tag:theconversation.com,2011:/ca/topics/multinational-tax-package-16247/articlesMultinational tax package – The Conversation2022-04-05T14:24:25Ztag:theconversation.com,2011:article/1797972022-04-05T14:24:25Z2022-04-05T14:24:25ZHow multinationals avoid taxes in Africa and what should change<figure><img src="https://images.theconversation.com/files/455537/original/file-20220331-21-fgqb71.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There is an urgent need to clamp down on tax evasion in Africa.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/papers-about-tax-evasion-on-a-desk-tax-avoidance-royalty-free-image/868676654?adppopup=true">Getty Images </a></span></figcaption></figure><p>In developing countries, and the sub-Saharan region especially, the scale of unmet basic needs is enormous. It is <a href="https://www.ilo.org/wcmsp5/groups/public/---dgreports/---inst/documents/publication/wcms_216451.pdf">estimated</a> that 3 billion people in the developing world subsist on less than US$2 a day per person.</p>
<p>About <a href="https://sdgs.un.org/goals/goal2">2.37 billion people</a> are without food or unable to eat a balanced diet on a regular basis. The prevalence of undernourishment is highest in sub-Saharan Africa: <a href="https://www.actionagainsthunger.org/africa-hunger-relief-facts-charity-aid#:%7E:text=24.1%25%20of%20the%20population%20of,all%20regions%20in%20the%20world.">24.1%</a>. Out of the almost 60 million children not in school, <a href="https://ourworldindata.org/children-not-in-school">33.8 million are in this region</a>. </p>
<p>Revenues from taxation are fundamental to changing this dire situation. Taxes enable the state to redistribute wealth to alleviate poverty. They also provide education, healthcare, social security, pensions, efficient public transport, clean water and other public services taken for granted in developed economies. </p>
<p>But in both developed and developing countries, tax revenues are being undermined by the ability of some of the wealthiest taxpayers – including many transnational companies – to effectively opt out of the corporate tax system. They do this through a combination of ingenious (and lawful) tax haven transactions, and huge tax concessions awarded by governments. </p>
<p>These practices have received plenty of attention from scholars. Broader accounts of their impact on developing countries are relatively scarce, though. In a recently published <a href="https://www.emerald.com/insight/content/doi/10.1108/JFC-01-2022-0012/full/pdf?casa_token=IEAQMCWEnUAAAAAA:_uRWsIbIpuSqFJnNqGid0bZB3PRgJZstAtVqAbx9nYyvLGx1GNTmMUikRLcIuI2euyO6O-49_OK5-ULSKOWWQiutcdkt8Vli8TmijFkT5D1x5j1eMdhekg">paper</a> we therefore aimed to investigate the effect of tax dodging on development in Africa, with a focus on Nigeria and Zambia.</p>
<p>Using publicly available evidence, we show that tax havens and offshore financial centres, shaped by globalisation, facilitate the sophisticated tax schemes of highly mobile transnational corporations. The effect of low-tax jurisdictions (“tax havens”) hampers the social and economic development of poorer states. </p>
<p>We advocate radical reform. This should close the gaps that allow tax evasion and avoidance by transnational corporations. It calls for legislation and stronger institutional structures. </p>
<h2>Forms of tax dodging</h2>
<p>Tax dodging is used to describe all of the ways – tax avoidance, tax evasion, corruption and offshore accounts – that companies and rich individuals employ to reduce their tax bills. They lobby governments for tax breaks and lower corporate tax rates, exploit obscure loopholes in tax laws or shift profits into tax havens.</p>
<p>Globalisation has created new transnational spaces where economic actions take place without much regulation, taxation or surveillance. Behind a wall of secrecy, corporations can devise complex schemes to boost their profits. The activity of offshore companies and tax havens is therefore central to the antisocial tax practices of corporations and elites.</p>
<p>A <a href="https://www.theguardian.com/global-development/2015/jun/02/tax-dodging-big-companies-costs-poor-countries-billions-dollars">2015 report</a> by the UN Conference on Trade and Development estimated that profit-shifting by multinational companies costs developing countries US$100bn a year in lost corporate income tax. <a href="https://www.imf.org/external/pubs/ft/wp/2015/wp15118.pdf">Another report</a>, by International Monetary Fund researchers, estimated that developing countries may be losing as much as US$213bn a year to tax avoidance. In addition, Oxfam <a href="https://www.oxfam.org/en/press-releases/tax-evasion-damaging-poor-country-economies">estimated</a> that developing countries lose between US$100 billion to US$160 billion annually to corporate tax dodging.</p>
<p>African countries, rich in resources, easily fall prey to aggressive tax planning and tax evasion enabled by offshore companies. As the UN Conference on Trade and Development <a href="https://unctad.org/system/files/official-document/aldcafrica2020_en.pdf">reported in 2020</a>, high volumes of intra-company trading, the secrecy cloaking foreign investment activities, and loopholes in treaties leave countries in Africa vulnerable to tax avoidance. Governments in sub-Saharan Africa lack the human, financial, and technical resources to stem this outflow of wealth.</p>
<h2>Zambia and Nigeria</h2>
<p>Zambia and Nigeria provide examples of tax dodging practices among transnational corporations, enabled by tax havens. </p>
<p>Zambia, a country <a href="https://www.worldatlas.com/articles/what-are-the-major-natural-resources-of-zambia.html#:%7E:text=Zambia%20has%20a%20wide%20range,tourmaline%2C%20amethyst%2C%20and%20aquamarine.">rich in natural resources</a>, gains scant rewards from the foreign companies that extract its mineral wealth. <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf#page=6">For example</a>, in 2011, five companies producing copper worth US$4.28 billion paid only US$310 million to the government in taxes. This represented 11% and 19% of production for 2010 and 2011 respectively. In fact, only one or two mining companies declared positive earnings. Others reported losses of questionable validity, according to the UK-based non-governmental organisation <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf">War on Want</a> and the Zambia Extractive Industries Transparency Initiative. </p>
<p>Consequently, the country <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf">loses</a> about US$3 billion a year in tax revenues, a sum <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf">equivalent</a> to an eighth (12.5%) of its current annual <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=ZM">GDP</a>. </p>
<p>War on Want has <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf">accused</a> Vedanta, a copper producer operating in Zambia, of dodging taxes through <a href="https://www.investopedia.com/terms/t/transferprice.asp">transfer mispricing</a>. This is when related companies or divisions trade with each other at prices that aren’t market related, to avoid being liable for tax. Vedanta has 29 subsidiaries operating in the “secrecy jurisdictions” of Mauritius, the Netherlands, the British Virgin Islands and Jersey. <a href="https://taxsummaries.pwc.com/zambia/corporate/taxes-on-corporate-income">Zambia’s tax regime</a> allows the company to pay less tax when it spends money on physical assets or makes losses. It <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf">paid</a> only US$11,111 against profits of US$221 million in 2011-2012. </p>
<p>Likewise, Associated British Foods <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf">was accused</a> in 2015 of paying no tax in Zambia, even though its local affiliate, Zambia Sugar, made profits of US$123 million. This, according to War on Want’s report, cost Zambian public services US$27 million — enough to put 48,000 children into school. The revenue lost to tax havens was <a href="https://www.waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf">10 times greater</a> than the amount given each year to Zambia by the UK in educational subsidies.</p>
