This section provides a selection of media items from June 2013.
Adam Courtenay, The Sydney Morning Herald, 28 June 2013
The Employee Share Option Plan tax is like being given a lottery ticket and having to pay tax on winnings not yet received.
If you were to ask the start-up community what was the biggest pain in the innovation space, chances are they’d all be in unison – get rid of the ESOP tax.
The Employee Share Option Plans tax, otherwise known as Division 83A of the Income Tax Assessment Act 1997, was amended three years ago to close a loophole, but has ended up crimping the advancement of technology start-up businesses.
ESOPs work by offering discounted shares to employees in the hope of a financial benefit when the company is properly valued. Start-ups typically take time to make money but still need to attract talent to the venture. The share options are designed to encourage commitment and long-term tenure from employees.
The problem is, if employees are offered a plan to the value of say, $10,000, the Australian Tax Office says that’s $10,000 issued and income tax must be paid immediately.
“Instead of giving employees an incentive, you’re giving them an instant tax liability on the value of an illiquid asset,” says Nick Abrahams, technology partner at law firm Norton Rose Fulbright.
As Abrahams and others say, few start-up employees can afford to pay the tax on shares that have not yet vested, may not vest for many years or which may not vest at all. As one commentator says, it’s like being given a lottery ticket and being asked to pay the tax on the winnings you haven’t yet received.
Jon Tanner, managing partner of MitchelLake Group, describes it as “the hidden pain in the innovation space”. “It’s patently unfair for businesses that have not even had the time to generate an income,” he says.
Tanner, whose company is involved in early-stage funding and recruitment in the digital arena, believes it is holding potential entrepreneurs back, and possibly even forcing some companies to move to more “entrepreneur-friendly” tax jurisdictions, such as Singapore, Hong Kong and the US.
It is well known that the US taxation system – unlike Australia’s – allows tax to be deferred on stock options and shares until the shares are crystalised and have a real value.
“There is a definite move to places like Singapore – and part of that is the complexity and expense of our tax regime,” Tanner says. “The Singapore government is enticing early-stage businesses from around the region – companies like 99 Designs, Pollenizer and Effective Measure.”
There are ways around the tax, but experts agree that it is expensive, unnecessary and synthetic. Software developer Atlassian is well known for having paid the expense of stock options upfront for about 500 employees, but this is an exception. Other schemes involve structuring loan deals which simulate a share option arrangement. Here the idea is to lend employees the money to buy the shares at an agreed value. Employees don’t have to repay the loan until they sell the shares, or they simply return them if they leave the job before an agreed time.
Michael Derin, chief executive of Azure Group, which structures schemes for start-ups, says methods to counteract the scheme are achievable with good advice, but more expensive than they should be for small start-ups. The current rules state that ESOPs, in order to be concessionally taxed, should be offered to 75 per cent of an organisation or not at all, which makes it difficult to implement for private companies as a whole.
“Yes, for the small start-ups, you can put in a loan agreement, but it gets tricky,” says Derin. “There are fringe benefit tax issues and there are Division 7A loan issues,” he says.
What all parties are seeking is an end to a tax which falls on a notional value rather than any realised value.
Katherine Woodthorpe, chief executive of the Australian Private Equity & Venture Capital Association, says the tax came in when the government perceived that higher-paid executives would “stream” income as shares, thus enabling them to pay the lower capital gains tax rate.
An executive could receive $200,000 in shares and $300,000 in stock options. Instead of paying the higher rate of income tax on a full income of $500,000, the larger portion would be subject to concessional rates of CGT if held for more than 12 months.
“You can quibble about whether people should pay income or capital gains tax on them all you like,” says Woodthorpe. “Frankly, we don’t care. We have asked the government to do just one thing – allow people to pay tax when they have a real gain, not a notional one.”
A recent release from the Department of Broadband, Communications and the Digital Economy states that the government “will review the tax treatment of employee share schemes and develop guidance to reduce the administrative burden of establishing such schemes”.
Abrahams at Norton Rose Fulbright is lobbying government to reform the tax, and he says it helped his cause to disclose a survey of the fast growth community jointly run by his firm and Deloitte.
“Over 90 per cent of the 105 people surveyed said this was a major problem of start-ups to get off the ground,” he says.
All the same, months of lobbying Canberra has finally opened doors, he says. “This is a case of unforeseen consequences – the government was not trying to cause problems for the early-stage community. It happened because the community didn’t have the voice to stop it.
“There is growing bipartisan political support to change this. We’ve tried to find out how much the government is earning in tax from the early-stage community. We don’t really know, but my suspicion is that it is not very much at all.”
John McLaren, The Conversation, 28 June 2013
More than 500 Australians are apparently on a list of tax haven users obtained by the Washington-based International Consortium of Investigative Journalists, as part of its investigation into the use of offshore companies. But anyone relying on this list should not cast aspersions about illegal activity…
More than 500 Australians are apparently on a list of tax haven users obtained by the Washington-based International Consortium of Investigative Journalists, as part of its investigation into the use of offshore companies.
But anyone relying on this list should not cast aspersions about illegal activity without first acknowledging that there are many legitimate uses for tax havens.
The two misconceptions about the use of tax havens is that the activity is both illegal and illegitimate. But having a bank account with a bank in a tax haven is not illegal under Australian law and there are many legitimate reasons why Australian taxpayers – either individuals or corporations – conduct business in tax havens.
What does amount to illegal conduct is failing to declare a bank account in a foreign country or the ownership of assets in another country. Secondly, it is illegal not to include income generated from money or assets owned in a foreign country as part of an Australian taxpayer’s assessable income.
Through Operation Wickenby, the Australian Taxation Office (ATO) has been very successful in detecting and deterring Australian taxpayers from hiding income in tax havens. AUSTRAC, the Australian government agency responsible for monitoring the flow of funds in and out of Australia, in conjunction with the ATO have been successful in detecting Australian taxpayers using tax havens. Therefore, only complete idiots would try to hide money in tax havens today.
However, there are legitimate uses for tax havens by Australian taxpayers. This may amount to simply the ownership of property in a known tax haven as a legitimate investment, especially if it is in a resort on a tropical island.
One media report referred to figures from the ATO showing that A$16 billion flowed to tax havens between 2007-2008. But A$29 billion flowed back to Australia from tax havens. If tax havens cease to exist, then Australia would probably not attract a similar level of foreign investment from mobile capital looking for a safe haven to invest in. One prominent example is the A$85 billion Future Fund, which is invested through asset managers located in the Cayman Islands.
In 2009, then-Minister for Finance and Deregulation, Lindsay Tanner, justified this practice on the basis that the Cayman Islands was becoming more transparent and negotiating a Tax Information Exchange Agreement with Australia. He also conceded that “given the structure of the industry and complexity of international law, this is common practice”.
However, the most extensive lawful use of tax havens comes through the global insurance and reinsurance industry.
Havens such as the Cayman Islands are a popular location for what are known as “captive” insurance companies. Captive insurance companies are wholly-owned by a large corporation to insure risks associated with the business. The captive insurance company then obtains reinsurance from a large insurer for large losses but maintains the risk itself for small losses.
Far from being illegal, many large Australian corporations and banks have their own captive insurance companies located in tax havens such as the Caribbean or Singapore. Since 1996, the Australian Taxation Office has recognised insurance premiums paid to captive insurance companies as tax deductions, when the case of WD & HO Wills (Australia) v Federal Commissioner of Taxation established a precedent.
Many insurance and reinsurance companies are also located in tax havens such as Bermuda, a dominant player that hosts 35% of the insurance industry worldwide and 65% of the global reinsurance industry.
The main justification is that insurance and reinsurance companies are able to invest their premium income without the cost of paying income tax on the earnings – meaning there is more money to be used to pay out claims for major global catastrophes.
Without this tax benefit, many businesses would not be able to operate because they would not be in a position to acquire the required insurance cover for their particular business activity. This was the situation in the US in the mid-1980s when US businesses were unable to obtain liability insurance cover, according to the research by Yelena Tsvaygenbaum from the University of Connecticut.
Tsvaygenbaum’s research shows half of all risks insured through Bermuda are of US origin and one third, European. About 60% of all policies sold in Bermuda are for property insurance and reinsurance.
Reinsurers take some of the risk from the original insurers and, by doing this, insurance companies can take on more risk, or less desirable risk, thus helping more customers.
So if premium income was not given favourable tax treatment by tax havens, then many risks facing businesses throughout the world would not be insured. The continued existence of tax havens in the insurance and reinsurance industry is firmly acknowledged as being of global importance.
abc news, 30 June 2013
The law will eliminate state and local tax subsidies for charities that spend more than 70 percent of donations on management and fundraising over three years, the Statesman-Journal reported in Sunday’s paper (http://is.gd/yJAIca ). The measure, House Bill 2060, was signed by the governor in June.
“No other state has done this,” said Jim White, executive director of the Nonprofit Association of Oregon. “We’re the first in the country, and we should be proud of that.”
There are 17,152 charities registered to solicit funds in Oregon. About 23 percent of those are based out of state.
The Oregon Department of Justice already has identified the top 20 worst charities, which all spend less than 30 percent of their money on programs and services. The list is available on the agency’s website: http://is.gd/CaktEo .
It includes a Michigan-based law enforcement charity that the department says spent less than 3 percent of its money on programs over the past three years. Also on the list is a California-based international ministries group that allegedly spent just over 3 percent on programs.
All 20 of the worst charities are based out of state. They spend between 2.7 and 21.7 percent of donations on programs, according to the Justice Department.
Some states, including Oregon, used to have laws prohibiting charities from soliciting donations if they were paying too much to themselves and their fundraisers.
The laws were repealed after the U.S. Supreme Court ruled in 1980 that attempts to restrict a charity’s ability to solicit donations violated their First Amendment rights.
Oregon’s new law likely would survive a challenge because it doesn’t restrict a charity’s ability to do fundraising, Department of Justice spokesman Jeff Manning said.
Instead, donors to those charities can no longer claim a state tax deduction. The charities also will lose their local property tax exemptions.
“These organizations have found the business model of using a nonprofit as a cover for what’s basically a telemarketing for-profit firm,” White said. “They’re giving charities and nonprofits a black eye and need to be gotten out of our midst.”
State officials estimate fewer than 100 charities will be affected by the law in its first year.
Ian McAuley, New Matilda, 28 June 2013
The states need cash and a GST increase might be the best way to do it. Could Kevin Rudd pull off the politically distasteful? Ian McAuley makes the case
Kevin Rudd is back, and, as Bernard Keane wrote in Crikey this week, he has a clean slate when it comes to policy. Building on the big-ticket policy items set up by Julia Gillard, Rudd might have the opportunity to work on a few neglected areas, either before the election or, should he win it, during his second tilt at the prime ministership.
One such neglected issue is taxation – the very issue that got Rudd into hot water in the first place. Tony Abbott and shock-jock journalists have successfully conveyed the impression that our taxes are high: two-thirds of people surveyed by the Australia Institute believe that Australia is a “high tax” country, while only 2 per cent correctly identify Australia as having almost the lowest taxes among the 30 countries in the OECD.
In fact, an analysis of ABS taxation statistics shows that Australian taxes have fallen sharply from their peak in 2004-05, when the Howard government was enjoying a boom spurred by rapidly rising commodity prices and a property boom. In that year our taxes – Commonwealth, state and local – reached 30.3 per cent of GDP, before falling to 25.6 per cent of GDP in 2001-11 and only slowly creeping up since.
Had Wayne Swan enjoyed the taxation revenue that flowed into Costello’s coffers, the Commonwealth Budget would have had an extra $197 billion in revenue over the four years to June 2012 – enough to fund the NBN, the Pacific Highway and an east coast fast train, with some left over, and with no net debt (assuming those assets remained on the Commonwealth balance sheet). Perhaps Chris Bowen will be luckier, although it seems unlikely.
While Commonwealth revenues have suffered, so too have state and local revenues. By the same calculation as I have used for the Commonwealth, state governments lost $22 billion over that period from their own tax bases, and they lost another $24 billion in GST revenue – money which is collected by the Commonwealth, but passed through to the states.
That’s why state premiers are crying poor, and why, apart from Campbell Newman’s intransigence and the usual squabbling, are attracted to the Gonski reforms. When there is money on offer they care little about the partisan alignment of the Canberra government.
In general, state governments survive or fall on the quality of their services. Health care and education absorb half of all state expenditure and policing takes another 10 per cent. These are all skill-intensive services, for which labour costs are a major part of expenditure. It may be convenient for some on the left to condemn the hard line state governments are taking towards nurses and teachers, but that hard line is more a fiscal imperative than an ideological stance. (Again, Queensland must be excused from assumptions of fiscal rationality.)
There are rumblings from state premiers about their share of GST funding, particularly from Western Australia which, because of its potential to raise royalty income, gets a much lower share of funding than other states. The Grants Commission recommendations for the coming year (which the Commonwealth usually follows) are for Western Australia to get back only 45 cents per dollar of GST collected, while at the other extreme the Northern Territory will get $5.31 per dollar collected and Tasmania $1.61.
Redistributing GST away from the Grants Commission formulae would be politically difficult, particularly in view of the fact that Tasmania has the same Senate representation as larger states, and it has a number of swinging House of Representative seats.
And it’s hard to imagine that GST revenue will come back to its earlier levels. When the Howard government introduced the GST in 2000, it was definitely a “growth tax”. Incomes were rising, and people were running down their savings, particularly by borrowing against rising house prices. It was a boom period, but that boom ended in 2008.
Although real incomes are still rising, people have become more cautious about going into debt – the GFC and stabilising house prices have had a sobering effect. Some items exempt from GST, particularly health care and education, have been subject to relatively high price rises, and this has meant less expenditure on items on which GST is levied. And, to the marketers’ chagrin, there is emerging among many young people what the advertisers call a “post materialist” lifestyle. For many, shopping is losing its attraction.
An Abbott government is already considering increasing the rate of GST. Julia Gillard’s predictable response was to prepare to launch a scare campaign. But there are a few reasons why progressives might support an increase to the GST.
The textbook economic wisdom is that consumption taxes are more regressive than other forms of tax, particularly income tax. The better-off devote a larger share of income to saving and a lower share to consumption. That means consumption taxes take proportionately more from a household with low income than from a household with high income. That is no mere abstract theory. Australia’s GST is regressive, even allowing for exemption of most food and health care.
But the GST is much harder to avoid than other taxes, and, apart from local government rates, it is virtually the only tax collected from wealthy “self-funded” retirees, thanks to the undeserved breaks granted in Costello’s final budget, which have been so hard for the present government to wind back.
There is also a case for abolishing or paring back certain exemptions. As incomes have risen across the board, food is taking a smaller share of our expenditure: in 1988-89 food took 18.1 per cent of household expenditure; in 2009-10 that was down to 16.5 per cent. The same reduction in food’s prominence has happened in all income bands. There is also a good case for applying GST to private health insurance to arrest its uptake, before it inflicts more damage on our public hospitals. After all, other insurers are subject to GST.
Most importantly, GST goes to state governments, who provide those services which form the most important part of the “social wage”, particularly health, education, transport and public housing, which all have redistributive benefits as well as a strengthening of our social and human capital. States don’t squander money on military equipment or on middle-class welfare. And they have no incentive to subsidise private health insurers to suck resources out of public hospitals.
A higher or more inclusive GST is not the only way to improve state revenues. But the general point is that there are political and constitutional imperatives for the states to be responsive to people’s needs. If Abbott pitches a rise, perhaps Rudd could show leadership; instead of beating up a GST increase as a bogeyman, he could sell it as an antidote to the neoliberal sell-off of public services. A rise may not be politically popular, but it may be necessary.
The Economist – WASHINGTON, 27 June 2013
Yet most countries raise relatively little money from taxing property. John Norregaard at the IMF calculates that the average rich country—including all levels of government—raises 5% of its total tax take from annual property taxes. In middle-income emerging economies, the norm is lower still, at 2% of total revenues.
These averages mask big differences between countries. Property taxes loom largest in Anglo-Saxon economies: according to Mr Norregaards’s figures some 17% of all tax revenue in America comes from property taxes. They make up 70% of local governments’ tax take property taxes. But in Germany only 2% of revenues come from property taxes; and in Switzerland it’s a mere 0.4%.*
Our Free exchange column this week looks at property taxes and argues that they should be more widely used.
Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes. That is even truer of urbanising emerging economies with large informal sectors.
Property taxes are a stable source of revenue in a globalised world where firms and skilled people can easily move. They are also less prone to cyclical swings. In the financial bust America’s state and local governments saw smaller declines in property taxes than other forms of revenue, largely because the valuations on which tax assessments are based were adjusted more slowly and less dramatically than actual prices. Property taxes may even restrain housing booms by making it more expensive to buy homes for purely speculative purposes.
Given these advantages, why don’t governments raise more money from property taxes? A few are trying. Mr Norregaard finds close to 20 countries that have, or are about to, introduce land taxes or property taxes. For some, particularly in emerging economies without complete land cadastres, these taxes are hard to implement. But a big factor is that they are wildly unpopular. Remember California’s Proposition 13, the 1978 amendment to the state constitution to limit property taxation which is widely thought to have spawned the 1980s tax-cutting revolution. One reason Mario Monti, Italy’s technocratic former prime minister, lost the election earlier this year was his much–reviled decision to raise the property tax.
The column points to an interesting NBER paper which helps to explain why.
Voters hate property taxes because they are what economists call “salient”: the burden is obvious, easy to calculate and hard to avoid. An intriguing new paper by Marika Cabral and Caroline Hoxby at Stanford University shows what a difference this makes. Most American homeowners pay their property taxes in one or two lump sums during the year. Around a third (mainly those with mortgages) have their tax payments bundled in with monthly mortgage payments. The economists find that how people pay their property taxes affects their tolerance for them. The more people pay in lump sums, the lower property taxes are likely to be. For property taxes to become a much bigger source of revenue, governments must apparently ensure people don’t realise how much they are paying.
* For the wonky, these ratios are based on the IMF’s definition of total tax revenue and so exclude social-security taxes in the denominator. They are thus slightly different to the ratios you find on the OECD’s tax data-base.
Alicia Wood and Leigh Van Den Broeke, The Daily Telegraph, 26 June 2013
Community Services Minister Pru Goward will today announce details of the controversial bed tax, which will be charged to all public housing tenants who have an extra bedroom and refuse to move to a smaller property.
Singles with extra bedrooms will be charged an extra $20 a week, and couples will be charged an extra $30 a week under the tax.
Ms Goward said there were more than 17,000 public housing properties with three or more rooms that are occupied by singles or couples, and she is prepared to cop some resistance to the idea.
“I ask all the tenants with vacant bedrooms in their property to think about the needy families with children who remain on the waiting list,” Ms Goward said.
“These tenants should think about putting up their hand to move to a more suitably sized property.
“The government has looked at a number of ways to encourage more families with children into multi-bedroom homes and were unsuccessful. We need a stronger incentive.”
The government expects to reap $2.2 million from the rehousing of tenants, but Ms Goward said it was not a revenue-raising scheme.
The state government will target suburbs with high numbers of public housing tenants with extra rooms, where there are large numbers of families on the waiting list that need those rooms. It is understood Liverpool, Mount Druitt and Shellharbour will be the first suburbs targeted when the push begins in September.
Ms Goward said tenants would only be charged the tax if they refused to move: “Everybody will benefit, existing tenants will be rehoused more quickly, families waiting for help will receive it sooner and the NSW taxpayer whose dollars will be used more efficiently (will benefit).”
Blake Johan, 21, was born with cerebral palsy and his family of four have been on the government housing waiting list for seven years. They currently live in private housing.
