More indications of multinational profit shifting

The Australian Financial Review has just published some pretty explosive evidence of multinational profit shifting by major Australian and international firms. I joined Waleed Aly on Radio National's Drive program to talk about what the government should be doing to tackle this.

E&OE TRANSCRIPT

RADIO INTERVIEW

RADIO NATIONAL DRIVE

THURSDAY, 6 NOVEMBER 2014

SUBJECT/S: multinational profit shifting

WALEED ALY: Andrew Leigh joins me now, the Shadow Assistant Treasurer. He's been arguing that we've got some problems here and that the government is going the wrong way about trying to deal with them. Thank you very much for joining us, Andrew.

ANDREW LEIGH, SHADOW ASSISTANT TREASURER: Pleasure, Waleed.

ALY: Let's talk about this scenario, and let me be radical about this and ask a threshold question: is this actually a problem? Because we can try to close tax loopholes but won't that just ultimately drive people or companies to other countries where they can use those loopholes, and then we don't even get the benefit of their employment?

LEIGH: Waleed, I think it's a constant race between lawyers for multinational firms looking to find loopholes and countries looking to close those loopholes. We need to be vigilant as a country to make sure that we're closing those loopholes. I don't think that making sure that people pay their fair share of tax means that they'll ship all their jobs overseas. In fact, that ought to be a free market notion: that everyone pays the same rate of tax. Every time one firm pays less tax, effectively other firms and individuals have to make up the difference in order to support the social services we value.

ALY: The problem we have here is the cracks which exist in laws between states, ultimately. If we had one global tax regime this would be impossible, you simply couldn't do this. 

LEIGH: That's right. As a result, what you have is firms wanting to book revenue in low-tax jurisdictions and deductions in high-tax jurisdictions. The tax authorities are seeking to stop them doing that. 

ALY: Right. But that needs international cooperation. The G20, I suppose, will take a look at this next week, it's certainly on the agenda. But is there anything Australia can actually do? Because unless everyone is one the same page – it's a bit like the climate change problem – unless everyone cooperates, anything you do ends up being futile.

LEIGH: No, that's not right. We can certainly move to close loopholes in our own tax laws, and that's one of the big things that Wayne Swan and David Bradbury did last year when they put together the biggest ever package of multinational profit shifting reforms. It was so recognised around the world that it won David Bradbury an award for being one of the 50 best tax reformers in 2013. When the Coalition came to office, I'd expected that they'd take that package and build on it. But instead, they took that package and chipped away at it. They gave $1.1 billion of tax breaks back to multinationals by deciding not to proceed with measures, for example, to curtail the use of offshore banking units or to stop multinationals engaging in debt shifting. 

ALY: I understand the idea, I mean, Wayne Swan was quite big on this as well towards the end of the Labor Government. But that Labor Government had been in power for six years, and one of the things which is interesting about this story is that the Future Fund itself, which is a government-owned corporation, had been taking advantage of these deals and had done so back in 2010 under a Labor Government. So is it possible that, actually, it was the previous government as well as other governments prior to that which had been looking the other way?

LEIGH: What the Future Fund has done by using Luxembourg, I find that pretty shocking, the tax deal they've done. The Future Fund operates within a broad mandate and, as I understand it, the Labor Government wasn't aware that the Future Fund was using this particular tax minimisation device. Had it been so, I suspect people would have been pretty troubled by it. 

ALY: But that tax minimisation device existed on the books under the Labor Government, whether or not it was aware that the Future Fund was specifically doing this. It was on Labor's watch that this was all possible – are you suggesting Labor didn't understand the loopholes in its own tax laws?

LEIGH: There's two different issues here, Waleed. Firstly, we need tax laws that make sure multinationals pay their fair share. That was what motivated Labor to put together the 2013 package of reforms which the Coalition chipped away upon coming to office. Then there's the issue of the Future Fund's behaviour. Not every deal done by the Future Fund is informed to government, and as I understand it, the details of this one weren't. I think there's some expectation by the community that the Future Fund won't fly close to the law, and that it will set a standard with its investments. That issue has come up in terms of certain categories of Future Fund investments, such as investments in tobacco companies.