<p>Nigeria provides another example. The Shell Group, through its affiliate, <a href="https://www.shell.com.ng/about-us/what-we-do/spdc.html">Shell Petroleum Development Company of Nigeria</a>, had a special sharing arrangement with another affiliate, Shell Petroleum International Mattschappij BV (SPIM). Services and expenditure were charged to the group so that it made no profit over eight years, between 1992 and 1993. This cost Shell £20.09 million (US$44.75 million) in tax revenues. This is published in the Nigerian Revenue Law Report, 1998-1999 Shell Petroleum International Mattschappij B. V. v Federal Board of Inland Revenue, appeal no. FHC/L/CS/1A 96, Volume 1. This is not unusual; it is one of many cases.</p>
<h2>Why does exploitation continue?</h2>
<p>In an age of globalisation, developing countries have been encouraged to deregulate and privatise their economies to attract foreign investment. The <a href="https://www.macrotrends.net/countries/NGA/nigeria/foreign-direct-investment">flow of foreign direct investment</a> into Nigeria from transnational corporations grew from US$0.59 billion in 1990 to US$2.14 billion in 2000 and US$2.31 billion in 2019. That represented 1.09%, 1.64%, and 0.52% of GDP respectively. Zambia <a href="https://www.macrotrends.net/countries/ZMB/zambia/foreign-direct-investment">attracted</a> US$0.12 billion in 2000 and US$1.11 billion in 2017.</p>
<p>As <a href="https://www.emerald.com/insight/content/doi/10.1108/JFC-01-2022-0012/full/html#loginreload">our investigation</a> reveals, however, opening economies to the outside world can have the opposite effect of that intended. Rather than attracting the lucrative inward investment so desperately needed, countries in sub-Saharan Africa have opened their economies to self-interested multinational corporations. </p>
<p>Globally, between 50 and 60 tax havens <a href="https://www.emerald.com/insight/content/doi/10.1108/JFC-02-2021-0044/full/html">give sanctuary</a> to more than 2 million companies, including thousands of banks and investment funds. Of the Fortune 500 companies, <a href="https://uspirg.org/sites/pirg/files/reports/USP%20ShellGames%20Oct15%201.3.pdf">nearly three-quarters</a> have subsidiaries in offshore tax havens. </p>
<p>As long as small, independent nations gain financial benefit from declaring themselves tax havens, poor nations will be exploited. </p>
<p>There is an urgent need to clamp down on tax practices that drain countries with impoverished economies, and to give poor countries a real voice in tax negotiations. </p>
<p>It seems probable that if the loopholes in the tax laws are not closed, then the rule of law and the effective administration of tax will not be strengthened in Africa. Consequently, the continent may continue to lose billions of dollars to the activities of transnational corporations and their affiliates.</p><img src="https://counter.theconversation.com/content/179797/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>African countries, rich in resources, easily fall prey to aggressive tax planning and tax evasion facilitated by offshore companies.Jia Liu, Professor of Finance, University of PortsmouthOlatunde Julius Otusanya, Professor of Taxation, University of LagosLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/581532016-05-03T10:49:30Z2016-05-03T10:49:30ZGovernment pitches for ‘integrity’ in tax and super: experts respond<p>In its 2016-17 budget the federal government has released a raft of new measures that it says will help modernise and build integrity into Australia’s tax and superannuation systems.</p>
<p>Small business will be the biggest beneficiary of the measures, while high-income earners building their super for wealth creation will be targeted to help the government raise A$2.9 billion.</p>
<p>From July 1 this year, businesses with turnover of less than $10 million per annum will pay a reduced tax rate of 27.5%. The same rate will only kick in for large companies (with turnover of $1 billion or more) in 2023. The tax rate for businesses both big and small will only hit the headline 25% rate in 2026.</p>
<p>The instant asset write off for small businesses will be extended to businesses with turnover of up to $10 million per annum, and the government will undergo a trial of simpler business activity statements.</p>
<p>The government claims these tax measures will contribute to a 1% increase in GDP, according to Treasury modelling.</p>
<p>There’s little in the way of tax cuts for individuals however, apart from a move on bracket creep that will increasing the upper limit for the middle income tax bracket that pays 37 cents in the dollar from $80,000 to $87,000 per year.</p>
<p>As expected, the government will increase the tax paid on super contributions by those on incomes of $250,000 or more from 15% to 30%. A range of other caps and reductions in concessions aimed at high-income earners will deliver the government revenue to extend the low income super tax offset. This will allow those on incomes of $37,000 or less to receive a refund of tax paid on concessional contributions up to $500.</p>
<p>And in a bid to help women who have career breaks, the government will introduce “catch-up super contributions” that will allow unused concessional contributions to be carried forward for up to 5 years for those with super balances of $500,000 or less.</p>
<p>A new “Diverted Profits Tax” will hit companies found shifting profits offshore with a tax rate of 40%. This is expected to raise $200 million by 2019. The government will also increase penalties for large companies that lodge their tax returns late, and fund a “tax avoidance taskforce” that’s expected to help the government raise $3.7 billion over the next four years. It will also strengthen protection for whistleblowers who report tax avoidance.</p>
<p>There will be four annual 12.5% increases in tobacco excise from 2017, which will help the government raise $4.7 billion. This measure will be backed up with a $7.7 million “strike team” to crack down on illegal tobacco activity.</p>
<p>Our experts respond below.</p>
<hr>
<h2>What changes will be made to superannuation tax?</h2>
<p><em>Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School</em></p>
<p>The superannuation package will deliver a significant redistribution through scaling back the tax concessions available to people with high superannuation balances and/or the capacity to make substantial contributions to superannuation. The measures, with the exception of the lifetime cap, will commence from 1 July 2017. </p>
<p>The good news is the restoration of a tax offset for low income earners with income of less than $37,000 pa. The new Low Income Superannuation Tax Offset (LISTO) is very similar to the LISC: although the method of calculation is different, it will reduce any tax paid by the fund by up to $500 as long as a concessional contribution has been made during the year. </p>
<p>As expected, the concessional contributions cap has been reduced, although the new contribution is cap of $25,000 is at the higher end of the predictions. This is effectively reduces the current cap by $5,000 pa for people under 50, and $10,000 for people over 50. This cap can also be rolled over to assist people who have interruptions to their workforce participation, as long as their superannuation account balance is less than $500,000.</p>
<p>An associated measure will allow additional tax deductions for people who may not have been able to access the cap. This could arise where an employer will not allow salary sacrificing, or where a person has some income from paid employment but the balance of their income is from self employment. In such cases a person could not claim a tax deduction on topping up their superannuation so that additional contributions were treated as non-concessional contributions. This measure will allow consistent treatment across contributions.</p>
<p>The work test is being withdrawn so that people aged over 65 will no longer have to show that they are gainfully employed, which will allow either concessional or non-concessional contributions to be made up to the age of 75.</p>
<p>The non-concessional cap is being completely restructured. Under the rules that were in place prior to budget night a person could contribute up to $180,000 a year, or $540,000 every three years under the bring-forward rule. </p>
