Labor and Greens give tech giants a taxing time

senate ctteeAustralian politicians are considering legislation to force some of the world’s largest corporations to pay company tax on the profits they generate in the country, rather resorting to profit shifting techniques and tax minimisation. In doing so they risk a clash with multilateral efforts, led by the OECD and the G-20, which aim for a coordinated agreement which they hope can be concluded in October, and be operational by 2017.

Australia, along with other nations including Britain and France, has for two years been seeking a concord that will make major international companies pay taxes in those countries where the profits are generated. Though long regarded as an arcane issue, Greens leader Christine Milne has successfully gained national media attention with sharp, and sometimes abrasive, questioning of the local CEO’s of these multinationals. But Pascal Saint-Amans, head of tax at the OECD, in a less theatrical performance, made it clear he thought Australia – and other nations – would be best served by supporting the OECD’s 15-point action plan to fight tax evasion, arguing that it would reduce or remove altogether profit shifting through low tax countries like Ireland or Singapore. However, faced by the joint efforts of the Greens and Labor to “take action”, the Abbott government may well bring forward legislation to Parliament later this year, on the British model.

Analysis

Many of the world’s biggest and most profitable companies are saving hundreds of millions of dollars through profit shifting and tax avoidance. There is nothing new in that. Painstaking work has been undertaken by the 34-nation OECD, which was supported by the G-20 leaders in November 2014, to usher in a new world order based on the principal that companies should pay tax in the countries where the income is generated, not siphon profits through countries with more favourable tax environments. Australian governments from both sides of politics have been among those leading the push for change. Australia used its chairmanship of G-20 last year to secure agreement. However politicians in Canberra have just staged a cynical exercise to convince the public that they are fighting a just cause and that profit shifting by multinationals is partly to blame for Australia’s budget woes and economic mismanagement.

Many of the world’s biggest and most profitable companies are saving hundreds of millions of dollars through profit shifting and tax avoidance. There is nothing new in that. Painstaking work has been undertaken by the 34-nation OECD, which was supported by the G-20 leaders in November 2014, to usher in a new world order based on the principal that companies should pay tax in the countries where the income is generated, not siphon profits through countries with more favourable tax environments. Australian governments from both sides of politics have been among those leading the push for change. Australia used its chairmanship of G-20 last year to secure agreement. However politicians in Canberra have just staged a cynical exercise to convince the public that they are fighting a just cause and that profit shifting by multinationals is partly to blame for Australia’s budget woes and economic mismanagement.

The Senate Inquiry into corporate tax avoidance has had three days of public hearings in Sydney, Canberra and Melbourne, conducted more in the manner of a show trial than an attempt to build on the work already undertaken over two years. Under interrogation were the Australian chiefs of Apple, Google, Microsoft and News Corporation, and Australian resources giants BHP-Billiton and Rio Tinto.

First, the case for the prosecution was laid out. Apple: $6 billion of revenue from Australia in 2012-13, tax paid $80.3 million. Google: $358m of Australian revenue, tax paid $7.1 million. Microsoft: $2 billion of revenue from Australia reported through Singapore, $100m tax paid. And so on.

There followe some impressive flourishes by the chairman Senator Sam Dastyari, an upcoming Labor figure likely to feature in Cabinet in the event of a Government defeat in 2016. But the real theatre was created by the headline-seeking leader of the Australian Greens, who sought to show that Apple’s Australian subsidiary deliberately paid too much for iPads purchased from other parts of Apple Inc in order to minimise tax liabilities.

Apple’s Australian managing director, Tony King, had told the inquiry that his company booked Australian sales of all Apple products, including iTunes, into the accounts, logged all costs, including the purchase of products, and paid full tax at the 30pc corporate tax rate. He explained that the transfer pricing of Apple products developed and manufactured overseas was based on an advanced pricing agreement (APA) the company had with the Australian Tax office developed over two decades and which is reviewed annually.

Milne
Senator Christine Milne

Senator Milne was clearly not much interested in the APA. Her mind was elsewhere. What is a double Irish sandwich with Dutch affiliations, she asked.

“I have no idea what you are talking about”, replied Mr King.

Senator Milne: “Oh come on, you have not come here to say that”.

Both Google and Microsoft made no bones about the fact that most of their revenues were invoiced from their companies in Singapore, and remitted there; for example, all sales of Microsoft’s on-line Office suite, and Google’s Ad Sense.

Google Australia MD, Maile Carnegie, was quite happy to give as good as she got in exchanges with senators across the table. “We are not opposed to paying tax”, she told them, “we are opposed to being uncompetitive”. She went on, ”If I asked each one of you what is the appropriate and morally right tax to be paying, I would probably get as many different answers as the number of people sitting at the table…. we have competition sitting at this table and all around the world. When I think about the morality of it, I think the people who need to give the right number are, quite frankly, the people sitting on your side of the room.”

The ATO is committing almost $250m to an intensive audit of companies it thinks should be paying more tax. By the end of the financial year in June it expects to have undertaken 40 or more audits of corporations, 12 of them in the technology sector. It expects to return to the Government a 400pc return on its investment, though tax commissioner Chris Jordan says he is confident the ATO will easily exceed this figure.

The OECD’s head of tax, Pascal Saint-Amans, made it clear in his evidence he thought an international solution was not only possible but also more desirable. “From China to the US, from Australia to Europe, almost all countries in the world have faced that phenomenon that we in the OECD have identified as base erosion and profit shifting”, he said. He said the OECD would bring to this year’s G-20 a set of proposals to “put an end to aggressive tax planning by closing loopholes” in transfer pricing and international tax arrangements, as well as ending harmful tax practices used by some governments to enable companies to facilitate tax avoidance”.