ALY: Right. We tried to speak to the Future Fund, by the way, and they weren't available to speak to us. They referred to the comments they'd already given to the Financial Review, and effectively said they had nothing more to add to that. I'll just take you through those comments because they're interesting: David Neil, who is the Managing Director of the Future Fund, said that the Luxembourg structure that they used is commonly used by institutional investors and external investment managers. So that's point one. Point two is that the structure is predominantly about providing operational efficiency and effective risk management, so not about the avoidance of tax. He goes on to say that as a sovereign investor, had the Future Fund directly invested in the underlying loans, it would have ended up in substantially the same tax position. So is it possible that if we tried to close what we're calling here 'tax loopholes', that it actually wouldn't affect the tax position of these companies anyway, but what we might be doing is simply offsetting their attempts to provide operational efficiency and effective risk management?

LEIGH: In terms of changing the law, certainly the advice that Labor received from the Treasury at the time was that we could book significantly more revenue. The effect of the Coalition not going ahead with some of these Labor measures has also been to cost the budget revenue. At a time when they're making 20-somethings wait six months in order to get the dole, or imposing a $7 tax on people going to the GP, they're also giving $1.1 billion of tax breaks to multinationals. I don't think that's fair. When it comes to the Future Fund, as I've said, I'm concerned about it flying close to the wind. When I look at this tax structure, it doesn't smell good to me. I know that there is a debate going on between Luxembourg, the European Union and the OECD as to Luxembourg's tax arrangements; there's clearly a lot of concern being raised by other international authorities about these sorts of tax arrangements.

ALY: Are you concerned that the new leader of the European Community is a former leader of Luxembourg?

LEIGH: I'm less concerned about personalities, Waleed, than I am about trying to get the institutions right.

ALY: But there's a conflict of interest there, isn't there? 

LEIGH: Every country is entitled to be represented on multinational bodies. My chief concern is making sure that the Future Fund is doing the right thing, and that Australia is making sure we deal with the challenge of multinational profit shifting.

ALY: I understand that. But if you've got global forums that are meant to be looking into this, or even regional ones, and they're headed by someone who would effectively be investigating themselves, then that strikes me as a prima facie problem.

LEIGH: The particular investigations won't necessarily be conducted by the person heading the EU, and there's a range of other bodies which are looking into Luxembourg's tax affairs. In the end, that's going to be a matter for Luxembourg and the other member nations that deal with it. My main beef is with the Abbott Government's decisions around transparency and tax affairs. At every turn they're backing the big end of town over the battlers. So when it comes to signing up to a thing called the Common Reporting Standard, a whole range of other countries will be doing it from 2016, we'll be doing it a year late. When it comes to tax transparency, Labor is arguing for tax transparency to be brought forward and to happen as quickly as possible; the Coalition is dragging its feet on having the biggest Australian firms report their tax paid so we can have a sensible, evidence-based debate. 

ALY: I should point out that we did try to speak to Mathias Cormann, he's issued a statement and that's all we have. He speaks about the government tackling this on three fronts: they want to implement effective domestic policy changes; they want to work closely with the Commissioner of Taxation – and they are, they say – to strengthen administration; and they are pursuing multilateral change through fora like the G20. The G20 is in town, it's going to take place next week – can anything really come out of that which would solve this?

LEIGH: It certainly can. The G20 is encouraging, for example, the Common Reporting Standard, which will lead to more revenue coming back to Australia. But there are 40 countries moving faster than Australia on this. The G20 will also be talking about the issue of base erosion and profit shifting across the developed world, but again, Australia comes to this from the position of a laggard, not a leader.

ALY: It's the involvement of nations like Luxembourg, isn't it, that's the real problem? I mean, if you could tackle that then this would deal with a lot of the problems we would face.

LEIGH: We don't need a globally-administered tax, Waleed. What we need is cooperation and making sure that countries' rules are as closely aligned with each other as possible. But what troubles me is that the Coalition could be in a real leading position on this, it could be around the table saying: 'we took Labor's package and we added to it'. But instead they're in a position of saying: 'we've taken away from Labor's tax reform package, we're not following through on the Common Reporting Standard as quickly as we could, we're against transparency happening faster, and we've slashed thousands of staff out of the tax office – so that while we're asking it to do more, really it's got fewer resources to do it with.' 

ALY: Alright, well we'll see what comes out of the G20. Thank you very much, Andrew.

LEIGH: Thank you, Waleed.      

ENDS

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