<p>With effect from Tuesday 3 May, the cap has been converted to a lifetime cap of $500,000. This will include all non-concessional contributions made since 1 July 2007, although if the cap has already been reached there will be no penalty imposed. However in future if a person breaches this cap it will be required to be withdrawn or subject to penalty tax.</p>
<p>Other measures to reduce the tax benefits to high income earners are the lowering of the income threshold where contributions are subjected to the higher 30% tax rate to $250,000. However there is a new proposal to limit the tax exemption of superannuation in retirement phase when the member has a balance of more than $1.6m in assets. If a member balance is more than $1.6m, the surplus needs to be left in accumulation phase where it is subject to 15% tax, or penalties will apply. Assets that are used to support transition to retirement income streams are also to be taxed at 15% in the superannuation fund.</p>
<p>In addition to the rollover of concessional contributions, a spouse can receive a tax offset of up to $540 for contributions made on behalf of a spouse who earns less than $37,000 – increased from $10,800. The low income threshold resulted in the existing concession being underutilised. However there is no superannuation guarantee requirement on paid parental leave. </p>
<p>Overall, the package is progressive. The government has estimated that the net increase to the revenue is $2.9bn after redistributing over $3bn to low income earners and in removing some anomalies.</p>
<p>There is evidence that high income earners will continue to save in other environments. The test will be how much of the savings is switched to productive income, and how much goes to other tax shelters, such as the property market.</p>
<h2>How will tax excises change and what will this mean for the cost of alcohol and cigarettes?</h2>
<p><em>Megan Vine, Law Lecturer, UNE</em></p>
<p>The proposed a 12.5% annual increase in tobacco excise over the next four years to 2020, will act as a continuation of the same increase over the previous four years introduced by the Labor government. If <a href="https://theconversation.com/labor-would-slug-smokers-to-boost-revenue-improve-health-51136">previous estimates</a> are correct this means a 25-cigarette pack will cost approximately $40 by 2020. In addition to increases in tobacco tax the government will be decreasing the duty free tobacco allowance in Australia from 50 cigarettes to 25 cigarettes or equivalent.</p>
<p>There will be no changes to excise tax rates for alcohol or fuel and no changes to the way in which wine is taxed. This means inconsistencies in the current tax arrangements for alcohol, where rates of taxation vary considerably for different types of alcoholic beverages will not be addressed by the current budget.</p>
<p>However, as part of its Ten Year Enterprise Tax Plan, the current brewery refund scheme, which provides a refund to independent breweries of 60% of the excise duty paid up to a maximum of $30,000 per financial year, will be extended to domestic distilleries and producers of low strength fermented beverages such as non-traditional cider from 1 July 2017.</p>
<p>Further in response to integrity concerns the government will be reducing the wine equalisation tax (WET) rebate cap from $500,000 to $350,000 on 1 July 2017 and to $290,000 on 1 July 2018 and will be tightening eligibility criteria from 1 July 2019. Hopefully these changes will have some impact on the distorting effects of the rebate discussed in the Senate Committee <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/Australian_wine_industry/Report/c02">report</a> into the grape and wine industry. The Government will also be providing $50 million over four years to the Australian Grape and Wine Authority to promote wine tourism within Australia and Australian wine overseas to benefit regional wine producing communities. While changes to eligibility will likely be welcomed by the wine industry the reduction in the cap may impact smaller producers. </p>
<h2>Will there be a new Australian Google tax to crack down on tax avoidance?</h2>
<p><em>Antony Ting, Associate Professor, University of Sydney</em></p>
<p>The government has introduced the Multinational Anti-Avoidance Law (MAAL), commonly known as the Google Tax, effective from 1 January this year. The MAAL is designed to deal with tax avoidance structures of multinational enterprises such as Google and Microsoft.</p>
<p>Early signs suggest that the MAAL has both positive and negative impact on the behaviour of MNEs. On the positive side, many multinationals have proactively initiated discussion with the Australian Taxation Office with the intention to ascertain whether they will be subject to the MAAL, and if so, to explore how they should restructure to comply with the law. An obvious positive result of the MAAL is that Google recently announced that it will <a href="http://www.afr.com/business/media-and-marketing/google-australia-pays-more-tax-questions-remain-over-revenues-20160429-goiars">restructure its operations</a> and commence to pay more tax in Australia in 2016 </p>
<p>On the negative side, the ATO has recently <a href="https://www.ato.gov.au/law/view/document?DocID=TPA/TA20162/NAT/ATO/00001">released a tax alert</a> to warn multinationals that it is aware that some have entered into “artificial and contrived arrangements to avoid the application of the MAAL”. </p>
<p>The silver lining of this development is that it suggests that the ATO appears to be on top of the issue and the release of the tax alert is likely to have some deterrent effect to curb the zest for aggressive tax planning by multinationals with respect to the MAAL.</p>
<p>To further strengthen the tax law on this front, the Treasurer announced in the Budget that the government will introduce an even stronger anti-avoidance law, a new Diverted Profits Tax (DPT). The new tax will be effect from 1 July 2017. Its design follows largely the DPT <a href="https://theconversation.com/amazon-shows-google-tax-can-work-despite-arguments-against-it-43545">introduced in the UK last year</a>.</p>
<p>The new DPT will have a wider scope than the MAAL. It will apply to large multinationals (with a global revenue of at least $1 billion) if among other things, a multinational has artificially shifted profits from Australia and the foreign tax paid on that profits is less than 80% of the Australian tax otherwise payable. </p>
<p>In other words, if the profits are shifted to a jurisdiction with a corporate tax rate of less than 24%, the DPT may apply. This threshold will cover most of the low tax countries commonly used by multinationals in their tax avoidance structures.</p>
<p>If properly designed, the new DPT is likely to have strong deterrent effect. This is because its tax rate is 40%, which is 10% higher than the standard corporate tax rate in Australia. The experience in the UK with its version of the DPT suggests that this penalty rate will be an important factor for MNEs to consider before entering into aggressive tax avoidance structures.</p>
<p>The new DPT is a welcome move by the government to combat tax avoidance by multinationals.</p>
<h2>Do the tax changes represent real reform?</h2>
<p><em>John Freebairn, Professor, Department of Economics, University of Melbourne</em></p>
<p>The Treasurer has proposed tax reforms which in aggregate are approximately aggregate revenue neutral. The question then is will the reforms reduce distortions to productive decisions to work, invest and spend, and what are the implications for distribution of the tax burden?</p>
<p>The decision to extend special tax concessions to small businesses (a lower rate of 27.5%, immediate write-off for investments less than $20,000, and extend the small business definition from turnover of $2 million to $10 million) while maintaining the current higher taxation of larger businesses might be politically popular, but it involves a revenue loss for no productivity gains. While the Treasurer indicated funds to pay for the current changes, mostly from greater integrity of the taxation of multinational companies. However, no indications were given for funding to extend the 27.5% rate to all businesses by 2023-24. </p>
<p>There is no compelling evidence that small businesses are more or less important or successful than large businesses in creating jobs, developing and implementing new products and production processes. There are many examples of successes and failures across both small and large businesses. The revised $10 million cut-off for the concessions is just as arbitrary as the preceding $2 million number. A more nationally productive reform would have identical and lower tax rates on comprehensive business income tax bases independent of size.</p>