Blake’s father, Dean, said the bed tax initiative was a good way to get the right residents into the right homes.
“If they’re not using the room they should be paying extra for it,” Mr Johan, from Barrack Heights, said.
“There’s plenty of people waiting and waiting.”
Business Spectator, 28 June 2013
The Australian Taxation Office (ATO) has accused two Hong Kong-based firms that jointly own Australian electricity distribution networks of failing to pay more than $750 million in taxes, according to The Australian Financial Review.
The two firms, Cheung Kong Infrastructure and Power Asset Holdings, own 51 per cent of networks in South Australia and Victoria and have been accused of failing to pay taxes going back to 1999.
The ATO lodged documents in Federal Court in Melbourne accusing Cheung Kong of owing $372,380,301 in taxes, penalties and interest, while Power Asset Holdings has been accused of owing $387,425,569 in unpaid taxes, penalties and interest.
The remainder of both electricity distribution networks are owned by ASX-listed Spark Infrastructure, which earlier this year disclosed tax disputes with the ATO over SA Power Networks and Victoria Power Networks.
The SA Power Networks dispute involves rent instalments under land lease, labour and motor vehicle costs, among other issues, while the Victoria Power Networks dispute revolves around tax assessments for 2006 and 2007, the AFR added.
Peter Martin, The Sydney Morning Herald, 27 June 2013
Tax Commissioner Chris Jordan has declared war on local firms trying to emulate the practices of multinationals such as Google and move their profit centres offshore.
Warning that the corporate tax base was ”under threat”, he said local firms were starting to think that if foreign firms can route their profits through locations such as Ireland, they could, too.
”Australian companies are not stupid,” he told Parliament’s public accounts committee on Wednesday. “They can see what is happening as a result of these international companies taking profit out of the country. They are thinking: ‘What functions can we move offshore, what functions can we disconnect and have third-party providers fulfil to put the profit in a low-tax jurisdiction and receive an exempt dividend coming back into the system?’”
Mr Jordan told the committee: ”Companies are putting these structures in place and asserting they have tax compliance
”That might be their assertion, but we are going to test every single aspect of those structures. We will want to know whether what purports to happen actually happens on the ground.
”It is one thing to put in place a fancy structure, but it is another to have it tested five years later, because by their nature these schemes are quite, sort of, artificial.
”Firms in Australia deal with customers in Australia and not in Ireland, for example.”
Ireland is the location used by Google to house the subsidiary it says sells advertising to customers in Australia. Documents filed by US congressional investigators show Apple products made in China are resold to Apple retailers in Australia after an Irish subsidiary takes ”paper” ownership in transit, collecting the profits.
”We will be taking a leadership role internationally in addressing the problem, but we need to also look at how changes can be made here,” Mr Jordan told the committee. ”The corporate tax base is under threat. What’s happening is unacceptable to the community, the government, and to regulators.
”It is the first time in all my career in tax I have seen an alignment of interests saying these practices are unacceptable and we need to do something about them.”
A former policeman who worked as an adviser to Coalition leader John Howard in opposition during the 1980s, Mr Jordan was appointed to head the Tax Office in January from a private sector role at accounting firm KPMG.
Asked whether the laws able to be deployed against private equity firms taking capital gains out of Australia were tough enough, he said the general anti-avoidance provisions had proved to be ”not necessarily as effective as they could have been”.
”I am not only talking about private equity here, but there is a problem in the interaction between our rules for countries with which we have treaties and our rules about tax havens,” he said.
ABC News, 26 June 2013
Riverina public housing tenants with extra bedrooms will soon face a weekly tax if they refuse to move into smaller properties.
The New South Wales government has followed the United Kingdom by introducing a “spare bedroom tax” for around 17,000 public housing tenants.
The Community Services Minister Pru Goward says tenants wwill not be charged if an alternative property can’t be found.
She says the weekly tax is aimed at freeing up larger public houses for families.
“We have tens of thousands of families on the public housing waiting list with nowhere to live, people living in the backs of their cars with their kids, we need to get those people into public housing and this is a fair way of doing it.”
“We are saying to people in large under-occupied houses, if we find you a suitable smaller property we expect you to take it up. If you don’t and you reject suitable properties twice, then we’re going to charge you an empty room charge,” said Ms Goward.
Since April, public housing tenants in the UK have had their benefits incrementally cut for each spare bedroom, even if they cannot find alternative accommodation.
Anna Patty, The Sydney Morning Herald, 26 June 2013
New charges for underused public housing
New bedroom charges are needed to provide housing to needy families, says NSW’s Minister for Family and Community Services, Pru Goward.
Single people and pensioners who refuse to move out of public housing to make way for families will be charged higher rent to stay.
The Minister for Family and Community Services, Pru Goward, said the new vacant bedroom charge was necessary to provide housing access to more needy families.
Ms Goward said there are more than 17,000 houses with three or more bedrooms occupied by single people or couples, which has left 35,000 bedrooms vacant.
Singles will pay an extra $20 each week and couples $30 per week if they refuse to find “more suitable” accommodation.
“We understand that vacant bedrooms often come about because public housing tenants’ families grow up and leave home, or because of family breakdown, just like other families,” Ms Goward said.
“Single tenants and couples who are living in large properties should move to a more suitably sized home when one is available.
“This is only fair and reasonable, both to vulnerable families on the waiting list as well as NSW taxpayers that heavily subsidise public housing.”
Priority status on the transfer list will be given to tenants who agree to relocate.
If a tenant refuses two offers of alternative accommodation and chooses to remain in an oversized property, they will be charged the extra fee.
“This will act not only as an incentive to house more needy families with children, but will mean that tenants pay a fairer contribution for vacant bedrooms,” Ms Goward said.
In September, Housing NSW will target areas including Liverpool, Shellharbour and Mount Druitt where there are high numbers of tenants living in larger homes with unused bedrooms and large numbers of families on the public housing waiting list.
Ms Goward said tenants will generally be offered a property in the same area they are living, unless they demonstrate a need to live in a different location.
“We are making it easier for tenants to move to smaller homes so vulnerable families are not left waiting, but they need to know that refusing this assistance will result in additional costs,” Ms Goward said.
British Prime Minister David Cameron was accused of acting like the greedy Sheriff of Nottingham after he introduced a similar policy known as the the Bedroom Tax, in the UK.
Opposition spokeswoman for housing Sophie Cotsis said the new policy would lead to homelessness, as it has in the UK.
‘‘Barry O’Farrell’s bedroom tax is harsh and heartless and will effect the most vulnerable communities such as pensioners and people with disabilities,’’ she said.
‘‘Where are these people going to move to? The government has the cut housing budget by $22 million and instead of providing a co-ordinated solution, Pru Goward is taxing the most vulnerable people.
‘‘This is a policy Pru Goward has ripped off from the UK conservative government.
‘‘In the UK it has led to chaos. After two months of this policy being introduced, tenants have fallen into arrears, facing eviction.’’
ABC News, 26 June 2013
New South Wales public housing tenants with extra bedrooms will soon be penalised with a weekly tax if they refuse to move into smaller accommodation.
From September, around 17,000 people living in public houses with extra bedrooms will be slugged with a spare bed tax if they refuse to move into smaller properties.
Singles will be charged an extra $20 per week and couples an extra $30 per week.
The government says there are more than 35,000 vacant bedrooms that could be used by families.
Community Services Minister Pru Goward says the tax will create a fairer public housing system by freeing up larger houses.
“If there is no suitable smaller accommodation, they don’t have to move and they don’t have to pay the charge, so it’s fair to our existing tenants,” she said.
“We have tens of thousands of families on the public housing waiting list with nowhere to live, people living in the backs of their cars with their kids, we need to get those people into public housing.”
The state opposition is warning elderly public housing tenants will be hardest hit by the changes.
Spokeswoman Sophie Cotsis says making people move is cruel.
“A lot of these elderly people have lived in those places for a very long time,” she said.
“They’re close to doctors, they’re close to their social circles, they’re close to transport.
“My concern is where are they going to move them and why tax people? Why put a tax on people’s rent? Why increase their rent? They should look at an incentive rather than a tax.”
Ms Cotsis says there is not enough alternative public housing to move vulnerable people.
“This government has cut $22 million from the housing budget,” she said.
“That means there’ll be less construction of public housing in New South Wales.”
The Government’s move follows a similar policy adopted in the United Kingdom in April where public housing tenants have their benefits incrementally cut for each spare bedroom.
Flint Duxfield, ABC Rural, 25 June 2013
Left-leaning think tank, the Australia Institute, says Federal Government subsidies to the mining industry have increased by half a billion dollars over the past year.
Figures released earlier this month by the Productivity Commission show the mining industry received $492 million in direct subsidies last year.
But senior economist with the Australia Institute, Matt Grudnoff, says if you include tax concessions provided to mining companies, the amount of subsidy is almost ten times that figure.
“The mining industry has the lowest rate of corporate tax because it has so many tax concessions,” he said.
“The average is about 21 per cent, the mining industry only pays 14 per cent.
“While we have a big debate about the car industry and how much subsidies we give those, they’re only getting about half a billion dollars a year whereas the mining industry gets four and a half billion dollars a year.”
Exploration and prospecting deductions increased by $220 million on last year while deductions for capital works expenditure rose by $127.5 million.
Concessions for tax paid on crude oil condensate have decreased by $550 million following the Federal Government’s decision to shift this tax to the petroleum resources rent tax.
But Mr Grudnoff says the decrease has been compensated by a rise in fuel tax credits to the industry of $458 million.
The mining industry has dismissed the figures saying they misrepresent the scale of government support.
Minerals Council spokesman Ben Mitchell says fuel tax concessions shouldn’t be considered a form of subsidy.
“It’s not a subsidy because it’s a business input, in the same way that a carpenter’s drills might be a business input,” he said.
“The fuel tax was imposed to build public roads. Mining builds its own roads and that’s why we get a credit on that.”
The figure produced by the Australia Institute doesn’t include any state-based subsidies or concessions.
Mr Grudnoff believes the $4.5 billion estimate is conservative.
“The Federal Government is helping to pay for a lot of rail and port infrastructure that the mining industry uses,” he said.
“So it’s certainly an underestimate of how much they actually receive.”
Knowledge@Wharton, 19 June 2013
In a confrontation that made headlines in May, the Senate Permanent Subcommittee on Investigations released a report claiming that Cupertino, Calif.-based tech giant Apple has been using a “complex web of offshore entities” to avoid paying U.S. taxes on $44 billion in “otherwise taxable offshore income over the past four years.” According to the report, Apple set up at least three foreign subsidiaries that are “not tax resident in any nation” in order to avoid paying the taxes.
Among numerous statements in its own defense, Apple said that it was likely the largest corporate income taxpayer in the U.S.; that it has created or supported about 600,000 jobs at home; and that it has substantial foreign cash because it sells most of its products outside the U.S. Echoing such views, Apple’s supporters have argued that the firm’s corporate tax strategy involves nothing illegal or improper, and that it is only playing by the same rules as other global high-tech giants such as Google and Microsoft.
What are the mechanisms that companies like Apple use in order to minimize their taxes without breaking any U.S. laws? Why does the U.S. maintain such a tax system, and what are its economic consequences? Should the system be fixed — and if so, how?
“The whole debate only exists because the U.S., in theory, has a ‘residential’ tax system instead of a ‘territorial’ system like many European countries,” says Kent Smetters, Wharton professor of business economics and public policy. “Under a territorial system, a tax is paid to a country for economic activity happening in that country, regardless of citizenship. Under our residential system, the U.S. taxpayer (firm or individual) is supposed to pay the U.S. tax rate, less any taxes already paid to another country that has a territorial system, regardless of where the income is earned. There are valid arguments for both types of tax systems, although the lack of international parity is always a concern.” While U.S. companies are liable for taxes on their overseas income, the system allows them to defer their U.S. taxes on foreign income until those funds are repatriated to the United States.
‘Double Irish with a Dutch Sandwich’
In practice, there are “big holes” in this system, notes University of Pennsylvania Law School professor Chris William Sanchirico. Tax havens — often small island countries — use the system to attract U.S. businesses to their territory, and they tax companies at a low rate that is appealing to multinationals, he says. U.S. companies can set up a subsidiary that sells their products to non-U.S. markets without developing sufficient legal connection to those countries to trigger their tax systems. Thus, Apple’s subsidiaries can sell in Europe and Asia without paying European or Asian taxes on income from such sales.
Since the tax rate in such foreign countries is lower than that of the U.S., the American firms want “to shift their income” so it is on the books of the subsidiary. This “transfer price” between a company and its overseas subsidiaries “is not really a market price, but it ends up determining its income” in that foreign country, Sanchirico notes. In this case, “Apple has the intellectual property (IP), including its brand and know-how. Apple sends that [IP] to its foreign subsidiary [in Ireland, for example], which gets to stamp [those devices] as made by Apple. Apple wants the transfer price to be at an artificially low level so that the subsidiary pays very little for the product.”
That’s just part of the process. “Ireland then allows [the U.S. company] to go and shift that income into even lower-tax areas” via more transfer pricing, this time to shell corporations in Bermuda, the Cayman Islands and elsewhere, he adds. In one intricate arrangement, U.S. companies can set up two Irish corporations and have one corporation own the other. This is known as “Double Irish.” Sometimes, Sanchirico says, there is a Dutch corporation interposed between the two Irish corporations in order to tax the Dutch company between them. This is known as “Double Irish with a Dutch Sandwich.” Such arrangements wind up being very complicated because of anti-abuse provisions in the U.S. that are designed to catch American companies that take advantage of shell corporations. According to press reports, other companies that have employed the Double Irish include Adobe Systems, Eli Lilly, Facebook, GE, Microsoft, Oracle, Pfizer and Starbucks.
While in theory, Apple could repatriate its storehouse of overseas cash, Victor Fleischer, a professor at the University of Colorado Law School, notes that the firm would be reluctant to do so. “[Apple] would rather lobby for a ‘tax holiday’ and bring the cash back tax-free. An added benefit of a tax holiday for Apple is that it would provide a quick jump in reported earnings when the accounting entry for the deferred tax liability is reversed.”
Given such complexities, what is the best way to estimate how much in taxes that Apple and similar multinationals are actually paying worldwide? Wharton accounting professor Stephanie Sikes says that firms must disclose the amount of cash taxes paid during the year in their annual reports to shareholders. “Although this number could include refunds or additional taxes plus interest and penalties from prior years’ returns, it is the best publicly available estimate of the amount of cash taxes paid for a particular year, because firms’ tax returns are confidential.”
Sikes adds that a common measure of the relative amount of taxes that a company pays is its long-run cash effective tax rate. This rate is calculated “by summing a company’s cash taxes paid across all jurisdictions (federal, international, state and local) over X years and dividing it by the sum of the company’s worldwide pre-tax book income over X years. The reason to calculate a long-term rate, as opposed to an annual rate, is that cash taxes paid in any one year could include refunds or additional taxes owed from prior years. Thus, the long-run measure removes the lumpiness of the annual measure.”
But how can one decide if the effective tax rate paid by a multinational is ‘fair’? “Obviously, this is a very subjective question, and different people will have very different answers,” notes Sikes. “If the question is what is ‘fair’ to shareholders, I suspect many people would agree that Apple and the other companies in the spotlight are paying their fair share because their tax planning is meant to maximize shareholder value. These companies are paying all taxes that they legally owe. They spend large sums of money on accountants and lawyers to devise these structures, and the benefits must outweigh the costs; otherwise they would not do it.”
At times, pressure by customers to be a “good corporate citizen” can result in firms reducing their tax planning or paying more taxes than they actually owe, Sikes adds. For example, in December 2012, Starbucks agreed to pay the British government 10 million pounds in each of the next two years — which it does not legally owe — in order to end a consumer boycott that was hurting sales. “Starbucks obviously felt that paying the additional taxes was in its shareholders’ best interests.”
Critics of Apple and other U.S. companies often overlook the fact that similar tax strategies are being pursued by other multinationals located elsewhere around the world, notes Wharton accounting professor Jennifer Blouin. “I understand the political debate. People say, ‘Gosh, this company makes so much money, and it is not paying [tax] in the U.S.,’ but on the other hand, why would I force Apple to pay 35 cents on every dollar when Samsung — and many other non-U.S. competitors — don’t have to? They could price Apple out of the market…. Apple is not unique. Samsung has to have a similar situation.” Like the politically unpopular — but essential — corporate strategy of supply chain outsourcing, these tax strategies reflect the fact that in the age of globalization, “residence and nationality are becoming less clear,” Blouin says.
Sikes agrees. “These companies are competing in an international market, and the U.S. has the highest statutory corporate tax rate in the world. In addition, the U.S. is one of the few countries that still have a worldwide tax system, meaning that it taxes corporations incorporated in the U.S. on all income earned, even if it is earned outside of the U.S. Most other countries have a territorial tax system, in which a country only taxes income earned within its borders. The combination of the U.S. having the highest statutory tax rate and a worldwide tax system results in U.S. corporations shifting investment abroad to lower-taxed countries and then avoiding at all costs repatriating the foreign earnings back to the U.S.” For example, even though Apple has plenty of cash to pay dividends and repurchase shares, it issues debt and uses the borrowed funds to pay dividends and to repurchase shares, she points out. “This is because its cash is overseas, and it does not want to pay the U.S. taxes that it would owe if it were to repatriate.”
A Threat to Growth?
Critics contend that such practices are damaging to U.S. economic growth. However, “what [Apple and other firms] are moving overseas … is intangible assets,” such as intellectual property, Blouin says. “So it is not as if we are losing jobs out of the United States to Ireland. There are a few [jobs lost] because they have to [do that] legitimately; they will open up an office and put in servers in Ireland, but that’s at the margin. What they are really doing is shifting a lot of profits out of the United States.”
Ironically, Blouin adds, it is the Europeans who “really care about this now. Europe is starting to get nervous” about the Double Irish and the Dutch Sandwich because “those structures facilitate the reduction of the European tax obligations of these firms…. Apple has this quasi-Irish entity that, it turns out, is not filing taxes anywhere for that income that supposedly is in this Irish entity.” That means Europe is losing out.
According to Sikes, while no one can expect U.S. companies to pay more taxes than they are legally bound to pay, “the U.S. corporate tax system is broken and needs to be reformed. [It] is stunting U.S. economic growth. The corporate tax rate should be cut in order to incentivize companies to invest in the U.S.” Many critics also call for the U.S. to move to a territorial system. On the one hand, says Sikes, “a territorial system would remove the disincentive to repatriate foreign earnings. However, it will not attract business to the U.S. The only way to do that is to cut the rate. The government could cut the rate in a revenue neutral manner by broadening the base [i.e., eliminating loopholes]. Cutting the corporate tax rate and broadening the base will stimulate the U.S. economy and cultivate jobs at home.”
“What we are concerned about is where the dollars get invested,” notes Fleischer. “What matters is whether the cash is getting invested offshore instead of in the United States. We don’t want the tax code to push companies to invest offshore in order to avoid tax on repatriated funds.”
A Range of Reforms
Given its obvious deficiencies, many agree the current U.S. tax system is broken. But there is widespread disagreement about what a reformed system should look like. According to Fleischer, the liberal position on reform involves taxing U.S. companies’ worldwide income at the current 35% rate, and closing the loopholes that plague the current system. At the center of the political spectrum, reformists advocate a worldwide system without tax deferrals, at a lowered rate of about 20%. In such a system, U.S. companies would be taxed on their worldwide income regardless of whether it was repatriated, and they would pay no additional tax if the money were repatriated to the U.S.
