LABOR WANTS TO WORK WITH BUSINESS IN A RACE TO THE TOP
Australian Financial Review, 9 August 2022
With an area of around 700 square kilometres, Singapore is about 1/10,000th the size of Australia. Not surprisingly, it doesn’t have much of a mining industry. But starting around 2006, Singapore suddenly began to play a key role in Australian commodities exports. From 2006 to 2014, BHP sold $US210 billion worth of resources to its Singapore subsidiary. They then marked it up by 10 per cent and sold it on. The iron ore never went near Singapore – it was shipped out of Western Australia to the final buyers in Korea, China, India and Japan. Yet somehow a chunk of the profits landed in Singapore.
The creation of Singapore marketing hubs isn’t the fault of the Singaporean government, which has a long and distinguished tradition of welcoming traders and financiers from around the world. It arose because some clever accountants at BHP and Rio decided to play a thimble-and-pea trick with their profits. Some called it ‘the Singapore Sling’, but while the cocktail is a deliciously sweet gin drink, these tax tactics left a sour taste in the mouth of Australian taxpayers.
Unwinding the problem of marketing hubs has taken decades. In 2015, questioning from Labor and independent Senators on the Senate Corporate Tax Inquiry revealed the extent of the tax lurk, and put a public spotlight on the oddity of the practice. Most of us understand why marketing is a big deal if you’re selling Nike sneakers or the latest iPhone. But marketing iron ore doesn’t exactly pass the pub test.
Over time, the Australian Taxation Office has scrutinised the claims being made for marketing hubs. In 2018, BHP announced that they had reached a settlement with the ATO regarding their use of marketing hubs. A few weeks ago, Rio announced that they had done the same. The BHP settlement was worth around half a billion dollars. The Rio settlement was worth around one billion dollars. Put another way, these two settlements were worth around $60 for every single person in Australia. That’s more than loose change.
Importantly, the latest deal doesn’t just settle past arrangements – it also applies to the future. Under the settlement, when commodities are dug up in Australia, company tax will be paid in Australia. That’s good for taxpayers, since tax revenue goes to fund the public infrastructure that we all use. And it’s good for the economy, since it ensures that there’s a level playing field in tax. Smaller miners shouldn’t be put at a competitive disadvantage because they don’t use tricky tax arrangements such as marketing hubs.
What holds for mining marketing hubs holds for multinational tax more broadly. The Albanese Labor Government went to the last election with a plan to close multinational tax loopholes that allow firms to use debt deductions and royalty deductions to inappropriately lower their tax bill. We are now on the path to implementing these policies. On 5 August, a consultation process opened that will allow firms to offer their views on the best way to put these changes in place, and identify any unanticipated issues. We’re keen to work collaboratively with business as we put in place a fairer multinational tax system.
Ultimately, success in the Australian economy should depend on coming up with great ideas, delivering cheaper prices, producing new products, and innovating in how companies are managed. If we’re to get productivity growth going again, it’ll depend on thousands of savvy business decisions across the economy that ensure firms are more efficient and effective. What we don’t want to see is an economy where multinational companies are looking for a shortcut to success by finding another tax loophole. That kind of lazy approach isn’t going to lift living standards – it’s just a pretence of progress.
One of the great things about being part of the Labor Treasury team is the chance to work with business on a race to the top. Like Jim Chalmers, Katy Gallagher and Stephen Jones, I’m a pro-growth progressive – committed to the importance of growing economic activity in the national interest. A better multinational tax system will mean a stronger economy and a fairer society: one where the Singapore Sling is just a tasty cocktail, not a tax dodge.