<p>Budget proposal to reduce some of the tax concessions for superannuation for high income earners and use the revenue saved to raise the personal income tax bracket from an annual income of $80,000 to $87,000 for those on upper middle and above incomes represents a very tentative move towards a more equitable and less distorting system of personal income taxation. Of course, part of the change is no more than a return of bracket creep and the associated increase of average tax rates for all. </p>
<p>Those who are making large superannuation contributions will lose more from the reduced concessions than the gain from the lower tax rates. For many with average decisions the gain and loss will roughly cancel. A broad and comprehensive labour income tax base would tax all forms of remuneration, including super and fringe benefits, the same as wages and salary income. The broader base and lower rate approximately revenue neutral package would reduce distortions to decisions to work and encourage participation.</p>
<p>The Treasurer in defending no changes to the lower income tax brackets fell back on the argument that these people received income tax cuts as compensation for the carbon tax introduced in July 2012. Bracket creep is causing larger increases in average tax rates for the two-thirds of taxpayers with incomes below average weekly earnings. When the carbon tax was removed in July 2014, the income tax cuts were retained. This seems a tough equity argument to sell.</p><img src="https://counter.theconversation.com/content/58153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson receives funding from AHURI. Helen Hodgson is a member of the ACOSS Tax Advisory Panel and the NFAW Social Policy Committee. Helen Hodgson was a member of the WA Legislative Council between 1997 and 2001 as an Australian Democrat. She is not currently a member of any political party.</span></em></p><p class="fine-print"><em><span>Antony Ting has received research funding from CAANZ. </span></em></p><p class="fine-print"><em><span>John Freebairn and Megan Vine do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Wins for small business; significant superannuation reform; multinational tax avoidance addressed; and more.Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin UniversityAntony Ting, Associate Professor, University of SydneyJohn Freebairn, Professor, Department of Economics , The University of MelbourneMegan Vine, Law Lecturer, University of New EnglandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/545822016-02-11T13:39:20Z2016-02-11T13:39:20ZGoogle deal: in defence of the taxman<figure><img src="https://images.theconversation.com/files/111122/original/image-20160211-29185-7v17yy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">YanLev/Shutterstock</span></span></figcaption></figure><p>Google came under a <a href="http://www.theguardian.com/technology/2016/feb/04/google-uk-tax-deal-share-options-scheme">barrage of criticism</a> for paying less than its “fair share” of tax and HMRC has been accused of being soft or incompetent for the “<a href="https://theconversation.com/if-you-want-google-to-pay-more-tax-change-the-law-53669">sweetheart deal</a>” it negotiated. </p>
<p>Publicly available information is not sufficient to judge whether this is a “good” or “bad” deal for the UK. Critics have no way of knowing if HMRC interpreted and applied the law correctly and neither do we. But we need to look at some context.</p>
<p>When <a href="http://press.labour.org.uk/post/138086048999/john-mcdonnell-writes-to-osborne-for-answers-over">writing to the chancellor of the exchequer</a> on the matter, John McDonnell, the shadow chancellor, noted that there had “been much comment and discussion about the rights and wrongs of this case specifically, as well as the general principle of large companies being able to negotiate settlements such as this with the UK’s tax authorities”. Settlements are clearly viewed with suspicion in some quarters. The term often used to describe such settlements – “sweetheart deals” – has clear undertones of impropriety and favouritism. Settlements have been portrayed as a luxury afforded to large multinationals to negotiate down the amount of tax due.</p>
<p>In fact, there is nothing untoward or suspect in settlements; settlements are a legitimate feature of a tax system and facilitate its smooth operation. Given the number of taxpayers under HMRC’s charge, the number of issues on which a single taxpayer and HMRC can disagree, the limitations of time and resources, and the genuine uncertainty surrounding such issues, it is only reasonable for HMRC to seek to reach agreement.</p>
<p>But why do HMRC and taxpayers disagree so often on the tax due under the law? This is partly because some taxpayers push the law to the limit, but also because tax law is uncertain and the associated processes that are used to establish a tax charge, such as valuation, are not exact sciences. The notion that one can plug a series of figures into a tax computation machine and it will spit out the “right” amount of tax due is fanciful. Different people can have wholly respectable but differing views on the interpretation of the law and its application to the facts. It is for this reason that <a href="https://www.supremecourt.uk/cases/docs/uksc-2010-0041-judgment.pdf">judges overturn each other’s decisions</a> – and even the five judges sitting in the Supreme Court at times disagree with each other.</p>
<p>Criticism of this specific settlement was sparked by the “<a href="http://www.theguardian.com/technology/2016/jan/23/google-uk-back-tax-deal-lambasted-as-derisory">derisory</a>” amount of tax paid by Google. We cannot judge if this was due to the wrong or soft application of the law by HMRC, but we know that the <a href="https://theconversation.com/double-trouble-why-landmark-oecd-tax-reform-is-doomed-before-it-starts-48115">current law is inappropriate</a> for taxing multinational companies such as Google. It is not at all surprising that it produces this result. </p>
<h2>Going public</h2>
<p>Some critics have called on the government to <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447313/Improving_Large_Business_Tax_Compliance.pdf">publish the information</a> necessary for the public to assess these settlements, a move that would require a change in the law. This is a questionable idea. One would require voluminous information to properly assess the “correctness” of a multinational’s tax charge, not to mention very significant expertise, time and resources. </p>
<p>More importantly, to properly understand why a company pays a certain amount of tax would require information at a level of detail which runs into confidentiality and competition issues. Making less than this amount of information publicly available is unlikely to be very useful and may easily lead to misinterpretation and misinformation. </p>
<p>What question would we be asking: whether the law was interpreted and applied correctly or whether the “fair share” of tax was paid? If the latter, one has to decide whose idea of fairness ought to apply. Again, two reasonable individuals can disagree on what is fair. And while critics have argued that this kind of transparency is necessary to restore trust in HMRC, this call and its accompanying criticism does the exact opposite – it sends a message to the public that HMRC cannot be trusted to do their job properly.</p>
<h2>Checks and balances</h2>
<p>This is not to say that HMRC will never get things wrong. They will, but we should deal with that by ensuring that internal and external checks are in place to pick up mistakes. Internal checks <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/444911/How_we_resolve_tax_disputes.pdf">have been bolstered</a> in the past few years. This, together with the knowledge that all eyes were on the tax affairs of the big multinationals – but especially Google, Amazon and Starbucks – would make it surprising, if HMRC did not do its job properly when reaching this settlement. Of course, that does not necessarily mean that they did. However, we should keep internal process under review and if necessary improve them further. We should also think more carefully about the need for <em>ad hoc</em> or regular external reviews by the NAO or other independent bodies.</p>
