Statelessness, Software and Shifting Profits: Fairness and Taxation in the Twenty-First Century

This morning I spoke at the CEDA 2014 State of the Nation Conference at Parliament House, addressing the challenge of closing loopholes that allow multinational companies to pay a lower rate than Australian small businesses. 


Thanks very much Stephen for a very generous introduction. Can I of course acknowledge that we're meeting on traditional lands of the Ngunnawal  people and I pay my respects to their elders past and present.

It's a great honour to be sharing the stage too with John Brumby, one of our great economic reformers and Jeremy Thorpe, one of the deep thinkers in Australia around the issue of tax. You’ll be surprised to know that some people find tax eye-glazingly dull. I've been looking forward to talking to you about tax all week.

The only dispute we've had so far was John suggesting the improvement that could be made to CEDA was by moving this conference to Melbourne. As a proud Canberran, I think this is an outrageous suggestion. But I can't help noticing, when I look up at this audience, you're either all on the left or you're all on the right. Maybe if you were all in Melbourne you'd move towards the centre there. Maybe it's a Canberra thing. 

I want to talk today about the economics, politics and future of multinational taxation; a topic that has received too little attention in our political debate but which I think is going to increasingly going to grow in importance.

How many people have seen the movie The Terminal, with Catherine Zeta-Jones and Tom Hanks? The Terminal is about a man who is stuck in JFK airport. He's effectively stateless as a result of the fact that the country he came from won't take him and the country he has arrived in won't let him in. Last year, a result of some very careful US congressional questioning, it was discovered a major technology company, I won't say which, but they do produce some good products, had as one of its major income generating entities, an entity that was effectively stateless. Like the protagonist in The Terminal this entity didn't pay tax anywhere. And as a result significant amounts of revenue were being lost. 

Multinational profit-shifting has seen the emergence of the double Dutch Irish sandwich; a concoction that sounds far more delicious when you say it, than it is for the taxpayers who have to eat it (or in this case, don't get to eat it).

For those of you, who are coming afresh to the topic, let me briefly explain how multinational profit shifting can work.

Suppose you've got an off-shoot in a low tax jurisdiction and you want to shift a million dollars from Australia to that low-tax jurisdiction. One simple way of doing it is to have the low-tax jurisdiction sell Australia a paper clip for the value of $1 million dollars. A paper clip has now shifted to Australia and $1 million dollars has shifted to that entity. Another slightly more complicated strategy is to have the low-tax entity make a loan to the Australian entity, say for $10 million  and the Australian entity then pays interest at a rate of 10 per cent a year, allowing a $1 million dollar a year deduction for the Australian entity - again shifting profits to the low tax jurisdiction.

When Labor was in government we put in place a significant package, spearheaded by Wayne Swan and put together by David Bradbury who has now taken on a senior job at the OECD in charge of tax. It was aimed at closing some of those loopholes. And, while I'm pleased to see that the incoming government has pursued in principle the agenda on multinational profit shifting, I've been troubled by their legislative actions. While the Government has gone to the G20 and said it's a priority to deal with multinational profit shifting, their only actions, have been to reverse parts of that package. 

We're now up to a cumulative $1.1 billion in multinational profit shifting measures announced by Labor and reversed by the Government. These include Section 25-90 and Offshore Banking Units.

It all amounts to $1.1 billion dollars that has to come from somewhere else. As all of you in the room know, less tax revenue means one of three things: we take on more debt, we have lower services, or someone else pays more tax. And so it's fundamental that we have in place fair rules around multinational profit shifting - and not just to shore up the revenue base, but because of the perverse incentives that loopholes can cause. 

Good tax reform involves broadening the base and lowering the rate. But if we're to aspire to a lower rate of company tax, as Shadow Treasurer Chris Bowen has clearly said that Labor does, then one of the key elements of that is going to be addressing multinational profit shifting.

If we don't tackle multinational profit shifting, we're creating distortions in the market. Small companies will be outperformed by large companies which are able to do the profit-shifting. And companies in industries more amenable to profit-shifting will gain an unfair advantage over corner stores, hairdressers, brick manufacturers; the nature of whose business means they're less able to shift profits offshore. 

Marc Andreessen, the co-founder of Netscape, had an article in the Wall Street Journal a couple of years ago, in which he argued that software is going to "take over the world". And he pointed to a range of things that we do every day. 

If we're communicating with our friends, increasingly now we're doing so through software rather than telephone and letter. If we're carrying out financial transactions, almost invariably software is behind them. 

If you're a farmer, increasingly software is telling you when to plant, where to plant, and even what to plant, with better use of crop modelling and satellite data. If you're on the battlefield, Australian soldiers are being kept alive thanks in large part to software. And if you're a mechanic, where decades ago you would have been pulling out tools to knock bits of the car back into shape or replace parts, these days often you'll be downloading a new software update for one of the hundreds of on-board computers.

The software revolution is fundamentally changing business models across the world. And there's businesses like health and education, where it's only just starting to come in but will potentially be utterly revolutionary. But software has huge implications for our tax base. Because, as we start delivering health and education services online, the physical location of those companies matters less and less. That means we need fairer arrangements to work globally to tackle profit shifting. 

But it also places the onus on Australian governments not to keep open loopholes that allow profit shifting. 

Profit shifting matters a lot now. $1.1 billion dollars. But it'll matter even more in the future. If we get this wrong, it's in some sense a fork in the road. A moment from which we will struggle as policymakers to recover as we see increasing amounts of revenue going to industries which can move production around the world.

So I think we need to get our heads around profit-shifting, and what's striking to me is the growing interest in this conversation. 

I've just come from speaking to a group of Micah Challenge volunteers. They're young people from churches all around Australia who, in previous years, have come to Parliament House to talk about increases in overseas aid and how to make aid more effective.

But this year, they're in the building, and they've had 114 meetings with parliamentarians to talk about base-erosion and profit-shifting. So, teenagers and twenty-somethings from around Australia are gathered here in Parliament, just as business leaders and policy entrepreneurs like yourselves are, to talk about the important issue of profit shifting. We need to get it right, because our tax system needs to be simple, efficient, and equitable. And we can't do any of those things if we don't close loopholes around multinational profit shifting. 

Thank you very much for being here today. I've always enjoyed my engagement with CEDA: one of the great intellectual powerhouses in Australia public policy. 

The ideas that come out of CEDA are always thought-provoking and I'm looking forward very much to the conversation today. 

24 June, 2014

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Cnr Gungahlin Pl and Efkarpidis Street, Gungahlin ACT 2912 | 02 6247 4396 | [email protected] | Authorised by A. Leigh MP, Australian Labor Party (ACT Branch), Canberra.