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Tuesday, October 13, 2015

Tax treaties and profit shifting

During the Global Financial Crisis South Korea's fiscal stimulus measures were greater than those of Australia.

One stimulus was a reduction in the corporate tax rate from 27.5 percent to 24.2 percent.
South Korea's corporate tax rate - reduced as part of its GFC stimulus

Australia's corporate tax rate has been kept at 30 percent.
Australia's corporate tax rate - left unchanged during GFC

As a result South Korean power and steel companies that import Australian thermal and coking coal obtain a tax advantage by raising the profit level of their South Korean operations and reducing the profit level of their Australian operations.

This is what they have done. By investing in Australian coal mines and lifting production, South Korean power and steel corporations have contributed to the fall in the price of coal so that they may now buy coal from their own Australian coal mines at a price near to or below the cost of production.

As a result the profit and tax payable in Australia has all but vanished, and the profit and tax payable in South Korea has substantially increased.

The moving of profits from Australia to South Korea is reflected in the changing share value of the Australian coal mining companies and the South Korean companies that both own them and import coal from them.
South Korean coal importer lifts profits at expense of its Australian coal mine

Avoiding an international "race to the bottom"