Taxes, corporations and the guillotine illusion

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(Image via abc.net.au)

John Haly discusses multinational tax avoidance and why Scott Morrison's claims of combatting tax loopholes is just another amazing illusion. 

TAX BILLS are perceived, by many wealthy entrepreneurs, as the slicing guillotine blade of government.

Ever since the French introduced Madame la Guillotine’s blade as their historical precedent for resolving differences with the wealthy upper class, the wealthy one per cent have been understandably nervous.

They traditionally hold it securely, so none of it can trickle out, or hide it in havens, lest any be taken from them. Yet to settle the proletariats, the government must be observed to be taxing the bourgeois, without actually removing their entitlements to wealth. The Liberal Party’s 2016 budget is an illusion of mastery of this particular magic.

The Coalition Government’s latest trick is the traditional guillotine illusion where the blade falls upon the “victim” but nothing is actually cut off. Tax cuts and tax management were a predominant topic of the Budget. Shaving off a little less for the not even a fifth of the taxpayers that earn over $80,000 but seemingly pursuing deeper cuts from they that hoard their treasures.


Many corporations protest to ATO auditors, quite rightly, that everything is above board and legal. Let us consider the three primary ways that corporations avoid tax burdens. 

  • Offshore Registration of your business in a foreign municipality with a cheaper rate of tax, aids companies in avoiding tax in the country where they may do business.
  • Transfer Pricing makes use of a subsidiary firm – again in a foreign country with cheaper tax rates – as the official sales agent. It is an agent selling your Australian product — much like Google does by selling Australians advertising ($2 billion in 2015), although it is officially billed to Singapore, where they pay only 2.5 per cent tax ($5 million). The business pays reduced tax on profits acquired at the foreign rate, not the local rate. 
  • Tax Havens such as Panama, Cayman Islands (our Prime Minister’s choice), Switzerland, the Virgin Islands and many others provide the facility for companies to setup holding companies on paper. Practices such as Intellectual Property (IP) Licensing, where you sell your intellectual property back to your company and Debt Loading, where your foreign holding company lends money to your subsidiaries in Australia.

In the latter case, the Australian firm pays back the “loan” at crippling interest rates reducing any profits the firm would otherwise make. As a result of this “loan sharking” manoeuvre, profits vanish. Often the interest acquired overseas is not even taxed at all. Nothing to tax here!

This is not unlike the magic performed by the Rupert "the Mystic" Murdoch when the tax office held in their very hands the $882 million that they had taken in tax from him — with a wave of his wand, the profit he made in Australia was relocated to U.S. shores and the $882 million had relocated itself back into Rupert Murdoch’s bank account. It was coincidental, of course, that this occurred during the election period, which resulted in Tony Abbott being magically levitated onto the public stage as Prime Minister. Joe Hockey who was hysterically alarmed by our enormous national debt, never raised the spectre of these funds vanishing from the public purse. 

Apple's $8 billion in revenue in Australia resulted in a tax bill of only $85 million, or one per cent.

Corporate Raiders

These corporate raiders have made use of the resources of our country. They pay for our labour (but not the development of it), transport (but not what it moves on), ports (but not their construction), power & rent (but not the infrastructure that supports it). Every other small business in Australia pays for this as well, because the rest of us pay taxes! Taxes paid by their customers, employees and even the people that clean their offices.

Individually, any of these individuals often pay more tax then the corporations. It is no wonder we have a net foreign debt of a trillion dollars with all that draining from the country.

So how does one lower Madame la Guillotine’s blade without chopping off anything?

Treasurer Scott Morrison announced in the May Budget:

... combatting tax avoidance, especially by multinationals, with new measures to ensure everyone pays the tax they should on what they earn in Australia, not avoid tax by shifting their profits offshore.

... a new operational taskforce of more than ​1,000 specialist staff in the ATO to police and prosecute companies, multinationals and high wealth individuals not paying the tax they should.” 

Whish, down comes the “blade” — but does the blade really cut anything? This was later disclosed to be a taskforce of 'around 1,300 jobs in the ATO, including 390 new specialised officers.'

First off, 1,300 newly minted tax officers are hardly a replacement for the 4,700 very experienced ATO officers that lost their jobs since Hockey cut their funding. They weren’t keeping up with the multinationals that weren’t paying tax when there were that many. Now they are short-changed by 4,400 staff and have lost a world of experience.

Less obvious is to what extent these new diverted profits laws are applied. The new laws came into effect on 1 January 2016 and apply where the annual turnover is more that $1billion. This will certainly affect Apple and Google but many foreign interests who carry on through subsidiaries in Australia will not be affected. The only real targets will be the top mining and technology sectors where services, research or marketing performed in Australia is booked to overseas subsidiaries.

What needs to be reiterated is companies like Amazon, Google, Energy Australia, Facebook and so on, practice legal tax avoidance. They will modify their strategies, as allocation transactions to overseas entities is just one strategy. Remember none of their tax avoidance practices are illegal. They may stonewall in senate hearings because they want to avoid public distaste and a drop off in profits but they have done nothing illegal.

These billion dollar turnover companies may lose a few locks of hair to Madame la Guillotine’s blade but certainly no head.

The cutting illusion

Unless the government changes the legislation to significantly cast a wider net and encompass transactions made in Australia facing tax liability, not much will change. Mr Morrison’s taxing blade may thrill your perverse appetite for expecting blood on the scaffolding but the results will ultimately disappoint. 

The falling blade of Madame la Guillotine’s blade is nothing more than another clever illusion.

You can follow John Haly on Twitter @halyucinations or on his blog at auswakeup.info.

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