Does Australia need a Google Tax? Sinclair Davidson The public perception There has been a lot of public protest about wellknown multi-national corporations not paying their fair share of tax. Source: http://www.huffingtonpost.co.uk/2012/12/10/googlestarbucks-amazon-tax-spoof-logos_n_2270830.html RMIT University 2017 Economics, Finance and Marketing 2 Joe Hockey 2015 Budget Speech
Madam Speaker, fairness is essential to the integrity of our taxation system. So I say to all Australians, rather than introducing new taxes on you, we simply want people or companies who are avoiding their tax to pay their fair share. As a result of Tax Office investigations we have identified 30 large multinational companies that may have diverted profits away from Australia to avoid paying their fair share of tax in Australia. Everyday Australians rightly believe that if a dollar of profit is earned here, then you should pay tax here. Unfortunately this is not always the case for some multinationals. Many have the capacity to aggressively minimise their tax. What that means, is that families and small businesses are forced to carry more than their fair share of the tax burden. Tonight I am releasing the details of a new Multinational Anti-Avoidance Law, that will stop multinationals using complex schemes to escape paying tax. Under this new law, when we catch companies cheating, they will have to pay back double what they owe, plus interest. RMIT University 2017 Economics, Finance and Marketing 3
Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 Scott Morrison second reading speech. This government will not stand for tax avoidance. We will not stand for the deliberate flaunting of our tax laws by major multinational enterprises. We are determined to have the strongest rules against tax avoidance for these matters; to level the playing field and deliver a fairer tax system for all, so the important serviceshospitals, schools and important targeted welfare benefits; all of these thingsAustralians can rely on into the future on a sustainable basis. The diverted profits tax is expected to raise $100 million in revenue each year from the 2018-19 year and will reinforce Australia's position as having some of the toughest laws in the world to combat corporate tax avoidance. It is expected that the diverted profits tax will apply in limited circumstances. Most companies do the right thing and meet their tax obligations. The diverted profits tax is focused only on tax avoidance arrangements that are artificial or contrived. Importantly, the diverted profits tax does not expand the coverage of the corporate tax base but seeks to maintain its integrity.
RMIT University 2017 Economics, Finance and Marketing 4 Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 Scott Morrison second reading speech. The diverted profits tax contains a number of key features that will encourage greater cooperation between uncooperative multinationals and the ATO. As a result this will reduce the length of disputes between the ATO and multinationals. These key features include: allowing the commissioner to impose the diverted profits tax on the basis of a reasonable assessment of the available informationplacing the onus on multinationals to demonstrate they have not diverted profits from Australia; imposing an up-front diverted profits tax liability payable on the amount of the diverted profits at a penalty rate of 40 per cent; and preventing multinationals from introducing new information on appeal to
the Federal Court that was not previously made available to the ATO, unless exceptional circumstances apply. RMIT University 2017 Economics, Finance and Marketing 5 Adam Smiths four tax principles The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the taxgatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of
taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty. RMIT University 2017 Economics, Finance and Marketing 6 Adam Smiths four tax principles Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasury of the state. The levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose
perquisites may impose another additional tax upon the people. It may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them. by subjecting the people to the frequent visits, and the odious examination of the taxgatherers, it may expose them to much unnecessary trouble, vexation, and oppression. RMIT University 2017 Economics, Finance and Marketing 7 Initial Impressions This law violates societal norms of fairness: Reversal of onus of proof. Removal of right to fair trial. Removal of right to silence.
This law violates Adam Smiths principles of taxation: Are these profits really earned in Australia? Taxation now uncertain and arbitrary. Unintended consequences? FDI has declined. Business investment is low by historical standards. Coincidence? A lot of effort and anti-business rhetoric for $100 million pa. Ulterior motives? RMIT University 2017 Economics, Finance and Marketing 8 Some Facts: Budget Situation Source: MYEFO RMIT University 2017
Economics, Finance and Marketing 9 Some Facts: Australia has a Spending Problem Source: MYEFO RMIT University 2017 Economics, Finance and Marketing 10 Some Facts: By OECD standards company tax revenue is high RMIT University 2017 Economics, Finance and Marketing
11 Some Basic Questions: Why have Company Tax at all? Three reasons can be given for imposing company tax: Desirability Pigouvian taxation the corporate form imposes costs on the economy. Alternatively, the corporate form derives a benefit that is shared via taxation. Necessity Backstop to personal tax system. Tax all sources of income to reduce tax distortion in the economy. Convenience Company income tax is a source of revenue to government Fiscal illusion. Economic incidence is uncertain. Politically popular. RMIT University 2017 Economics, Finance and Marketing
12 Some Basic Questions: Who pays Company Tax? Legal incidence all companies pay 30% of their taxation income (if positive) in company income tax. Arguments to the contrary by Tax Justice Australia and promoted by (some) Fairfax media and ABC are Fake News. Economic incidence who bears the burden of the company tax? According to Henry Review the deadweight loss of company tax is 40%. The burden could be shared among three groups: Consumers Workers Investors Australian Treasury believe that the burden is mostly borne by consumers (in the form of higher prices) and workers (in the form of lower wages). RMIT University 2017 Economics, Finance and Marketing
13 Some Basic Questions: Who pays Company Tax? 200102 200203 200304 200405 200506 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 PROPORTION OF FIRMS
26.10 26.37 Source: ATO TaxStats, Author calculations RMIT University 2017 Economics, Finance and Marketing 14 Some Basic Questions: Who pays Company Tax? Tran and Yu (2008) suggest that large firms can afford better tax planning activities i.e. engage in aggressive tax minimisation and are better able to influence political processes in their favour. Richardson and Lanis (2007, 2008) are predisposed to the latter view pointing to a political power hypothesis that suggests an inverse relationship between firm size and effective tax rates. By contrast Davidson and Heaney (2012) find evidence in Australia of a political cost hypothesis the notion that larger firms would be subject to greater scrutiny from the taxation authorities leading to higher effective rates of taxation.
