Tax us if you can: Progress towards tax justice
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Australians continue to show significant concern that corporations fail to pay their fair share of tax. A recent survey of 1,097 Australians found that 48% of those surveyed wished to avoid investments in corporations that don’t pay their fair share of tax1. That was the same as the portion of people that wished to avoid investments in corporations involved in tobacco, gambling, weapons, and firearms2.
Well-run corporations recognise that paying tax is part of their social licence to operate. Therefore, investors may want to consider tax evasion and tax avoidance like they would exploitative child labour or bribery. It should not be welcomed as a way for a company to boost its profits if the corporation can get away with it. It is conduct that may cause actual harm. It deprives democratic governments of vital revenue to pay for hospitals, schools, medicines, and other community needs, and is detrimental to long-term economic growth. Developing countries continue to be hit hardest.
The Australian Government has made commendable efforts to stem the losses Australia has suffered from tax avoidance by multinational corporations. However, the struggle is far from over, and those businesses that advise companies on how to avoid paying taxes have been very aggressive in opposing reform measures.
The Australian Taxation Office (ATO) estimates the gap between what corporations with revenue over $250 million should have paid in tax in 2018-19, versus what they did pay, was $5.1 billion or 8.3% of gross corporate income tax for this class of corporations3. Recent audit cases by the Tax Avoidance Taskforce include Apple, BHP, Chevron, Facebook, and Google. In some cases, tax revenues from these entities in Australia have increased up to five times4.
Case study – McDonald’s profit shifting short-changes Australia
In 2020, McDonald’s principal subsidiary in Australia either paid or owed service fees of $602 million to a shell company in the UK, McDonald’s Asia Pacific, which is at the heart of new allegations of global tax dodging by the burger giant5. These service fees are a form of royalty for intellectual property. The shifting of profits through service fees dramatically reduced taxable profits in Australia. The service fees siphoned offshore to the tax shelter company were;
Based on the most recent ATO corporate tax data, McDonald’s earned total income in 2019/20 was $1.836 billion. It paid $152 million in corporate income tax. The shifting offshore of royalty/service fee payments is likely to have reduced tax payments by more than half9.
In January 2022, McDonald’s was convicted and fined for failing to provide documents requested by the ATO10.
In June 2022, McDonald’s was forced to pay the French government US$1.3 billion, the most significant tax fine ever in France, to settle claims over years of profit shifting11.
Australia’s actions so far
In Australia, multinational corporations with more than $1 billion of revenue globally are required to provide their financial details on a country-by-country basis to the ATO. None of the information is made publicly available, which is a significant shortcoming given that investors and civil society are integral in scrutinising corporate tax behaviour. However, the information in the reports is exchanged with the tax authorities of other participating governments.
In June 2013, the Australian Parliament passed legislation to allow the tax payable by companies with revenue greater than $100 million to be published by the ATO, a small step towards greater tax transparency. One of the first actions of the new Parliament in August 2022 was to remove the exemption that had applied to the over 1,500 ‘grandfathered’ privately owned Australian corporations.
In December 2015, the Australian Multilateral Anti-Avoidance Law came into effect, which allows the ATO to tax profits made from Australian customers by multinational enterprises even if the company has not set up a permanent presence in Australia for tax purposes12. This is particularly important with the provision of digital services and only applies to companies with more than $1 billion in global revenues.
The Australian Government introduced a Diverted Profits Tax that came into effect on 1 July 2017. The tax imposes a 40% corporate income tax rate on multinational corporations with over $1 billion in revenue that attempt to avoid paying tax on profits made in Australia13.
The Parliament passed legislation in February 2019 to provide protection and compensation for whistleblowers in the private sector who expose tax evasion and tax avoidance. Whistleblowers play a vital role in exposing tax evasion and other corporate criminal wrongdoing.