<p>An SDP MP and the Labour Party <a href="http://www.ft.com/cms/s/0/dc1e3cd4-c592-11e5-808f-8231cd71622e.html#axzz3zqniQy5v">have asked the European Commission to investigate</a> whether this settlement breaches state aid rules, which <a href="http://ec.europa.eu/competition/state_aid/overview/index_en.html">forbid government support</a> that gives a company advantages over its competitors. There are serious questions to be raised about the commission’s state aid <a href="http://europa.eu/rapid/press-release_IP-15-5880_en.htm">investigations into the tax affairs of multinationals</a>, but that is beyond the point of this comment. Certainly, the UK cannot rely on the commission to investigate the tax affairs of multinationals operating in the UK who appear to pay less than their “fair share”.</p>
<p>Surely, it must be more sensible and sustainable in the long term to ensure that the internal and external review processes in the UK are up to scratch. We must also improve the tax law itself. These steps, and not the current criticism of HMRC, will lead to a better tax system and restore the public’s trust in it.</p><img src="https://counter.theconversation.com/content/54582/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Centre for Business Taxation receives funding from the ESRC and various companies from the Hundred Group. A full list is available on the CBT's website: <a href="http://www.sbs.ox.ac.uk/ideas-impact/tax/about/funding">http://www.sbs.ox.ac.uk/ideas-impact/tax/about/funding</a></span></em></p>The finger of blame has been pointed at HMRC over the multinational’s ‘sweetheart deal’. That’s not fair.John Vella, Associate professor and Senior Research Fellow at the Oxford University Centre for Business Taxation (CBT), University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/524902015-12-18T05:49:55Z2015-12-18T05:49:55ZSo now we know which companies did not pay tax; time to target aggressive avoidance<p>With much anticipation and very little fanfare the Australian Taxation Office quietly released information about corporate tax entities with a total income of $100 million or more for the 2013–14 income year and how much tax they paid.</p>
<p>If you’re not doing anything dishonest then you should have no fear of public disclosure. Nonetheless, although we are all meant to be equal under the law, until now many firms have been employing accountants and lawyers to shroud their true corporate and social behaviour under the cover of privacy whilst the Government stood by quietly (that is, the information was deemed confidential by the ATO).</p>
<p>The media frenzy surrounding the release of information demonstrates that the public demands disclosure from all. So do these new tax transparency regulations finally lift the lid on so that the public can peek inside? Critically, these disclosures come with many limitations. </p>
<p>For instance, included are companies, corporate unit trusts, public trading trusts and corporate limited partnerships with a total income of $100 million or more. However, excluded from the ATO disclosure are firms that have not lodged their tax returns before September.</p>
<p>Certain Australian-owned resident private companies are excluded from reporting if they are Australian-owned residents with a total income of $250 million, or not a member of a foreign holding company, and some simply for unspecified reasons.</p>
<p>Another limitation is that the data set released by the ATO has only three columns of numbers: total income, taxable income and income tax payable. This is where it gets tricky. First, the deductions claimed against total income to arrive at net profit are not disclosed.</p>
<p>Second, there is nothing to explain why a firm like Qantas (with huge carry forward of their previous fleet write-downs) had no taxable income in that year. Also, simply multiplying taxable income by the company tax rate of 30% rarely explains income tax payable because there is nothing to explain how a firm deducts tax offsets, such as the research and development (R&D) incentive and franking credits. </p>
<p>Hence, data from the ATO list is not simply comparable to that from the financial statements. Reasons for this range from different consolidation requirements and choices, different rules within the tax system, and the effect of tax incentives.</p>
<p>For the Macquarie Group for instance, the financial statements reported revenues of $12.743 billion but the ATO list reported total income of $8.1 billion. This is a reduction of over 36% and there remains no publicly available information to explain this discrepancy.</p>
<p>Here is a brief summary of the facts, as the significance of the event has to some degree clouded much of the analysis. </p>
<p>In total 1,539 entities are included, including wholly owned subsidiaries of MNC such as Apple, Google and Cisco (all of which are large proprietary companies), the largest publicly listed Australian companies such as BHP and Rio Tinto, as well as large proprietary companies such as healthcare insurer BUPA Australia, mining giant Glencore, and beverages company, Lion. </p>
<p>Of these 1,539 entities listed by the ATO, 466, or 30% of these firms report no tax payable for the 2013-2014 tax year. This includes some large, well-known companies such as Qantas, GHP Pty Ltd, ExxonMobil Aust, Lend Lease, Glencore, General Motors Aust., Vodafone Hutchison, Anglo American Aust, Chevron Aust, Ford Australia, Hewlett Packard, Sydney Airport, Goodman Fielder, Macquarie Telecom Group, TEN Network, NBN Co., Goldman Sachs ANZ, JP Morgan Aust, and publisher News Australia, part of Rupert Murdoch’s empire.</p>
<p>Aggregate analysis reveals that gross income of $1,629 billion earned by these firms is reduced down to $169 billion in taxable income. This equates to a tax “net margin” of only 10.4%. While this calculation of a “net margin” is rudimentary, it should equate closely to the financial statement calculated net margin of net profit before tax on total revenues. The tax “net margin” is well below the financial statement net margin for a number of large US subsidiaries. </p>
<p>For instance, subsidiaries of Apple, Hewlett Packard, Chevron, Cisco Systems, Microsoft and Google that are included on the list with their average tax margin from the ATO at 3.5% compared to their parent group net margin of 20.8%. This indicates that these firms seem to be increasing expenses and reducing revenues in Australia. </p>
<p>A reduced amount of tax payable doesn’t necessarily mean tax avoidance. However, many firms, using legal tactics, are not even filing financial reports with THE Australian Securities and Investment Commission (ASIC), let alone attempting to explain their tax affairs. </p>
<p>At least now they’ll be forced to explain their aggressive tax arrangements publicly, otherwise we suspect that the capital markets which are the ultimate arbiter of public sentiment may punish those who remain recalcitrant. While the ATO’s data set is a positive step forward, it’s only the first in a series of many needed to better inform the Australian public about the tax affairs of all “publicly accountable” for-profit businesses operating in this country.</p>
<p>Significantly, will these firms continue to be as tax aggressive given that a light has now been shone into their hollow, and will the government expand the limited disclosures and improve public accountability in the run-up to next year’s federal election?</p><img src="https://counter.theconversation.com/content/52490/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The drop of tax data showing hundreds of major companies did not pay tax needs parsing; but there must be crackdown on aggressive tax planning.Roman Lanis, Associate Professor, Accounting, University of Technology SydneyBrett Govendir, Lecturer, University of Technology SydneyRoss McClure, PhD Candidate, casual academic, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/486142015-10-09T12:02:36Z2015-10-09T12:02:36ZHow governments are helping big companies pay less tax<p>Corporate tax policy says more about power than anything else. Corporations seek to minimise the tax they pay – and, while governments ordinarily try to maximise their revenues, in the case of transnational corporations (TNCs) they also understand that they have to tread carefully. Governments have come to accept that they <a href="http://onlinelibrary.wiley.com/doi/10.1111/hojo.12112/pdf">hold fewer and fewer cards as capital has become more mobile</a>. </p>
