A high price to pay as tax-compliance costs soar
It’s not just the corporate rate that disadvantages Australia
Corporations are an easy target for media and public criticism amid claims they are engaging in sophisticated tax-evasion strategies.
But a new study casts a different light on the debate and highlights the significant compliance burden that major businesses in Australia face in meeting their tax obligations.
In the paper The Tax Compliance Costs of Large Corporations: An Empirical Enquiry and Comparative Analysis, the researchers conclude that the tax-compliance imposts for these businesses are "significant, regressive and are not reducing over time".
Factoring in all taxes – federal and state or territory – the total compliance bill, on average, is $3 million per company a year. Complying with income tax alone costs $1.8 million per company a year.
Chris Evans, a professor in the school of taxation and business law at UNSW Business School and one of the paper's co-authors, says tax experts have been conscious of this millstone around businesses' necks for the past 40 to 50 years.
"But it's still an issue and it's not getting better," Evans says.
Part of the problem, according to Evans, is that the tax system's original role – to raise revenue for government – has been broadened to fund community awareness programs, R&D credits for business and other initiatives such as tertiary education loans for students.
"So we're trying to use our tax system to do a little more than perhaps it's capable of doing."
Cost of doing business
For the research, Evans teamed up with Philip Lignier, a lecturer at the Tasmanian School of Business and Economics, and Binh Tran-Nam, a fellow professor at UNSW Business School.
They examined the tax-compliance costs incurred in recent years at the top end of the corporate sector, based on a survey of large and very large business and international groups in Australia.
‘Government has done a bad job of selling economic reform and part of that is because they’ve been so focused on addressing the perception of corporate tax avoidance’ – michelle de niese
The research is the first such study to focus exclusively on major corporations, with most attention in the past concentrating on the small and medium business sector.
The authors' findings mirror other studies highlighting the regressive nature of tax-compliance costs, while the research outcomes suggest that, apart from the size of businesses, the number of taxes with which an entity has to comply is a significant predictor of the costs they will face.
Companies identified by the Australian Taxation Office (ATO) as a significant compliance risk typically incur higher compliance costs than those with lower risk classifications.
Three broad factors appear to drive tax-compliance expenditure: the complexity and uncertainty of tax rules; the administrative compliance requirements that tax authorities impose; and the company's international exposure.
Evans says a key conclusion from the study is that "it seems there is a relationship" between a company's level of tax aggressiveness and the impact it has on compliance payments.
He notes that the Henry Tax Review, published in 2010 and intended to guide Australia's tax system reforms during the next 10 to 20 years, found that more than 90% of tax revenue was generated from less than 10% of the 119 federal and state or territory taxes in Australia. It called for the removal of some of the more inefficient taxes.
In light of his experience and new research, Evans supports such a call.
"Harmonising and reducing the number of taxes in the economy isn't going to have much impact on the tax coming in. But it will reduce the cost of doing business in Australia and therefore make multinationals a little more inclined to base themselves in Australia," he says.
Doing a lot more with less
The Australian government's tax discussion paper, Re:think – Better tax system, better Australia, released last year, estimated that the total cost of all tax compliance in Australia is about $40 billion a year, a large proportion of which is absorbed by businesses.
Michelle de Niese, executive director of the Corporate Tax Association, the key representative body for large companies in Australia on corporate tax issues, says such money would be better spent on investment and growth strategies.
With little prospect of government tax cuts for companies, she argues that reducing expenditure on tax compliance represents "one of the few areas that we can give businesses some relief around costs".
"There has been a significant uptick in compliance obligations for large companies in the past two years or so," says de Niese, who attributes the rise in part to the OECD's base erosion and profit shifting (BEPS) reforms, designed to stop multinational tax avoidance.
She believes the ever-growing compliance burden is having a negative impact on corporate tax teams.
"The difficulty is that tax teams across Australia are doing a lot more with less. I am seeing a level of stress in a lot of tax teams around what is expected of them, both in terms of their own boards and the tax office," de Niese says.
All or nothing packages
Rick Krever, a professor in the department of business law and taxation at Monash University, says part of the discussion should be around the efficiency of tax concessions for large businesses – benefits that have been labelled corporate welfare in some quarters – because of the high compliance costs that often go hand in hand with implementing and assessing such policies.
"The question is whether they could be better targeted for lower cost to business and to the government," Krever says.
While direct subsidies for businesses remain controversial, they typically incur low compliance costs and, as such, may represent a better option for government, business and the broader community.
"[You don't] have to hire top tax consultants to re-engineer and re-characterise what the business did to qualify for the subsidy," Krever says.
While he supports moves to eradicate many corporate tax concessions, Krever says governments around the world have struggled to deliver on this front because "they're hard to get rid of".
However, he notes that in the mid-1980s the Hawke government ushered in capital gains and fringe benefits taxes, plus a full dividend imputation system, as part of sweeping tax reforms. Around the same time, the Reagan administration in the US overhauled tax laws.
The key to the passage of these reforms was that governments presented "all or nothing packages" in which business benefits came at the expense of other significant trade-offs.
Krever says a similar approach would have to be taken today if government wanted to significantly reduce tax-compliance costs.
‘Anything we can do to reduce that pain and get them paying the right amount of tax has got to be a good thing’ – chris evAns
De Niese believes government, business and the ATO have a role to play in addressing the "trust deficit" around companies and tax, while at the same time encouraging a corporate tax system that fosters productivity and growth and meets the community's needs for services and infrastructure.
"Government has done a bad job of selling economic reform and part of that is because they've been so focused on addressing the perception of corporate tax avoidance," she says.
In addition to eliminating some taxes and harmonising others between the states, de Niese supports the ATO's efforts to introduce more "safe harbours" that allow businesses that satisfy certain criteria to simplify their tax reporting requirements.
In their paper, Evans, Lignier and Tran-Nam invited respondents from the corporate sector to make suggestions as to how tax compliance costs could be mitigated or reduced.
Ideas ranged from reducing the number of taxes and simplification of tax rules to the streamlining of ATO processes, especially the audit and review process. Some specific taxes, including fringe benefits taxes, were perceived as costly and unnecessary.
Such moves aside, Evans sees potential for technology and automation, including electronic interfaces such as the Standard Business Reporting program, to simplify tax processes and minimise human error.
While it is unrealistic to expect that a complicated area such as corporate tax will ever be perfect, all possible measures should be taken to reduce complexity and compliance requirements.
"Anything we can do to reduce that pain and get them paying the right amount of tax has got to be a good thing," Evans says.