Commitments from the new Labor Government
The new government supports implementing the Organisation for Economic Co-operation and Development (OECD) Two Pillar plan that includes a Global Minimum Tax to ensure very large multinational corporations pay an effective tax rate of at least 15% on their profits. The agreement, reached in principle in October 2021 by 136 governments, will catch corporations with revenues greater than €750 million a year.
The Labor Government has promised to limit interest deductions that multinational corporations can claim from excessive interest payments. Often these interest payments are made to a finance subsidiary in a tax haven, shifting profits away from where the corporation is really doing business.
The Labor Government has also promised that tax deductions will be denied for payments for the use of intellectual property when the payments are made to a jurisdiction where the corporation doesn’t pay sufficient tax.
The new Government has stated it will require the publication of the tax paid in each jurisdiction a multinational corporation operates in alongside the number of employees working in that jurisdiction. When a multinational corporation reports large profits in a low-tax jurisdiction where it has few employees, it is a red flag for tax avoidance.
The other commitments from the Labor Government are:
- Establishing a public register of who ultimately owns and controls companies to curb the use of shell companies with concealed ownership for tax evasion and other criminal activity;
- Corporations will be required to disclose to shareholders as a “Material Tax Risk” if the corporation is doing business in a jurisdiction with a tax rate below 15%; and
- All corporations tendering for Australian Government contracts worth more than $200,000 will be required to state their jurisdiction of domicile for tax purposes.
Global Report Initiative Tax Standard
Ideally, large multinational corporations should be required by law to report against the Global Reporting Initiative (GRI) Tax Standard. The GRI Standard was developed with broad global consultation with a diverse group of experts and stakeholders and is supported by global investors holding over US$10 trillion in assets14. It is the only country-by-country tax transparency template specifically designed for public reporting. Many multinational corporations are already using the GRI Tax Standard, which is relatively new. Many other companies use other GRI standards for reporting on sustainability and various other issues.
In the game of cat and mouse between some multinational corporations seeking to engage in tax avoidance and tax authorities seeking to have them comply with the intention of tax laws, there is a legion of tax advisers who are always on the lookout for the next tax loophole to sell to corporate clients. Thus, the struggle to ensure multinational corporations pay the taxes they should in Australia and globally will remain. Investors have an essential role to play in setting an ethical norm for corporations to pay their fair share of tax by abiding by the intention of tax laws and not exploiting legal loopholes. Investors should also be vocal in supporting reforms that address tax evasion and profit shifting, in the same way they speak out in support of reforms to address corporate corruption.
This contributed article was authored by Dr Mark Zirnsak, the secretariat for the Tax Justice Network Australia and Senior Social Justice Advocate at the Uniting Church in Australia, Synod of Victoria and Tasmania.
Betashares is not a tax adviser. This information should not be construed or relied on as tax advice and investors should obtain professional, independent tax advice before making an investment decision.
1. Banhalmi-Zakar, Z & Parker, E. 2022. From Values to Riches 2022: Charting consumer demand for responsible investing in Australia, Responsible Investment Association Australasia, Melbourne, 12.
5. Sources: https://waronwant.org/sites/default/files/2022-03/Secrets%20%26%20Fries%20%28WOW%20report%29.pdf and https://www.abc.net.au/news/2022-03-18/mcdonalds-fined-for-withholding-information-from-ato-tax-bill/100904170
6. McDonald’s Australia Holdings Pty Ltd, Financial Report for the year ended 31 December 2020, p.6 Income Statement.
7. Ibid, p.23, Note 4(b). Figures for wages and benefits do not reflect franchisees.
8. Costs are estimated at $530.5m by subtracting employee costs of $305.1m from payments to suppliers and employees of $835.6m (p.8 Cash Flow Statement). These costs do not reflect franchisee costs; no disclosure is provided concerning franchisees’ costs or service fees associated with franchisees.
9. Applying the 30% tax rate to the $602m in service fee payments would produce over $180m in additional tax payments in Australia.