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Finance & Innovation

Australia has had enough of corporate tax avoidance, and so should you

nationofchange.org

According to the Australian Labor Party, AUD $300 billion of Australia’s cross-border trade consists companies transferring money out of their Australian arms to overseas parent or subsidiary companies. Of this, almost half is sent to tax havens such as Singapore and Switzerland.

Why is this relevant to our work at Global Citizen? Because when large multinational corporations eschew tax obligations, the rest of us have to pick up the slack. Australian businesses have an even harder time competing with global brands when they pay their fair share of taxes, but their multinational counterparts are able to whittle their tax obligations down to fractions of those amounts.

National budgets must be slashed to accommodate the shortage from missing tax revenues. This means taking money from budgets designated for things like infrastructure projects, school funding, pensions, and importantly, foreign aid.

We have already seen Australia demolish its aid budget in recent months, returning it to the lowest levels in 40 years. Once these cuts are fully implemented, Australia will be giving a paltry 22 cents in foreign aid for every $100 dollars of its gross national income.

The tax revenues that could be generated by closing certain tax loopholes and preventing multinational profit shifting out of Australia are worth billions. Billions that could go towards eradicating polio, funding global education, or supporting the health and equality of women and girls, on top of domestic expenditures.  

Australia is missing out on corporate tax revenue because companies are moving their profits outside of the country. They can do this through a number of accounting tricks but the goal is the same: to avoid paying high taxes in Australia and to “record” or “book” the profits in a low tax country. This saves the company money, but hurts the Australian government and economy.

Here is an example: In 2014, one of the largest companies in the world paid AUD $80 million in Australian tax after generating AUD $6 billion worth of revenue within the country. The Australian retailer Harvey Norman paid AUD $89 million in taxes, despite revenues of only AUD $1.5 billion.

It’s important to note, that international companies that do this are not necessarily bringing that profit “home” to their headquarters in the US or Europe (traditionally because those countries have tax rates equal to or higher than Australia) but instead are sending the profits to “tax havens”. Tax havens are traditionally small countries with limited connection to the actual operations of the business, whose key feature is a low corporate tax rate. This “offshoring” of profits, means the companies select a low tax country to pay taxes and hold their money there, avoiding paying taxes in Australia or even in their “home countries”.

Because of the tax loopholes that allow companies to do this, an unprecedented about of money is being funneled out of countries throughout the world. Certain industries make it easy to move and keep money overseas, such as technology and pharmaceutical companies who generate profits from intellectual property that can be moved around quickly. Today, US corporations have now stockpiled a total of USD $2.1 trillion overseas. This sum alone would almost fully fund the cost of ending poverty and mitigating climate change for a full year.

Australia’s Labor Party has had enough. The party recently made a commitment to end corporate tax avoidance through several initiatives, including reducing the amount of debt for which multinational companies can claim deductions in Australia.

When a company has debt, it is allowed to write off the interest payments on the debt as tax deductions. The problem with this, is that in Australia (and in other countries where tax rates are high), companies use their Australian subsidiaries to borrow money so that they have a higher proportion of debt coming from this location than for the company overall. Thus, they are able to have a much larger tax write-off than what the average debt ratio of the company actually allows them.

Example: If the Australian subsidiary has a debt-equity ratio of 60% but the parent company has a debt-equity ratio of 30%, it will deduct interest payments on the higher proportion of debt, even though it is not reflective of how much debt the company actually holds.

According to the Parliamentary Budget Office, the plan will bring at least $1.9 billion back to Australia in tax from big multinationals over the next three years.

As global citizens, these are the types of campaigns that we can stand behind. The types of campaigns that attempt to level the playing field. This step towards the redistribution of wealth has significant consequences for not only the domestic budgets of countries that are being deprived of billions in tax revenues, but for the world’s poor who depend on foreign aid sourced from tax revenue. A company that avoids paying its fair share of taxes by jumping through accounting loopholes directly impedes the development work that governments and organizations are fighting so hard for.

Global Poverty Project is not the only organization in the sector that shares this belief. There are many supporters of tax reforms designed to close loopholes. Oxfam, for example, is in the process of launching a tax and transparency campaign with the hopes of catalysing thousands of citizens around the world to demand their heads of state prioritise fighting corporate tax avoidance and restructure certain tax regulations.

We’ve sometimes been critical of the Labor Party in the past, as it cut the aid budget twice while it was in government between 2007 and 2013. But this new initiative represents a huge commitment from a major party in an OECD country, and is relevant to all countries throughout the world. If we can make a push for other countries to close tax loopholes, it would prevent corporations from under-representing their revenues in the regions where they are actually earned, allowing that money to be put to use for the greater good.

The showcasing of tax issues planned for Earth Day on April 22 represents a great change to announce Australia’s progress, and make a call to action for other world leaders to make similar commitments, gathering public support for this extremely important issue that is relevant for funding the causes we care so ardently about.