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Tax transparency can work for companies if they do it right

Naming and shaming is not really the main agenda of tax transparency. Bart Maguire/Flickr, CC BY-NC-ND

The Tax Transparency Package released by the European Commission last week comes amid global moves by the G20 and others to make it more difficult for companies to avoid paying their fair share of tax.

But as serious information sharing plans are hammered out between nations around the world, the Australian government is considering protecting the privacy of some of Australia’s richest people, diluting transparency measures aimed at private companies.

Citing what Senator Josh Frydenberg called the “legitimate concern” of the potential for kidnapping, the Australian government is reportedly planning to wind back tax disclosure laws to protect the privacy of individuals who own companies with turnovers of more than A$100 million.

Surely no-one believes this is a valid concern, given many of the people in question already feature regularly in magazine rich lists, with their photos, personal wealth, age, location, business ventures, and family details published. Wouldn’t this be the “go-to” list for wannabe kidnappers? Or, are they waiting for the Commissioner of Taxation to publish taxpayer name and ABN, total income, taxable income and tax payable? Keep in mind the taxpayer name will be that of a corporate entity.

The reason transparency matters

In reality, transparency measures are not aimed at naming and shaming corporate taxpayers. Large corporate entities and multinationals are complying with the law but often pay very little in tax. Ultimately, the transparency measures are a step in determining how and why this is the case. The broader agenda to address base erosion and profit shifting is about addressing the laws which allow this to happen.

Corporate entities may choose to react to disclosures according to their own circumstances. Some entities will see no need to respond, while others will explain their position.

Voluntary reporting is already on the agenda for public companies. Last week Rio Tinto voluntarily disclosed its taxes paid in 2014. BHP Billiton has indicated it will follow later in the year. Interestingly, publicly at least, Rio Tinto reported the taxes as an “economic contribution to public finances”, not as a cost of doing business.

Informing the debate

The rationale for increased transparency measures is to allow policy makers and the Australian public to be better informed about the levels of tax being paid by large and multinational businesses in Australia. This enables informed debate about the efficiency and equity of the corporate tax system.

The measures introduced are just one response to the concerns that international tax rules have not kept pace with the global economy. These are the same concerns that have been raised by the G20 and the OECD.

The European Commission is examining the feasibility of public disclosure of certain tax information by multinationals. No doubt, Australia has gone further than other countries by already legislating for disclosure. But this is neither good nor bad of itself. The question is whether the measures will meet their stated objectives.

Shade of secrecy

The idea of improving the transparency of Australia’s business tax system was first raised by the previous government in February 2013. The consultation process that followed saw nine of the 25 submissions received marked as confidential. This was followed by a Senate inquiry into the proposed legislation, with nine similar submissions received.

The arguments for and against increased transparency broadly fell into two categories. First, those who believed greater transparency of tax affairs would assist in a community debate on the appropriateness of our current tax rules. Second, those who believed it would lead to a misunderstanding by the general public who could potentially jump to incorrect conclusions. Risk of kidnapping did not seem to be a concern, the potential for naming and shaming clearly was.

If we dismiss the kidnapping argument, a much more likely concern of affected taxpayers is reputational risk and consumer backlash.

The published data will be minimal, revealing limited information about taxpayers. The real story will be one about a taxpayer earning profits in Australia and either contributing to its tax system or not. The likely response by taxpayers who believe their reputation has been affected is voluntary disclosure. Further information may be made public to provide context to the mandatory information published. This also leads to the Australian public being better informed.

Selling the public short

Corporate entities are selling the public short if they believe there is no way to address reputational risk and consumer backlash from any disclosed information.

The Australian public understand that international tax rules are broken and are simply asking why. The public also understands that tax is a contribution that individuals and corporations alike should make. Perhaps some of these privately held companies should also start viewing tax as a positive contribution to this country rather than a cost that should be minimised at an expense.

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