Tax haven explosion puts hole in corporate tax
Confidential documents obtained from the Tax Office under the Freedom of Information Act show Australia's corporate tax base is in crisis because of the explosion in tax haven dealings by multinational companies.
The alarming data in these internal documents is at odds with the public position of the Australian Tax Office (ATO), which maintains the tax regime in this country is functioning well and most large corporations pay their fair share of tax.
One of the most telling FOI findings is a comparison between real trade and international related party dealings. In 2012, Australia's largest trading partner, China, accounted for 20 per cent of total trade but just a fraction of related party trade, whereas Singapore and Switzerland accounted for 40 per cent of related party trade.
In layman's terms, the purpose of these related party deals is often to siphon profit out of Australia to avoid paying tax on it. Because Australia has a 30 per cent corporate tax rate, the aim of the game is to declare as little profit in this country as possible, and instead to somehow transfer the profit to a low tax regime such as Singapore, which touts rates as low as 5 per cent for big deals.
One of the most cherished tricks is for a related company in, say, Singapore to award a large loan to its related Australian business. The Australian business pays interest on the loan - payments that are funnelled off to Singapore, often tax effective to boot, thanks to the interest deductibility on loans.
Besides interest on loans, the two other ruses for the multinational tax trickster are to get the money out via dividends on shares or by royalty payments on intellectual property.
In recent years there has been a dramatic escalation in related party dealings - that is, in multinational companies striking deals with themselves. Not to put too fine a point on it, Australia's budget is being plundered by Switzerland, Singapore and an array of islands in the Caribbean Sea and the Atlantic Ocean.
The documents show there is " a disparity between IRPD (international related party dealings) transactions and the pattern of Australia's international trade. Given the level of IRPD, Switzerland and Singapore should be the giants of Australian trade and China relatively insignificant."
The other most telling findings are that at the nadir of the global financial crisis in 2009, 29 per cent of Australia's largest companies paid no tax. Three years later that figure was 26 per cent. It had barely recovered by 2012, even though the economy had bounced and the resources boom had reached its zenith.
The figures are worse for foreign-based multinationals: 34 per cent paid zero tax in 2010 and 30 per cent paid zero in 2012. What doesn't show up in the FOIs is that, thanks to aggressive profit shifting into tax havens, many pay some tax but very little.
The Tax Office document "Corporate Transparency Overview" showed that between 2005 and 2011 there was a 49 per cent rise in the number of controlled entities in havens and low-tax jurisdictions by companies in the ASX Top 100. Bear in mind things will have deteriorated, with these figures all at least two years old.
Moreover, the FOIs are quite heavily redacted, particularly when it comes to identifying individual offenders.
Still, the numbers are enormous, and suggest that even if part of these related party dealings were clawed back, and profits were kept in the country, Australia's budget deficit would be repaired quickly.
Thanks to globalisation and the expansion in e-commerce, cross-border trade ($600 billion in 2012-13) has increased dramatically in recent years and so have international related party dealings ($400 billion in 2012-13).
In 2012, there were 7834 International Dealing Schedules lodged by taxpayers in Australia covering IRPD totalling $272 billion. Singapore accounted for about 33 per cent of total IRPD expenditure, while Switzerland accounted for about 35 per cent.
Between 2006 and 2012, the IRPD dealings of these multinationals rose by 64 per cent, from $154 billion to $253 billion, and account now for about 7 per cent of their total income and expenses.
Their $271 billion in related party borrowings (interest-free and interest-bearing loans) accounted for 26 per cent of their total debt in 2012. The financial services and resources sectors between them accounted for more than 70 per cent of total related party borrowings.
Another document from July 2014, "Offshore hubs mitigation strategy overview", said:
"Foreign and Australian-based MNEs (multinationals) use offshore arrangements to inappropriately transfer profits from Australia to related offshore party hubs, which:
"* Result in profit in Australia not being taxed, or the exclusion of profits that were previously taxed in Australia, where this is not commensurate to the level of economic activity that takes place in Australia.
"* Where the transfer of function or risks is involved, the transfer does not appear to have a commercial justification, or does not appear to be to the benefit of the Australian taxpayer."
As the parliamentary inquiry into corporate tax avoidance looms, lobbying by vested interests has been furious, commensurate with the size of the dollars at stake.
Among recent developments, the "big four" accounting firms the architects and promoters of profit shifting lifted their collective contribution to political parties, mostly the Liberal Party, by almost 20 per cent last year to $551,498.
PricewaterhouseCoopers and KPMG were the most enthusiastic, collectively doubling their "contribution to the democratic process" during 2013-14.
Moreover, the push to shut down proposals for greater tax transparency proceeds apace. In its submission to the inquiry, peak accounting body CPA Australia has called for the government to abandon plans for increased disclosure. Incredibly, its argument is that disclosure leads to uninformed public comment.
"Accordingly, to review taxpayers based predominantly on information they disclose will inevitably continue to lead to uninformed public comment," CPA said. "This could be both unfair and damaging to company reputations and their businesses, where companies complied fully with their legal obligations but are perceived by some commentators to have paid insufficient tax."
On this logic, if the CPA was about a few thousand years ago it would have advised Moses to stage a cover-up of the Ten Commandments, just in case the Israelite commentators got the wrong idea and challenged the views of the Rabbinical elite.
http://www.smh.com.au/business/tax-haven-explosion-puts-hole-in-corporate-tax-20150213-13dnh8.html
: ...what is wrong with you ? :lol:
