This page contains a selection of media articles from January 2013
Michael Pascoe, The Guardian AU, 24 January 2013
How nice to see that public-spirited Obeid family campaigning so hard to end the rort that is the family trust system. Well done, Eddie, Moses and the rest of them.
Of course, the Obeids might not quite see it that way, but the creeping exposure of their use of trusts to disguise, channel, fiddle and generally muck around with the spirit of the Tax Act, revealing the power of the rich and well-accounted to avoid paying their fair share, is the best advertisement yet for radical reform of the putrid trust system.
Moses’ ability to be officially broke while living the millionaire life, courtesy of the family trust structure, thus avoiding a $16 million debt to the City of Sydney, and this week’s ICAC evidence outlining trust “loans” to avoid income tax are why the Obeids are the new pin-up boys of tax avoidance.
Whether that avoidance strays into the realm of illegal evasion is something for the Australian Tax Office to investigate. One can only hope there’s an ATO officer keeping notes at the ICAC hearing.
But, giving the Obeids the benefit of the doubt, as one must on legal matters, they nonetheless have supplied the nation with more than enough evidence to suggest that the use of family trusts is a joke at the expense of the less fortunate.
That’s if the nation is awake or, more importantly, if the political class had any will to pursue the wealth and privilege of some of their own members and many of their backers, let alone the richest and therefore most powerful Australians.
And it’s not as if there is anything particularly new in the Obeids slipping the odd camel through a trust loop-hole. Kerry Packer was famous for it, throwing in the odd Caribbean tax haven for good measure.
The closest the public ever came to discovering some of the legal fiddling in the Packer empire was when his daughter’s claimed love of privacy over her trust structure was the reason given for James Packer needing to pull out of a dud US casino deal.
The untrusting souls on the other side of that $US1.75 billion disaster reckoned Gretel’s desire to keep the labyrinthine family finances secret was just a ruse to protect James from his failed American expansion.
But I would again give her the benefit of the doubt: I can well understand that the Packer clan wouldn’t want people to know what’s been avoided, particularly now that James is playing the philanthropist role, wanting to “give” Sydney another casino.
Far more mundane is the routine use of trust structures to minimise tax by the merely well-off, as opposed to the mega-wealthy. In the multi-millionaire and billionaire class, it’s taken for granted. For the comfortable, there’s the line to cross between the extra accounting fees and the benefit.
A little while ago I had a chance social encounter with an accountant. As people will talk ailments with doctors, crime with police and scandal with journalists, chat fell to occupations and structures. The accountant was a little perplexed that I operate as a sole trader with no company structure, let alone a family trust.
He suggested I really should consider setting up a trust as I could save several thousand dollars a year in tax, after the initial set-up costs. He said I’d have no trouble meeting the three ATO legitimacy tests – the third of which was that the trust wasn’t being set up to avoid tax.
David Uren, The Australian, 23 January 2013
CARBON emissions from the electricity sector have dived in the first six months under the carbon tax, with much greater use of renewable energy and cutbacks in consumption.
While the government believes the 8.6 per cent fall in carbon emissions shows its policies are working, it also means it will collect less from the tax than the $4 billion it anticipated this year.
The drop in revenue comes after the minerals resource rent tax, forecast to raise $2bn this year, failed to raise any revenue from the big three miners in the first six months of the year.
Total emissions from the electricity sector in the December half were 7.5 million tonnes lower than in the same half of 2011.
The government cautions that a big abatement task remains, cutting total emissions by 33 million tonnes from 2011 levels by 2020. The fall in electricity demand was not anticipated by the Australian Energy Market Operator and is unlikely to have been included in Treasury’s budget forecasts.
Analysis by Climate Change Minister Greg Combet’s staff shows that total electricity production in the first half of the financial year fell by 2.7 per cent, compared with the corresponding period of 2011-12.
However, the analysis shows there has also been a big change in the mix of power, with much greater use of renewable energy from hydroelectricity from the Snowy Mountains and Tasmania, and also wind farms, while there have been cuts in use of both black and brown coal.
This has reduced emissions by a further 6 per cent in the first six months of the financial year.
A spokesman for Mr Combet said there were many factors, including the carbon tax and the renewable energy target, influencing emissions in the power sector.
“The government’s clean energy policies have been implemented smoothly and are working as intended to cut carbon pollution,” the spokesman said.
“Our policies are stimulating more investment in renewable energy and clean technologies which is reducing pollution, helping to tackle climate change for future generations.”
The head of Ernst & Young regional climate change operations, Mathew Nelson, said the carbon tax would not suffer shortfalls of the magnitude expected by the government’s troubled mining tax.
“It is impacted by production in the economy as a whole and electricity demand; but variations within those are within percentage points,” Mr Nelson said.
The decline in electricity emissions could easily slice $300 million from the budget forecast of $4bn cash earnings from the tax this year.
Companies have to pay 75 per cent of their expected 2012-13 carbon tax by June 15, with the balance due in February next year.
The power sector accounts for about half of Australia’s emissions and a larger share of the carbon tax, because some of the largest emitters have free permits.
Department of Climate Change projections issued last October envisaged that emissions overall would rise by 0.4 per cent this year while emissions from the electricity sector would fall by 0.5 per cent.
However, there have been huge falls in electricity generation in both Victoria, down 8.6 per cent, and NSW, down 5.3 per cent. With changes in the energy mix, emissions in Victoria dropped 14.6 per cent while they were 10.4 per cent lower in NSW.
Consulting firm Pitt & Sherry says changes of this scale are without precedent in the 120-year history of the electricity supply industry.
A consultant with the firm, Graham Anderson, said the Energy Market Operator has been overestimating growth for several years.
The retreat of manufacturing has been a factor, with the closure of the Kurri Kurri aluminium smelter last year and cutbacks in other metals plants affecting industrial demand.
Mr Anderson said the spread of roof-top solar panels and of appliances that used less energy were reducing growth in household consumption.
An associate director with the research firm Reputex, Bret Harper, said the flooding of the Yallourn brown-coal mine last winter limited output at the adjoining brown-coal power station, with the loss largely made up by hydro-electric plants.
Brown-coal plants in South Australia were also mothballed during the winter, reducing emissions.
Barbara Drury, The Sydney Morning Herald, 23 January 2013
Perhaps the kids have left home, you are newly divorced, or simply need to boost your income. Maybe you just enjoy the company of strangers with a story to tell.
For all sorts of reasons, Australians are twigging to the idea that they can make some extra cash by renting out a room or part of the house. This is especially so now that websites such as Airbnb and Stayz, owned by Fairfax Media, are making it easier to advertise your place to a global audience.
While taking in paying guests is a great way to turn your home into a cash box, it could be costly to ignore tax.
If you use your home to produce income, you are required to declare the income on your annual tax return and pay tax at your marginal rate. Failure to do so could result in stiff tax penalties.
The director of WLM Financial Services, Geoff Walker, says the Australian Taxation Office (ATO) usually calculates penalties as a percentage of the amount of tax avoided and the amount of co-operation shown to resolve the matter. Depending how long the venture has been running, the bill could be large.
The tax treatment of your home-based rental accommodation will depend on the type of rental arrangement. According to a partner with accountants HLB Newhouse, Ben Fock, this needs to be worked out on a case-by-case basis.
”You are dealing with three very different things: pure leasing of a room or a granny flat; a bed-and-breakfast offering a turndown service and food; and board or home stay, which is typically longer-term accommodation for students offering room and board,” he says. (A turndown service is when the host prepares the guest’s bed covers.)
If you are simply leasing a room or flat, you must include the rental income received in your tax return and you may be liable for capital gains tax (CGT) on any future sale of the property.
The family home is generally exempt from CGT but if you rent out all or part of your home, or use it to run a business, part of any profit on the sale of the property may be taxable. CGT is generally payable on a pro-rata basis for the percentage of floor space used to produce income.
You will only be liable for CGT for the period it is used to produce income, so it can be a good idea to have the property valued before you start renting it out to establish a cost base.
By comparison, board or home-stay payments are generally non-taxable, provided they are designed to cover your costs rather than provide you with a profit. These arrangements are typically made through an educational institution for foreign students and the amount paid is set by the institution to cover food, laundry and other costs.
Fock says the ATO has released a ruling and an interpretive decision on these board and home-stay arrangements that classifies them as ”non-economic rental”. But hosts are advised to get some sort of agreement in writing to clarify their position.
”You can get into trouble [with the ATO] if the board is considered excessive. If it’s excessive it could be considered more as a straight rental,” Fock says.
But it is with the increasingly popular B&B or holiday let that tax can be a grey area.
”[Your tax treatment] depends on factors including what you charge, services provided, where you advertise and the regularity of income,” Fock says.
Now that individuals can list their homes on international websites, it is only a matter of time until the ATO begins to take an interest in your nice little earner. If the enterprise is designed to make a profit, then income tax will be payable.
You will likely be up for CGT on sale, but if you are running a commercial venture you may be able to claim small-business CGT concessions.
Commerciality is assessed on such things as regularity of bookings, the number of rooms available and length of time they are let, but this is a complex area and people are advised to seek professional advice. Walker says you may be able to claim a tax deduction for costs such as insurance and depreciation of furniture and fittings in the rooms available for rental.
If guests also have the use of common areas such as a kitchen and living area, you may also be able to claim a portion of the depreciation on appliances and furnishings. You can also claim on a proportional basis for rates, water and utilities.
If you also offer guests meals, Walker says it is a good idea to account for food and accommodation separately. Generally, there is no profit on meals included in the deal so no tax is payable.
Walker says people should also think about landlord and tenant insurance to cover against damage caused by guests. Public liability is normally covered by your home-insurance policy.
Whatever your plans, it is worth getting professional tax advice from the outset. There is no point renting a room only to lose the roof over your head to pay a large tax penalty.
Noel Davis, Australian Financial Review, 23 January 2013
The Administrative Appeals Tribunal decision of Verschuer v the Australian Tax Office, referred to in the article “Dymocks director’s 78 per cent super tax a bit French” (AFR, January 21), has important tax implications for employers, large and small, and their auditors.
Many employers (some unwittingly) pay their employees’ superannuation contributions into clearing accounts and the money is transferred later to the bank account of the superannuation fund. The effect of the tribunal’s decision is that the contribution is not made when it is paid to the clearing account. It is only made when it is transferred to the superannuation fund’s bank account.
There have been a number of instances where contributions paid into a clearing account towards the end of a financial year are not transferred into the superannuation fund’s bank account until early in the next financial year, which has the effect that the contribution was not made until the latter year.
Under the tax legislation, an employer is only entitled to a tax deduction for a contribution in the year in which it is made. Employers who pay contributions to clearing accounts will, therefore, need to check whether each such contribution was transferred from the clearing account to the superannuation fund before the end of the financial year, in order to avoid incorrectly claiming tax deductions.
The 93 per cent tax rate that was applied to Ms Verschuer, because of an excessive contribution resulting from the payment of a superannuation contribution into a clearing account at the end of a financial year, has been the subject of a submission to the government that the legislation should be altered, but the submission has not resulted in any change. Such a penal rate of tax should not apply to transactions that result in technical breaches of the tax legislation.
AAP, The Australian, 23 January 2013
TREASURER Wayne Swan says inflation has moderated and there’s been no significant impact from the introduction of the carbon tax.
The Australian Bureau of Statistics says the consumer price index (CPI) rose by just 0.2 per cent in the December quarter, which was half of what economists expected.
This was a sharp slowdown down from the 1.4 per cent jump in the September quarter and left the annual inflation rate at 2.2 per cent.
Underlying measures of inflation grew by an average 0.55 per cent in the December quarter, for an annual rate of 2.3 per cent.
Mr Swan said this result reflected subdued price pressures across the board with a number of seasonal factors putting downward pressure on inflation.
“Importantly, today’s result provides further evidence that there has been no significant broad-based increase in consumer prices as a result of the carbon price,” Mr Swan told reporters in Brisbane.
“That is a result which is entirely consistent with Treasury modelling. In fact much of the impact of the carbon price on inflation occurred in the previous quarter.”
The data also exposed the scare campaign from Opposition Leader Tony Abbott and the Liberals about the carbon tax as being fraudulent, the treasurer said.
“There has been a very modest impact on inflation and Mr Abbott’s prediction of legs of lamb costing $100, Gladstone and Whyalla being wiped out have come to naught,” he said.
Despite this, Mr Swan said the opposition was still intent on “ripping out” the government assistance associated with the carbon tax, such as the tripling of the tax-free threshold, increases to family payments and pension increases.
The figures showed inflation was contained, serving as a reminder of Australia’s “strong economic fundamentals”.
“The government’s fiscal discipline has contributed to contained inflation giving the RBA (Reserve Bank of Australia) room to move to cut the cash rate by something like 175 basis points over the year,” Mr Swan said.
The treasurer compared the result with the figures seen at the end of the last Liberal government where underlying inflation “was pushed to its highest level in 16 years and where reckless spending pushed up the inflation rate to more than double what we see today”.
Mr Swan said while you would rather be in Australia than any other developed economy, the efforts being made to boost global growth in both the United States and Japan are welcome.
“The efforts by the monetary authorities in the United States and Japan are directed towards increasing global growth and increasing global growth is what we need to do for the prosperity of the global economy,” he said.
“What is good for the global economy is always good for our economy.”