“The lower the tax rate, the less incentive there is for companies to engage in sophisticated gamesmanship to get around the rate,” argues Fleischer. “The [current] 35% sticker price is not doing us any good because no one is paying attention to it.” Republican Congressman Dave Camp, chairman of the House Ways and Means Committee, favors lowering the U.S. tax rate and establishing a territorial system — thus taxing only U.S.-source income. U.S. companies would be free to repatriate their foreign earnings at no cost. How much could U.S. taxes be cut? According to the Organisation for Economic Co-operation and Development, the average corporate tax rate among industrialized nations is between 20% and 25%. U.S. companies and business associations argue that U.S. rates must not exceed that level if the U.S. is to be competitive worldwide.
For the time being, notes Blouin, “if we at least reduce our tax rate, companies may be willing to bring the money back to the United States.” Meanwhile, legislators may start imposing a minimum tax on the income from intellectual property that is used by foreign subsidiaries, she adds. “I am cautiously optimistic that we will move forward, either to reduce the U.S. tax rate on corporate income, while maintaining the worldwide system and coming up with some sort of favorable regime to tax this intellectual property” at a reduced rate — much like the U.K.’s “patent box” system, which taxes intellectual property at an especially low rate. “Or we will do a really big shift, and think about moving toward territorial taxes. This much is clear: It makes little sense for the U.S. to establish a nominally high rate, and then create loopholes in the law that allow companies like Apple to avoid those high rates through means of transfer pricing and tax deferrals.”
Jillian Berman, The Huffington Post, 17 June 2013
Income for the country’s top 1 percent has soared by 275 percent over the past 30 years, while growth for the rest of us has stagnated. A new study finds that policymakers’ decisions to make the tax code less progressive played a large role in widening that gulf.
About 30 percent of the expansion of the after-tax income gulf between the rich and not-so-rich between 1979 and 2007 was due to tax and budget policies becoming less redistributive, according to a recent paper from the Economic Policy Institute, a left-leaning think tank. In addition, the boost in income for the top 1 percent and the top 0.01 percent of households is correlated with tax cuts, the study found.
In short: Policymakers’ decisions to slash taxes — especially on the rich — contributed to income inequality.
Andrew Fieldhouse, the paper’s author and a budget policy analyst at EPI, said that while market forces are largely to blame for the growth in income inequality, the government bears responsibility for making it worse.
“This is just another piece of evidence, at the broadest level, that Washington’s model for tax reform is completely divorced from economic research,” Fieldhouse told The Huffington Post. “Federal budget policy not only failed to push back these market forces, but exacerbated income inequality.”
While EPI’s analysis is one of many to find that keeping taxes low — especially for the rich — widens the gap between the haves and have-nots, that hasn’t stopped policymakers from fighting tax increases. The budget President Barack Obama proposed earlier this year boosted taxes on the wealthy — but still by not has high of a margin as he originally promised — and it was met with opposition by leading Republicans.
Recent research has found that slashing taxes on the rich doesn’t lead to the boost in economic growth promised by many proponents. And while some have argued that raising taxes on the rich will disincentivize them to work hard, another EPI study that rich households don’t respond to increases by being less productive — rather, the study found, they simply shift their income to categories that are taxed at lower rates (like investment income).
Indeed, the jump in income inequality over the past few decades is correlated with a simultaneous boost in investment income, which is largely concentrated in the hands of the rich and is taxed at lower rates than the income earned from good old-fashioned work, according to EPI.
The preferential tax treatment of investment income has increased over the past few decades, a factor which “almost certainly played a role” in widening the income gulf, the EPI paper found.
More income inequality has consequences for Americans at all places along the income ladder. The large gap between the rich and the poor is slowing the nation’s recovery from the recession, Nobel Prize-winning economist Joseph Stiglitz wrote in a New York Times op-ed earlier this year. And reducing income inequality could prolong periods of economic growth, a 2011 study from the International Monetary Fund found.
Henrietta Cook, The Sydney Morning Herald, 21 June 2013
The Napthine government should reverse its ”cruel decision” to include carbon tax compensation in public housing rent calculations, Federal Community Services Minister Jenny Macklin says.
The Victorian government will increase public housing rents from August in response to the federal government’s carbon tax compensation payments for low-income families and pensioners.
In a letter to Premier Denis Napthine, Ms Macklin said the payments were designed to help vulnerable people with the impact of the carbon price and not intended for states and territories.
She said the state government’s decision would ”significantly increase rents for public housing tenants”.
”I’m sure you would agree that public housing tenants are some of the most vulnerable people in our community and deserve these payments,” she said.
Ms Macklin said the ”cruel decision” would take up to $87.50 out of the pockets of more than 46,000 pensioners and 18,000 low-income families every year.
She said the move was ”particularly concerning” because the Victorian government had also introduced a threshold for providing concessions for gas and electricity bills in light of the federal government compensation.
But a state government spokeswoman said the Gillard government was trying to shift the blame for the financial impact of its carbon tax.
”The carbon tax imposes significant new costs on our public housing system, like those on construction and maintenance of our 83,000 properties.”
She said the state government unfortunately had to ask public housing tenant’s for a quarter of their clean energy supplement to cover these new costs.
”Victorian public housing tenants still pay no more than 25 per cent of their assessable income in rent, with the remainder subsided by the state government to the tune of $400 million per year, or more than $1 million per day,” she said.
Opposition housing spokesman Richard Wynne said: ”This decision shows Victoria’s poorest are the biggest losers under the Napthine government.”
Simon Bowers, The Guardian, 19 June 2013
David Cameron said Britain would use its G8 presidency to crack down on tax avoidance. What progress has been made so far?
How serious has David Cameron been in attempting to tackle tax abuses?
The prime minister has set out bold ambitions to “rewrite the rules on tax”. He promised Britain would use its G8 presidency to crack down on big businesses and rich individuals using “an army of clever accountants” to avoid tax. “This is an issue whose time has come,” he told the World Economic Forum in Davos in January. But seasoned tax experts heard in his words an echo of Gordon Brown’s distinctly premature 2009 summit declaration of “the beginning of the end for tax havens”.
Has the G8 made progress cracking down on multinationals playing off one regime against another to lower its tax bills?
The world leaders have called on the OECD, the body that draws up international guidelines on tax, to draft a template for multinationals to report the tax they pay to taxing authorities in each jurisdiction in which they operate. Cameron claims this will “identify where multinational companies are earning their profits and paying their taxes so we can track and expose those who aren’t paying their fair share”. Tax campaigners, however, suggest it does not go nearly far enough. There was no commitment for this information to be made public or for companies to provide greater disclosure on other economic activity on a country-by-country basis.
What about closing loopholes in international tax rules exploited by firms such as Google, Apple and Amazon?
Several issues around taxing multinationals are being worked on furiously by the OECD before a wider G20 meeting of finance ministers next month. The G8 promised to “take the necessary individual and collective action” to back up any recommendations from recasting the rules. As a broad statement of intent the G8 leaders said: “Countries should change rules that let companies shift their profits across borders to avoid taxes.”
Will companies and trusts be forced to disclose those who stand behind them as owners, or as trust settlors and beneficiaries?
Tax fairness campaigners fought hard on this issue and appeared to have won the support of Cameron who pushed for a commitment to registers of beneficial ownership to be set up. However, the prime minister appears to have been left isolated on the issue by his G8 peers. The final leaders’ communique offered little more than support for an existing review being carried out by the Financial Action Task Force (FATF), another international quango. The FATF believes a central register is just one way forward, with other proposals more akin to imposing tougher know-your-customer rules on company administrators. With little common ground on transparency thresholds the G8 declared that nations would each commit to their own “action plans” on this issue. The UK is to set up a central registry of beneficial owners, but will consult on whether this should be made publicly accessible. It will also review the role of nominee directors and bearer shares in corporate life. The US is to leave the decision to individual states, with Delaware – a well known secrecy haven – thought likely to resist.
Did the G8 achieve progress on tax information exchange between countries to help in the battle against evasion?
There have been a confusing blizzard of bilateral and multilateral tax information exchange agreements in the last four years, each of them building in significance. Before the G8 meeting, Cameron was able to claim a victory by corralling many British affiliated tax havens – crown dependencies and overseas territories – into signing up to some less onerous tax co-operation initiatives. The gold standard in this area is a US measure called FATCA (Foreign Account Tax Compliance Act), an aggressive unilateral initiative that comes into force later this year requiring financial firms to disclose details of all US citizens’ assets held overseas or face punishing taxes. There are signs that Europe and others could follow with similar draconian measures, setting a common international standard. “We call on all jurisdictions to adopt and effectively implement this new single global standard at the earliest opportunity,” the G8 communique said.
How will the summit be judged?
Cameron’s verdict at the closing press conference was that he had secured a G8 declaration that “has the potential to rewrite the rules on tax and transparency for the benefit of countries across the world”. New tools, he said, would now be forged that would help ensure “proper tax justice in our world”. But most tax campaigners were last night expressing disappointment at a final communique long on talk and short on commitment. Some took heart that radical ideas had made it onto the table for discussion – even if they were not adopted. Murray Worthy, tax campaigner at the anti-poverty charity War on Want, said: “As always, the devil will be in the detail, and there is no detail here. Talk of stopping companies shifting profits to avoid taxes is a huge step forwards, but we have heard great promises from the world’s heads of state before – it is what they do that counts.”
What will it mean for tax haven’s linked to Britain?
Jersey and other crown dependencies were on Monday night claiming that they were already way ahead of the G8 economies themselves in meeting the standards set out in the communique. “We have been doing what is being commended for quite a long time,” said Geoff Cook, chief executive of the islands financial lobby group Jersey Finance, “So my message to the G8 is … Level Up!” If Cook is right, and principles set out by the G8 leaders changes little in Jersey, many tax campaigners will regard the summit as a heavy defeat. The islands trust industry – and that of Guernsey and the Isle of Man – are viewed by critics as facilitating billions of founds of tax evasion. Campaigners claim sophisticated evaders use these offshore trusts, often in combination with companies and bank accounts in other secrecy jurisdictions, to hide assets from tax authorities.
SBS News, 19 June 2013
Treasurer Wayne Swan says the G8′s commitment to tax information exchange will support fairer tax regimes around the world.
The Australian government may share information with European taxation authorities under global efforts to cut avoidance, Federal Treasurer Wayne Swan says.
Mr Swan announced the proposal after the Group of Eight (G8) major industrialised nations on Tuesday agreed to a new global standard for tax information exchange.
“The Gillard government is currently looking into joining with a number of European countries in an initiative to exchange information automatically between tax authorities,” Mr Swan said in a joint statement with Assistant Treasurer David Bradbury on Wednesday.
“This would continue the government’s strong commitment and global leadership in promoting exchange of information as an important part of ensuring the integrity of the international tax system.”
Australia is a strong advocate of the Organisation for Economic Cooperation and Development’s work to address tax base erosion and profit shifting by multi-national corporations.
It plans to continue this work during its year as host to the Group of 20 nations in 2014.
The G8 – which brings together Britain, Canada, France, Germany, Italy, Japan, Russia and the United States – met in Enniskillen, Northern Ireland on Tuesday.
Larry Elliott, The Guardian, 19 June 2013
PM fails to get any other country at Lough Erne to back UK calls for public registries of beneficial ownership of companies
David Cameron’s 10-point plan to tackle global tax evasion has met a hostile reception from campaigners after the prime minister failed to persuade his G8 colleagues to make any new binding commitments.
The prime minister hailed the Lough Erne declaration, issued at the end of the UK-hosted summit, as “real progress” in ensuring tax justice, and said the west’s leading industrial countries would be held to account if they failed to act.
“These are very strong commitments that have never been written down in this way before. I made sure everyone put their names to these 10 commitments,” Cameron said.
Downing Street insiders insisted the communique, on an agenda the prime minister had pushed hard, was the most substantial on tax and development in years.
But the prime minister’s statement that the decisions made at the summit had the potential to rewrite the rules on tax and transparency were immediately challenged. Kevin Watkins, the director of the Overseas Development Institute, said: “We were promised a bang, but this is a whimper. It is simply a wish list.”
Richard Murphy, of the Tax Justice Network, said the G8 had agreed that tax abuse was of global importance but had been unable to agree what to do about it. “Cameron has not delivered,” Murphy said. “A few small things apart, the G8 declaration is all vague commitment and almost nothing of any consequence.”
Cameron was unable to get any G8 countries to support Britain’s call for registries of beneficial ownership of companies to be made public, he could not get Russia and Germany to publish national action plans to combat tax evasion, and he failed to get the G8 leaders to agree that an agreement on automatic exchange of tax information should be open immediately to developing countries.
The G8′s declaration on tax said authorities around the world should automatically share information to “fight the scourge of tax evasion”, and that countries should change rules that let companies shift their profits across borders.
“Companies should know who really owns them, and tax collectors and law enforcers should be able to obtain this information easily,” it said.
“This could be achieved through central registries of company beneficial ownership and basic information at national or state level. Countries should consider measures to facilitate access to company beneficial ownership information by financial institutions and other regulated businesses. Some basic company information should be publicly accessible.”
Samantha Taggart, a UK Uncut protester, said: “For all Cameron and [George] Osborne’s tough talk on tax over the last year in the UK, there has been no tough action on tax. In fact, it’s seemed more like the government is trying to turn the UK into a tax haven than close them down. So it’s hard to believe that today’s agreement will really live up to its huge hype because it is lacking in any substance as to how it will be implemented, or when by. Style over substance rarely leads to meaningful change.”
Sally Copley, spokesperson for the Enough Food For Everyone IF campaign, said: “Today’s G8 tax deal is a step in the right direction but it also leaves major unfinished business.
“The public argument for a crackdown on tax-dodging has been won but the political battle remains. Future G8s and G20s must urgently finish the job.”
The prime minister said: “We agreed a Lough Erne declaration that has the potential to rewrite the rules on tax and transparency for the benefit of countries right across the world, including the poorest countries in the world.
“We have commissioned a new international mechanism that will identify where multinational companies are earning their profits and paying their taxes so we can track and expose those who aren’t paying their fair share.”
Cameron said the new commitments to transparency on company ownership would help ensure “people can’t avoid taxes by using complicated and fake structures”. The prime minister said the declaration made clear that “all this action has to help developing countries, too, by sharing tax information and building their capability to collect taxes”.
Britain is still trying to persuade other G8 members that developing countries should be part of a pilot scheme to test automatic exchange of information.
The summit also agreed oil, gas and mining firms should report what they pay to government, and administrations should publish what they receive “so that natural resources are a blessing and not a curse”.
Michael Kobetsky, The Conversation, 18 June 2013
International tax avoidance is at the top of the agenda for world leaders attending the G8 Leaders Summit in Northern Ireland this week. There is also considerable international political pressure for measures to counter aggressive tax avoidance. In Australia, the Gillard government plans to introduce…
International tax avoidance is at the top of the agenda for world leaders attending the G8 Leaders Summit in Northern Ireland this week.
There is also considerable international political pressure for measures to counter aggressive tax avoidance. In Australia, the Gillard government plans to introduce legislation that would publicly disclose the amount of tax large companies pay.
The US Senate Permanent Committee on Investigations and the UK House of Commons are looking at avoidance by multinationals, while the UK’s Committee of Public Accounts has recently published a highly critical report on the behaviour of Google, which has generated US$18 billion in revenue between 2006 and 2011, but paid only $US16 million in tax.
The report follows a threatened consumer boycott of Starbucks in the UK, after its very low levels of tax paid were revealed. The company has been embarrassed into promising it would make voluntary company tax payments of £10 million in UK for the next two years.
University of Melbourne’s international taxation law specialist Associate Professor Michael Kobetsky explains why tax avoidance tactics such as profit-shifting may comply with the letter of the law, but ignore the moral dimensions of paying your “fair share”.
TC: Is there a moral argument for multinationals to pay more tax?
MK: Multinationals operating in Australia, like other taxpayers, are only required to pay the minimum amount of tax imposed under Australian law. One criteria of an effective tax system is tax equity. That is, taxpayers in a similar economic position should pay similar amounts of tax. So if some multinationals are able to engage in international tax avoidance arrangements that result in them paying little or no tax in Australia, whilst domestic companies are paying tax, we have an inequity in the tax system.
This international tax avoidance deprives Australia of tax revenue and it undermines voluntary compliance, as it may encourage other taxpayers to engage in tax avoidance as well. There is no moral amount of tax that multinationals should be paying, they should simply be paying tax according to tax law. Press reports claim that Google only paid a small amount of income tax.
If some multinationals are avoiding tax in Australia, Parliament should enact measures to stop profit-shifting. And they should liaise with the OECD on exploring which measures to enact as unilateral measures are unlikely to be effective. The key principle is that multinationals should pay tax in the countries in which they conduct business. However, the multinationals engaged in aggressive tax avoidance respond with the defence that they are complying with the tax laws in the countries in which they operate.
TC: So this includes what Google have done – and possibly Starbucks and Apple?
MK: The colourful name given to the arrangement is the “Double Irish and Dutch Sandwich” which is used to shift a multinational’s profits to a tax haven. A tax haven may be defined as a jurisdiction which imposes very low income tax or no income tax at all. The underlying feature of the arrangement is that a multinational’s intellectual property is located in a tax haven and the intellectual property costs are able to absorb most of the income of the multinational derived in the countries in which it operates.
A multinational’s intellectual property is claimed to be owned by a subsidiary in a tax haven. The company may be a company incorporated in Ireland but is managed in a tax haven like the Bahamas and is not subject to tax in Ireland.
It is treated as a Bahaman company and there is no company tax in the Bahamas. The company then provides a licence to a Dutch subsidiary to use the intellectual property. In turn, the Dutch subsidiary then provides a licence to an Irish company to use the intellectual property.
My understanding is that if an Australian individual or company wants to advertise on Google, the customer will have to deal with Google Ireland. The invoice is issued by Google Ireland. What that means is that the Australian customer is paying Google Ireland, and the income will probably have an Irish source. Australia has jurisdiction to tax non-residents on income which has a source in Australia. If the income has an Irish source and is derived by Google Ireland which is a resident of Ireland, Australia has no taxing right over the advertising income.
Even if the advertising income has an Australian source, under the Irish-Australian tax treaty, if Google Ireland doesn’t have a permanent establishment in Australia, such as a branch office, involved in selling advertising, Google Ireland is only subject to tax in Ireland. In this situation, Australia gives up its source country taxing right under the treaty.
After Google Ireland receives advertising income from around the world, it then claims a deduction in Ireland for a royalty paid for the right to use Google intellectual property. The deduction covers most of Google Ireland’s income and results in minimal tax being paid in Ireland. The royalty payment by Google Ireland is made to a Google subsidiary in the Netherlands.
The reason for this step is that under the Ireland-Netherlands tax treaty there is no royalty withholding tax. This allows the royalty payment to move from Google Ireland to Google Netherlands tax-free. The final step is that the Netherlands entity pays a royalty to the second Irish company which is incorporated in Ireland but is managed in the Bahamas. The royalty payment moves out of the Netherlands tax-free as well. A small amount of income will be left in Google Netherlands after subtracting its licence fee from its royalty income.
So the end result is that the operating profit ends up in a tax haven, having avoided taxation in Australia, Ireland and the Netherlands. There are a number of multinationals that are using a similar sort of technique. For US multinationals the profits will only be subject to US tax when they are repatriated to the US. But the US multinationals are allowed to indefinitely defer making a dividend payment to the US parent.
TC: Now this is a legal structure, under international jurisdictions isn’t it? It’s not like they’re breaking the law?
MK: Tax evasion – not declaring income, or claiming false deductions – is illegal. But tax avoidance may be defined as complying with the letter of the law but not the spirit of the law. The “Double Irish and Dutch Sandwich” is tax avoidance, so as multinationals claim, they are complying with the law. The way to counter this avoidance is to amend the law in Australia and other countries. Another option is to attempt to embarrass multinationals by disclosing the amount of tax they are paying, which Australia is proposing to do.