<p>They’ve worked on their electorates in order to drive this message home. During the early period of the 2010-2015 coalition, George Osborne and David Cameron <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/193239/Corporation_tax_road_map.pdf">set out their own views</a> by stating that they needed to ensure: “that the way the tax system operates for UK headquartered multinationals does not inhibit commercial business practices or make them unattractive to international investment”.</p>
<p>Trade and competition rules mean that some of the traditional methods of protecting businesses – the imposition of tariffs and the allocation of business subsidies – have been challenged. In such an environment, governments have looked for new inducements to maintain existing, or capture new, business investment <a href="http://onlinelibrary.wiley.com/doi/10.1111/hojo.12112/pdf">and corporate taxation has offered new opportunities in this regard</a>.</p>
<p>The key developments in national tax policies begin to make a lot of sense against this background, especially when we factor into the mix higher public debt levels and large national deficits. Governments have seldom been as desperate to capture the revenues owed to them and close the various tax avoidance schemes that prevail. International interest in corporation tax peaked in the aftermath of the post-2008 economic crisis. And the manner in which the UK Parliament’s Public Account’s Committee, <a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/report-tax-avoidance-the-role-of-large-accountancy-firms-follow-up/">chastised some of the largest and most successful companies for tax avoidance</a> caught many, including the companies involved, by surprise. Parliament wasn’t supposed to talk to major corporations in this way.</p>
<p>We shouldn’t separate the investigations of the Public Accounts Committee from the context of the crisis. For a brief moment at least, major corporations were on the back foot. Public trust in big business – and in the banks in particular – was at an all-time low. The government had an opportunity to tackle the problem of corporate tax abuse and of closing the substantial deficit. However, many governments also recognised that, in the area of tax, they had to act multilaterally in order to ensure that they didn’t simply scare off investors to more favourable tax regimes. And it is out of this that international initiatives, including the <a href="https://theconversation.com/double-trouble-why-landmark-oecd-tax-reform-is-doomed-before-it-starts-48115">OECD’s Base Erosion and Profit Shifting initiative (BEPS)</a>, have evolved.</p>
<h2>Pay little pay late</h2>
<p>The basic strategy for most corporate tax avoidance is simple: TNCs seek to design their businesses so that they pay as much income as possible in countries where taxes are low and as many costs as possible in jurisdictions where the statutory tax rate is high. Low standards of transparency in corporate financial reporting, differences in what should be included in estimates and disagreements over the meaning of corporate tax avoidance have produced varying estimates. The UK government estimates that the difference between the amount of tax expected and the actual amount paid was <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/249146/mtg-2012.pdf">£4.1 billion in 2010/11</a> (the most recent estimation year available), although independent estimates put the figure at around <a href="http://www.taxresearch.org.uk/Blog/2012/10/18/why-hmrcs-tax-gap-still-makes-no-sense/">£12 billion</a>.</p>
<p>Avoidance stems from a similar set of pressures to corporate tax competition: <a href="http://onlinelibrary.wiley.com/doi/10.1111/hojo.12112/pdf">corporate lobbying</a> and <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9442.2011.01650.x/abstract">structural pressures on successive governments to induce businesses to invest</a>. These same drivers have created a vast range of broadly defined <a href="http://money.cnn.com/2013/05/24/news/">tax benefits</a> – which increase the opportunities for tax avoidance and <a href="http://ctj.org/ctjreports/2013/04/ten_of_many_reasons_why_we_need_corporate_tax_reform.php#.VhPtrCt0Z2A">help to lower the effective tax rate</a>.</p>
<p>Findings from the UK have revealed the fuzziness of the rules regarding corporation tax. Creativity in the interpretation of tax rules is embedded in the institutional processes used to develop them. Large accountancy firms second staff to the Treasury to <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/870/87002.htm">provide advice on formulating tax legislation</a> so that when they return to their firms, they have inside knowledge of how to identify loopholes in new legislation and advise their clients on how to take advantage of them.</p>
<h2>Playing the system</h2>
<p>The ability of firms to interpret tax rules creatively also reflects the imbalance of resources between accountancy firms and tax authorities. In 2009, the four major accountancy firms alone employed nearly 9,000 people and earned £2 billion in the UK and as much as US$25 billion globally from their tax work; <a href="http://www.theguardian.com/business/2009/feb/07/tax-gap-avoidanceschemes">an estimated 50% of their fees now come from “commercial tax planning” and “artificial avoidance schemes”</a>. In 2012, HMRC reported that it had 1,200 staff overseeing <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/716.pdf">783 large businesses</a>, in respect of which £25 billion in tax was potentially outstanding. There are now around <a href="http://www.wired-gov.net/wg/wg-news-1.nsf/article/Continuing+weakness+of+HMRC+in+its+efforts+to+deal+with+tax+avoidance+26042013131000?open">four times as many staff working for the accountancy firms on transfer pricing alone</a>. And even where companies have been accused by HMRC of having underpaid taxes, the outcome has tended to be a negotiated settlement – an unequal process given the different resources available to the two sides and governments’ need to create a pro-business environment.</p>
<p>The potential weaknesses of co-operative approaches are illustrated by the UK’s <a href="https://www.gov.uk/guidance/disclosure-of-tax-avoidance-schemes-overview">Disclosure of Tax Avoidance Schemes (DOTAS)</a>, which requires companies engaging in tax avoidance to disclose their avoidance activities to HMRC which, in turn, rules on their legality. If legal, the tax avoidance scheme can be used for financial gain until HMRC acts to close the loophole that makes it possible. Unsurprisingly, DOTAS has had <a href="http://www.nao.org.uk/wp-content/uploads/2012/11/1213730.pdf">little impact on the use of aggressive schemes</a>, largely because HMRC lacks the necessary resources to take effective pre-emptive measures.</p>
<h2>Cosy deals</h2>
<p>It isn’t just companies that governments are doing battle with over taxation, it is also other states. Apple has negotiated a special tax rate with the Irish government, resulting in its <a href="http://www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-profit-shifting-and-the-us-tax-code_-part-2">affiliates paying 2% or less since 2003</a>. Starbucks has also apparently reached a similar <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/716.pdf">“secret” deal with the Netherlands tax authorities</a>. Amazon’s tax deal with Luxembourg is so generous that the <a href="http://www.ft.com/cms/s/0/44fbcf44-4e36-11e4-adfe-00144feab7de.html#axzz3ntleyE82">European Union is currently investigating it as potential state aid to the company</a>. </p>
<p>Evidence of bespoke tax deals reached between corporations and governments throws into question the very sustainability of the corporate tax system and raises serious questions about the alignment of government and corporate interests and its effects on tax revenues and public spending in future. It also raises questions about the lengths governments will have to go to in future to entice companies to invest and suggests that international agreement on corporate tax competition may be further away than is presently thought.</p>