What happens now?

The inquiry has achieved one of its proposed major aims – to attract domestic media headlines and give the public the impression that Labor and the Greens are taking action while the government is sitting on its hands. There will be more headlines, and fodder for parliamentary questions in the crucial Budget session that will wedge Treasurer Joe Hockey between his desire to be seen to do something and a preference to wait for international agreement. That agreement, if it comes, is unlikely before the next Australian election towards the end of 2016, so we can expect some draft legislation to take a stab against profit shifting.

Heading into deep waters

 

Postcard of sinking of the Titanic
Postcard of sinking of the Titanic

The issue.

Can Australia avoid the malaise of Southern Europe?Investors and thinking Australians are apprehensive – for good reason. And this has nothing to do with the fact that the Government has posted a high level of terrorist alert, which means it believes an attack is likely. It’s the economy that worries people more. Growth is slowing, the Budget deficit is accelerating out of control, exports are slipping, while the terms of trade are deteriorating.The Lucky Country is out of luck. Can the good times return?

Analysis.

While a halving in iron ore price in the past 15-months, and a sharp drop in coal prices has put a huge dent in the mining sector, many of Australia’s endemic problems are self-made.

Australians are half way through a decade of delusion. They have been led there by poor political leadership, a lack of long term vision, an entitlement mentality, espoused by a very old Australian expression – “she’ll be right mate”. Both main parties are culpable.

Nowhere was this more obvious than in the (normally) buoyant state of Queensland where, earlier this month, the centre-right Coalition government squandered a seemingly unassailable majority and were outed by a negative, vacuous campaign led by the economically-illiterate Anastasia Palaszczuk. Like the Greeks, the electorate was tired of hair-shirt but necessary austerity, and dumped premier Campbell Newman out of his seat, as well as his job.

1.     The Coalition government inherited from Labor in late 2013 a growing Budget deficit and a mountain of debt, estimated to rise to $667 billion. The problem was not simply over spending by the Rudd-Gillard government, but future commitments in education and social services, especially the planned National Disability Insurance scheme, a measure the Coalition supported. In its most recent Mid Year Economic and Fiscal Outlook (MYEFO), published in December, the Abbott government’s treasurer, Joe Hockey, said it was on track to cut debt by $170 billion, but reported a continued deterioration in the forecast Budget deficit, suggesting it would be the end of the decade before it could be brought back to surplus. He cited deterioration in Australia’s terms of trade, a 30 per cent fall in iron ore prices, and the refusal of the hung Senate, the upper house, to pass some Budget measures. These together have cost the government $70 billion in tax receipts since it was elected.

2.     International investment into Australia, particularly in the energy sector, has been falling, partly due to the tumbling oil price, but also because of high labor and construction costs, and a powerful environmental lobby, which has hobbled the development of coal seam gas. Two key states have blocked it.

3.     The Australian government is due to publish two white papers in 2015 – one on the tax system, and the other on defence, the third in five years. Both will be controversial. A comprehensive review of the tax system by former Treasury secretary Ken Henry in 2010 is gathering dust on the shelves. A potential increase in the General Sales Tax (GST), currently 10 per cent, is on the agenda, as is its extension to a number of goods and services currently exempt, including basic foods, fares, and financial services. Also in the white paper will be changes in the way GST revenues are distributed from state to state – a perennial argument. Goods bought on line overseas under $1000 are exempt from GST – that will change. On defence, the identification of China as a potential threat (a feature of the Rudd government’s white paper) will be withdrawn or watered down, with much of the focus being on procurement, including replacement of Australia’s inefficient submarines and fighting aircraft.

4.     Australian GDP growth in the past 12 months has been largely due to residential housing and mining construction. Mining construction is now well past its peak. House and apartment price growth in all cities is likely to slow down, or stagnate, as the government forces the banks to maintain higher reserves, and to tighten lending standards.

What will happen

•    Australia will not hold much excitement for international investors or policymakers. True, trade minister Andrew Robb is the stand-out Cabinet minister for his successful conclusion of free trade treaties with China, Japan and South Korea – and India on the way – but the real benefits of these will not flow until 2016 at the earliest. The reductions in tariffs will reduce the costs to Australians in $US terms, but will be more than offset in the decline of the $A, which has also reduced the benefits of falling oil prices. The stock market will under perform the US and South East Asian markets, pushing Aussie investors oversea.

•    The Abbott government will introduce a new, fairer Budget in May, but will not heed those who believe it needs to be more ruthless on public spending. If, as expected, unemployment rises and company performance falls short of expectations, the Budget deficit will rise further. A modest recovery in minerals exports will be insufficient to halt the trend, leaving Abbott heading into a 2016 general election he could lose. One of the most interesting news items to watch for will be Opposition leader Bill Shorten’s strategy to restore the country’s economic health. Don’t hold your breath – our bet is that by the end of 2015 he and his team will still be in denial.

•    We expect both individual stocks and funds to fare worse in 2015 than the international average. Australia can no longer be regarded as a safe haven. The economy will be outperformed by New Zealand and the countries of South East Asia.

Longer-term prospects are brighter. One of the better prime ministers, Paul Keating – responsible for many sensible economic reforms – used to talk of the “recession we had to have” after he described Australia as a “banana republic” in 1986. He was able to take the public with him by a combination of sound policy, good communications and a (largely) cooperative Opposition. Just now Australian politics lacks all three of these virtues. But if one of the two main parties can articulate the urgent need to restore Australia’s competitiveness, promote a vision of expanding economic strengths, such as in agriculture, education and tourism, and couple these with technology and incentives for small business, we can see Australia becoming the “Lucky Country” again.