Could a levy on big business offset $4 billion in tax avoidance?

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Corporate tax avoidance cost us $4 billion in the last financial year — a small "democracy levy" on big business could help balance the scales, says John Passant.

WHEN IT COMES to big business not paying income tax, nothing much has changed.

In the 2013/14 financial year, according to the ATO, 36% of big business – public companies with a turnover of greater than $100 million and private companies with a turnover of $200 million or more – paid no income tax. In 2014/15, 36% of big business paid no income tax.

We are not talking small bikkies either. In 2013/14, the amount of revenue these untaxed companies earned was $454 billion. In 2014/15 it was $462 billion.

A report released by Oxfam puts the figure at over $4.8 billion in unpaid taxes.

Disgracefully, the Commissioner of Taxation, Chris Jordan said:

"There are no surprises here to the ATO."

The Commissioner is a former partner at KPMG — a big accountancy firm who advises big business on how to "minimise" tax. He should talk to his own Tax Office staff at the coal face. They are surprised.

Now, as the ATO and apologists for big business constantly tell us, there are many reasons why a big business can earn billions of dollars and yet pay no income tax in Australia. As I already mentioned, when the first set of 2013/14 figures came out, the “spin doctors” are out in force. They are dealing in half-truths about gross revenue and legislated exemptions, deductions and offsets (credits).

Of course, gross revenue is not taxable income. You have to take away from gross income all the deductible expenses to arrive at taxable income and the report doesn’t detail what these are. And, of course, some companies will have years in which their revenue doesn’t come near their spending. Using Australian Securities Exchange (ASX) data, the ATO says that this is likely to be about 20 to 30% of the companies listed in the report.

Or they will have losses from previous years which, when carried forward, give zero taxable income for the year. Or there might be lots of franking offsets (credits associated with dividends and related to the company tax paid), or research offsets or foreign tax credits. All true. But the release of the figures allows us to ask those companies with lots of gross revenue why they pay no income tax or little income tax.

These rationalisations are all correct, but they are a case of the facts hiding the truth. Some of the non-taxation of big business (or low taxation) occurs because of tax lurks Parliament puts in the income tax law — what I call legislated tax avoidance. Every January, the Treasury puts out a Tax Expenditure Statement for the previous income year. This is basically a list of the revenue forgone from a wide range of legislated tax lurks. Needless to say, business tax lurks are quite substantial. My rough back of the envelope calculations for specific business tax expenditures in 2015 is $7.6 billion. That doesn’t take into account other lurks, like the capital gains tax discount, from which business, as well as other mainly well-off taxpayers, benefit.

Some of the non-taxation occurs because of out and out tax avoidance. Companies like Google, Apple, mining companies such as BHP – to name just a few – are much in the news because of transfer pricing or, related but different, base erosion activities. These activities are costing the Australian revenue many billions a year.

However, even when market conditions explain the tax situation, the question is: why not tax such companies to operate in Australia, irrespective of whether they make a profit. Take QANTAS, for example. Its revenue in the 2014/15 financial year was $15 billion and, unlike the year before, it made a taxable profit of $211 million — but no tax was payable. Yet QANTAS still uses Australian assets and resources, such as roads, airports and, of course, makes its profit from a well-trained and educated workforce.

Why not impose a tax on those big businesses that are not paying income tax? Given their size, they have the ability to pay a small operating fee to carry on business in Australia. A 3% tax, based on gross revenue, would have raised over $13 billion on the untaxed revenue of $462 billion from the 2014/15 corporate transparency report.

It is not just about those big businesses which pay no income tax.

According to Roman Lanis and Ross McClure in The Conversation:

‘[The] average [effective tax rate] ETR for companies on the ASX 200 [was] around 22%, and [for] the 100 largely privately owned corporate tax payers [it was] around 16.2%.’

The statutory company tax rate for big business in Australia is 30% and the government aims to cut that to 25% over ten years. In effect, this is a loss of government revenue of about $50 billion and a cash grant to big business of over $5 billion. With the U.S. under President-elect Trump proposing a company tax rate of 15% and the British Conservatives muttering about doing something similar, the pressure from big business in Australia will be to cut our company tax rate even more than the current government proposal of 5% over ten years for big business. When it comes to company tax, the global race to the bottom has begun.

Since most large businesses in Australia pay less than the headline 30% rate anyway, why bother? A study by United Voice has found that 29% of the top 200 ASX companies have effective tax rates of less than 10% — way less than 30%. So a slightly lower operating fee, of say 2%, could be applied to those big businesses paying some small amount of tax — those with effective tax rates of up to 10%. For those with effective tax rates between 10-20%, the operating fee rate could be 1%.

Again, business and their apologists will trot out the usual arguments explaining how the effective tax rate is different to taxable income, and how these activities are explained by market conditions, tax deductions and exemptions, tax offsets and the like. And of course, such operating fees recoup the tax benefits flowing from specific tax expenditures.

All of this misses the point. Australia has become more inequitable over time and one of the reasons for this is the lack of progressivity in Australia’s tax system, including income tax. (As an aside, the main reason for the increase in inequality is the long-term decline in labour’s share of total factor income and the corresponding increase in capital’s share.)

As Peter Varela has argued:

‘ … the Australian tax system is only very slightly progressive; those in the lowest income quintile pay around 22% of their income in tax, while those in the highest quintile pay around 27% of their income in tax.’

Thomas Piketty and others have pointed out that growing inequality is a threat to democracy.

In the words of the great American jurist Oliver Wendell Holmes:

"Taxes are the price we pay for a civilised society."

Big businesses that pay no or little income tax are not contributing to our upkeep while, at the same time, they are using our resources.

Taxing those non-contributors a little is about defending democracy and civilised society. We could easily impose a levy for democracy imposed on big business to ensure that even when they are not making a profit they are contributing a small amount to Australian society. Who would argue against such a reasonable proposal?

John Passant is a former Assistant Commissioner of Taxation. Read more by John Passant on his website En Passant or follow him on Twitter @JohnPassant.

Signed copies of John Passant’s first book of poetry, Songs for the Band Unformed (Ginninderra Press 2016) are available for purchase from the IA store HERE.

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