<p>The key question is whether BEPS will reduce corporate tax avoidance. The OECD, upon releasing its <a href="http://www.oecd.org/tax/aggressive/beps-2015-final-reports.htm">final report</a>, stated that the new tax agreement will increase the corporation tax take and restore trust in the fairness of tax systems. But there is still a <a href="https://theconversation.com/oecds-new-tax-proposals-wont-stop-companies-shifting-profits-to-tax-havens-48466">long way to go</a> before the BEPS reforms can really be considered to offer a way of tackling tax avoidance. </p>
<p>Country-by-country reporting, for example, will provide country-level disclosures that are unlikely to be transparent and readily available in anything like the format required to facilitate true international cooperation to act on tax avoidance. Moreover, while the rules about taxing economic activity are clearer, there has been no movement on the taxation of corporate subsidiaries so that they will still be treated as independently trading entities. This will do very little, therefore, to eradicate tax avoidance through transfer pricing.</p>
<p>Of course, no international agreement will reduce the pressure, much of it self-imposed, on governments to compete vigorously with other governments in the area of taxation. The UK government has a clear strategy to compete in such terms and has laid out its own stall by setting one of the <a href="https://stats.oecd.org/Index.aspx?DataSetCode=REV">lowest rates of corporation tax in the OECD</a>. </p>
<p>There is nothing surprising about the fact that corporations should seek to minimise their tax bill. What is more surprising and worrying is the extent of the problem and the fact that <a href="http://www.theguardian.com/commentisfree/2015/jul/10/corporate-welfare-budget-tax-money">governments also appear to be colluding in the practice</a>. The battleground is no longer between corporations and governments, but between governments and governments, each one keen to attract new private sector investment with increasingly attractive inducements to companies to facilitate such investment. With all this going on, the big transnationals may be excused for thinking that such permissiveness is simply part of the overall package of inducements.</p><img src="https://counter.theconversation.com/content/48614/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Fooks is a member of the Labour Party, has previously received money from the National Institutes of Health in the US and Cancer Research UK, and currently receives funding from Cancer Research UK.</span></em></p><p class="fine-print"><em><span>Kevin Farnsworth does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Governments may pledge to stop big companies from exploiting tax avoidance loopholes, but are they being honest?Kevin Farnsworth, Senior Lecturer, Social Policy, University of YorkGary Fooks, Corporate Criminologist, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/484662015-10-06T11:46:05Z2015-10-06T11:46:05ZOECD’s new tax proposals won’t stop companies shifting profits to tax havens<figure><img src="https://images.theconversation.com/files/97405/original/image-20151006-7366-1jeub4v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">ChameleonsEye</span></span></figcaption></figure><p>The news has been <a href="http://www.bbc.co.uk/news/magazine-20560359">full of stories</a> about how companies such as Amazon, Apple, Google, Microsoft, Starbucks and others are able to shift their profits to low or no-tax jurisdictions by using novel, legally permitted corporate structures and complex internal transactions (known as transfer pricing schemes). Companies are able to do so because they are generally taxed at the place of their residence rather than where the underlying economic activity takes place.</p>
<p>The European Union is estimated to be losing about <a href="http://www.euronews.com/2013/05/21/web-as-europe-faces-tax-evasion-worth-1-trillion-euro-meps-debate-solutions-ahe/">one trillion euros</a> each year due to a combination of tax avoidance, evasion and arrears. This is bigger than the combined gross domestic product (GDP) of Norway and Sweden and requires political action.</p>
<p>Against the above background, in 2013, the governments of G20 nations asked the Organisation for Economic Cooperation and Development (OECD) to develop proposals for dealing with <a href="http://www.oecd.org/tax/beps-2015-final-reports.htm">Base Erosion and Profit Shifting (BEPS)</a>.</p>
<p>As part of the BEPS project, the OECD has now completed the first phase consisting of 15 possible actions. These form part of its final reports which exceed 1,000 pages and a <a href="http://www.oecd.org/ctp/beps-reports-2015-executive-summaries.pdf">summary is available here</a>. There is much to digest and the OECD does offer some ways of tackling BEPS, but ultimately the project is <a href="https://theconversation.com/double-trouble-why-landmark-oecd-tax-reform-is-doomed-before-it-starts-48115">unlikely to make a significant dent</a> in organised corporate tax avoidance.</p>
<h2>Profit Shifting</h2>
<p>Transnational corporate groups have been very adept at engineering inter-group loans. Under this, one subsidiary borrows from another and pays interest. No cash effectively leaves the group and the interest paid by the paying subsidiary attracts tax relief while the receiving company, often located in low or no-tax jurisdiction, pays no tax on its income. So the OECD suggestion that the tax relief on such interest payments be restricted may dissuade some from opting to adopt these ingenious and complex financial arrangements.</p>
<p>The OECD has supported calls for <a href="https://theconversation.com/country-by-country-reporting-is-a-victory-for-citizens-over-companies-14654">country-by-country reporting</a> (CBCR). This requires companies to show the profit they make in each country together with sales, employment and other relevant information. This information can help to illustrate the mismatch between economic activity and profits booked in each country. </p>
<p>But the OECD only recommends that this disclosure be made by each multinational corporation to the tax authority in its home country. To secure this information, governments of other countries will need to enter into numerous treaties. Poorer countries will hardly be in a position to leverage negotiations with more powerful countries. A more efficient solution would be for companies to publish the required information as part of their annual accounts – something the <a href="http://www.europarl.europa.eu/news/en/news-room/content/20150703IPR73914/html/Tax-MEPs-advocate-country-by-country-reporting-to-help-developing-countries">European Parliament</a> has called for.</p>
<h2>Out of date</h2>
<p>The <a href="http://www.taxjustice.net/cms/upload/pdf/Picciotto%201992%20International%20Business%20Taxation.pdf">current corporate tax system</a> was designed nearly a century ago when the contemporary form of transnational corporation, direct corporate investment in foreign operations and the internet did not exist. The OECD has failed to address the three biggest fault lines in the current system. First, under various international treaties, companies are taxed at their place of residence rather than the place of their economic activity. The OECD reforms do not make any significant change.</p>
<p>Second, modern corporations, such as Starbucks and Google, are integrated entities. They coordinate the economic activities of hundreds of subsidiaries to achieve economies of scale, market domination and profits, but for tax purposes are assumed to be separate economic activities. So a single group of companies with 500 subsidiaries is assumed to consist of 500 independent taxable entities in diverse locations. This leaves plenty of scope of profit shifting and tax games. </p>
<p>Third, the profits of a group of companies are allocated to each country by using a system known as <a href="http://repository.essex.ac.uk/8098/1/WP2010-1%20-%20PSikka%20Transfer%20Pricing%20Paper.pdf">transfer pricing</a>. This requires arm’s-length or independent market prices to calculate the price of intra-group inputs and value of outputs to estimate taxable profits. In the era of global corporations, independent prices can’t easily be estimated. For example, as I found in an investigation in 2011, just <a href="http://www.etcgroup.org/files/publication/707/01/etc_won_report_final_color.pdf">ten corporations control</a> 55% of the global trade in pharmaceuticals, 67% of the trade in seeds and fertilisers and 66% of the global biotechnology industry. </p>
