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.
And while Labor Senator Sam Dastyari has been vocal in the media about naming and shaming big companies that have aggressively minimised their tax, there’s no mention of such a policy in the publicly available documentation on Labor’s proposed package.
Calls for change
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.
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.
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.
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.
These are all useful suggestions and certainly such an increase in tax revenue would assist with reducing the federal budget deficit.
But in the longer term, big firms will still find ways to reduce their tax bill.
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.
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.
Accordingly, each subsidiary of the parent company is a separate entity from a legal and tax point of view.
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.
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.
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.
Naming and shaming
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.
Most multinationals reduce their tax bill in a manner that is entirely legal.
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.
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.
Starbucks made an additional tax payment of around £20 million 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.
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.
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.
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.
This is a major shift in thinking but, as the Starbucks example proved in the United Kingdom, it’s quite possible.
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.