The Google arrangement uses Ireland’s tax treaties to avoid taxation in countries such as Australia. One measure, which is drastic, would be for countries with tax treaties with Ireland to threaten to terminate their tax treaties. Tax treaties are designed to prevent double taxation but some tax treaties are being used to avoid taxation. If Australia were to terminate the Irish treaty and to enact a source rule that treats payments by customers in Australia for goods or services from an entity abroad as having an Australian source, this would give Australia the right to tax payments to Google.
TC: How effective would this be if Australia did this? Would it be a lone voice?
MK: Multilateral measures coordinated by the OECD are more likely to be effective. The OECD is looking at this issue with the base erosion and profit shifting report that it issued earlier this year. Another technique that they can look at is how the intellectual property is being migrated into the tax haven, which is a transfer pricing issue. The Double Irish and Dutch Sandwich scheme manipulates a whole range of tax laws in various countries to end up with this overall result.
Polly Toynbee, The Guardian, 18 June 2013
Cameron has made a bold push at the G8. But it’s time our politicians admit you can’t have Swedish services on US rates
Tax is the root of all politics. What parties think about tax defines them. Tories are always low-tax by nature, by creed and by greed, eager to brand Labour the high-tax party. In office Labour ducked and weaved, adopting Tory language where all tax is a “burden”, and all tax cuts good. But at least in theory, all parties agree tax should be collected.
David Cameron strikes a bold stance at the G8. Though nothing concrete may be agreed, acknowledging a global tax avoidance crisis is a step forward. Good news, too, that Cameron will make shell companies declare their true beneficiaries to HMRC, but it’s regrettable this won’t be public. Only if every country goes public, says Cameron – global agreement yet again an excuse for inaction as G8 leaders drag their heels on making companies declare profits in each country. Though Cameron suggests it should be voluntary, the Confederation for British Industry opposes country-by-country reporting on the unlikely grounds that it risks “swamping people with highly complex data”.
Before the G8, Cameron had to be seen putting Britain’s own shameless tax havens in order. But as Richard Murphy of the Tax Justice campaign says, nothing was signed: Bermuda and the rest still deny they are havens. We’ve been here before: in 2009 a list of black, grey and white tax countries was drawn up, warning only white-listers would be tolerated. What happened? Within weeks, all tax havens on the black and grey lists manoeuvred themselves on to the white list with virtually no change in their habits. In a tax dispute General de Gaulle once surrounded Monaco with troops and turned off its water supply: could we turn off banking connections with recalcitrant dependencies?
Britain could collect far more tax, but is the government genuinely determined? Francis Maude last year boasted that he wanted Britain to be a tax haven: “That is exactly what we’re trying to do.” Non-dom foreign oligarchs awash with funny money benefit from our lax rules. The influential Free Enterprise Group of 40 new Tory MPs wants corporation tax cut to 10%, racing to undercut Irish rates. Vince Cable agrees, writing in the Observer: “In truth, taxing company profits is not ideal. All taxes are ultimately paid by people. We should tax people when they receive the benefits of profitable companies.” If tax is out of favour, how hard will this government really try to collect it?
Cutting the 50% top rate suggests no great enthusiasm for rigorous taxing. Last week’s ONS figures revealed gigantic avoidance of the 50% top rate. It could have been collected but George Osborne needed to prove it didn’t work. The Treasury estimated raising the rate to 50% should bring in £6.2bn, but the actual return was a puny £100m.
In year one, before its official start date, high earners gamed the tax by rushing to take dividends and bonuses early. They paid more into pensions, gaining undeserved higher tax relief. Or they used trusts, or took income as capital gains. (That can be stopped, by fixing capital gains, as Nigel Lawson did, at the same rate as income tax, as the Institute for Fiscal Studies advocates.) Once Osborne announced the top rate would fall to 45%, high earners gamed it again. Incomes Data Services reports a massive delay in bonuses until after 6 April, when they leapt up by 107% in the finance sector to catch the new 45% rate. That could have been forestalled.
To Osborne it proved there’s no point in taxing the rich. But the IFS says Denmark successfully collects its high top rate because it has no dodges: the rich can be taxed if reliefs are blocked. But this government never worried over income being sucked up from middle to top, with the share of national income taken by the top 1% now having risen to 14%, as GDP shifts from pay to profits. Osborne redistributes taxes the wrong way. Even raising tax thresholds sees most gain go to the top half, not to low earners.
Would Cameron have taken up tax avoidance but for the brilliant UK Uncut short, sharp, witty invasions of Top Shop, Starbucks, Vodafone and Barclays? Had the redoubtable Margaret Hodge not shamed avoiders with forensic and pithy contempt, would government have acted? Campaigning works.
Doubts remain: would a government serious about tax collection reduce HMRC staff by 10,000, when the EU puts UK tax evasion at £70bn? Tireless campaigner Richard Murphy’s report on Companies House shows a shocking dereliction by this government and the last. A third of firms fail to file returns and £16bn in tax goes missing, with little inquiry and low risk of penalty. And now its staff are cut too. Forcing shell companies to register owners might not work without the risk of penalties.
Britain can do plenty alone: we could adopt US tax laws that make every UK passport holder, wherever they are in the world, pay UK tax. We could make non-dom residents pay after, say, four years’ stay. Why let private equity strip the public purse? Boots, bought up by private equity, was loaded with debt and moved to low-tax Zug. Overnight, its tax bill fell from £606m to £74m. Why did Labour and this government permit such drainage of national resources?
In power Labour was timid on tax. Ed Miliband’s recent good speech on Google came late, after Cameron made the running. Tax cheating should be Labour’s chance to tell honest political truths: you get what you pay for, you can’t have Swedish services on US tax ideology. Tax is the price we pay for civilisation. At elections, all parties promise the impossible, more with less and cuts in “bureaucracy” to pay for everything. Treating the public like children on tax does nothing for trust in politics. The door has opened for that conversation.
Sue Mitchell, The Australian Financial Review, 17 June 2013
The largest retailers have put aside competitive differences to lobby both sides of politics in a last-ditch bid to impose the GST on online imports, thwart calls to strengthen competition laws, and boost labour productivity.
Four of the most powerful retailers – Coles managing director Ian McLeod, Woolworths managing director Tjeerd Jegen, Bunnings managing director John Gillam and Harvey Norman managing director Katie Page – will kick off a campaign by the Australian National Retailers’ Association this week. Alarmed at what they see as increasing attacks on “big retail” by regulators, unions and government, they will highlight their role as the largest private employer and the billions of dollars it invests every year in stores, formats, supply chains and technology.
Mr Gillam, ANRA’s chairman, is also seeking meetings ahead of the election with Prime Minister Julia Gillard and Opposition Leader Tony Abbott.
“We are looking to walk the talk and roll our sleeves up on issues of real significance, not just preaching from a self-interested perspective and approaching things from a truly partisan perspective,” Mr Gillam told The Australian Financial Review. “We think partisanship is deeply unhelpful for the challenges that the wider Australian community and the business community face,” he said. “The issues we’ve raised are the ones we think are the most serious for ANRA – we could have a shopping list of stuff but that doesn’t do anything for anyone,” he said. “These are the issues of substance we think can make a positive contribution to.”
ANRA wants the government to reduce the $1000 GST-free threshold on overseas online purchases. They say it would raise $1 billion a year, although a government taskforce is still struggling to find ways to curb collection costs.
Lead set by the US
Mr Gillam said the government should follow the lead set by the US and introduce laws similar to the Marketplace Fairness Act. That legislation enables US states to collect sales taxes from online retailers. “The principles in that are very clearly the principles we think need to be adopted to ensure there’s taxation fairness,” Mr Gillam said.Similar calls are being made in the UK. Last week, the chief executive of Sainsbury urged the UK government to follow the US example, saying unfair tax regimes were ¬crippling high-street retailers.
“This is not in any way a bunch of Australian retailers whingeing, this is a common problem throughout the western world and other governments are leading the way, showing how it can be addressed,” Mr Gillam said. ANRA envisages a system where registered overseas online retailers would collect GST and duty from consumers at the time of purchase and remit it to the federal government.
Reports by the Productivity Commission, the low-value parcel processing taskforce and the review of GST distribution have all endorsed the case for the GST-free threshold to be reduced. The government is still struggling to find ways to ensure the cost of collection does not exceed the revenue collected.
Deliveries sent to Australia by unregistered overseas retailers would be stopped at customs and consumers would be forced to pay GST and duty as well as handling fees.
An Ernst & Young report commissioned by ANRA and released in April concluded that lowering the threshold to $20 would raise $997 million in the first year after set-up costs of $100 million and annual operating costs of $34 million. “There are plenty of examples now of exactly what the Australian government needs to do to properly equalise the tax burden on all participants in the economy from a retail perspective, wherever they are domiciled,” said Mr Gillam.
Warning against protectionism
But not all retailers support reducing the GST-free threshold. Online retail pioneer Paul Greenberg, co-founder of dealsdirect.com.au, has warned the government against protectionism in the form of import duties.
Last week, after a three-month campaign, Mr Greenberg, chief of the new National Online Retailers Association, was appointed to the Retail Council of Australia, which was established two years ago to help the sector better liaise with the government over issues such as the GST-free threshold and red tape.
Mr Greenberg, who replaced former eBAY Australia chief Deborah Sharkey on the council, says Australian retailers need to compete by being better than their overseas rivals.
Mr Greenberg said protectionism was a short-sighted strategy that will fail both retailers and consumers.
However, Mr Gillam said the GST loophole is a “mistake” – everyone recognizes it and it needs to be fixed.”
ANRA also wants to counter calls for a review of competition policy and tougher competition laws, which have escalated in the wake of allegations of misuse of market power by Woolworths and Coles.
Mr Gillam says retail competition has increased, pointing the arrival of US discount retailer Costco and European brands Zara and Topshop.
“This is a far more competitive landscape and when there are calls for regulatory action, [government] needs to recognize that consumers are benefiting greatly from the lower prices,” Mr Gillam said.
Overhaul of penalty rates
“If there are instances of bad behaviour then use the [existing] laws to address that bad behaviour,” he said.
Retailers are also seeking to improve labour productivity by working with unions to find common ground for changes to the Fair Work Act.
“We believe that by working quietly and effectively with the SDA [Shop Distributive and Allied Employees Union] that can help paint a clear path for government to make quick and effective changes that will be welcomed by all,” Mr Gillam said.
Retailers want an overhaul of penalty rates and a re-examination of the Better Off Overall Test, but Mr Gillam declined to be specific about ANRA’s priorities. “It’s best we be allowed to have these discussions in camera with the SDA,” he said.
“We should put forward joint solutions that guide government on areas where legislative efficiency can be achieved.”
The Economist, 15 June 2013
Britain’s leader envisages a world of tax compliance and clear corporate ownership. The obstacles have become a bit less daunting.
AT FIRST blush, David Cameron seems an unlikely foe of tax dodgers and their accomplices. Conservatives are traditionally friendly to the wealthy and to big business, who gain most from fancy financial footwork. The City of London enjoys symbiosis with a cluster of offshore dependencies—including Jersey and the British Virgin Islands (BVI)—which have a reputation for, at best, inviting tax avoidance and, at worst, aiding financial crime.
But as chair of the summit of the G8 (the biggest industrialised countries) being held in Northern Ireland next week, the prime minister will push for global reform of the world economy’s most shadowy corners. He wants to improve tax compliance through the cross-border exchange of information, to improve those data by making companies, trusts and the like show their true owners, and to change outdated rules which multinationals exploit to cut their tax bills. His assault is both on the offshore tax havens and on the often dodgier, if less well-known, practices in onshore jurisdictions such as Delaware—or London.
Cynics will say this is nothing new. John F. Kennedy tried in vain to rein in tax havens in the 1960s. In the late 1990s the Organisation for Economic Co-operation and Development (OECD), a Paris-based club of rich countries, had a go but was foiled by America, which said low tax rates were a form of healthy competition. European leaders declared war on tax havens at a G20 summit in 2009 but had to retreat when China, whose wealthy citizens are big users of Hong Kong and Caribbean offshore financial centres, objected.
Mr Cameron may fare better. Since 2009 tax havens and financial secrecy have become deeply unpopular with both the public and policymakers. A furore over corporate-tax avoidance in Britain has ensnared high-street brands, such as Apple and Starbucks. A series of leaks, notably 260 gigabytes of data on clients of trust companies in Singapore and the BVI to the International Consortium of Investigative Journalists, led tax authorities in several countries to open investigations.
Campaigners for transparency are in full cry. They have been “dictating the script lately”, complains Richard Hay, counsel to the IFC Forum, a lobby group for offshore lawyers: “Cameron has been reading from it.” Ernst & Young, an accounting firm, talks of a “tipping point”.
The British agenda is ambitious. It includes everything from curbing the legal avoidance of corporate taxes to the use of anonymous shell companies to hide corruptly obtained public assets, evade sanctions and launder drug money. A refreshing whiff of candour is in the air. “Instead of preaching to poor countries or promising to double aid, which we never did anyway, the idea now is for the G8 to put its own house in order, in ways that are good for us and also good for Africa,” says Paul Collier of Oxford University, who has been advising Mr Cameron. “The days of ‘do as we say and not as we do’ are over.”
Instead of increasing inflows through aid, the new approach is to curb the often bigger outflows from poor countries—whether from the illegal siphoning of the proceeds of corruption or the legal shifting of corporate profits by mispricing internal transactions. If you include those outflows, Africa would have been a net creditor to the rest of the world in 1980-2009, to the tune of up to $1.35 trillion, according to the African Development Bank and Global Financial Integrity, a campaigning group.
Rich countries will have to change a lot, starting with the creaking system of international corporate taxation, which dates from an era when companies’ main assets were immovable. Now accountants can shuffle intangible assets such as intellectual property, and the profits they generate, from one jurisdiction to another with ease. A confusing thicket of bilateral tax treaties lets them play off national rules against each other. A tasty example is the “Double Irish with a Dutch Sandwich”, which diverts profits made in, say, France through an Irish company to one in the Netherlands, and on to a second Irish subsidiary in a tax haven such as Bermuda. The result is a lip-smacking absence of tax for the owner, and a sour taste in the places that provide the public services that enable him to do business.
The OECD is working on a series of reform proposals, to be presented to another summit in July, of the broader G20 (the world’s biggest economies). Strong support from the G8 would help. A big part of the proposed changes is to tighten rules on “transfer pricing”: sales of goods or services from one bit of a company to another, at often artificially low or high prices. This allows profits to be moved to low-tax countries and losses to high-tax ones. The OECD wants firms to justify internal prices that deviate from outside norms. But the issues are complex and lobbyists canny. Even with an international consensus, closing loopholes will take years.
The other big push on tax is to move from an “on request” model of information exchange, where countries have to cajole each other to hand over data, to one where they are swapped automatically. This is already well under way, thanks to America’s Foreign Account Tax Compliance Act (FATCA), which has inspired European countries to make similar demands. It could become the global standard within a decade. Offshore centres are starting to sign up, calculating that a voluntary move now may mean better terms. European laggards, such as Switzerland, Austria and Luxembourg, are also reluctantly increasing compliance. This will make it harder to hide assets abroad.
But not impossible. Much personal wealth is held through shell companies and trusts: empty corporate vehicles, where beneficial ownership is often obscured. Though these have legitimate uses (for example, to conceal a company’s hand in negotiations), they are also useful vehicles for tax-dodgers—and criminals. They can be fronted by nominees, who may have no idea who really owns the company. Combined with other tricks (such as bearer shares, which give ownership to whoever actually holds the relevant bit of paper), the result can be impenetrable murk. In a review of 150 notorious corruption schemes, the World Bank found that each relied on an average of five shells to move or hide the loot. Mr Cameron talks of the need to “knock down the walls of corporate secrecy”.
Of 69 jurisdictions surveyed last year by Eurodad (an anti-corruption network), only six required all types of company to record beneficial-ownership information. The Financial Action Task Force, which sets anti-money-laundering standards, calls for the identity of real owners to be available in a timely manner to law-enforcement authorities. But the recommendation is non-binding and none of its own members is fully compliant.
Transparency on this front may be a lot for the G8 to manage. In offshore centres such as the Cayman Islands and Jersey, corporate service providers have had to collect ownership information since they first came under international pressure a decade ago, though they are sometimes slow or unwilling to turn it over to investigators. In America, by contrast, the information generally is not even collected. Indeed, states like Delaware and Nevada are among the easiest jurisdictions in the world in which to form a company without revealing who ultimately owns it. This frustrates and embarrasses America’s crime-fighters, but the states’ lawmakers have blocked reform. Britain, with its bearer shares and easily abused limited-liability partnerships, is little better. Complaints from police about anonymous shells helped persuade Mr Cameron to make transparency a G8 theme.
Campaigners want more. A big advantage of owning a bit of a joint-stock company is limited liability: if the firm goes bust, its shareholders do not have to pay its debts. A fair price to pay for the privilege is disclosing ownership in publicly accessible central registries (with narrow exemptions for firms with legitimate security concerns). That would help investigative journalists (we declare an interest) and anti-corruption campaigners, as well as law enforcers and regulators. Many banks support the idea, too; it would help them meet due-diligence requirements to identify who their clients really are. A study by John Howell & Co for Global Witness, another campaigning group, found that the transition costs in Britain would be modest, ranging from £10m-103m ($16m-161m) depending on the level of gold-plating.
Still, opposition remains formidable. Mr Hay argues that private-sector “tax vigilantism” could get out of hand. Transparency would make life easier for kidnappers and extortionists. Geoff Cook of Jersey Finance, a trade body, says that giving authorities, but not the public, access to the information “strikes the right balance between being able to monitor potential wrongdoing and leaving legitimate privacy rights intact for the great majority who do no wrong.”
Jason Sharman of Griffith University in Australia argues that poor countries are already overwhelmed by anti-money-laundering obligations. He would prefer to see a tougher version of the model already used in some offshore centres: service providers which register trusts and companies would have to identify owners, hold the information and pass it on promptly when authorities, domestic or foreign, requested it. Those that did not would face harsh penalties, including prison. Such service providers may also be better placed than registries to sniff out false ownership information. For this to work, though, they would have to be well regulated. At the moment, regulation is ineffective in Britain and non-existent in America.
Muck and brass
The first countries to adopt fully transparent corporate registries might suffer a competitive disadvantage. Britain’s offshore satellites fret that while they are being forced to clean up their act, clients could leave in droves for jurisdictions that are under less pressure. If China (not a G8 member) does not sign up to information exchange and corporate openness, Hong Kong and Singapore are unlikely to—so these fast-growing financial centres would continue to suck business from G8 countries and the old offshore centres. The West “could score an own goal”, muses Mr Hay. But reformers fear that the search for a level playing field means no change at all.
Mr Cameron’s advisers see a strong statement in Northern Ireland as an essential step towards further progress. If the G8 is seen to be dealing with its own shortcomings, transparency is more likely to move to the front of the agenda at the G20 (of which China is a member). The best outcome, says Mr Collier, would be a statement of commitment that gives political backing to the fiddly work being done by technocrats at the OECD and elsewhere. Enthusiastic G8 countries can take the broad principles to turn into detailed national “action plans” for peer review later.
But international tax reform will produce losers. America, for one, is loth to inflict more pain on its multinationals, which have borne the brunt of public criticism. Not all G8 countries support changing ownership disclosure rules, let alone making the data public. Germany, Russia and Canada are sceptical. America is keener, but its hands are tied by the states. Britain and France are the keenest, though neither is likely to opt for full public disclosure of beneficial ownership, at least for now.
