Speech To The OECD Forum On Tax Administration
Thursday 29 September 2022
Good morning, my name is Andrew Leigh and as Assistant Minister responsible for multinational tax, I am very pleased to have the opportunity to speak to you at this important forum.
I will begin by acknowledging the traditional owners of the land on which I am making my remarks from in Canberra, the Ngunnawal people, as well as where you are meeting today on the lands of the Gadigal people of the Eora Nation. I pay my respects to their elders past, present and emerging.
It’s a pleasure to be a part of this event supporting the Forum on Tax Administration’s work. The work of tax administrators is a crucial element of ensuring a well-functioning economy and a fair society.
As an Economics Professor, a lot of my work was in public finance, particularly at the intersection of taxation and inequality. I learned a great deal from my co-author Tony Atkinson, who worked across a large number of countries, drawing insights on big questions from looking at different nations. That’s one of the great strengths of the OECD: sharing ideas across countries in the interests of improving policies everywhere. If Tony Atkinson was still alive, I reckon he’d love to be joining your conference today, as he did with many other OECD events.
Why corporate taxes exist
Like the modern corporate firm – corporate taxes came into being comparatively recently. While there were several attempts to create taxes we might recognise as corporate taxes in the 19th century – they often faltered. The USA introduced a corporate tax in 1898 – it was promptly challenged by outraged moguls, and over-ruled by the Supreme Court a year later. A corporate tax made it onto the books in 1913 but the moguls clearly remained outraged, it was set at a measly 1%.
In Australia, a corporate income tax was introduced in 1915 by then Attorney General and future Prime Minister Billy Hughes. Introduced in conjunction with Australia’s first income taxes, in his second reading speech Hughes stated the new taxes were “necessary to meet the great and growing liabilities created by the war”. Hughes stated that this form of direct taxation was “not only an effective means for raising money for the conduct of government, but serving as an instrument of social reform.”
He went on to say: “I know of no other means whereby we could raise the necessary revenue. Certainly there are none which would so little disturb the economic equilibrium of the community, and impose so little hardship on individuals.”
More than a century on, while the essential purpose of corporate income tax remains the same, the challenges of collecting corporate taxes have grown enormously.
Corporate taxes are much more straightforward in a manufacturing economy. Firms have a clear location of production. That’s become increasingly difficult in a world of weightless production. In 1915, manufacturing made up around 15 percent of the economy. Now it comprises around 5 percent.
In the modern era, some moguls remain outraged at paying corporate taxes. Some tax havens are willing to accommodate them.
The estimates of the amount of corporate tax revenue lost annually due to big multinational firms minimising tax through low or no tax jurisdictions range from $500 billion to $600 billion.
A race to the bottom between nation states has seen average corporate tax rates fall from 49% in 1985 to 24% in 2019.
The challenge for governments
These challenges have led to some questioning whether efforts to fairly tax companies may be doomed to failure.
Australia relies more heavily on company tax relative to other OECD countries even though Australia’s aggregate tax burden across all levels of government is lower than the OECD average.
Since company taxes comprise 19 percent of Australia’s revenue base to accept the accounting tricks and dodgy behaviour that multinational firms engage in would have a massive impact on Australia.
The accounting details may be complex, but the principle is simple: all companies, large or small, should pay their fair share.
Among the shenanigans we’ve seen are shell companies created in low or no tax jurisdictions, allowing multinationals to funnel huge profits into secret locations where they have zero employees and no physical office.
We’ve seen one part of a company purporting to owe another part of the same company a huge amount of debt, shifting profits by paying large amounts of interest to itself in another country and deducting these payments from their tax bill.
These examples of companies exploiting tax lurks are only possible for companies with cross border operations. This gives them an unfair advantage over local firms and comes at a cost to other participants in the economy. This unfair advantage ultimately weighs on the broader health of the economy, limiting productivity, economic growth and real wages.
The Australian Taxation Office has tackled some of these issues, including through its Tax Avoidance Taskforce.
Yet there are some who argue that transfer pricing has become so widespread that we should give up on corporate taxation altogether. Last year, academics from the University at Albany and the University of Missouri published a paper arguing that company taxes should be abolished.
What’s at stake here is nothing less than the future of the corporate tax itself. I believe it is good economics to save corporate tax, but it will take deft policymaking and proper tax administration to do so.
It threatens to disturb the economic equilibrium of our society when our wealthiest companies refuse to pay their share.
The principles of the international corporate tax system were created by the League of Nations nearly a century ago. Modern problems demand modern solutions.
Government’s multinational tax integrity and transparency measures
That is why the Australian Government will introduce new rules to close the loopholes around debt deductions and deductions for royalty payments; we will implement the OECD/G20 Two Pillar solution, and we will ensure greater tax transparency.
Debt deductions (interest limitation rules)
The Australian Government will tackle the issue of multinationals artificially inflating the amount and cost of debt they hold in Australia to claim higher deductions and reduce the amount of tax they pay.
This will be in line with the OECD’s recommended approach to limit debt related deductions based on earnings.
This will ensure that an entity’s interest deductions are directly linked to its economic activity and the entity’s taxable income, rather than allowing deductions based on false debt structures.
Deductions for royalties and intangibles
We will stop multinationals from claiming tax deductions where they are exploiting payments for royalties and intangibles to funnel profits to low or no tax jurisdictions, as some other countries have done.
Intangible assets, such as brand names, patents and copyrights are valuable and mobile. Their exploitation can generate both high returns (if you’re the entity that owns them) and high expenditures (if you’re the entity that must pay royalties for their use).
These intangibles have been exploited by multinationals in tax minimisation and tax avoidance arrangements.
Multinationals can locate their profit-generating intangibles in jurisdictions with a lower tax rate, and charge fees to the Australian entity for the use of such intangibles in Australia. Current tax laws allow the Australian entity to claim an income tax deduction for the cost of these payments to minimise the tax they pay even further.
We will stop the Australian entity from claiming a tax deduction for the cost of accessing intangibles in arrangements that result in too little tax being paid.
This will result in the multinational paying a fairer level of tax here to better reflect the profits they make in the Australian market.
OECD/G20 Two Pillar Solution
Australia is also working energetically in international fora to support the OECD/G20 Two Pillar Solution.
The Pillar One allocation of taxing rights to market jurisdictions, and Pillar Two global minimum tax of 15% on corporate profits aim to ensure multinationals pay their fair share of tax in the countries where they operate.
Australia will continue to work with other countries to implement these changes.
The Australian Government will also ensure greater tax transparency for multinationals and large corporates.
The Government’s focus is to invite a behavioural change among large and highly profitable corporations about how they view their tax obligations, including their decision-making around tax planning strategies.
Enhanced public scrutiny of tax information will help provide the community with a better understanding of how much tax multinationals pay relative to their activities.
Our measures will provide more transparency among significant global entities, listed companies and firms tendering for large government contracts.
We have been consulting broadly on these measures, and we will have more to say on them in the 25 October Budget.
In Australia, as in many other advanced countries, the corporate tax is under pressure. Debt-shifting, royalty payments and tax havens pose a challenge to the ability of countries like Australia to use company taxes to fund vital social services.
Your discussions are vital to ensuring that taxes in OECD nations adhere to the fundamental principles of good public finance: that taxes should be as equitable, efficient and simple as possible.
I regret that I cannot join you in person, and wish you well for a productive set of conversations today.