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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
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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.
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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 services—hospitals, schools and important targeted
welfare benefits; all of these things—Australians 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.
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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 information—placing
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.
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Adam Smith’s 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 tax–gatherer, 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.
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Adam Smith’s 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 tax–gatherers, it may expose them to much
unnecessary trouble, vexation, and oppression.
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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 Smith’s 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?
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Some Facts: Budget Situation
• Source: MYEFO
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Some Facts: Australia has a Spending Problem
• Source: MYEFO
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Some Facts: By OECD standards company tax revenue
is high
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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.
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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).
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Some Basic Questions: Who pays Company Tax?
2001–02
2002–03
2003–04
2004–05
2005–06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
PROPORTION
OF FIRMS
(%)
0.35
0.37
0.39
0.38
0.44
0.52
0.53
0.44
0.45
0.50
0.49
0.50
0.48
PROPORTION OF TAXABLE
INCOME
(%)
56.09
63.39
67.06
70.11
73.11
74.42
72.52
72.50
70.69
75.00
75.11
71.06
68.05
PROPORTION OF NET
COMPANY TAX
(%)
69.79
70.54
70.20
72.59
75.60
77.80
76.26
78.60
75.29
78.06
73.54
75.90
75.87
EFFECTIVE TAX
RATE
(%)
22.41
22.27
25.54
25.68
25.36
25.57
24.56
25.49
26.70
24.67
26.63
26.10
26.37
• Source: ATO TaxStats, Author calculations
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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.
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Stateless Income
• OECD project Base Erosion and Profit Shifting
– Latest in a long line of allegations that multinational corporations don’t 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
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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.
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Double Irish Dutch Sandwich
• Source: AFR 20 June 2013
http://www.afr.com/p/markets/gaping_legislative_loopholes_mean_twxDlS6YlGZ6qqNos31HbM
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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.
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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?
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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.
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Evidence IV
• Is the Australian tax base being eroded?
• Peter Birch Sørensen 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.
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Evidence IV
• Source: Berg and Davidson 2017
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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.
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(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.
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