After decades in which corporate tax fiddles have mushroomed, and colossal amounts of criminal and kleptocrat money have sloshed through the world financial system, even limited progress is welcome. Support for clarity on tax and ownership has never been broader, and calls for reform never louder. Mr Collier says the main aim of the summit is to “get the ball rolling”. And if it doesn’t get moving now, when will it?
Shaun Drummond, The Australian Financial Review, 5 June 2013
In March, the finance chief of medical devices company ResMed, Brett Sandercock, was one of several senior executives paid a visit by the Irish Investment and Development Agency, which is tasked with attracting foreign investment to Ireland. ResMed already has some research and development staff in Dublin, but the IDA wanted it to do more business there.
Sandercock describes the Irish offers as “aggressive”, but that is not unusual these days as the battle intensifies to make regulatory regimes more attractive to entice corporate profits and the tax dollars and jobs they bring.
While there is now more international co-ordination of regulation than ever, and G20 countries are making noises about cracking down on tax loopholes, regulatory arbitrage opportunities if anything are multiplying. The executive director of the IDA, Dermot Clohessy, told Capital competition among countries has never been greater.
Sandercock agrees. “It has absolutely intensified; there are certainly states [in the US] that are prepared to offer incentives to relocate, and if you look at countries as well, there are a lot of incentives being offered,” he says. “These are not being matched by Australia.”
By and large, he says, inducements in Australia are specific to certain sectors, notably car manufacturing. While Australia maintains some attractive research and development incentives, the budget announced plans to wind them back for big companies.
The budget also included plans to tighten so-called thin capitalisation rules. Combined with several other proposed changes, some fear Australia is only making itself less competitive. The other changes include delays to easing of controlled foreign companies rules, which tax the foreign subsidiaries of multinational companies at Australia’s tax rate, and the repeal of part 25-90 of the Income Tax Assessment Act.
KPMG’s Australian head of international tax, Jeremy Hirschhorn, says we appear to be seeing a reversal of decades of liberalisation aimed at fostering foreign investment. This may divert international companies to other regional centres like Singapore and Hong Kong.
The combination of local regulators getting tough at a time when Australia’s cost base has ballooned compared to other jurisdictions means Australian boards are also more than willing to consider moving to other locations to maintain margins. While many CFOs have moved back office work offshore in the past 18 months, and before that manufacturing, there has been a steady stream moving headquarters or tax bases.
Most commentators say that tax and other regulatory relief is rarely the chief reason to move the centre of operations, but often one that tips the balance. Where their customers are, access to capital, investors, expertise, labour laws and sufficient talent are more important. But given the choice of several jurisdictions in a region, the regulatory burden will likely decide the exact location.
For many this will remain Australia. However, others are being attracted to places like Britain, Ireland and the US, or the high growth, low cost countries of Asia, not to mention the traditional tax havens of Bermuda and some Caribbean countries.
David Shafer, the executive director of online retailer Kogan, says Australia is “getting left behind” on the regulatory and tax front.
“As somebody who travels a lot in Asia, I can see how other countries are opening themselves up for business. Other countries embrace foreign businesses and make life easy for them to invest capital.
“The regulatory burden in Australia is so cumbersome that we’re now at the stage where different government departments seek to regulate the same subject matter in a different way.”
Resource companies should be less mobile than online entities. But even though their assets can’t move, their domiciles can. This is a specific term that generally means they choose under which jurisdiction they will be subject to tax or other regulatory and corporate governance purposes.
Five small Australian resource companies moved domicile overseas over the past 12 months, including Canada, New Zealand, Bermuda and the Cayman Islands.
The most recent is Synergy Metals, which has exploration licences over gold resources in eastern Victoria. Its move to Bermuda via a scheme of arrangement was approved by shareholders on May 16.
In such a move, typically the company remains listed in Australia and executives can also remain here.
Synergy Metals’ senior management refused to comment on the move, but its scheme booklet cited the need to diversify sources of funding beyond Australia, and “that shares, options, bonds and convertible securities issued by a company incorporated in a jurisdiction like Bermuda will be more attractive to international investors”.
Lawyers who have structured the moves of other companies recently say this is typical of company statements on the reasons for such moves. While true, it is rarely stated that the attraction is the better shareholder returns that lower tax jurisdictions will provide.
Bermuda is a traditional destination, but companies including insurers are also looking to other European destinations whose tax rates and regulatory setting look relatively appealing. The UK is now phasing in reductions in its corporate tax rate from 28 per cent to 23 per cent in 2013, dropping to 20 per cent by 2015.
Another important change is to its own controlled foreign companies rules, which removed a requirement that if a company based in Britain was earning profits in a jurisdiction with a tax rate less than 75 per cent of the British rate, the profits of that subsidiary would be subject to UK taxes.
Competition from its neighbour and others means IDA’s push is more urgent now as Ireland hauls itself back from an International Monetary Fund bailout.
On the move
With its high currency and high costs, Australia is a prime target. Not only are Ireland’s incentives, including a 12.5 per cent corporate tax rate and generous R&D and manufacturing concessions, enticing by comparison but property and labour costs have plummeted, helped by a weak euro.
Apart from ResMed, other Australian firms with operations in Ireland include James Hardie (which moved its global HQ there from the Netherlands in 2012), QBE, Computershare and Macquarie Group (its aviation leasing base is in Ireland).
Since the British changes were introduced in 2012, insurer Lancashire has shifted its domicile from Bermuda to Britain, while still maintaining a Bermudan subsidiary, and international insurance broker Aon has moved from the US to Britain.
Jeff Soar, an insurance tax specialist at Ernst & Young in London, says up to another six specialist insurers seriously are considering moving domicile to Britain. Another five or six large insurers are watching developments closely and may follow suit.
Insurers move constantly to take advantage of different tax havens. The changes follow the exit of several insurance companies from Britain. Just a few examples include Hiscox redomiciling from Britain to Bermuda in 2006. In the same year Omega moved to Jersey. In 2009 Brit Holdings moved to the Netherlands and Beazley Group moved to the Republic of Ireland. The latest move to Bermuda was specialist insurer Randall & Quilter in April. This appeared to indicate the new rules were not enough for some. Lawyers there note, however, a key distinction in this move is that the company has chosen to remain a UK tax resident.
Early implementation of tougher global capital standards in Australia for financial institutions is also causing some to consider other jurisdictions to maintain margins. Grant Peters, an Australian insurance specialist at Ernst & Young, says Australia is leading the world in the introduction of its LAGIC reforms, or life and general insurance capital, but that has implications for companies based here that are competing globally.
“Broadly there has been an increase in the capital that needs to be held, so that arguably goes straight to any return on capital equation,” he says. There is also a difference in the types of capital that need to be held, with a greater proportion of costlier common equity.
Most agree the changes will make insurers safer, but the tougher and in some cases unique approach by the prudential regulator here, and delays in implementing similar reforms elsewhere are raising the costs of insurers based here compared to global competitors.
Peters says insurers are now grappling with the business implications of the reforms. “We expect a lot of companies will be revisiting how they manage their capital and how they optimise their capital structure under these new reforms,” he says.
One unique aspect of the Australian Prudential Regulation Authority’s transitional rules is non-viability clauses that it requires to be included in hybrid instruments, which allow the regulator to turn them into common equity.
Some financial institutions here have complained this means they now need to pay a higher premium to investors for that risk – a cost not faced by offshore competitors.
Peters says this is still a concern. “Every nuance adds to the terms of conditions of those instruments and just either adds to the cost or makes it harder to get them away.”
Ironically, APRA’s changes are modelled on Europe’s Solvency II measures, the insurance equivalent to Basel III. However, Europe has delayed their introduction until at least 2016. Soar notes Britain will be ready to implement them earlier, but argues they won’t be so harsh. “I don’t think [Britain] will bring it in when no one else has, but the good bits of it, like the increased focus on risk, may be,” he says. “But things like the increased capital requirements under Pillar I, I suspect it would be wrong for any country to require their insurers to do that before anyone else because it will probably cause some competitive issues.”
However, Peters says tougher standards here could create an advantage, with investors potentially seeing them as safer companies, with their lower risk improving their credit worthiness.
Numerous Australian companies have moved their headquarters and senior management offshore over the past 20 years, and continue to assess their next move.
ResMed moved its headquarters to California in 1995. Like the majority of large US corporations it is domiciled in Delaware, but has maintained R&D and manufacturing in Australia. CFO Sandercock is also based here. The company set up a dual listing on the Australian Stock Exchange and the New York Stock Exchange.
More recently, the company has progressively been moving its manufacturing base to Singapore. In addition, earlier this year, Sandercock took part in a review of whether distribution and marketing operations should be moved from California to another US state. His role is to assess the cost differentials, tax and investor implications.
Unilife Corporation, another Australian listed biotechnology company at a much earlier stage of development, also moved to the US in 2010, settling its headquarters in Pennsylvania and incorporation in Delaware. Its original CFO, Jeff Carter, has stayed on as a director and Australian investor contact here.
Just as for Resmed, the primary reason to move was initially better access to capital and to be closer to its chief customer. Unlike ResMed, the drug injection device maker moved manufacturing to the US to reduce transport costs in supplying its main market. Carter, who was central to structuring the move, says that makes even more sense now as the Australian dollar has appreciated.
The company also considered listing on the AIM market in Britain, but a potential acquisition of a US company provided an opportunity for a “reverse takeover” of Unilife (see box opposite).
Yet the US capital markets also create dangers for the uninitiated. “You have to keep your eyes wide open going into the US market,” he says. For instance, much smaller companies are targets for short selling in the US. “Up to 17 per cent of our capital is now held short.” When the company first listed in the US, there was a massive spike in its share price within the first week of listing.
There are many global companies that stay in Australia because there is no clear advantage yet in going elsewhere.
Computershare derives 75 per cent of its revenue from the US. But senior management remains here. CEO Stuart Crosby says this may change when he is no longer CEO, but there are still good reasons to stay. “There are three dimensions to it – where you have your capital markets presence, where you have your tax home; third is where you put your management team,” he says. The Australian stockmarket has been good to the company and on the tax front, he says moving its intellectual property out of Australia will trigger capital gains tax payments. “We have a very small management team and for a long time Australia was a reasonably cheap place to have them located,” he says. “That hasn’t been the case for the past year and a half, but because we are not huge in any one place, wherever you are you are, you are going to be on the road for half the time.”
Gareth Hutchens, The Sydney Morning Herald, 15 June 2013
The most effective propagandists in this federal political cycle have been the Coalition.
To see what I mean, try to list as many political slogans as you can without thinking too hard.
I can recall five Coalition slogans immediately: ”Stop the boats”, ”Axe the tax”, ”This is a dishonest government”, ”She needs to come clean”, and ”Get back to surplus”.
I can also recall without trying two slogans associated with the Sydney radio host Alan Jones, who (I suspect) is a Coalition supporter: ”Ju-Liar” and ”She needs to be put in a chaff bag”.
But I can remember only three Labor Party slogans before getting stumped: ”Going forward”, ”Working families”, and ”Stronger, smarter, fairer”.
By listing these stupid slogans, it can remind one how our national political debate has unfurled over the past few years, to a dumb and steady beat.
But the phenomenon isn’t confined to federal politics. Propaganda is ossifying the arguments we’re having elsewhere, too.
Take the economics profession.
A popular argument propagated today is the idea that our economy will necessarily benefit if the corporate tax rate is cut.
The argument goes something like this: a reduction in the corporate tax rate (30 per cent) is necessary to increase investment and spur employment growth. If this is done, it will increase the size of the economic pie.
But is this claim true? Has anyone tried to test the proposition and apply it to Australia?
Since Adam Smith, economists have been great propagandists. They’re good at squeezing their descriptions of complicated real world phenomena into tiny models that can be regurgitated, en masse, in essays and lecture halls and TV interviews.
Just think of the remarkably potent and popular phrase, the ”invisible hand”.
You may have heard it being used. You may also know that it can be found in Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776). But you probably don’t know that Smith only used it three times in his oeuvre. Could you say in what context he used it? Probably not. Does it matter that each time he changed its meaning? For today’s purposes it wouldn’t matter.
The reason why modern politicians like to use the phrase so much is because it’s great for propaganda. It comes with a ”frame”, and if you understand what that frame is – that markets operate best when governments don’t interfere with them – then regardless of what Smith actually meant by the phrase, you understand what the phrase is supposed to mean. Thus, it has become a vessel for ideology that helps politicians and their economist friends to bamboozle the economically illiterate.
Jump forward a couple of hundred years.
Just this week, the chief economist of the Chamber of Commerce and Industry, Greg Evans, repeated an argument about corporate tax cuts that was very similar to the one sitting a few paragraphs above.
I had called him to ask him what he thought of the view of Geoffrey Cousins, the millionaire businessman and current Telstra director, who said this week that wealthy Australians had a civic duty to pay their ”fair share” of tax.
If Australians wanted to maintain their standard of living then the wealthy would have to start paying more, Cousins argued.
But Evans said Australia actually had to cut its company and personal tax rates because we needed lower rates to attract investment. Australia was part of the Asian region, he said, to which our future was tied, and our economic neighbours already had much lower tax rates than us. So if we wanted to remain competitive in the region – and remember, competition and productivity are the things that will help our economy to grow – then we ought to cut our tax rates to match our neighbours.
It was an elegant argument but where’s the evidence to support it?
The Australia Institute’s Richard Denniss says he and his colleague David Richardson actually tested the proposition in December, with specific regard to the corporate tax.
They wanted to see if there was strong empirical evidence to support the claim that cutting the corporate tax rate would have significant macroeconomic benefits in Australia, as usually suggested. What did they find?
”Despite the widespread support for this view, particularly among the business community, the theoretical and empirical case for such an expensive change in policy is weak,” their report says. Huh? Their paper’s worth a read, and we don’t have time to cover everything here, so here’s an example of the way they present their argument.
From 1940 to 1987, the corporate tax rate fluctuated between 45 and 49 per cent.
Since 2001, the corporate tax rate has been 30 per cent.
If one of the most commonly cited benefits of a cut in the corporate tax rate is supposed to be an increase in employment, what’s happened to the unemployment rate after 2001?
Well, when the company tax rate was 45 to 49 per cent, the average unemployment rate was 3.3 per cent.
Since the tax rate fell to 30 per cent, the unemployment rate has averaged 5.2 per cent.
So the unemployment rate has actually gone up, despite the company tax rate dropping 15 percentage points.
They explain what they think might be the problem: ”The promise of job creation on the part of business does not count for much when official policy seems to be to hold unemployment around 5 per cent.
”That is, given monetary policy is used to stabilise the unemployment rate at around 5 per cent, it is unclear how a lower corporate tax rate could lead to an increase in employment above the level of ‘full employment’ determined by the Reserve Bank.”
What about the effect on investment?
Since 2001, investment in the private sector increased from an average 20.7 per cent of gross domestic product to 22.1 per cent.
But that increase of 1.4 per cent of GDP in private investment, they argue, is ”more than accounted for by the privatisations of public utilities and the mining boom”.
OK. Well, surely the rate of economic growth has improved since 2001?
”Real economic growth averaged 3.8 per cent between 1960 and 1987, but fell to 3.1 per cent in the period since 2001.”
They conclude: ”If there is any truth in the proposition that lower company tax is good for the economy the effect has been too weak to make a noticeable difference in the macroeconomic data.”
Good luck packaging that into a slogan.
abc news, 15 June 2013
U.K. Prime Minister David Cameron struck a deal Saturday with leaders of Britain’s overseas territories to share tax information — a move he heralded as a “positive step forward” on an issue at the forefront of next week’s G-8 summit in Northern Ireland.
The prime minister met Saturday at Downing Street with representatives from Britain’s network of overseas territories and dependencies, and he said that all agreed to sign up to a multilateral convention to exchange information automatically between tax authorities.
“I commend their leadership and I look to other international partners to work with their own territories to reach similar agreements,” he said, adding that the deal is a “very positive step forward” that will strengthen Britain’s voice in the G-8 and its campaign on the issue around the world.
“At the G-8 I’m going to push for international agreements to fight the scourge of tax evasion and aggressive tax avoidance,” Cameron said. “That means automatic exchange of information between our tax authorities – so those who want to evade taxes have nowhere to hide.”
It also means getting companies to report to tax authorities where they earn their profits and where they pay their tax, plus transparency about who owns which companies and who benefits, he added — all moves Britain’s territories and dependencies supported by signing onto the tax initiative Saturday.
Cameron said in an interview with the Guardian newspaper that in order to set an example to fellow G-8 leaders, he will introduce a new central register in Britain requiring the owners of “shadowy shell” companies be declared to tax authorities.
“Personally, I would hope the whole world will move towards public registers of beneficial ownership, but I want to maximize the leverage that the U.K. has got over others in terms of each step in turn,” he added later.
Britain has a number of offshore territories, which include the British Virgin Islands, Bermuda, the Cayman Islands and the Channel Islands.
Gavin Cordon, The Sydney Morning Herald, 15 June 2013
British Prime Minister David Cameron is promising to “sweep away” tax secrecy in the country as he seeks to persuade the leaders of the G8 to agree to establish a set of global standards to tackle tax evasion.
The prime minister has said he will a introduce a new central register requiring the true owners of shadowy “shell” companies to be declared to the tax authorities.
In an interview with The Guardian, he said he was determined to put an end to the “secretive companies in secretive locations” which cost billions of dollars in lost tax revenues.
Cameron will also tell leaders from Britain’s network of overseas territories and Crown dependencies that they must do more to clamp down on tax evasion and aggressive tax avoidance.
The prime minister has summoned the 10 leaders for talks in Downing Street ahead of next week’s G8 summit in Northern Ireland, where international tax compliance is one of the key issues on the agenda.
The twin moves reflects an acknowledgment by Cameron that the UK needs to “get its own house in order” if he is to persuade the G8 leaders to sign up to the development a worldwide set of standards on the exchange of information between tax authorities.
Mr Cameron said he wanted to set an example by clamping down on British accountants and lawyers who use shell companies to conceal the identity of the final beneficiaries.
“We need to know more about who owns which company – beneficial ownership – because that is how a lot of people and a lot of companies avoid tax, using secretive companies in secretive locations,” he said.
“The way to sweep away the secrecy and get to the bottom of tax avoidance and tax evasion and cracking down on corruption is to have a register of beneficial ownerships so the tax authorities can see who owns beneficially every company.”
Gareth Hutchens, The Age, 11 June 2013
A former Howard government adviser has warned Australia will need to increase taxes on its wealthiest families if it does not want standards of living to drop.
Millionaire businessman Geoffrey Cousins, who is also a Telstra director, has also criticised the wealthy families in Australia who try to avoid paying their ”fair share” of taxes, saying they need to remember they have a ”civic duty” to contribute to society.
”All the evidence would say that the percentage of wealth in the world, and certainly in western countries, is falling into fewer and fewer hands,” Mr Cousins said. ”If you don’t increase taxes on the wealthy, inevitably, people’s standard of living is going to decline and governments are going to find it extremely difficult to maintain services, let alone improve them.”
Mr Cousins, who was a close associate of the late billionaire Kerry Packer, led the charge a few years ago to convince Malcolm Turnbull to reject Gunns’ $2 billion pulp mill in Tasmania.
But according to a famous Packer pronouncement, someone of Mr Cousins’ view would ”need his head read”. In the early 1990s, Packer told a Broadcasting Tribunal he paid whatever tax he was required to pay under the law, ”not a penny more, not a penny less”.
But Mr Cousins has called that perspective ”unethical”, saying the well-off have a duty to contribute to society in a reasonable way.
