September 28, 2014
The usual culprits top the list again this year: Rupert
Murdoch's Fox, Frank Lowy's Westfield and the host of real estate trusts
listed on the Australian Securities Exchange.
These are our thoroughbreds of tax avoidance; the nation's chief "leaners", as opposed to its "lifters", the ordinary tax-paying Australians, small businesses and big retailers who fork out their fair share.
Those singled out in for special mention in the latest report from the Tax Justice Network will scream blue murder that they obey the law, that they have a duty to their shareholders to minimise tax. This much may be true. The one simple thing about corporate tax though, despite its impenetrable complexity, is that every year in a company's financial statements there is a number showing exactly how much has been paid.
Or in the case of Rupert Murdoch's media empire, how much it got back. This group has historically "leaked" very little in tax but last year it even won an $880 million rebate from the Australian Tax Office for a company restructure – where no money changed hands – back in 1989. It has now split into two entities, News Corp and Twenty-First Century Fox.
Fox, which led the pack for sheer numbers of tax haven subsidiaries, was also cited for the dubious honour of having the greatest negative impact on Australia's tax base. With its effective tax rate of just one per cent – even before last year's rebate – the Tax Justice Network estimates $1.6 billion in tax forgone.
Elsewhere, the word "aggressive" was used a number of times in respect of the tax practices of the world's biggest shopping mall operator Westfield. Toll-road operator Transurban, Sydney Airport and many stapled trust structures spawned from the loins of the Macquarie Group were also among the nation's top leaners.
They will argue it is up to their unit-holders, members in the trust that is, to pay income tax not them. Yet many of these are offshore or are trusts themselves which enjoy special tax relief.
The two biggest miners, BHP and Rio Tinto, were nominated for failing to disclose all but a fraction of their tax haven subsidiaries. These pay good deal more tax though than the third biggest miner, Glencore, whose coal holding company enjoyed an $8 million rebate last year.
The point is that while tax avoidance is rife among companies in the ASX Top 200, which are covered by the analysis, it is far worse among multinational companies who have their headquarters elsewhere.
It is a good thing for taxpayers that executive pay schemes are mostly based on profits and share prices.
This way, there is an incentive for companies listed on the Australian Securities Exchange to sustain a high share price by delivering high profits, profits which are taxable. Unfortunately, the opposite forces are at play for multinationals that operate here. The higher their costs and the lower their profits the better. They pay less tax in this relatively high-tax jurisdiction and transfer their profits, often by loans from their foreign associates, elsewhere.
Still, as highlighted in the latest report by the Tax Justice Network, tax avoidance remains rife among the S&P/ASX 200, although admittedly in a different league to the likes of American tech giants Google and Apple, which pay virtually nothing.
The report recommends some things that need to be done to combat tax avoidance, such as tightening up the "thin cap" rules on how much debt a company can run (therefore soaking up profits in interest rate payments a la the REITs, Sydney Airport, Transurban and the power companies).
Another no-brainer is phasing out stapled securities (where the heavy debt sits in the company and the distributions come untaxed via the trust). Such structures would be laughed off the bourse by regulators in other countries. They are particularly noxious when deployed by utilities. The likes of DUET, APA, Envestra and SP AusNet (now AusNet Services) already enjoy almost riskless returns from regulators while they run big borrowings to boot. Both taxpayers and customers lose.
There is a more obvious quick-fix for tax dodging, however. That is transparency. The idea that Australia has to wait till November to kick off the collegiate process of tax reform at the G20 is a furphy. Measures could literally be adopted tomorrow.
For a start, it should be mandatory that all foreign subsidiaries are disclosed in financial statements.
The Tax Justice Network study noted that in 2013, "BHP had 462 subsidiaries in 49 countries; tax payments were disclosed in 12 countries, but not in the other 37 countries with 128 subsidiaries. Rio Tinto had 926 subsidiaries in 71 countries; tax payments were disclosed in 28 countries, but not in the other 43 countries with 111 subsidiaries."
It was more scathing of Westfield's disclosure. Westfield listed more than 700 subsidiaries and controlled entities registered in nine different jurisdictions in its 2010 accounts.
"By contrast, the 2013 Westfield Group annual report listed just 21 subsidiaries and controlled entities. This does not reflect a disbursement of these subsidiaries by Westfield; rather, the company has simply revised what they consider to be 'material' to shareholders. The net result is that the company's operations are much less transparent."
The broader challenge here is that the business of the big four accounting firms – Deloitte, Ernst & Young, KPMG and PwC – is assisting large corporations on how best to dodge tax; a lucrative practice. Accountants and lawyers from these firms are routinely on secondment with regulators – the Tax Office and the Australian Securities and Investments Commission.
Regulators are to a great extent therefore compromised by those who owe a living to the most aggressive tax avoiders. Adding to this system bias are recent reports from former top ATO people that the Tax Office now prefers to pursue negotiations rather than litigation. Few would argue that it has been weak when it comes to enforcing Part IV of the Tax Act, which requires that the "dominant purpose" of a transaction should be commercial rather than tax-driven.
The point being that the government, Treasury and the ATO should man up, stop being diddled by sham structures and drag a few offenders off to the Federal Court rather than chatting with them.
Same deal for ASIC. Were the corporate regulator to insist from tomorrow that all large companies henceforth issue general purpose financial statements (and disclose the purpose of all subsidiaries in all jurisdictions and all related-party transactions) – no ifs or buts – the incidence of tax avoidance would decline dramatically.
The courage and the political will are not there yet. Public concern is on the rise, though. The result of concerted action is evident in the case of Macquarie, whose tricky tax structures once had it paying less than 10 per cent (the corporate tax rate is 30 per cent). Recently it has been paying 40 per cent, bringing in extra tax revenue of hundreds of millions of dollars – all thanks to the ATO manning up and having a crack.