<h2>The way forward</h2>
<p>The OECD recognises the problem but does not offer any way forward. Instead, it seeks to repair the current broken system through improved documentation for transfer pricing and international treaties. An alternative approach known as <a href="http://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf">unitary taxation</a> can address the above shortcomings. It treats each group of companies as a single unified economic entity. It recognises that there can be no sale, cost or profit until the company transacts with an external party. Thus, all intragroup profit shifting is negated. </p>
<p>The global profit of an entity is allocated to each country in accordance with key variables, such as sales, employees and assets – and each country can then tax the resulting profit at any rate that it wishes. A system of unitary taxation has been operated within the US since the 1930s to negate the impact of domestic tax havens (for example Delaware) and profit shifting. The OECD could have studied this but chose not to.</p>
<p>The BEPS project is unlikely to be the last word on corporate tax avoidance.</p><img src="https://counter.theconversation.com/content/48466/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Prem Sikka is director of the Association for Accountancy and Business Affairs (AABA), a not-for-profit organisation.</span></em></p>The EU is thought to be losing one trillion Euros from tax avoidance, evasion and arrears. But the latest tax reform is unlikely to fix that.Prem Sikka, Professor of Accounting, Essex Business School, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/405342015-04-21T20:11:10Z2015-04-21T20:11:10ZLabor’s multinational tax package misses the point<p>The <a href="http://www.theirfairshare.org.au/ourpolicy">multinational tax package</a> recently <a href="http://www.andrewleigh.com/hockey_loses_7_2_billion_by_refusing_to_accept_labor_s_multinational_tax_plan_joint_media_release">announced</a> by the federal Labor party is clearly well-intentioned but it misses the point about big companies paying their fair share of tax. </p>
<p>The proposed policy has some useful suggestions but fails to recognise how easy it is for big firms to restructure their finances and get around rule changes. </p>
<p>And while Labor Senator Sam Dastyari has been <a href="http://www.abc.net.au/lateline/content/2015/s4212189.htm">vocal</a> in the <a href="http://www.smh.com.au/comment/why-companies-that-avoid-tax-should-be-named-and-shamed-20150407-1mfi98.html">media</a> about naming and shaming big companies that have aggressively minimised their tax, there’s no mention of such a policy in the publicly available <a href="http://billshorten.com.au/big-multinationals-to-pay-fair-share-under-labor">documentation</a> on Labor’s proposed package.</p>
<h2>Calls for change</h2>
<p>The general mood of the electorate and the ordinary person in the street is that multinational firms are not paying appropriate amounts of tax in Australia. </p>
<p>Labor has said that it is committed to getting the rules right so that everyone pays a fair share of tax. It consulted with academics, multinational tax practitioners and industry to formulate the policy package.</p>
<p>The announcements centre tightening up the rules that regulate excessive tax deduction claims (thin capitalisation rules), aligning the definitions of debt and equity between countries and improving data matching rules to achieve better compliance.</p>
<p>The Parliamentary Budget Office has costed Labor’s proposed policy and said that such measures will bring in $7.2 billion of tax revenue over ten years. </p>
<p>These are all useful suggestions and certainly such an increase in tax revenue would assist with reducing the federal budget deficit.</p>
<p>But in the longer term, big firms will still find ways to reduce their tax bill.</p>
<p>The problem for Labor is that their proposal misunderstands the manner in which multinationals operate their business operations across the globe. The same can be said for the manner in which the federal government is dealing with this issue. </p>
<h2>Separate entities</h2>
<p>Multinationals are, in essence, a group of separate companies that are recognised by most jurisdictions as separate legal entities, and separate taxpayers in each and every one of those jurisdictions. </p>
<p>Accordingly, each subsidiary of the parent company is a separate entity from a legal and tax point of view. </p>
<p>On that basis, the subsidiary need only satisfy the relevant tax rules of the country in which they operate. The practical effect is that even though the subsidiary is usually 100% owned by a parent multinational company, these companies can still work their way around the tax rules by shifting profits between countries. </p>
<p>Labor’s proposals, while well-meaning, are unlikely to put a stop to that practice altogether. It’s true that data matching between countries will help governments keep better track of which firms are hiding profits where.</p>
<p>In the short term companies will have to rethink their tax strategies but in the longer term, firms will still find ways to reduce tax bills legally.</p>
<h2>Naming and shaming</h2>
<p>There’s a difference between companies paying the amount of tax they legally owe in a certain country and paying what many people would regard as a “fair share” of tax.</p>
<p>Most multinationals reduce their tax bill in a manner that is entirely legal. </p>
<p>If our political parties wish to use the phrase “fair share of tax” as distinct from “legally correct amount of tax”, then there is a broader issue to deal with. With the right policy levers, enormously profitable firms that are legally paying the correct amount of tax required under domestic law may be inspired to voluntarily donate extra tax.</p>
<p>That may sound fanciful but this approach has already worked in the United Kingdom. There, the government has begun naming and shaming companies that the community regards as not paying their fair share of tax, regardless of whether they are actually paying the correct amount of tax required of them under current law.</p>
<p>Starbucks <a href="http://www.starbucks.co.uk/our-commitment">made an additional tax payment of around £20 million</a> to the UK government, above and beyond what they were legally required to pay. There was no suggestion that Starbucks had not paid the correct and legal amount of tax. </p>
<p>While raising the corporate tax rate may simply inspire firms to shift operation to low-tax countries, naming and shaming can have the effect of boosting tax revenue to governments while presenting a PR opportunity for companies.</p>
<p>Starbucks’ decision to pay extra tax after being “named and shamed” allows them to position themselves as good corporate citizens. The naming and shaming approach is a very good way of bringing a social and community justice perspective to an issue often bogged down in complex and legalistic debate.</p>
<p>There needs to be a change of perspective as to how we treat multinationals within our community. It is not just about their contribution of taxes to the economy but rather a wider perspective as to how they can contribute to the community to which they are operating. </p>
<p>This is a major shift in thinking but, as the Starbucks example proved in the United Kingdom, it’s quite possible.</p>
<p>Both political parties need to address this issue and stop making tax proposals that will, in the end, have little effect, even if they are legislated. The time has come for a wider conversation on this vexed and complicated issue.</p><img src="https://counter.theconversation.com/content/40534/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael William Blissenden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The tax package recently announced by the Federal Labor party is clearly well intentioned but it misses the point about multinationals paying their fair share.Michael William Blissenden, Associate Professor in Law, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.