Chasing tax: Fiona Martin on a fair deal in a time of diverting profits
The growing revenue gap has to be filled from somewhere
Fiona Martin is a professor in the school of taxation and business law at UNSW Business School and a taxation expert of international renown. She spoke with Julian Lorkin for BusinessThink.
An edited transcript of the conversation follows.
BusinessThink: Is there really an issue with tax transparency with large multinational corporations?
Fiona Martin: Well, there is and there isn't. What we're talking about here is the problem with a lot of these multinational corporations not paying what's considered an appropriate amount of tax. Now, this started back in 2016 when the Commissioner of Taxation was appearing before the Senate estimates committee on this particular issue and he was very strident about his views that a lot of tax minimisation, planning, whatever you might like to call it, was happening, and Australia was losing out. So that's what really started things happening.
BusinessThink: But picking up on the appropriate level of tax – after all, we've got a 30% tax rate for large corporations in Australia and some companies could argue that's just not appropriate.
Martin: Yes, that's a good point. That's our headline rate. But there's a lot of things that go on behind the 30% rate. We have extensive deductions that these companies can claim, and in our latest discussion in the media about a lot of companies, they weren't paying any tax at all because they said they were legitimately claiming previous year losses that they had incurred during the global financial crisis of 2008-10.
But what's happening is that some companies are claiming expenses for various things that the Tax Office does not agree is appropriate. For example, we have them diverting profits that really, they have derived here in Australia, but they've diverted overseas to lower tax countries. And that's where we have the introduction of the Diverted Profits Tax.
'I don’t think too many shareholders would like their companies to be engaging in anything that’s really pretty nefarious'FIONA MARTIN
BusinessThink: But if companies are writing off things from many years in the past and therefore paying no tax at all, because legitimately and legally they can do so, is the legislation actually correct?
Martin: Well, I wouldn't say that there's a problem with that legislation because we're really looking at the fact that they had an economic loss, so they really did have a substantive loss that was detrimental to the company. The Australian tax policy is, "OK, that should be able to be taken into account". But the problem is where they've got something that's not substantive – it's a deduction that's technical but it doesn't affect the substance of the company, the economic situation of the company – that's what this legislation now is targeted at.
And we have two types of legislation: in 2016 we introduced MAAL, the Multinational Anti-Avoidance Legislation. So that's a great acronym isn't it, MAAL. It's very malicious, if you like. So that's again against this sort of area. But then more recently we got the Diverted Profits Tax. Now, that is much tougher. That actually imposes a 40% penalty where companies are found to have engaged in diverting profits overseas. And it's aimed at significant global enterprises – so the very, very large companies.
But as well as this legislation, the government, through the Tax Office, has established the Anti-Avoidance Taskforce and the idea is that it's educative, that it works on a one-on-one basis with the representatives of these multinational corporations to see what can be done about ensuring that some more revenue is collected, in a legitimate manner, but these artificial arrangements are not undertaken, and Australia doesn't lose out because of them.
BusinessThink: And the penalties for companies that are found guilty are obviously quite severe.
Martin: It's a 40% penalty. That's completely different to the tax that's raised. So that's a separate assessment, of 40%. So it's really a very draconian measure. And the Tax Office is not engaging in this project lightly so that's why I say they've issued quite a lot of public statements, public guidelines, about this because they want to ensure that they really educate these companies more than have the big stick coming down.
BusinessThink: But is the Diverted Profits Tax actually working? They've got a big stick, they've got big teeth, they've got a 40% penalty – but have any companies been found guilty?
Martin: Not yet. But it's only just started. It was only on July 1, 2017, that it came into effect. But with the MAAL tax, the Tax Office is now reporting that through that, and through peer pressure and a whole lot of other things such as the work that I did with the Board of Taxation – developing guidelines on transparency for these multinational organisations – they now say they've raised an additional $7 billion that they weren't expecting in revenue. That's pretty good.
'That's probably right. But we do live in a very complicated world and we are part of a global economy'FIONA MARTIN
BusinessThink: That's pretty good for the Treasurer but on the same point, playing devil's advocate, surely every company has a responsibility to their shareholders to minimise their own tax bill.
Martin: Well, every company has a responsibility to shareholders to increase their profits, OK. So that's a slightly different issue, isn't it, if you think about it. I don't think too many shareholders would like their companies to be engaging in anything that's really pretty nefarious.
But also, if we think about Australia, we have a 30% tax rate for corporate tax but we have the dividend imputation system. Our shareholders, particularly our resident shareholders, actually get a credit for any tax paid to the maximum of 30%. For every $100 that a company makes, if it decides to distribute $70 to its shareholders as a dividend, it pays $30 of tax and the shareholder actually gets the credit of that $30. So, shareholders want tax to be paid and in Australia that system actually encourages a lot more dividends paid out to shareholders.
Technically, it only applies to resident shareholders but there's emerging research to show that non-resident shareholders also get the benefit of this. So, it's one way that our system is unique, and it doesn't necessarily mean that the 30% tax rate is such a disincentive to shareholders to invest.
BusinessThink: It seems we're making it much more complicated. We heard a lot about tax simplification 10 years ago – and now we make it more complicated.
Martin: That's probably right. But we do live in a very complicated world and we are part of a global economy. I know that's a cliché but that's the situation, so whatever we do has huge ramifications for us. So, for example, the Diverted Profits Tax and MAAL are all part of the OECD's measures about base erosion of profit shifting – BEPS, they call it.
So again, it's the profit shifting and it's the fact that we have a shrinking base from where we can get our tax revenue. That's a developing world problem because we've got an ageing population and we're just not collecting the same amount of tax from corporations and salary and wage earners and individuals as we used to. And that's why there's been a very large increase in the amount of VAT or GST that's collected by the OECD nations. And if we look at their rates, it's something around 21% to 22% on average for the more developed of the OECD nations. We're still paying 10%. So, our revenue gap has to come from somewhere.
BusinessThink: If we look at the tax system that we've got at the moment, and in particular with the new Diverted Profits Tax, can we say that despite some companies theoretically paying no tax at all on the money that they're making, does the tax system in Australia seem to be fairly well-designed and is working?
Martin: Well, the tax system is very large but if you're talking about the corporate tax system, I think the emerging research is showing that it does work very well, and that 30% in a time of stagnation, if you like, is not such a terrible thing, particularly coupled with the dividend imputation.