These are our thoroughbreds of tax avoidance; the nation's chief "leaners", as opposed to its "lifters", the ordinary tax-paying Australians, small businesses and big retailers who fork out their fair share.
Those singled out in for special mention in the latest report from the Tax Justice Network will scream blue murder that they obey the law, that they have a duty to their shareholders to minimise tax. This much may be true. The one simple thing about corporate tax though, despite its impenetrable complexity, is that every year in a company's financial statements there is a number showing exactly how much has been paid.
Or in the case of Rupert Murdoch's media empire, how much it got back. This group has historically "leaked" very little in tax but last year it even won an $880 million rebate from the Australian Tax Office for a company restructure – where no money changed hands – back in 1989. It has now split into two entities, News Corp and Twenty-First Century Fox.
Fox, which led the pack for sheer numbers of tax haven subsidiaries, was also cited for the dubious honour of having the greatest negative impact on Australia's tax base. With its effective tax rate of just one per cent – even before last year's rebate – the Tax Justice Network estimates $1.6 billion in tax forgone.
Elsewhere, the word "aggressive" was used a number of times in respect of the tax practices of the world's biggest shopping mall operator Westfield. Toll-road operator Transurban, Sydney Airport and many stapled trust structures spawned from the loins of the Macquarie Group were also among the nation's top leaners.
They will argue it is up to their unit-holders, members in the trust that is, to pay income tax not them. Yet many of these are offshore or are trusts themselves which enjoy special tax relief.
The two biggest miners, BHP and Rio Tinto, were nominated for failing to disclose all but a fraction of their tax haven subsidiaries. These pay good deal more tax though than the third biggest miner, Glencore, whose coal holding company enjoyed an $8 million rebate last year.
The point is that while tax avoidance is rife among companies in the ASX Top 200, which are covered by the analysis, it is far worse among multinational companies who have their headquarters elsewhere.
It is a good thing for taxpayers that executive pay schemes are mostly based on profits and share prices.
This way, there is an incentive for companies listed on the Australian Securities Exchange to sustain a high share price by delivering high profits, profits which are taxable. Unfortunately, the opposite forces are at play for multinationals that operate here. The higher their costs and the lower their profits the better. They pay less tax in this relatively high-tax jurisdiction and transfer their profits, often by loans from their foreign associates, elsewhere.
Still, as highlighted in the latest report by the Tax Justice Network, tax avoidance remains rife among the S&P/ASX 200, although admittedly in a different league to the likes of American tech giants Google and Apple, which pay virtually nothing.
The report recommends some things that need to be done to combat tax avoidance, such as tightening up the "thin cap" rules on how much debt a company can run (therefore soaking up profits in interest rate payments a la the REITs, Sydney Airport, Transurban and the power companies).
Another no-brainer is phasing out stapled securities (where the heavy debt sits in the company and the distributions come untaxed via the trust). Such structures would be laughed off the bourse by regulators in other countries. They are particularly noxious when deployed by utilities. The likes of DUET, APA, Envestra and SP AusNet (now AusNet Services) already enjoy almost riskless returns from regulators while they run big borrowings to boot. Both taxpayers and customers lose.
There is a more obvious quick-fix for tax dodging, however. That is transparency. The idea that Australia has to wait till November to kick off the collegiate process of tax reform at the G20 is a furphy. Measures could literally be adopted tomorrow.
For a start, it should be mandatory that all foreign subsidiaries are disclosed in financial statements.
The Tax Justice Network study noted that in 2013, "BHP had 462 subsidiaries in 49 countries; tax payments were disclosed in 12 countries, but not in the other 37 countries with 128 subsidiaries. Rio Tinto had 926 subsidiaries in 71 countries; tax payments were disclosed in 28 countries, but not in the other 43 countries with 111 subsidiaries."
It was more scathing of Westfield's disclosure. Westfield listed more than 700 subsidiaries and controlled entities registered in nine different jurisdictions in its 2010 accounts.
"By contrast, the 2013 Westfield Group annual report listed just 21 subsidiaries and controlled entities. This does not reflect a disbursement of these subsidiaries by Westfield; rather, the company has simply revised what they consider to be 'material' to shareholders. The net result is that the company's operations are much less transparent."
The broader challenge here is that the business of the big four accounting firms – Deloitte, Ernst & Young, KPMG and PwC – is assisting large corporations on how best to dodge tax; a lucrative practice. Accountants and lawyers from these firms are routinely on secondment with regulators – the Tax Office and the Australian Securities and Investments Commission.
Regulators are to a great extent therefore compromised by those who owe a living to the most aggressive tax avoiders. Adding to this system bias are recent reports from former top ATO people that the Tax Office now prefers to pursue negotiations rather than litigation. Few would argue that it has been weak when it comes to enforcing Part IV of the Tax Act, which requires that the "dominant purpose" of a transaction should be commercial rather than tax-driven.
The point being that the government, Treasury and the ATO should man up, stop being diddled by sham structures and drag a few offenders off to the Federal Court rather than chatting with them.
Same deal for ASIC. Were the corporate regulator to insist from tomorrow that all large companies henceforth issue general purpose financial statements (and disclose the purpose of all subsidiaries in all jurisdictions and all related-party transactions) – no ifs or buts – the incidence of tax avoidance would decline dramatically.
The courage and the political will are not there yet. Public concern is on the rise, though. The result of concerted action is evident in the case of Macquarie, whose tricky tax structures once had it paying less than 10 per cent (the corporate tax rate is 30 per cent). Recently it has been paying 40 per cent, bringing in extra tax revenue of hundreds of millions of dollars – all thanks to the ATO manning up and having a crack.
