Corporate tax avoidance reports are avoiding the real facts

Claims that a large chunk of Australia's top companies are avoiding tax are completely baseless, and many of them aren't even Australian.

Over the past few days Fairfax Media has been awash with coverage of a report that accuses Australia’s largest companies of tax avoidance on an industrial scale.

The report, produced by United Voice and the Tax Justice Network -- a coalition of unions, churches and charities -- purported to find that nearly a third of ASX 200 companies have an effective tax rate of 10 per cent or less, and more than half have subsidiaries in tax havens. It claimed that if the companies had paid tax at the corporate tax rate it would generate an extra $8.4 billion of tax revenue each year.

Startling? Outrageous? Those would be the conclusions, if they weren’t built on a complete absence of the facts. The report is remarkable for the shallowness of its understanding of corporate taxation and, indeed, of the entities it points the finger so accusingly at.

Of the “Top 27 companies ranked by average effective tax rate”, 20 are either property trusts (16) or infrastructure trusts (4).

The authors presumably don’t understand the difference between a trust and a company. A trust doesn’t pay tax -- it distributes its net income to its unitholders. The unitholders pay tax on that income. It shouldn’t be a surprise to anyone that the trusts pay little or no tax as that’s what they are designed to do, and what the tax law allows.

Then there’s a ranking of average annual tax revenue foregone, which concludes that had the companies concerned paid the full tax rate they would have generated an additional $8.4 billion in annual tax revenue.

The top-ranked company in that list, with average annual tax foregone of $1.6 billion, is 21St Century Fox (once part of News Corporation, publisher of Business Spectator).

There’s a small problem with pointing an accusatory finger at Fox. It isn’t an ASX 200 company and it isn’t an Australian company. It is US-incorporated and headquartered and the vast majority of its earnings are generated in the US. It has only minor operations in Australia. It’s nonsensical to apply the Australian corporate tax rate to the US earnings of a US company.

Number two on that list of companies ranked by revenue foregone is SingTel. SingTel! Well, it is listed on the ASX and does have a large Australian business in Optus but it also operates in about 25 countries across Asia and Africa as well as being the dominant telecommunications business within Singapore, where it is headquartered.

As with Fox or CSL, or James Hardie (other companies the report names and shames), it is ludicrous to apply the Australian corporate tax rate to SingTel’s offshore earnings. CSL’s main operations are in the US and, to a lesser degree Europe. James Hardie generates something approaching 90 per cent of its earnings in the US.

Then there is Qantas. The report says the annual average tax foregone over the past decade -- because Qantas’ effective tax rate (on the report’s calculations) was only 21 per cent -- was $93.6 million.

The authors don’t appear to appreciate that the Tax Act allows deductions and that Qantas, with a big fleet of very expensive planes, has a lot of depreciation. They also don’t appear to appreciate that if you don’t make money you don’t pay tax -- Qantas lost $2.8 billion last year.

The other problem with any attempt to analyse tax payments from publicly available accounts is that they don’t necessarily or exactly match the actual tax paid -- companies keep separate tax accounts for the Tax Office.

Back in the 1980s, for instance, Bond Corp was reporting big profits but very low tax payments. It was either minimising its tax, or overstating its profits (if any). With hindsight, we know it was the latter.

The report also makes much of the use of tax havens by Australian companies, essentially linking the existence of subsidiaries in low-tax jurisdictions with tax-dodging.

Even the Future Fund uses entities based in what are commonly regarded as tax havens, not to avoid legitimate taxes in the jurisdictions in which it invests but to avoid paying what could effectively be regarded as gratuitous and avoidable transaction taxes as it shifts capital around the globe. A lot of companies with international operations use tax havens purely as conduits, not to evade tax in the jurisdictions in which they have operations.

There is a legitimate debate occurring about global tax avoidance and profit-shifting, within which Joe Hockey has been quite a vocal and aggressive participant.

That debate has been sparked by the way in which the big technology companies, mainly US technology companies, have structured themselves so that the vast majority of their earnings appear to accrue in low tax jurisdictions. US technology companies, for instance, are holding almost $US500 billion of cash offshore in low-tax jurisdictions to avoid bringing it within the US tax net.

That’s a particular problem that the G20 meeting in November has on its agenda, and the broader issue of ensuring multinationals do pay their fair share of tax in the various jurisdictions in which they operate is worthy of debate and reform.

The kind of shambolic and misleading analysis in the United Voice/Tax Justice report that Fairfax has reported so breathlessly, however, is less than constructive, is damaging to the companies and trusts concerned, undermines taxpayer trust in the tax system, and confuses the debate.

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