”The idea that if you can somehow avoid paying tax [then] you ought to take that opportunity, I don’t agree with that at all,” he said. ”The law is the base level of behaviour … I find it very depressing when people say ‘well it’s legal, therefore it’s fine’.”
Mr Cousins’ comments come as governments around the world, including Australia’s, are increasing their fight against multinational companies that use complicated tax structures to reduce the level of tax they pay in the countries in which they do business.
Companies such as Google, Apple and Amazon have come under fire for paying a tiny proportion of global revenues in tax.
But Australian Chamber of Commerce and Industry chief economist Greg Evans disagrees with views like those expressed by Mr Cousins ”It’s businesses and individuals that improve our standard of living, it’s certainly not government,” Mr Evans said.
”We won’t increase our standard of living if we don’t increase our productivity [which helps provide] a proper tax base in order to fund those essential services.”
Mr Evans said Australia needed to reduce the level of personal and business taxation if it wanted to remain competitive.
”We happen to be located in the Asian region. We’re seeking to engage with Asia. Asia has low taxes, and we need to be competitive,” he said. ”So in the years ahead, we’re going to have to strive for a competitive taxation system, and that means lower income tax rates and lower company tax rates.”
Gareth Hutchens, The Age, 11 June 2013
Should wealthy Australians pay more tax, or at least pay their ‘fair share’ of tax? How much tax should each person pay?
Geoffrey Cousins, the former Howard government adviser and colleague of late billionaire Kerry Packer, believes wealthy Australians will need to pay their ‘fair share’ of taxes if we want to maintain our standard of living.
“If you don’t increase taxes on the wealthy, inevitably, people’s standard of living is going to decline and governments are going to find it extremely difficult to maintain services, let alone improve them,” said Mr Cousins.
But Greg Evans, the chief economist of the Australian Chamber of Commerce and Industry, says personal and company tax rates ought to be lowered to better match those countries in the Asian region with which we compete.
So, what do the experts say? We spoke to some former politicians, academics and economists to get their views.
Saul Eslake, chief economist, Bank of America Merrill Lynch Australia
“I am utterly unpersuaded of the need to increase any rates of tax but I do think there’s a very strong case for examining all of the distortions in the base of various tax instruments, starting with personal income tax.
“It is riddled with exemptions, concessions, distortions and loopholes that we usually introduced to favour particular types of income or expenditure … [but] that have been disproportionately used by upper income groups to reduce the amount of tax that they would otherwise pay.
On Geoff Cousins’ idea of the need to have the rich pay their ‘fair share’, Mr Eslake said:
“’Fair share’ is in the eye of the beholder. Fairness is a very subjective concept. To be fair to Mr Cousins, his view is one which may be shared by a lot of people who aren’t as wealthy as him, and it’s to his credit that he’s willing to advocate changes to the tax system that might make him personally worse off. But I suspect his views aren’t shared by too many people whose incomes and wealth are similar to his.
“It’s very easy for people to advocate that someone else should pay more tax. Mr Cousins isn’t doing that, that makes him unusual, and it also makes him worth listening to, but too much of this debate comes from people saying someone else should pay more tax.
Alexander Downer, former Howard government minister
“I think our tax on high income people is probably reasonable. It’s pretty consistent with what tax rates are in similar parts of the world.
“You’ve got to take into consideration the rest of the world. If you want to make Australia a peculiarly high-tax country for higher income people then you will drive out the investor class from Australia to other countries.
“You want to tax people as little as possible, but at the same time you’ve got to run a social security system and a defence force and health system and so on, so there’s a limit as to how much you can reduce taxes by. Though it is easy to say you should reduce taxes, it’s harder to work out how to do it.”
Professor John Keane, director, Institute of Democracy and Human Rights, Sydney University
“Cousins has a point. It’s not straightforwardly true that businesses and enhanced productivity alone result in a rising standard of living. All the evidence shows that inequalities of income and wealth not only have damaging effects on people’s lives. It adds hidden costs to whole economies, whole societies, and to the budgets of governments.”
Martin Parkinson, Treasury Secretary (May 21 speech, from the Q&A afterwards)
“We have a gap between what the community expects of government and frankly what government is able to deliver, but we have another big gap between what community demands of government and what it is prepared to pay for.”This requires us as a nation to find ways to pay for it. We have to think about whether we are going to find offsetting savings or find sources of revenues.
“I have never said [we have to find extra sources of taxes], and it is not my intention … but it is the case that we have to have a much more sophisticated discussion.”
Dr Frederik J. Vervaet, School of Historical and Philosophical Studies, University of Melbourne
“Low taxation for the wealthy is good only for the wealthy, it tends to be less beneficial for the majority of citizens.
“I left Belgium in part (in 2007) because I found taxation levels were too high. I paid up to 55%, and there was no real incentive for most people to work harder because the government takes so much. But having come to Australia I find this country is drifting towards the other extreme.
“Ever since the 1990s … successive Liberal and Labor governments have cut taxes, and I think we have reached a critical point – if we keep cutting taxes and we don’t close current fiscal loopholes and unfair subsidies for certain segments of the market then I think we will reach a point whereby many working class citizens will find it increasingly hard to get quality healthcare and education: the legendary Aussie battler will become and do just that.”
John Tomlinson, Online Opinion, 11 June 2013
In this article I shall try to answer the question implicit in the title. In order to do this adequately I shall cast a fairly wide net attempting to explain how various features of Western society are a part of the answer. In the final section of the article I shall suggest a method by way of which, if adopted, we could build a more socially just and economically productive Australia.
The worldwide economic depression subjected about a third of the people of the developed world to an impoverished existence for most of the decade prior to the outbreak of World War II. After the second world war a serious attempt was made in Britain and Australia to expand the welfare state significantly. In 1964, the United States President Lyndon Johnston declared a “war on poverty”. In Australia, in 1972, following the election of the first Labor government in 23 years, the Poverty Inquiry was substantially expanded. By the mid-1970s, it appeared reasonably likely that a guaranteed minimum income would be introduced because the Whitlam Labor Government had increased the scope and generosity of the social security system. Eligibility for social security had changed in emphasis from forcing people to establish an entitlement for a payment to trying to ensure that everyone experiencing financial hardship received their full entitlement. In Canada and the United States governments attempted to introduce generalised income guarantees for the less well off in the 1960s and 70s.
Since the mid-1980s welfare has been cut back in Europe, North America and in Australia and New Zealand. Throughout the 1980s and 90s many critics of US welfare policies attempted to force cutbacks, they particularly targeted monies paid to lone mothers. In 1996, an ideological shift reducing federal aid to impoverished people over the previous decade, culminated in the Personal Responsibility and Work Opportunity Act, which, as claimed by President Bill Clinton, “end[ed] welfare as we know it.”(Wikipedia [b] 2013). The European social insurance provisions came under attack long before the recent global recession sometimes referred to as the Global Financial Crisis.
In the late1980s Friends of the ABC held a meeting to discuss funding cutbacks in the Australian Broadcasting Commission in Canberra. I became the most unpopular bloke in the room when I suggested that ABC journalists had brought the problem on themselves by substantially increasing the time that was devoted to economics, especially the widespread use of the term “rational economics” when referring to neoliberal economic policies, the concentration put into trade weighted indices, the stock market, commodity prices, the value of the Australian dollar and the value of products whilst increasingly neglecting social values.
George Monbiot writing in The Guardian on the 14th January 2013 noted that
“In 2012, the world’s 100 richest people became $241billion richer. They are now worth…just a little less than the entire output of the United Kingdom.” He suggested that the policies leading to this result included reductions in the tax rates paid by high income earners, failing to pursue tax payments from the rich, “government’s refusal to recoup a decent share of revenues from minerals and the land; the privatisation of public assets and the creation of a toll-booth economy,…and the destruction of collective bargaining.”
“The Economic Policy Institute, a think-tank, calculates that chief executives at America’s 350 biggest companies were paid 231 times as much as the average private-sector worker in 2011″ (JS.2012). This same think tank calculated that in the year 2000 these executives or their equivalents had been paid in the order of 400 times average private-sector workers: whereas in 1975 this ratio was only 20 times the average workers salary. At Walmart the ratio between the pay of the CEO and the median workers pay is over 1,000 to one. “The average total remuneration of a chief executive of a top 50 company listed on the Australian Securities Exchange in 2010 is $6.4 million – or almost 100 times that of the average worker” and it needs to be remembered that two-thirds of Australian workers receive less than the average wage. The CEOs of Sweden’s 50 largest companies earn on average 40 times more than an industrial worker, a finding that a union organisation head believes is ‘totally unacceptable’ and requires a ‘popular uprising’ to remedy”.
In September 2001, following what the Americans are wont to call “9/11″ the United States launched the War on Terror. Millions of people in Iraq, Afghanistan, Pakistan, Yemen and elsewhere in Africa and Asia have lost their lives in, or fleeing from, this never-ending killing spree. The CIA disappeared and tortured thousands in a worldwide program of rendition and secret prisons. There are still 166 prisoners being held in legal limbo at Guantanamo and as I write 100 of them are on a hunger strike. There are daily drone strikes in Afghanistan, Pakistan or Yemen. These are targeted assassinations of what are meant to be “Islamist rebel leaders” but swept up in what the US militarists are apt to call “collateral damage” are women, children and wedding parties. The role of the military arm of the US government going round the world meeting lots of nice people then subjecting them to rendition, torture, or death, dehumanises those Western citizens who don’t vocally oppose such illegal actions. The “War on Terror” inexorably changed from the pursuit of Al Queida to a war of terror against much of the Middle East and beyond. George W. Bush’s simplistic dichotomy “You are either with us or against us” led many US allies (such as Australia) to adopt grotesque Kafkaesque terrorism laws. Such processes turn thinking adults into silent witnesses of State violence in fear of becoming enveloped in the witch-hunt that follows the expression of dissent.
The war on drugs began in the United States in 1914 with the Federal government outlawing heroin. Throughout most of the first half of the 20th century US governments thought that drug addiction could be cured by treatment but in 1951 legislation was passed providing for minimum mandatory sentences for possession of some drugs. This approach was eagerly adopted by the Eisenhower administration in 1952. “The addition of the Drug Enforcement Administration (DEA) to the federal law enforcement apparatus in 1973 was a significant step in the direction of a criminal justice approach to drug enforcement”(Head 2013). Since that time the US has invaded Panama and other Central and South American countries, arming Contras and other paramilitary groups to fight leftists and “drug runners”. It has filled its own prisons with people convicted of various “crimes” involving drugs. In doing so it has condemned many of its own citizens to a custodial system that blights their lives. When countries like Australia want to adopt harm minimisation polices such as heroin trials, drug injecting rooms or clean needle exchanges the US comes calling. This increases the difficulties of developing sensible humane drug policies and consequently alienates another generation of young people and older people with addictions to “illegal” drugs.
Monbiot, in the article referred to earlier, notes that the 2012 “annual report by the UN Conference on Trade and Development should have been the obituary for the neoliberal model developed by Hayek and Friedman and their disciples”. Monbiot asserts that this report “shows unequivocally that their policies have created the opposite outcomes to those they predicted. As neoliberal policies (cutting taxes for the rich, privatising state assets, deregulating labour, reducing social security) began to bite from the 1980s onwards, growth rates started to fall and unemployment to rise”.
Often associated with granting mining leases to rich people or giving them access, at less than replacement cost, to vast tracts of forest to wood chip is the necessity to criminalise environmentalists. This is just part of resource expansion which the State foists on the citizenry in the name of productivity and development. Little wonder ordinary people feel alienated from such acquisition of wealth by the few. The carbon price debate is just one small part played out in the multinational globalisation of resources. The climate change deniers are walking in the footsteps of Mussolini’s Black Shirts.
Once the State can cut off a section of the working class or the unemployed from the main working class movement it can set out to expand its wedging and politics of envy. Howard started with the young unemployed but it wasn’t long before all unemployed were metamorphosed into “dole bludgers” and “job snobs”. Asylum seekers became grist to the mill. Then Disability Pensioners soon found out they were a bunch of “malingerers” whose numbers had to be cut by a third. Then came the turn of single parents and their children. Subsequent Labor governments have followed suit.
The last throw of the dice for the outgoing Howard Government was to impose the Intervention on 73 Aboriginal communities in the Northern Territory ostensibly to safeguard Aboriginal children from sexual abuse or neglect and to protect women from being assaulted. The police and the army were sent into remote Aboriginal communities. The Government suspended the Racial Discrimination Act in order to quarantine half the social security payment made to Indigenous people. The amount quarantined was placed on a ‘Basics’ card that could only be used for approved purposes at certain stores and alcohol was banned from many communities.
Labor came to power in 2007 promising to continue the Intervention for a year before reviewing it. A committee was set up, headed by Aboriginal leader, Peter Yu, that recommended winding back most of the compulsory aspects of the Intervention except where it could be proven that Indigenous people were incapable of handling money. Labor ignored the report. It has moved towards providing incentives for the use of a Basics card whilst allowing people to “request” they not be required to have a Basics card. At the same time this government has expanded the areas of the Northern Territory and elsewhere in Australia where Aboriginal and other ethnic groups are cajoled into a paternalistic administration of their social security. It has reinstated the Racial Discrimination Act and so cannot specify any particular ethnic group that is forced to participate. What it does instead is select geographical areas where particular ethnic groups predominate and legislate to force all residents of those areas to participate in its paternalistic form of social security.
The process of marginalising various sections of society which can in turn be denigrated – the unemployed called dole bludgers, disability pensioners become malingerers, single parents become welfare mums who brought their problems on themselves, the original owners of this land are converted into drunks and paedophiles, asylum seekers are called illegals and queue jumpers – has now turned round to bite the very people who engaged in maligning the disadvantaged. Commentators around the country are calling on the government to end “middle class welfare”. The values which neoliberal economics promote inspire envy and hatred of out-groups and undermine solidarity.
Monbiot points out “the recent jump in unemployment in most developed countries – worse than in any previous recession of the past three decades – was preceded by the lowest level of wages as a share of GDP since the second world war.” The promise of neoliberal economics – that if governments would get out of the way and leave everything to the market then the rising tide would lift all boats and everyone would be better off – has failed to come true.
Following the second world war Britain moved away from a categorical means-tested benefit system by adding a social insurance system and later a tax credit system. The US largely maintained its welfare charity model to which were added private insurance and eventually a tax credit system. Australia introduced some universal payments such as child endowment but largely stuck to increasing the scope and generosity of its system of categorical benefits and pensions. In 1992 it introduced a privatised superannuation system.
Tax credits, social insurance and privatised superannuation are all tied to participation in the labour market or other financial contributions. They are of no help to people who cannot enter the labour market. When the values which emerged in the wake of the second world had inspired a desire to provide a liveable income for everyone were eroded by the corrosive values of neoliberal economics – solidarity evaporated and the poor were left to the ravages of the rich.
It is time to turn back, back from greed and downward envy, back from abusing asylum seekers, social security recipients and Indigenous people. We need to retreat from excessive inequality and turn our backs on indifference to the plight of others. It is time to note the social security advances in Brazil, Bolivia and Venezuela where they are moving to ensure all citizens have access to a livable income – the slogan that drives this campaign is “For all – the poor first”. The reason for doing this is that more equal societies are happier, less fearful and healthier societies. Monbiot notes “The greater inequality becomes…the less stable the economy and the lower the rate of growth”. This is a good economic reason for advancing equality as well as being the decent thing to do.
The best way of moving in the direction of a more egalitarian society is to discard the charity-style categorical means-tested welfare system and embrace a citizenship entitlement system for all permanent residents. Such a universal Basic Income would be paid to every individual permanent resident irrespective of their wealth, marital status or other social feature. To pay for such a scheme income tax would be paid on all other income the person earned or acquired from the first to last dollar gained. There would no longer be a political need to subsidise less productive industries, in order to keep people in work, thereby unleashing a huge creative and productive potential.
David Richardson, Austraila Institute, 7 June 2013
No-one ever looks back 40 years and suggests anything the McMahon government did could possibly have much effect today, so why, asks David Richardson, are we so keen to make such long run projections and frame policy with a view to the very long run?
A lot of the debate in Australia reflects concern about our future and how budgetary pressures are likely to evolve.
The backdrop of the discussion is a profile of the predicted population in 40 years, what that means for expenditure and how we should be preparing for that outcome.
The intergenerational reports have provided a useful service by presenting projections 40 years ahead and examining what is likely to happen given present demographic and other trends. But how seriously should we treat these predictions?
We are coming to the end of the 2012-13 financial year and the budget outcome is likely to be much different to the course set for us in May 2012 when a small surplus was projected for 2012-13.
The latest assessment is that we will have a deficit of $19 billion. That represents a swing from 0.1 per cent of GDP to minus 1.3 per cent of GDP.
If we can be out by 1.4 per cent of GDP in the space of 12 months, how valid are any estimates of our position in 40 years’ time? If those sorts of errors are cumulative and in the same direction, then the error in 40 years would be very large indeed.
Even if we could accurately project that far ahead, would it matter? Suppose we knew exactly what the economy would look like in 40 years assuming no policy change. That exercise is completely silent on the opportunities and problems the nation might face and the solutions it may choose. But let’s look back 40 years.
In 1972 the McMahon government presented a budget that had a surplus of $348 million or 0.7 per cent of GDP. In 1972-73 the national economy was much smaller with a GDP of $49.7 billion, one 30th the size of the present economy. Thinking about that era it all seems so irrelevant to us now. That was before Medicare, before fault-free divorce, China was not recognised and the internet did not exist, even in science fiction.
Nobody ever comments on how the last McMahon budget affected the situation we now experience and given the vast imbalance in the size of the economy then, compared to now, it is difficult to think how anything the McMahon government did could possibly have much effect today.
If similar trends persist into the future then our projections about the economy in 40 years are concerns about an economy that could be 30 times bigger than the present economy. The recent budget made sacrifices in the context of ageing pressures over the next 40 years, which seems very noble of us. But we can be sure of one thing, in 40 years almost no-one will remember the 2013 budget – just like almost no-one remembers the last McMahon budget.
Moreover there is almost nothing we can do now that would be irreversible over the next 40 years. Any of the governments over that time could decide to reverse the 2009 decision to increase pension payments or the series of tax cuts made during the late Howard government years and into the Rudd government. It is possible that the governments between now and 40 years’ time may reverse the decision to cut sole parent benefits when the youngest child reaches eight years old.
So why are we so keen to make such long run projections and frame policy with a view to the very long run?
The National Commission of Audit that reported to the Howard government in 1996 called for the publication of intergenerational reports to, in the words of the report: ‘address emerging social and budgetary pressures, urgent action is needed to moderate community expectations of government assistance’.
That was the genesis of the intergenerational reports – essentially a public relations exercise designed to convince voters that there would never be enough in the kitty to do the things that voters might expect from government.
Julie Novak, Institute of Public Affairs, 6 June 2013
In his latest contribution to The Drum, former journalist at The Australian newspaper, Mike Steketee, admonished the use of tax havens by multinational corporations and argued for tighter regulations to deter such practices.
Steketee lampooned Barbados, Bermuda and the British Virgin Islands as ‘powerhouses of the world economy,’ describing their disproportionate global shares of foreign direct investment as being attributable to their status as ‘tax havens’.
Although there is no agreed definition, tax havens are generally characterised as jurisdictions imposing low, or no, income taxes, and which usually, but not uniformly, maintain confidentiality provisions preventing the public disclosure of cash or asset holdings of investors in those jurisdictions.
The explanation for why certain jurisdictions around the globe select to impose low or no taxes on corporate income is reasonably straightforward.
In a world dominated by economically large, but high-taxing, advanced countries, an effective way for small countries and territories to grow their local economies is to impose lower taxes, in the hope of attracting more internationally mobile capital.