RMIT University 2017 Economics, Finance and Marketing 15 Stateless Income OECD project Base Erosion and Profit Shifting Latest in a long line of allegations that multinational corporations dont pay enough tax. Latest is a long line of allegations that tax competition between states is somehow harmful. Stateless Income Hypothesis Stateless income thus can be understood as the movement of taxable income within a multinational group from high-tax to low-tax source countries without shifting the location of externally-supplied capital or activities involving third parties. Their inframarginal returns stem not from some unique high-value asset, but rather from their unique status as structurally able to move pretax income across national borders. Edward Kleinbard
RMIT University 2017 Economics, Finance and Marketing 16 Sources of Stateless Income Structure of international taxation architecture: Avoidance double taxation. Often leads double non-taxation. Anti-tax haven = fiscal imperialism? Ability to employ unique tax strategy such as: Double Irish Dutch Sandwich. NOT unique assets. R&D. Business model. RMIT University 2017 Economics, Finance and Marketing
17 Double Irish Dutch Sandwich Source: AFR 20 June 2013 http://www.afr.com/p/markets/gaping_legislative_loopholes_mean_twxDlS6YlGZ6qqNos31HbM RMIT University 2017 Economics, Finance and Marketing 18 Evidence I A test of the Kleinbard stateless income hypothesis Daoyuan Zhang, Larry Li, Kelly Burns, Sinclair Davidson 800 large US firms With/without Double Irish Dutch Sandwich structures (DIDS) Raw tax data has firms with DIDS structures having higher effective tax
rates. Regression analysis shows that differences in tax rates across firms with/without DIDS driven by R&D Not multinational structure Stateless income is NOT a tax rent but a return on an investment in R&D. RMIT University 2017 Economics, Finance and Marketing 19 Evidence II T.J. Atwood, Michael Drake, James Myers, and Linda Myers 2012, Home Country Tax System Characteristics and Corporate Tax Avoidance: International Evidence, The Accounting Review, 87, 1831 1860. Employ data from 22 countries, including Australia, over the period 1995 2007 resulting in over 69,000 firm-year observations. firms in home countries with a worldwide approach engage in less tax avoidance than do firms in home countries with a territorial approach
for both the full and medians sample. They find no evidence that firms resident in countries with worldwide tax systems use sophisticated international tax-planning techniques to produce results that are better (i.e., that avoid more taxes) on average than those produced by firms resident in countries with territorial tax systems. But are multinational corporations are better able to avoid taxation than are purely domestic companies? RMIT University 2017 Economics, Finance and Marketing 20 Evidence III Kevin Markle and Douglas Shackelford, 2012, Cross-country comparisons of corporate income taxes, National Tax Journal, 65, 493 528. Employ data for 11,602 companies over the period 1988 2009 across 82 countries (including Australia) to investigate the impact of domicile on company effective tax rates.
Multinationals and domestic-only firms face similar effective tax rates. The location of the parent of a multinational company has a major effect on its worldwide tax liability; however, the locations of its foreign subsidiaries have much less impact, which is not particularly surprising since the bulk of its activities likely occur in the home country. In the case of Australia: domestic only and multinational corporation effective company tax rates vary by 1 per cent and in no instance is that difference statistically significantly different from zero. RMIT University 2017 Economics, Finance and Marketing 21 Evidence IV Is the Australian tax base being eroded? Peter Birch Srensen has provided a test where the ratio of corporate income tax revenue to GDP is decomposed into its component parts: R/Y=R/C*C/P*P/Y
R = corporate tax revenue, Y is GDP, C is total corporate profit and P is total profit earned in the economy. R/C is a proxy for the average effective corporate income tax rate, C/P is the share of corporate profits and P/Y is the profit share of the economy. RMIT University 2017 Economics, Finance and Marketing 22 Evidence IV Source: Berg and Davidson 2017 RMIT University 2017 Economics, Finance and Marketing
23 Conclusions Australia has a spending problem. Government hopes to expand revenue rather than cut spending. Little or no evidence that Australia has multinational tax avoidance problem. Morrison has admitted tax expected to raise $100 million pa. That implies $250 million in shifted profits (about the same amount as rorted family care payments). Australian company tax revenue is very high by international standards. No evidence that Stateless Income is a problem. Governments engaging in politics of distraction and fiscal illusion. Anti-business rhetoric is not free: Regime Uncertainty. Bureaucratic over-reach. RMIT University 2017 Economics, Finance and Marketing
24 (Very) Finally I blog as Catallaxyfiles.com I tweet @sincdavidson These slides and related papers can be downloaded from my blog. Google: Sinclair Davidson Blog then search Company Tax Resources for more material. RMIT University 2017 Economics, Finance and Marketing 25
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