A true tax package would tackle profit shifting on all fronts, Australian Financial Review, Wednesday 27 May
Imagine, for a moment, that Bill Shorten had fronted up to announce Labor's multinational tax package back in March, and told the assembled media it would add a grand total of $30 million to the budget bottom line. Imagine he'd said that he hoped this figure would turn into billions, but he didn't have enough confidence in the estimates to count on more than $30 million.
If Labor had presented a package of this kind, we would have been laughed off Capital Hill, and rightly so.
Yet, this is exactly what Treasurer Joe Hockey did when he unveiled his ideas to tackle the problem of big multinationals sending their Australian profits offshore.
Mr Hockey reckons he can't say how much revenue his proposed changes to the tax act might protect, although he's happy to put a dollar figure on his offshore banking unit changes. This leaves the government with a package that promises to return less than 1/60th of the revenue that the independent Parliamentary Budget Office says Labor's multinational tax package will deliver.
That's not a fair share – it's a flyspeck.
The Senate's ongoing corporate tax inquiry has highlighted the huge amounts of money being moved from our backyard to low-tax jurisdictions overseas. It has brought a number of questionable practices to light which now need urgent attention.
With his current package, Mr Hockey hasn't addressed the practice of companies loading debt into Australia to artificially inflate their tax deductions. Even as the Treasurer is cracking down on GST compliance for small businesses, he is turning a blind eye to how some of the world's biggest firms are abusing deductions.
We know that some big companies are transferring money into their Australian arms and dressing this up as a loan, even though it's really just shifting money from one pocket to the other. In paying back these artificial loans, companies can send their profits overseas while pocketing a tax deduction at the same time.
That's the problem Labor's package zeros in on. By moving to a world-wide gearing ratio approach, companies would only be able to claim deductions against the average amount of debt they owe to banks around the world.
It's a simple plan: if a company owes a lot to the banks, then it can claim a lot back in tax deductions. But if it doesn't owe the banks a cent, and all its debt is in opaque internal loans from overseas subsidiaries, this would no longer be a basis for claiming subsidies. After all, those deductions are effectively paid for by other Australian taxpayers.
The world-wide gearing ratio is already written into Australia's tax law, along with two other deduction tests. Adopting our plan simply means getting rid of those other two tests which are open to abuse.
Just as Joe Hockey says his multinational tax measures can be enacted by amending Australia's current laws, so too can the key parts of Labor's package. In fact, both the government's $30 million worth of measures and our $1.9 billion plan could be rolled into a single bill to put before the Parliament in the next few months.
Adopting our package would go a long way towards ensuring all companies doing business in Australia pay their fair share. It would also protect significantly more tax revenue than the government has claimed for its package – about 60 times more.
Tackling multinational profit shifting is a big task. It will require both of Australia's major parties to step up to the plate. That's why the Treasurer needs to also take up our package and commit to legislate the lot.