An empirical study by economist James Hines shows that tax havens have, indeed, enjoyed significant economic growth as a consequence of their tax competition strategies.
With tax havens otherwise typically lacking natural and human resource advantages to compete for investment, it would seem that tax haven opponents would rather prefer havens become poverty-stricken outposts that, at best, merely provide holiday opportunities for Western visitors.
However, in the eyes of some, tax havens are not confined to certain Caribbean islands but extend to even some major economies with below-average corporate tax rates, such as Ireland with its 12.5 per cent tax rate regime.
This Irish policy measure has created an obsession by politicians and tax authorities in countries imposing high corporate taxes, including Australia with its 30 per cent rate, about the economic and financial activities of multinational firms with a presence in the Emerald Isle.
Steketee noted in his piece that a US Senate subcommittee recently heard claims that about $22 billion, or 64 per cent, of Apple’s pre-tax income were recorded in Ireland in 2011, saving the company $7.7 billion in US taxes.
However, Apple CEO Tim Cook noted in his testimony to the subcommittee that the company made corporate income tax payments to the US Treasury of $6 billion in 2012, and $2.5 billion in US state and local tax payments.
While it may, or may not, be the case that Apple could have provided additional taxes to the US federal government of the magnitude revealed in the subcommittee hearings, Cook nonetheless noted that ‘revenues from international operations are taxed in accordance with the laws of the countries where they are earned.’
It is no coincidence that recent political harassment of successful multinational corporations specialising in information technology and communications products and services, such as Apple, Google and Amazon, for more revenue is closely aligned with the significant fiscal troubles faced by advanced economies.
Most Western countries are hampered by massive budget deficits and public debts brought about by years of over-spending, especially on welfare, however recent efforts to impose new taxes, and increase existing ones, have consistently failed to deliver expected revenue gains into public treasury coffers.
It is thankfully nigh on impossible for countries to effectively unite by imposing higher taxes upon all, since any global tax cartel would be undercut by a jurisdiction imposing significantly lower taxes in efforts to obtain a greater share of global investment.
In the absence of an international agreement on tax harmonisation, major countries and international bureaucracies, such as the OECD, have adopted an alternative strategy of attempting to eradicate tax competition from the global economic scene.
They are doing this by threatening crippling financial sanctions on tax havens and other low-taxing countries that refuse to end their financial confidentiality provisions, and using moral suasion and other tactics to pressure multinationals to disclose their tax payments and to disengage from tax haven activity.
The recent announcement by the Commonwealth Government to publicly disclose the tax payments of major companies, generating annual incomes of $100 million or more in Australia, is designed to foster public pressure upon companies to yield more taxes than they are legally obliged to.
The implementation of such measures, expediently dressed up as ‘tax transparency,’ would flout the rule of law, since one set of rules will apply to one class of taxpayers and not to others.
How would Joe Blow like it if his tax payments were published on a website for all and sundry to inspect?
On balance tax havens have contributed to our global economic prosperity by encouraging tax competition, enabling footloose capital and labour to move to economically hospitable environments and thereby limiting the worst fiscal excesses in high-taxing countries.
From the mid-1980s to the late 2000s Australia lowered its economically inhibitive high corporate and personal income tax rates, encouraging tax competition and allowing domestic workers and firms to keep more of their own earnings in their pockets.
The best way for Australia to now deal with the tax haven challenge is to join them by returning to the global tax competition contest.
Tax competition? Bring. It. On.
Emmet Oliver, The Huffington Post, 6 June 2013
The G8 Summit in Northern Ireland, which starts Monday, June 17, has a very broad agenda. The agenda is expansive enough to be daunting even for a group of experienced world leaders to grapple with.
While it can be summed up with the 3Ts — trade, tax and transparency
– it will undoubtedly be challenging to make measurable progress in such a short period of time. However, the leaders gathering in Fermanagh will no doubt do their best to make a tangible impact at the policy-making level.
The opportunity to host the summit on the island of Ireland is a welcome opportunity for Northern Ireland and Republic of Ireland authorities to showcase the attributes of their respective economies.
Though the economies share a relatively small geographical patch together, they are very different in terms of structure. While the public sector is one of the largest in the UK economy in Northern Ireland, foreign investment is a major contributor to the employment base in the Republic of Ireland, with over 250,000 people earning a living from activity tied to that segment of the economy.
Throughout the summit, promotion of Northern Ireland will be relatively uncomplicated. However, it has proven a little more complex in the Republic of Ireland as its tax offering has been under scrutiny over recent weeks due to hearings in the U.S. Senate on corporate tax practices.
Some facts are worth reflecting on in this context. All companies in Ireland pay the standard 12.5 percent rate on their trading profits arising in Ireland. Reports of lower effective tax rates appear as a result of combining the profits earned by group companies in Ireland and in other jurisdictions and incorrectly suggesting that Irish tax should apply to both.
Of course certain deductibles and credits are allowed for in the Irish system, including expenditure on research and development (R&D). This can reduce the amount of taxable income, but the rate remains the same and deals are not done according to this rate, which is based on statute.
Despite all these attributes, Ireland’s tax system has been placed under a microscope from politicians in the UK and U.S. Why? Because some companies have, in turn, faced scrutiny for their own tax practices.
For some politicians, the focus has been what these companies are doing “wrong”. These companies, as a result, have countered with a simple but compelling point: the tax code is ultimately designed via the political system. If the need for change is urgent, politicians from all backgrounds can make those changes, ideally through a multilateral forum like the Organization for Economic Cooperation and Development (OECD).
This includes the Irish government, which is fully supportive of the OECD’s process for reforming the global corporation tax system, known as the Base Erosion and Profit Shifting (BEPS) process.
In Ireland, multinationals are actually very significant taxpayers through direct corporation tax payments and taxes paid by their employees. The norm in Europe is for corporations to chip in about 2.5 percent of GDP in taxes, and Ireland’s rate is almost identical (2.4 percent).
While it would be overly simplistic to describe the current debate as one between larger countries and smaller countries, the U.S. Senate noted last week that smaller countries tend to have lower rates of corporate tax compared to larger countries. I suspect the size of the internal market in those larger countries means they have less immediate reason to seek foreign direct investment, although this is changing rapidly.
Either way, Ireland is not making apologies for its competitive rate and is very much open for business in the current climate. Ireland does not market itself solely on the basis of tax anyway, for a good reason.
Tax on its own never wins investments. Success results from a combination of factors. Crucial among them is the talent pool and access to staff. For example, Apple employs approximately 4,000 people in Ireland, a large employee base by any standard. Those employees were recently praised for their expertise and work ethic by Apple CEO, Tim Cook.
As the G8 Summit gets underway, a lot of discordant voices will be heard and a good deal of emotional language will be used beyond the confines of the meeting. However, voices that should be heard are those of businesses around the globe. Keeping conditions attractive for business remains a compelling need at a time of high unemployment, continent-wide and globally.
Emmet Oliver is the chief spokesman for IDA Ireland.
Vince Cable, The Observer, 9 June 2013
Public faith in tax system has been seriously dented by the actions of a few top
companies – which say they are just following the rules politicians make. So it’s now up to politicians at the G8 summit to remake those rules
Leaders from the world’s richest countries will gather in Northern Ireland on 17-18 Junewith a chance to make a real impact. At a time when austerity is biting, especially in Europe, tax avoidance by some of the world’s wealthiest companies has put the public’s faith in the fairness of the tax system to the test. As chair of the G8, Britain has an opportunity to show real leadership on the issue and reform a dysfunctional international tax system.
Five years ago, debates on tax avoidance centred on onshore tax havens for “non-doms” who lived in the UK but paid minimal tax. Now public concern has spread beyond a few super-rich tax refugees to top companies with networks of operations apparently designed to maximise UK tax-avoidance. Serious damage has been done to their reputations. Is that fair? And, if it is, what should be done?
I get two opposite reactions from business. Some are outraged. They operate in the UK, make money in difficult conditions, pay tax on their profits, and know that if they don’t the taxman will knock. But they see some big companies, often their competitors, getting away with ridiculously low levels of tax on what appear to be healthy profits.
But there is a counter argument: that these accusations are unfair and, even, “anti-business”. Google, for example, says: we just follow the rules the politicians create – blame them. Moreover, governments try to tempt investors with lower tax rates and complex tax breaks, so why criticise companies that use them? A manager who aimed to be tax-inefficient would be considered negligent by the shareholders.
Inconveniently, both sides have a case. In truth, taxing company profits is not ideal. All taxes are ultimately paid by people. We should tax people when they receive the benefits of profitable companies. But taxes on income and goods can also be avoided. The only really unavoidable taxes are on property and land. But, much as I believe in taxing mansions and land banks, I do not imagine that they could replace the 5% of government revenue that comes from taxing profits. And 90% of corporation tax receipts come from the top 1% of companies.
There is more common ground on the grey area between criminal tax evasion and legitimate tax planning. That grey area is populated by some of our cleverest and best-paid accountants and lawyers. Until the government demanded that it stop, banks paid small fortunes to their specialists in tax dodging.
The scope for aggressive tax planning has grown with cross-border transactions within groups, many relating to royalties and payments for intangibles. Big companies paid £5bn less corporation tax last year than in 2001-02, though profitability grew 65%. While much of this is explained by a lower headline rate and the huge recent hit to bank profits, it shows the problem is not solved.
What, then, can be done? My colleague Danny Alexander’s drive to close tax loopholes has netted around £15bn a year in revenue. A key step is the General Anti Avoidance Rule, an important new tool for HMRC. At the budget, Danny also announced a clampdown on offshore intermediaries, used by some to avoid employment taxes for UK staff.
There are serious limits to national action, however. The underlying problem is a messy patchwork of international tax rules, some almost a century old. The summit is an opportunity to give strong support to addressing weaknesses in those rules.
The prime minister has put this issue on the agenda for our G8 presidency. We aim to build on the UK’s success in becoming the first country to sign an automatic exchange of information agreement with the US and our efforts in securing agreement to pilot a multilateral automatic exchange between the G5. The government is also showing leadership on improving transparency over who owns and controls companies. We are looking at options including a central register.
In the meantime the business world has a responsibility. The law and ethics of tax avoidance are ambiguous. But standards of good practice and corporate citizenship are emerging, which decent, far-sighted companies can reasonably be expected to observe.
Chris Vedelago, The Age, 8 June 2013
The Tax Office has warned that privacy laws prevent it from sounding early warnings about potentially insolvent companies such as National Buildplan Group before they collapse.
The admission to the Senate estimates committee came after Nationals senator John Williams queried what the Tax Office could do to help prevent ”big hits to small business” when construction groups with government contracts failed.
”If a company is behind in its GST payments, its PAYG payments and perhaps its superannuation payments, is there any way that the ATO can raise the red alert with ASIC [the Australian Securities and Investments Commission], if they are trading insolvent?” Senator Williams asked.
”[National Buildplan] has fallen over owing $60 million. One plumber in Tamworth has been done for $481,000. They are big hits to small business. It is getting far too common.”
But officials said that while the Tax Office does see ”early signals” when businesses are in trouble, it is prohibited from sharing that information with credit ratings agencies, creditors or even other government departments due to ”secrecy provisions”.
”When businesses are accumulating debt to the Tax Office, we are generally not the only people they are accumulating debt to,” Tax Commissioner Chris Jordan said. ”So we are very conscious of the fact that we might be the first to be able to identify that businesses are not viable. As to what we can do with that information, though, we are very restricted.”
Mr Jordan said the Tax Office would be ”very happy” to see the rules changed.
Senator Williams said the regulations should be changed to ensure builders receiving state and Commonwealth contracts could be checked by the Tax Office to ensure they were meeting their obligations to staff and subcontractors. ”If they are not paying the Tax Office, it’s a pretty good sign that they won’t be able to pay their subbies.”
National Buildplan was placed into administration in April. The company is set to be resurrected under a Deed of Company Arrangement but unsecured creditors are likely to receive a maximum of 5¢ in the dollar.
ABC News, 6 June 2013
Small businesses are to receive a temporary payroll tax concession as part of this year’s South Australian budget, which the Premier will unveil on Thursday.
It will come in the form of a cash grant paid upfront to small businesses over two years.
Premier and Treasurer Jay Weatherill said it would effectively halve the payroll tax on small businesses with payrolls of up to $1 million, with the concession reducing on payrolls up to a maximum of $1.2 million.
He said some businesses could expect to pay up to $9,800 less.
Mr Weatherill said $21.6 million would be provided over two years in the state budget to cover the concession.
He said five institutions, Bank SA, Bendigo Bank, ANZ, the Commonwealth Bank and People’s Choice Credit Union, would offer products and services which complemented the Government’s business package.
“South Australia’s small businesses are often the backbone of a community, providing jobs and services to local people,” he said.
“Now is the right time to promote these measures so that we can actually build confidence and what we have is the fundamentals are strong.
“The fundamentals are strong across Australia, they’re strong in South Australia, the question though is confidence and so this is about trying to shake off the malaise that’s existing.”
Business SA CEO Nigel McBride said the relief was welcome.
“We have told the Government that small business in South Australia needs tax relief and the Premier has taken a step in the right direction by making this announcement today,” he said.
“Unfortunately this is not a long-term tax cut, rather a temporary reprieve from a high payroll tax regime, but all tax cuts are welcome by business during these tough economic times.
“This payroll tax measure eases some of the pressure but more must be done.”
Opposition treasury spokesman Iain Evans said the Government would collect $1.1 billion of payroll tax this year and was making a temporary cut of $11 million, or 1 per cent, of revenue for two years.
He said a tax concession for business would be welcome relief for many, but criticised the measure for being short-term.
Promise to ease red tape
Other support for small business in SA will be allocated $5.4 million over four years in the budget.
Mr Weatherill said easing red tape was among the priorities.
“This particular package is targeted at small businesses making sure that they can do business more easily, giving them access to opportunities, helping those young entrepreneurs to get a start by ensuring they have all the support they need,” he said.
“We are doing this by creating opportunities, encouraging partnerships between small businesses and key industries and cutting through unnecessary regulation.
“This is part of a much larger package that we’ll be pointing to in the state budget.”
Mr Weatherill said the $5.4 million package included $608,000 over two years to support small business start-ups and business development.
Another $3 million of the package would be allocated over three years for a small business innovation pilot program to continue.
The Premier said it helped small businesses develop innovative products.
There would be $440,000 spent over two years on helping local businesses win government contracts.
Other funds will support the office of South Australia’s Small Business Commissioner, which offers mediation services, and a stamp duty exemption for corporations which want to change their structure.
Mr McBride, of Business SA, said most of the $5.4 million over four years announced for business was an allocation to existing government programs.
He said it was particularly disappointing in light of cultural and arts institutions getting $18.2 million over four years.
“I’m sorry, we’re not going to have a cultural-led recovery, we’re not going to have a public sector recovery or a welfare-led recovery in this state,” he said.
“We need a business-led recovery, an amazingly small amount to invest in a business sector that is the only hope of leading this economy out of deficit.”
Miranda Stewart, The Conversation, 5 June 2013
There has been a lot in the news lately about the low tax paid by some multinational corporations, including Starbucks and Google. These multinationals say that they are complying with the tax laws of all countries. A recent Australian High Court case reveals the challenge facing national governments…
There has been a lot in the news lately about the low tax paid by some multinational corporations, including Starbucks and Google. These multinationals say that they are complying with the tax laws of all countries.
A recent Australian High Court case reveals the challenge facing national governments in trying to fix the international tax system to capture profits earned by multinationals around the world.
In this test case involving complex and technical Australian company tax rules, the High Court was asked to consider how these rules applied to the Commonwealth Bank of Australia’s controversial $2 billion capital raising in 2009.
The outcome was that CBA was legally able to reduce the cost of its capital raising – while both the Australian and New Zealand governments lost out on tax revenue.
PERLS V securities
At the time, most media attention around CBA’s capital raising centred around allegations it failed to disclose price sensitive material to the market, leading to a $100,000 fine by ASIC.
But the securities on offer, PERLS V securities were also notable for their complex “stapled” structure, comprising a preference share issued by the CBA, and a note issued by the bank’s New Zealand branch.
Under the issue, an investor was entitled to quarterly distributions of interest on the notes, plus a franking credit on the preference share. The interest was paid by the New Zealand branch of the CBA, which issued the notes. The franking credit reflected underlying Australian company tax paid by the bank as an Australian taxpayer.
A major reason for this structure was tax. The securities were treated differently in Australian tax law, compared to New Zealand tax law – we sometimes call this “hybrid” tax treatment and as the OECD identifies, it’s a challenge for tax systems.
Under Australian tax law, the PERLS V securities are treated as equity not debt, so although the return on the security was called “interest”, distributions were treated like a ordinary share dividend for tax purposes and carried a franking credit.
But under New Zealand income tax law, the note that formed part of the PERLS V securities was analysed on its own, separately from the preference share, and it was treated as debt.
This meant that in New Zealand, when the CBA branch paid interest on the note, that interest was deductible against profits of the New Zealand branch. As a result, the New Zealand branch paid less tax to the New Zealand government.
Cheap capital for the Bank
The economic advantage of this complicated structure is that the CBA was able to obtain high quality capital at a cheap price. The cost of raising capital using the PERLS V security was estimated by the bank as 5.86%. This compared to the economic cost of an ordinary issue of shares of 14.2%. That’s quite a saving.
For investors, it’s the franking credit combined with the higher rate of the “interest” return – which was above basic interest rates – that is really attractive, allowing them to reduce tax on their income.
Applying the tax anti-avoidance rule
The full bench of the Federal Court at first ruled in favour of Australia’s Tax Commissioner, finding that a tax anti-avoidance rule directed at franking credit schemes to avoid tax, could be applied.
Justice Jessup concluded the Bank had a “non-incidental purpose” of enabling its investors in the PERLS V securities to get the franking credits which were central to the scheme – and the fact the bank received a deduction in New Zealand was relevant. So, the anti-avoidance rule applied – to deny the investors the benefit of the franking credits.
But on appeal, the High Court found instead that the CBA was able to issue the securities with tax advantages, carrying a franking credit for the investor. Justice Gageler, in the High Court, accepted that the deduction in New Zealand was relevant to the Australian tax rules, but concluded that even though the franking credits were crucial for investors, the main purpose was the capital-raising.
Why should Australian taxpayers care?
Don’t get me wrong, the Commonwealth Bank pays quite a lot of tax. It reported about $2.1 billion in 2012 on a profit of more than $7 billion.
The result of this case confirms the CBA was operating absolutely within the income tax rules of Australia and New Zealand. Many will say the case is a straightforward and sensible approach to company tax rules in a situation where there was a genuine commercial capital-raising by one of Australia’s major banks.
But the bank’s cheap capital comes at a cost to the revenue and we all bear some of this cost (although the investors go home happy). On $2 billion of capital, the Bank saved about $170 million, most of which is the result of reduced tax paid in Australia and New Zealand. If the Tax Commissioner had won this case, the Commonwealth Bank estimated the cost of capital as rising to about 7.8%, still much cheaper than ordinary shares. The main reason for the cheaper capital is the deduction for the interest paid out of the New Zealand branch.
Why, if franking credits reflect company tax paid, should Australians care if the CBA could distribute them to its investors in the PERLS V securities? There actually has been, at some stage, company tax paid by the Bank.
The reason is that the Commonwealth Bank was in what is called an “excess credit” position. Some of the Bank’s shareholders are not Australian residents, and those shareholders cannot use franking credits to reduce their tax.
This means the Bank does not want to distribute franking credits to foreign investors and it builds up a stock of credits it cannot use. The PERLS V securities enabled the Bank to distribute some of those excess franking credits to Australian investors – who can use them – without paying any more company tax on the underlying profit that supported the return on the securities.
