Tax avoidance by multinationals and large corporations has become a systemic problem in Australia or at least become a more publicised issue.
Let us be clear. There is a difference between tax minimisation and tax avoidance.
Tax minimisation is a legitimate way for businesses to reduce their tax bill, based off justifiable deductions to their profits incurred by legitimate expenses or even losses.
Every business, from your small “mum and dad” operations, to your multi-billion dollar corporations, have the right to deduct reasonable expenses incurred by the normal operation of their business.
A common misconception is that evasions exist where companies have very high amounts of revenue comparative to their tax bills. This does not always equate to tax avoidance.
Different businesses will have different profit margins, different operating costs, and indeed may even be operating at a loss in any given year. It is important to understand this when determining how much tax a company should be paying.
The truth of the matter is that despite many honest tax minimisation methods there is also a very real problem, with many companies deliberately dodging taxes.
Large corporations are able to employ the best advisers, lawyers and accounting firms whose job is to exploit loopholes in laws to maximise their client’s cash flow. In some cases corporations act in outright fraudulent and underhanded behaviour that is deliberate in order to reduce taxes on profits.
One of the most publicised cases of tax evasion in recent years has been against Chevron. Chevron is an American multinational energy corporation that operates withing the boarders of Australia through a subsidiary company (Chevron Australia). Recently Chevron has been in the spotlight due to a landmark court ruling against them to pay to the Australian people $300 million dollars in tax.
Despite the court ruling in favour of the ATO, Chevron will be exploring its options in taking the matter to the highest authority in Australia, The High Court.
So how is it that multinationals are able to avoid paying their fair share of taxes?
While there are many ways of achieving this, two of the most common methods are transfer pricing and debt dumping. Both methods involve off shore tax havens.
So what does all this mean?
A tax haven (in relation to Australia) is simply a nation or foreign jurisdiction that has a lower corporate tax rate than Australia. In some cases these foreign nations will also have lessened transparency laws, so that transactions and business dealings are protected from government scrutiny.
Transfer pricing is usually achieved in two ways. The first a method is selling goods to a related company that is set up in a tax haven at an unrealistically low price.
This means that the parent company reduces its effective revenue because of selling its goods at a greatly discounted price. Reducing effective revenue leaves you with less profit after deducting operating expenses. The related company in the tax haven, then on sells the exact same goods to the intended purchaser at the correct market value.
The related company which is set up in a tax haven, then pays a smaller tax rate on profits then what the parent company would have, had it sold directly to the intended buyer at the true market value.
How do we determine what is a fair price and what is not?
A fair price of a transactions or deal is commonly described as being “at arms length”. While transfer pricing is illegal, determining weather a transaction is made at arms length can be challenging and is another way where companies can bog down the authorities in legalities that are designed to circumvent paying their fair share of taxes.
The second method is achieved via taking a loan from a related company that is setup in a tax haven.
These loans are usually at higher interest rates then loans that can be obtained within the borders of Australia. This is a way that companies artificially lower their profit margins as loan repayments are of course tax deductible. Cash is then transferred out of Australia to an offshore entity as “interest repayments” in a jurisdiction that charges a lower corporate tax rate.
Once again this particular behaviour is illegal, if conducted in a way where the dealings are not at arms length.
Determining the legitimacy of these loans and weather the interest rates are appropriate are subject to challenge and may require the determination of a costly and drawn out court dispute at a further expense to the tax payer.
Debt dumping is a way of transferring “bad debt” from a jurisdiction with a lower company tax rate to a related party in a country with a higher tax rate. Many multinational businesses have legitimate holdings in multiple countries. Countries of course have different tax rates, so while the business dealings of the company are legitimate in the two countries that the debt is passing between, the dumping of the debt from a low tax nation to a high tax nation is deliberate and calculated in order to avoid paying taxes.
Effects on Nation
Tax evasion is a serious problem in Australia and indeed around the globe. Tax revenue generated by the government goes towards all public and social projects that run the nation.
According to some reports, up to $6 billion of tax revenue, is lost due to multinational tax avoidance every year in Australia.
This $6 billion that is missing from the budget, inevitably gets passed on to the responsible members of society, that then have to plug the holes in the deficit.
This can lead to a raise in taxes to meet budget spending, an increase in government loans (which then attract interest repayments), or even budget cuts to key initiatives.
No matter which of the aforementioned remedies are actioned, the consequences are inevitably felt by the honest tax payers within Australia.
Australia has always prided itself on being a fair nation. A very common phrase here is “having a fair go”.
Multi nationals and big corporations should not to be shunned in Australia. The trade, jobs and economic benefits they bring are welcomed, as long as they are in turn acting in an ethical and moral manner.
Having a fair go is a two way street. While multinationals provide significant economic boosts to the nation, they also benefit from Australia’s vast resources that are owned by the Australian people. If they are going to make profits from their Australian operations, they simply must pay the fair local taxes.