Is this a silly question to ask, given the reported low taxes paid by Google, Apple, Yahoo, Starbucks and others? The G20 and OECD think there is a major problem and have launched an Action Plan to combat 'base erosion and profit shifting' (BEPS).
But many of the submissions to the Australian Senate inquiry into corporate tax avoidance seem to suggest there is not much of a problem, at least in Australia. Ernst & Young says Australia's tax system is 'world class' and 'robust internationally in preventing tax avoidance'. And all the corporates say they are model citizens on tax. To quote from Stockland, tax affairs are conducted in a 'commercially responsible manner, while having full regard to all relevant tax laws'. Google says it pays 'billions of dollars of corporate tax every year'. The Institute of Public Affairs (IPA) says 'there is no clear evidence of what is known as "base erosion" in Australia'.
The Senate inquiry is a response to a report by the Tax Justice Network (TJN) which said that, of Australia's 200 publicly listed companies, 29% have an effective tax rate of 10% or less and 14% have an effective rate of zero. The statutory corporate tax rate is 30%. The TJN report claims that if the ASX 200 paid the statutory rate, the government's coffers would rise by $8.4 billion annually.
The corporate sector has attacked the report. The Corporate Tax Association says it is a flawed analysis 'that paints an inaccurate and misleading picture'. The IPA says it contains 'ludicrous and utterly false assertions'.
Many blame the media for reporting that corporations are not paying the taxes they should. The Tax Institute says 'statements made in the media suggesting certain groups of taxpayers are not meeting their tax obligations unduly undermines the integrity of the Australian tax system as a whole'. [fold]
There are many problems with the TJN report. It confuses accounting profit and taxable income, and it confuses companies and trusts. It also fails to take into account that companies operating overseas pay taxes in those jurisdictions. But the report does tap into a widespread view that some corporations are not paying all the taxes they should. And there is some justification for this view. According to the Australian Tax Office (ATO), most taxpayers comply with the law. But the ATO points out that some multinational corporations are engaging in complex profit-shifting structures.
Corporations may be complying with the law, but international tax law is out of date with today's global corporate operations, and also does not account fully for the internet.
The objective of the BEPS Action Plan is to bring international tax law into the 21st century, but some are sceptical. Michael West says corporations know that the 'OECD's and G20's don't make laws – they make communiques and manifestos. Sovereign nations make laws.' He is right; it will be a challenge for the OECD and G20 to get their BEPS recommendations into national laws. But a multilateral effort is important to not only ensure global companies pay tax, but also to avoid them paying tax on the same profits in more than one jurisdiction.
One of the questions posed in the Senate inquiry is whether there is a need for greater transparency to deter tax avoidance. The answer is 'yes'.
While the TJN's report has many faults, it demonstrates how difficult it is for the public to get an accurate assessment of whether corporations, particularly multinationals, are paying all the taxes they should. As the IPA says, 'international taxation is phenomenally complex as it builds on top of domestic taxation which is a complex area. Given the complexity it is unsurprising that there is so much misunderstanding as to what actually occurs'.
More public information by companies on the taxes they pay is important to help maintain trust in the system. If corporates feel that they are being badly treated in the media, the best defence is for them to be more upfront in outlining their tax arrangements. Moreover, requiring greater transparency is a good way to ensure that corporates do the right thing when it comes to tax. Fear of reputational damage is a great motivator.
Some of the submissions to the Senate enquiry, such as those from the Corporate Taxpayers Association and PwC, support greater transparency. Rio points out that it is already very transparent. But others, such as Ernst & Young and the IPA, attack the concept of giving the public more information, claiming it will be misinterpreted.
We need more transparency on tax. As we have seen, problems over misinterpretation come from insufficient information rather than too much.
Photo courtesy of Flickr user William Murphy.