Offshore profit shifting by big multinational firms is a big concern of mine, not least because it creates an unbalanced playing field for small Australian businesses. Here's my latest opinion piece in the Daily Telegraph explaining why:
SHIFTY BUSINESS OF DODGING THE TAX MAN, Daily Telegraph, 12 August 2014
Glen is a chippy running his own small company. He employs a couple of apprentices, mostly building homes and units in the western suburbs. Business has been good this year; so good that the Australian Tax Office should be sending him an end-of-year bill worth tens of thousands of dollars.
Except it won’t, because Glen has a cunning plan to reduce his tax bill to zero. He’s established a company, GlenCarp, with its registered office in Jersey (a tax haven) and a head office in Switzerland. His Australian carpentry business is a branch operation of the Swiss parent, using the now dormant legal shell of an Australian body corporate in an attempt to hide the reality of its Australian carpentry business. By taking large, unnecessarily expensive loans from associates overseas, GlenCarp avoided paying any tax this year.
OK, I’m pulling your leg – but only slightly. The tax trick I’ve just described wasn’t performed by a carpentry firm, but by a global mining conglomerate, Glencore, which over the past three years has paid almost no tax on income of around $15 billion.
Multinational profit shifting schemes like these are worryingly common amongst big corporations operating in today’s globalised economy.
Corporations use these schemes to avoid paying their fair share of Australian tax. In March this year, the tax office announced that it was investigating 86 major international firms for allegedly shifting profits offshore. Tax Commissioner Chris Jordan has estimated that the combined cost of these schemes could be more than $1 billion a year in lost tax revenue.
To put that in perspective, $1 billion dollars is about the cost of a new hospital. So by stopping multinational firms from siphoning profits offshore, the government could build another new hospital every year.
When big companies take their profits offshore, it doesn’t just hit the federal budget’s bottom line. It’s also unfair for local small businesses that are left to pick up the slack of paying for government services. After all, a sole-trader hairdresser or suburban plumber has few opportunities to minimise their tax. Because in reality Glen the carpenter can’t shift profits offshore, he and his mates ends up paying more than their share while some big corporations skip out on the bill.
To maintain Australia’s revenue base and ensure a level playing field for local firms, the former Labor Government introduced a comprehensive package of reforms cracking down on multinational tax avoidance. But the Abbott Government recently introduced a revised package to the Parliament which has rolled back a quarter of Labor’s key measures. Where Labor’s reforms would have prevented over $4 billion of profits being moved offshore, the government’s current plans leave open tax loopholes worth over $1 billion.
At a time when they’re slugging vulnerable Australians, you might think Mr Abbott and Mr Hockey would be embarrassed about cutting a $4 billion profit-shifting package into a $3 billion one.
Not a bit of it. Abbott and Hockey are proudly beating their chests about how they’ve taken on the multinationals. In reality, they’re like a couple of guys who got a box of chocolates for Christmas, ate a quarter of them, then re-wrapped the box and tried to give it as a present the next Christmas.
If the Abbott Government is serious about putting the federal budget on a sustainable footing for the future, then implementing Labor’s full $4 billion package of tax avoidance reforms is a good place to start. That means going ahead with transparency measures that make it easier to see how companies are shifting money between their international arms. It also means tightening the eligibility rules for the Offshore Banking Unit regime sooner rather than later.
Australians deserve a fair taxation system where carpenters and multinational corporations alike pay their way. The Abbott Government’s decision to roll back Labor reforms that would achieve this is bad for the budget and bad for small Australian businesses.