Andrew Leigh

Toughen up tax for the big end of town, Business Spectator, 20 April 

The Australian Parliament is currently deep into an inquiry into corporate tax-dodging. The investigation has been sparked by real concern in the community that some big firms aren’t paying their fair share. That’s not surprising when, in the past few weeks alone, we’ve seen reports about our 900 biggest firms paying an average of only 19c in the dollar in tax, and major multinationals sending billions offshore to Singapore and beyond.      

Some of the tax lawyers and accountants who’ve come before the Senate’s hearings have tried to bamboozle with detail about their Byzantine tax structures. But in fact, one of the main methods companies use to shift profits overseas is as simple as lending money from one place to another.

When we think about lending, we tend to imagine a transaction between a bank and borrower who have no relationship with each another. But this is by no means the only way to borrow money, whether as an individual or a business.

Just as you might have borrowed money from your parents to buy your first car, multinational firms often lend cash from one arm of the company to another.

The argument companies make for this is that they know the affairs of their subsidiaries better than a bank does. This generally means one arm of a company can borrow more money at a better rate from another arm than they could from a bank. 

But for taxpayers like you and me, internal loans aren’t all upside. Companies can also easily transfer money between their subsidiaries and dress it up as a loan, even though it’s just a transfer of money from one pocket to the other. Just like other business expenses, interest costs on loans are tax deductible. These artificial loans become a way for companies to shift their profits into tax havens at the expense of the bottom line here in Australia. 

Here’s how that works in practice. Suppose Banana Inc has before-tax profits of $100 million in Australia. Banana Inc’s Irish parent company lends $1 billion to Banana Australia with a 10 per cent interest rate, costing the local arm $100m. Just like that, the Australian profit has disappeared. It’s now treated as income in Ireland, which has a company tax rate of 12.5 per cent -- quite a saving over Australia’s 30 per cent company rate. Great news if you’re a Banana Inc shareholder -- not so much if you’re an Australian taxpayer.

This practice is known as debt loading. In an effort to clamp down on this, successive Australian governments have introduced new rules to regulate how much debt a business is allowed to hold. Thanks to reforms announced by Labor in 2013, the current debt limit is set at 60 per cent of a company’s assets. If a business holds more debt than that, it cannot claim any more interest deductions from the tax office. 

These rules have put an upper limit on debt loading, but they’re not perfect. International experts like the OECD have suggested a number of ways to tighten them. Taking a company’s total debt levels around the world into account when calculating what they can claim deductions on in Australia is an approach with strong potential to tackle tax avoidance. 

That’s why we have included a so-called ‘world-wide gearing ratio’ for deductions in the $1.9bn multinational tax package Bill Shorten, Chris Bowen and I recently announced.

We need fresh ideas like these to ensure our laws keep pace with global business practice and everyone pays a fair share of tax. After all, every $1 of tax a big multinational company avoids paying in Australia is $1 that can’t be invested in our schools and universities. Labor is passionately pro-business, and we want to see individuals and businesses succeeding. But we don’t believe the tax system should become softer the further up the scale, or that how much tax you pay should be a product of how much you can pay your tax lawyers.

Above all, we believe it is fair and reasonable for Australians to expect big multinationals to pay their tax, just like everyone else does.