Hauling multinational corporations before a Senate committee to be interrogated about tax minimisation might not be pretty but it’s pretty effective at exposing the insidious demolition of Australia’s company income tax base. The hearings chaired by Senator Sam Dastyari possibly involve an element of rough justice, since some of the corporations making invited appearances might have done little or nothing wrong. Yet all have claimed there is no issue here; that they are entitled to minimise their tax within the law. But are they?
An argument that company management has a duty to its shareholders to pay as little tax as lawfully possible sits awkwardly with any notions of corporate social responsibility and a social licence to operate. And it doesn’t explain why corporate CEOs such as Richard Goyder and Gerry Harvey have condemned contrived profit shifting.
The death last week of Australia’s best finance minister, Peter Walsh, revives memories of earlier tax minimisation schemes that were adjudged legal. They involved stripping companies of their profits and assets before their annual tax assessments fell due, thereby obliterating any tax liability. Metaphorically, management dumped filing cabinets containing the company’s financial records into the Sydney Harbour and let them sink to the bottom.
Walsh despised those involved in these ‘bottom of the harbour’ schemes. An estimated 6,678 companies engaged in them. Walsh claimed that under Chief Justice Sir Garfield Barwick the High Court had protected tax dodgers by finding in their favour. With bipartisan support, the Fraser Government’s Treasurer, John Howard, eventually legislated against them, retrospectively. Walsh went so far, humorously, as to consider it his duty to consume substantial quantities of a particular white wine, which he labelled “Tax Dodger’s Special,” to assist its producing company to pay the tax it owed.
If company management sees nothing wrong with depressing revenues and inflating costs in its Australian affiliates so as to maximise income accruing in tax havens, it should not complain about the ever-increasing complexity of the income tax laws when a government finally declares it has had a gutful of having to eat Double Irish Sandwiches and other such concoctions.
The Abbott Government might now have some regrets about abandoning 48 tax integrity measures of the previous Labor Government. But Treasurer Hockey is making the right noises ahead of next month’s Budget, suggesting the Government will follow the UK Government’s lead in introducing a diverted profits tax. Predictably, the Institute of Public Affairs has labelled the proposal a “tax grab.”
Others argue that Australia must not move unilaterally and instead await the outcome of the OECD’s work on a universal solution to profit shifting. Hockey secured agreement to this work at the G20 meeting Australia hosted last year. But by the time specific legislation is drafted, agreed and widely implemented, Australia’s corporate income tax base might well be reduced to a pile of rubble. In any event, there should be little reason for confidence that the US Congress will pass enabling legislation.
Australian business groups have been advocating a cut in the company tax rate to achieve international tax competitiveness. But multinational profit shifting to tax havens is threatening to render the going international corporate rate close to zero. Under pressure from major developed countries, Switzerland is reforming its laws that have long facilitated international tax avoidance. Ireland, too, is rewriting parts of its legislation. A western world that has a track record of applying sanctions against rogue states should consider applying them against states that refuse to give up their tax haven status, such as Singapore and the Cayman Islands.
The present Senate inquiry, initiated by Labor and the Greens, has shone a light on the dark practice of multinational profit shifting, arousing the attention of everyday Australians. They don’t see the funny side of paying their taxes while multinational corporations can avoid their tax obligations. At a time when bipartisanship seems in scarce supply, the Abbott Government can look forward to strong Senate support for legislating against this latest form of tax dodging. Peter Walsh would raise a glass of white wine to his Senate successors if they so acted.
Craig Emerson, Managing Director of Craig Emerson Economics, is Adjunct Professor at Victoria University’s College of Business.