Calling time on decades of tax trickery

As the impact of corporate tax-shifting on Australia grows aggressively, the G20 will be a fork in the road for Joe Hockey.

While Treasurer Hockey is locked up in meetings with G20 finance ministers this weekend, Labor is making political hay with one of the key issues up for discussion -- tax evasion by multinationals.

This is an old problem for Australia, with roots back to the 1960s, particularly around profit-shifting by mining companies.

In a 1973 parliamentary debate over the mining industry, for instance, it was a young Paul Keating who told the House of Representatives: “The Commissioner of Taxation said ... that it is almost impossible now to assess multi-national corporations for tax because the profit-shifting devices are so sophisticated that they cannot levy tax upon them.”

Forty years on, however, the problem that looked “almost impossible” looks relatively simple by today’s standards.

In those days the tricks dreamed up by the lawyers and accountants of global firms often had physical manifestations that could be tracked.

In 1982, for example, Labor MP Brian Howe referred to a study of alumina sales by the global firm Alusuisse to an Icelandic subsidiary in which “it appears that the alumina price increased at sea 54.1 per cent.”

Nowadays things are more complex, with intangible transactions and accounting practices being the best ways to slip money out of the country -- where, for instance, are intellectual property or brand equity housed? They are not kept in warehouses.

And authorities around the world have found it difficult to stop intra-company interest charges being used to sneak profits across borders.

In 2013, Labor managed to tighten several loopholes via its Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013. The briefing document that accompanied that legislation explained why previous ‘clampdowns’ became increasingly useless over time.

It noted: “Multinational trade has grown over the last decade. Further, since 2002 the compositional change in multinational trade in Australia has been striking.

“For example, whilst trade in tangible items such as stock in trade grew by 67 per cent between 2002 and 2009, trade in highly mobile factors such as services grew by more than 100 per cent and trade in insurance products and interest flows grew by more than 160 per cent over the same period.

“Growth of this nature underscores the need for modern, robust transfer pricing rules capable of dealing with complex arrangements.”

Quite so, and most G20 and OECD finance ministers wholeheartedly agree.

On Tuesday the OECD released its first recommendations for a “co-ordinated international approach to combat tax avoidance by multinational enterprises ... designed to create a single set of international tax rules to end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax.”

The difficulty for Treasurer Hockey is that he has not fully explained why some of the loopholes closed by the Gillard government were re-opened in the early months of the Abbott government.

Shadow assistant treasurer Andrew Leigh continues to assert that Abbott government changes will see $1.1 billion of Labor’s clampdown now slip abroad over the forward estimates period. In a time of ‘budget emergency’ the onus is on the government to explain why.

So far the best explanation circulated by the government is a quote from the executive director of Treasury’s revenue group, Rob Heferen, to the effect that “it became apparent that the proposal that stood would not be a sensible proposal to proceed on”. Sounds like something Sir Humphrey Appleby of 'Yes Minister' might say.

Such a vague defence is unlikely to satisfy domestic firms seeking a lower company tax rate at home while global firms such as Google, Apple, Amazon and Glencore exploit tax-minimisation opportunities abroad.

Hockey now finds himself being pressured by Labor to join an ‘early adopter’ group of 44 countries who have agreed to a timetable to implement the OECD’s ‘common reporting standards’.

The early adopter nations, which include G20 members the United Kingdom, France, Germany, Italy, Argentina, India and Mexico, will have their work cut out for them. Legislation effecting the CRS will be needed for a series of deadlines ranging from January 2016 through to September 2018.

But surely the Australian parliament could easily meet those deadlines, especially when the nation faces a ‘budget emergency’?

Treasurer Hockey may surprise critics when this weekend’s G20 meetings are over, and out-flank Labor on this important issue.

If he does not, he will have to do more to explain why some companies are more slippery in the eyes of the tax code than others.