental. This is partly an issue of equity. This government is prepared to go after pensioners, students and the unemployed, so it's a bit rich when it starts giving extra tax breaks to multinationals. But it's also an issue of efficiency. If you want to have a good tax system, then it needs to have as broad a base as possible, and multinational profit shifting is effectively eroding the tax base.

GREEN: Are we too hung up in our discussion around the budget on the outgoings side? I mean, some estimates put this at about $8 billion which is not being collected by the Commonwealth, and when we're in a deficit position of about $45 billion as we heard last week. Why is it not in the government's self-interest to do better on collecting that revenue?

LEIGH: I think it would be. I think rather than starting by attacking spending which is focused on the most vulnerable, I think the government should have looked right across the board. So while at the same time they're making decisions to open tax loopholes for the top end of town on multinational profit shifting and, indeed, for high income earners' superannuation, then they're cutting back supports for the vulnerable, cuts to the pension, health and education. It all comes in a context in which Australian inequality is much higher now than it was a generation ago. So I think the decision to cut back on supports for the bottom end while giving more tax breaks to the top end is really completely out of touch with where Australia is at.

GREEN: Isn't there a bargain we make here, Andrew Leigh, that we welcome these businesses and we accept these tax arrangements for the sake of their participation in our economy? For the sake of the jobs that they bring? If we were to tax them at the full rate, might they not just walk away?

LEIGH: Well Jonathan, I think we ought to encourage overseas investment. Australia has more jobs and better paying jobs as a result of foreign investment in the agricultural sector, in manufacturing, in the services sector. But it's not unreasonable that we ask those firms to pay their fair share. I mean, if you're a local Australian business like a plumbing company, you can't exactly take your profits and shift them off to a tax haven. But that's exactly the sort of behaviour that some of the large multinationals seem to have engaged in. All we ought to ask them to do is to play by the same rules that the local plumber plays by.

GREEN: How fast and loose is some of the conduct?

LEIGH: We've closed, certainly, some loopholes. The Swan/Bradbury package was a multi-billion dollar package and the government has kept part of that. But there's other loopholes they've kept open. So they've kept open, for example, loopholes that permit debt shifting. In the government's view they think it's alright to have measures like Offshore Banking Units and measures that allow debt shifting. I don't think that's appropriate.

GREEN: Talk us through that – artificial debt loading, debt shifting, what's that all about?

LEIGH: One way of thinking about it is that you've got an offshore subsidiary and it makes a loan to the Australian arm at an artificially high interest rate. The Australian company is then able to deduct the interest payments as a tax deduction, so it brings down their tax bill here and at the same time moves profits over to the low tax jurisdiction. That's a loophole that would have been closed under the Labor reforms that we announced last year, but is still possible for companies to pursue now. I think that's one the government ought to re-think. If they're going hard on jobless twenty-somethings - saying they can't get income support for six months - then it seems pretty rich to be telling multinationals that it's alright to be shifting their profits offshore.

GREEN: Is there a quick fix or two available to the government? Things they could pull down off the shelf right now and do?

LEIGH: They could implement the $1.1 billion of loophole closing that Labor would have done; that would be the most straightforward thing to do. But of course, this is a moveable feast. So as I was saying at the outset, I fully expected the government would take the Labor package as a starting point and then look for other loopholes to be closed. I didn't expect them to start going soft on multinationals while they're going hard on pensioners and the unemployed.

GREEN: Just finally on another point, Andrew Leigh: the sell-off of Medibank Private. Is this a de-mutualisation? Should some sort of benefit go to the members?

LEIGH: My concern is the impact that it might have on premiums. I think there's certainly been little evidence put forward by the government that this is going to have a downward impact on premiums. I'm worried that we'll end up paying higher premiums. I would also note that the effect of selling off Medibank Private will be to increase the budget deficit by half a billion dollars or so, just after we've had Joe Hockey's huge budget deficit blow-out for 2013-14. Now we've got another decision which is going to blow the budget deficit out still further; it's a pretty strange decision for a government which claims to be very concerned about debt and deficit. 

GREEN: The point I'm trying to make though is: is this an entity that it entirely the government's to sell? Members have been given the option of buying shares, apparently, but should there not be some positive benefit for the members of Medibank Private?

LEIGH: Look, that's a legal issue. As I understand it, the entity is the government's to sell. My concern is over the impact on the cost of health insurance and blowing out the deficit. 

GREEN: Andrew Leigh, thanks for your time.

LEIGH: Thank you Jonathan.        



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