Tax cooperation needed in the global era
If anything, it’s New Zealand taxpayers who might care that they are not getting their full share of company tax from the CBA. Should Australians care about New Zealand’s tax revenue, if its tax law does not solve the problem?
I think the answer has to be “yes”. In the old days, the tax system of one country really had no connection to another country. But today, capital is increasingly mobile as a result of globalisation. International tax arbitrage by multinationals – for example, by using securities or other arrangements that have hybrid tax treatment across borders – is one way in which the global tax burden of the multinational is lowered.
In the CBA case, the Tax Commissioner argued that the bank had got “the best of both worlds” in its PERLS V securities. Indeed, the Bank has got the best out of our globalised world. All countries would benefit if we were able to achieve increased transparency and a new approach to multinational taxation that would address hybrid tax treatment across borders, as well as other concerns about profit shifting such as that alleged for Google and Starbucks.
There are some positive developments. The federal Treasury Working Group has issued a Discussion Paper on this issue, while the OECD has agreed to prepare new rules about tax avoidance before the G20 meeting in July.
National governments cannot succeed in taxing multinational corporations that can plan their tax and business affairs across a multitude of countries each with different tax and regulatory regimes, unless governments begin to cooperate in designing the tax laws that apply to multinational corporations.
Even countries as closely connected as Australia and New Zealand can miss out if we do not cooperate in designing our tax systems.
Caroline Fairchild, The Huffington Post, 5 June 2013
Apple and Google are among the many corporations to have argued that America’s high corporate tax rates discourage companies from bringing offshore profits — and hence jobs — back home to the United States. Yet after considering several decades of historical data on the U.S. corporate tax rate and economic growth, a new policy brief contends that there is no statistical relationship between the two factors.
The brief, by the Economic Policy Institute, a left-leaning think tank, finds that lowering the U.S. corporate income tax rate would not increase the country’s economic growth. Indeed, EPI goes as far as to say there is no evidence to support that the tax rate and economic growth are correlated at all.
The country’s top marginal corporate tax rate of 35 percent is among the highest in the industrialized world, and many large corporations and lawmakers contend that the high rate curbs growth and encourages companies to exploit tax loopholes.
Yet the effective corporate income tax rate in the U.S., a measure of the taxes a company pays as a percentage of its profit, averaged 27.7 percent from 2006 to 2009. That’s very close to the average rate of countries in the Organization For Economic Cooperation during the same period — 27.2 percent once weighted by GDP — according to the EPI.
The top 10 most profitable companies in the U.S, including Apple and Exxon Mobil, paid an average tax rate of just 9 percent last year, according to study by website NerdWallet.
Other companies, such as Boeing, CVS Caremark and FedEx, are currently lobbying Washington to lower the corporate tax rate, arguing that the broader economy would benefit as a result. Former American Express CEO Harvey Golub recently went even farther, saying large corporations like Apple should pay no taxes at all.
Meanwhile, corporate profitability is at an all-time high, according to EPI. Before-tax profits rose to 13.6 percent of national income in 2012.
Peter Whiteford, InsideStory, 4 June 2013
Contrary to what many commentators claim, Australia has the lowest level of middle-class welfare in the developed world, writes Peter Whiteford.
THE recent Grattan Institute report, Budget Pressures on Australian Governments, argues that the federal government and the states and territories could face a combined annual deficit of around 4 per cent of GDP by 2023, of which around 2.5 per cent of GDP would be at the federal level. The scale of the federal government’s fiscal challenge was also a theme of the debate about the Federal Budget last month and will undoubtedly feature in the election campaign later this year.
In a speech at Per Capita in late April the prime minister, Julia Gillard, foreshadowed a reduction in projected tax revenues of around $12 billion by the end of this financial year, which would demand “urgent and grave Budget decisions.” In a speech to the Institute of Public Affairs in early May, the shadow treasurer, Joe Hockey stressed the urgency of “attacking spending” and “looking for structural saves” and referred to a speech he gave last year to the Institute of Economic Affairs in London in which he argued that “all developed countries are now facing the end of the era of universal entitlement.” According to Hockey, “Addressing the ongoing fiscal crises will involve the winding back of universal access to payments and entitlements from the state.”
To a significant extent, the media reacted to these developments by calling for cuts in public spending, and particularly cuts to “middle-class welfare.” The Business Spectator’s Alan Kohler has argued that Australia’s means-testing regime is unduly loose. “Too many people are getting too many benefits they don’t need because successive governments have tried to buy their votes,” he wrote. “The health and welfare systems have been used as political tools, not safety nets” and poor means testing means that “the health budget is out of control and ‘middle-class welfare’ is blowing a huge hole in the budget.” The Sydney Morning Herald referred to the family assistance system as a “hotch potch… ripe for an overhaul,” and former Labor Minister Gary Johns argued in the Australian that too many households are on the receiving end of middle-class welfare, and that for those on low incomes “there is no dignity in not paying tax… [W]here is the dignity in not making a contribution?”
The criticisms aren’t confined to Labor’s spending. The Australian Financial Review has labelled the opposition’s plan for substantially more generous paid parental leave as “costly middle-class welfare.” In the Australian, business writer Adam Creighton described the Family Tax Benefit Part B, a relic of the Howard era, as “a superfluous $4.5 billion-a-year cherry on a welfare cake that is choking economic growth and operating contrary to other government policies.” Surely, added Creighton, “it is not unfair to rein in a benefit that is paid to families in the top 10 per cent of the income distribution, with household incomes up to $175,600?”
This preoccupation with middle-class welfare is partly motivated by the view that the budget gap shouldn’t be bridged by increasing taxes. In the Financial Review, Fleur Anderson suggested that “the middle class and the professions are staging a revolt as they find their growing share of the tax burden too hard to bear, after over a million people were made exempt from the tax system over the past ten years.” In that newspaper and elsewhere, commentators have pointed to the Australian Tax Office’s tax statistics for the 2010–11 financial year, which show that the top 5 per cent of income earners pay 34.1 per cent of net income tax and the top 25 per cent of income earners pay just over two-thirds of net income tax. Correspondingly, about 45 per cent of Australians pay no income tax at all.
Interestingly, that figure of 45 per cent is very close to the one used by Mitt Romney in the 2012 US presidential election campaign when he argued that 47 per cent of Americans pay no income tax and were therefore “moochers.” The economist Nicholas Eberstadt subsequently argued that the United States is now “on the verge of a symbolic threshold – the point at which more than half of all American households receive, and accept, transfer benefits from the government” – and suggested that there was now a divide between the “takers” and the “makers.”
Should we deal with the growing budget gap by cutting spending or increasing taxes – or by some combination of the two? Before we try to answer that question we need a clear understanding of the current distribution of welfare spending (who gets what?) and how spending is financed (who pays for it?). Are higher income groups already overburdened with taxes or are they actually benefiting too much from profligate spending?
Fortunately for those interested in accurate answers to these questions, the Australian Bureau of Statistics has published studies of government benefits and taxes and their impact on household incomes since the 1980s, with the most recent results being for 2009–10. These studies provide the most comprehensive accounting of government spending and taxation in Australia, taking into account not only the impact of social security cash benefits and direct taxes but also the effects of government spending on healthcare, education and community services, and the impact of indirect taxes, such as the GST. The ATO statistics used by the Financial Review and others are certainly useful, but they only identify who pays income taxes and don’t include the GST or other indirect taxes. Nor do they tell us what benefits households receive from governments.
The poorest 20 per cent of households received about $435 per week in cash benefits and received services worth about $446 per week (mainly public healthcare); they paid negligible amounts of income tax but around $105 per week in indirect taxes (excises, rates and the GST). In contrast, the richest 20 per cent of households received only $15 per week in cash benefits (or about one-thirtieth as much as the lowest income group), received $234 per week in government services (mainly education and healthcare), and paid $756 per week in income taxes and $273 per week in indirect taxes.
Not surprisingly, government spending on health and education is far more important than social security for the richest households. The richest quintile received only 1.7 per cent of social security benefits, but benefited from $83 per week in education benefits, or around 14 per cent of total government education spending, and $140 per week in health benefits, or 15.5 per cent of health spending. Overall, the non-cash benefits received by the richest were worth nearly sixteen times as much as the cash benefits they received ($234 per week compared to $15 per week).
Of the cash benefits received by the richest 20 per cent of households, only $1 per week came in the form of family payments, the most common target of the criticism of middle-class welfare and the main target for reduced spending in the 2013–14 Budget. Most of the social security benefits received by the richest 20 per cent were age and disability pensions, veterans’ pensions and unemployment benefits. This is not because the income-testing of these payments is lax; income tests in the social security system are based on the nuclear family, so this “leakage” to high-income households is mainly the result of aged or disabled people or the unemployed sharing a house with their parents or their children.
On the tax side, the richest quintile of households paid around 58 per cent of income taxes and 30 per cent of indirect taxes, although they had 45 per cent of private income. Direct and indirect taxes paid by the richest households amounted to 46.5 per cent of all taxes paid; so while indirect taxes offset some of the progressivity of income taxes, the overall tax take is still progressive. Most importantly, of course, these taxes pay for the benefits received by lower-income households.
The overall scale of redistribution in Australia can be gauged from the fact that while private incomes among the richest 20 per cent were more than twenty-one times higher than the private incomes of the poorest 20 per cent, that disparity was reduced to about three-to-one, or by 86 per cent, after benefits and services were received and taxes paid. In terms of improving the incomes of the poor, social security and government services are roughly equally important, with the social security system increasing its share from 2 per cent of private income to nearly 7 per cent of gross income. Because the poorest income group pay a small fraction of 1 per cent of income taxes, their share of disposable income was increased to 8 per cent, with government services increasing this further to 11 per cent of final income. Although indirect taxes are regressive, in this case taking 12.7 per cent of the income of the poorest households compared to 9.5 per cent of the income of the richest, they did not materially alter these disparities.
THESE ABS figures provide a snapshot of the distribution of benefits and taxes at a point in time, but in assessing proposals for reform it is important to keep in mind the longer-term impact and objectives of taxing and spending.
Overall, the Australian welfare state performs two main functions – redistribution between rich and poor (the Robin Hood function) and insurance and consumption smoothing (the “piggy bank” function). In Australia we tend to focus on the idea that the welfare state should mainly be about redistribution to the poor, which is why we focus so much on concerns about middle-class welfare. But as I have argued previously, Australia actually has the lowest level of middle-class welfare in the developed world and targets its spending to the poor more than any other OECD country.
As well as redistributing between rich and poor, however, Australia redistributes considerable resources to older people (as do all other developed welfare states). For example, households with a head aged seventy-five years and over have by far the lowest average private incomes, but in 2009–10 they received 43 per cent of all age pensions and 21 per cent of all health spending, and they paid less than 1 per cent of income taxes and 5 per cent of indirect taxes. In combination, this pattern of spending and taxing boosted their incomes from about one-third of the population average to three-quarters. Similarly, households with a head aged between sixty-five and seventy-four years got 46 per cent of age pensions and 16 per cent of health spending and paid 2.5 per cent of income taxes and 9 per cent of indirect taxes; this boosted their incomes from just over half the population average to just over three-quarters.
The welfare state also provides insurance against the kinds of risks faced by working-aged Australians enumerated in the latest report of HILDA (the Household, Income and Labour Dynamics in Australia survey):
• Around 3 per cent are fired or made redundant each year, and 10 per cent over four years.
• Around 8 to 9 per cent experience a serious personal injury or illness each year and 26 per cent over four years. Between 15 and 17 per cent experience serious injury or illness to a close relative or family member each year and nearly 50 per cent over a four year period. Around 10 per cent experience the same each year for a close friend.
• Around 1 per cent experience the death of a spouse or child each year, and 3 per cent over four years. Around 11 per cent experience the death of another close relative or family member per year, and 40 per cent over four years.
• Around 3 to 4 per cent separate each year and more than 10 per cent separated from a spouse or long-term partner between 2004 and 2008. Separation or divorce is by far the most important cause of lone parenthood. Between 1 and 1.5 per cent change each year from being a couple with children to being a lone parent and 4.1 per cent over nine years.
As a result of these and other risks, many Australians experience significant changes in their economic circumstances both in any given year and cumulatively over time. Commentators who praise Australia’s performance on measures of income mobility tend to focus on upward movement – low-income young people finishing their studies and then moving into jobs and people moving up the occupational ladder. But the HILDA report shows that in each year between 2001 and 2008 between 40 and 50 per cent of Australians experienced a drop in income and roughly 10 per cent fell more than 20 percentiles in the income distribution. Over the whole period, 44 per cent of the population moved more than 20 percentiles. Around half of those in the richest income quintile in 2001 were still in that income group in 2008, but the other half were in lower-income groups; only 30 per cent of those in the middle-income group in 2001 were in the same group in 2008, with 30 per cent being worse off and around 36 per cent being better off.
THIS mobility is also important in thinking about who benefits from and who pays for the welfare state. There is a tendency to think of welfare recipients as people permanently dependent on payments – the “takers” as described above, with the corollary that other people are the “makers,” permanently “independent” of welfare. But the impact of unforeseen events and consequent changes in incomes mean that over time many people change their status as recipients of welfare payments on the one hand or as taxpayers on the other.
In 2001, for instance, fully 37 per cent of working-age people received income support at some time in the year, although in 2008 – after a period of strong economic growth – this had fallen to 29.5 per cent. But 65.7 per cent of working-age Australians lived in a household where someone received welfare at some time between 2001 and 2009. In any one year in this decade between 5 and 7 per cent of working-age Australians received 90 per cent or more of their income from welfare payments (not including family payments) and fully 15 per cent of the population was in this position at some stage in the period (although only 1.2 per cent were reliant for all nine years).
In other words, people of working age who are “welfare dependent” for long periods are only a tiny percentage of the population, while many highly and very highly paid individuals face substantial risks of large income drops, associated particularly with health changes but also with changes in employment and family status. In summary, the welfare state – defined broadly to include health and education as well as social security payments – touches the lives of many more Australians than is commonly thought. Nearly everyone may be a “maker” or a “taker” at different stages in life.
It is certainly important to review government spending regularly to assess whether it is meeting its objectives. But the idea that there are vast amounts of wasteful social security spending that can easily be cut back simply does not accord with the reality that the Australian benefit system is the most targeted to low-income groups of any developed country. A further tightening of this targeting will unavoidably mean higher withdrawal rates for benefits and higher effective marginal tax rates over the range of incomes where benefits are withdrawn. For large savings to be achieved it is necessary either to cut social security spending well down the income distribution and shift the consequences of adverse risks and contingencies onto households, or cut spending in the politically popular areas of health and education.
It is also worth noting that there is an inconsistency in some of the arguments of those who favour cutting spending but not increasing taxes. On the one hand, there are those who argue that we should not increase taxes on higher-income groups since they already pay a disproportionate share of the tax burden; on the other hand there are those (including sometimes the same people) who argue that we should cut government benefits going to higher-income groups, when cutting benefits can obviously have a similar effect on disposable income as increasing taxes.
Given the projected size of the Budget gap in coming years, it seems sensible to consider all options on both the spending side and the revenue side. Reforms that encourage labour-force participation can also help by maximising the number of taxpayers relative to the number of people requiring support. Most importantly, it will be necessary to have a well-informed debate about who wins and who loses from welfare and tax reform.
Peter Whiteford is a Professor in the Crawford School of Public Policy at the Australian National University.
Matt Cowgill, The Guardian Australia, 3 June 2013
Railing against a soaring benefits bill and middle-class handouts is another international trend Australia should avoid importing.
Australians like to import cultural habits from overseas. When I was in primary school, dressing like East 17 and following the Charlotte Hornets was the height of fashion. Our politicians aren’t immune to foreign trends either – I don’t remember the “debt ceiling” ever being mentioned in Australian politics before Barnaby Joyce picked up on the Tea Party’s rhetoric and imported it to Canberra.
The latest imported fad is the war on the welfare state, which the shadow treasurer, Joe Hockey, launched in London a little over a year ago in his speech on “the end of the age of entitlement”. He recently reiterated his central point, warning that a Coalition government would implement drastic welfare and spending cuts. He’s not alone: the CIS, a major conservative thinktank, recently launched a campaign to slash government spending.
This radical war on welfare seems to rest on a couple of simple premises. The first is that social spending has risen rapidly, and is now too high. The second is the idea that too much of our spending goes to people who don’t need it, and that this “middle-class welfare” has risen significantly over time.
Neither of these claims holds up to scrutiny.
Statistics from the OECD show that Australia spent 8.1% of its national income on cash benefits last year, compared with an average of 12.6% across the advanced economies. Only South Korea (3.7%) and Iceland (6.8%) spent less. The US is no one’s idea of a generous welfare state, but we’d need to spend around $60bn extra on welfare each year to match its spending as a proportion of GDP. Even in 2005, before the financial crisis sent its unemployment rate soaring, America’s spending on cash benefits was a little higher than ours as a share of the economy.
Our welfare spending is low, and it also hasn’t grown that much over the past couple of decades. In the mid-2000s, we devoted about 8% of GDP to cash benefits, the same as we do now. In the mid 1990s, when unemployment was much higher, we spent 9% of GDP.
Strike one against the war on welfare.
A big part of the reason our spending is so low, relative to other advanced economies, is that we target our spending much more towards those who need it. If you want to get family payments, or the age pension, or unemployment benefits, you’ll need to tell the government what you earn. If you earn too much, you don’t get the payment. These means tests in Australia are much tighter than they are elsewhere, so a larger share of our spending goes to low-income households. In most other advanced economies, the welfare system has a much bigger “contributory” element – what you get out is related to what you put in – so higher-income earners actually end up with higher payments if they become unemployed, for example.
The latest ABS figures, for 2009-10, show that the poorest 20% of Australian households received an average of $323 a week in cash benefits, while the richest received just $22 per week, a ratio of $14.7 to a poor household for every dollar that goes to the richest. Peter Whiteford from the ANU has shown that a far larger proportion of our cash benefits go to the poorest households than in any other advanced economy. Not only do rich Australians receive a tiny share of welfare spending, but their share is smaller than it used to be back in the 1980s and early 1990s. The idea that Australia is a land of rampant middle- and upper-class welfare is a myth.
Strike two against the war on welfare.
Hockey has warned darkly that “western democracies … have been reluctant to wind back universal access to payments”. Maybe this is the sort of thing that goes over well at the UK Institute of Economic Affairs, where Hockey delivered his speech, but it doesn’t really translate to Australia. Now that the government has scrapped the baby bonus and means-tested family tax benefit part B and the private health insurance rebate, Luke Buckmaster of the Parliamentary Library could only find one “significant payment not currently means-tested”, which is the $2bn a year Child Care Rebate. If the war on welfare is all about introducing means tests, it’s already been won in Australia.
Where we do have “middle-class welfare” is in the tax breaks that mostly benefit the rich. Concessions for superannuation are skewed towards upper-income households, and the wealthy also benefit disproportionately from tax breaks on things like negatively geared property and capital gains. But I don’t think this is what Hockey and his fellow warriors against welfare have in mind when they mutter ominously about unsustainable policies.
When rumours were flying around earlier this year that the government might reduce some of the tax concessions that high-income households receive for superannuation, they were accused of class warfare, including by some disgruntled Labor figures. The same tedious accusation is made whenever talk turns to reducing public support for things such as private health insurance – the people who usually bleat about out-of-control spending splutter with outrage.
If future governments find we’re not raising enough revenue to fund our social spending, the obvious solution is to raise more revenue. We’re one of the lowest taxing countries in the developed world. There’s no need to gut our social protection system to balance the books. Some fads, like East 17’s hats, are best left in Britain.