Jesse Drucker, Bloomberg, 23 January 2013
Inside Reindert Dooves’s home, a 17th- century, three-story converted warehouse along the Zaan canal in suburban Amsterdam, a 21st-century Internet giant is avoiding taxes.
The bookkeeper’s home office doubles as the headquarters for a Yahoo! Inc. (YHOO) offshore unit. Through this sun-filled, white- walled room, Yahoo has taken advantage of the law to quietly funnel hundreds of millions of dollars in global profits to island subsidiaries, cutting its worldwide tax bill.
The Yahoo arrangement illustrates that the Netherlands, in the heart of a continent better known for social welfare than corporate welfare, has emerged as one of the most important tax havens for multinational companies. Now, as a deficit-strapped Europe raises retirement ages and taxes on the working class, the Netherlands’ role as a $13 trillion relay station on the global tax-avoiding network is prompting a backlash.
The Dutch Parliament is scheduled to debate the fairness of its tax system today. Lawmakers from several parties, including members of the country’s governing coalition, say they want to remove a stain on the nation’s reputation.
“We should not be a tax haven,” said Ed Groot, a parliament member from the Labour Party, which along with the People’s Party for Freedom and Democracy took power in November. Both ruling parties are “fed up with these so called PO Box companies,” he said. “If they go somewhere else we are not sorry at all because they spoil the name of Holland. Otherwise you can wait for retaliation measures and this we don’t want.”
Last month, the European Commission, the European Union’s executive body, declared a war on tax avoidance and evasion, which it said costs the EU 1 trillion euros a year. The commission advised member states — including the Netherlands — to create tax-haven blacklists and adopt anti-abuse rules. It also recommended reforms that could undermine the lure of the Netherlands, and hurt a spinoff industry that has mushroomed in and around Amsterdam to abet tax avoidance.
Attracted by the Netherlands’ lenient policies and extensive network of tax treaties, companies such as Yahoo, Google Inc. (GOOG), Merck & Co. and Dell Inc. have moved profits through the country. Using techniques with nicknames such as the “Dutch Sandwich,” multinational companies routed 10.2 trillion euros in 2010 through 14,300 Dutch “special financial units,” according to the Dutch Central Bank. Such units often only exist on paper, as is allowed by law.
The EU’s 27 member states had accumulated an annual 519.5 billion euro budget deficit as of the second quarter of 2012, according to Eurostat. In response, Spain is slashing teacher salaries and Greece is cutting funding for public hospitals and prescription drugs. The Netherlands had a deficit of 24.9 billion euros.
“Governments around the world have to cut budgets and at the same time multinational companies are avoiding taxes,” said Arnold Merkies, a Dutch parliament member from the Socialist Party.
Merkies recently sent questions to the state secretary for finance about the Netherlands’ role in enabling a tax-avoidance strategy used by Google, after Bloomberg News reported in December that the company had funneled almost $10 billion through a Dutch shell company en route to Bermuda in 2011. The move cut the company’s worldwide tax bill by $2 billion that year.
“We connect the tax havens here,” Merkies said. “We have a harmful role in the world and have a responsibility toward the rest of the world.”
Profit shifting into tax havens by corporations costs the U.S. $90 billion a year, according to Kimberly Clausing, an economics professor at Reed College in Portland, Oregon. The U.S. faces a projected budget deficit of almost $1 trillion in fiscal 2013.
The Paris-based Organization for Economic Cooperation and Development — which sets standards for how multinational companies allocate taxable income around the world — is also tackling the issue. It’s discussing a proposal that could make it harder for companies to move profits through the Netherlands into island tax havens.
Anger over corporate tax avoidance is spreading throughout Europe. On Jan. 31, the U.K. Parliament is scheduled to hold its second hearing on the issue. At a November hearing, members of Parliament quizzed executives from Google and Starbucks Corp. about their use of Netherlands subsidiaries to cut taxes.
Yahoo’s offshore operations cut its taxes by $42.8 million in 2011, U.S. securities filings show. Last February, the company reported a dispute with the U.S. Internal Revenue Service regarding its overseas arrangements. It didn’t disclose the amount at stake.
“Yahoo! pays all applicable taxes in every jurisdiction where we operate,” said Sara Gorman, a spokeswoman for the company, based in Sunnyvale, California. She didn’t respond to a detailed list of questions about Yahoo’s Dutch tax-cutting arrangements.
By routing profits through the Netherlands en route to island havens, companies receive an important benefit: They generally don’t have to pay taxes on payments leaving or entering the country.
Technology and pharmaceutical companies often seek to reduce their tax bills by paying royalties to license patent rights from offshore subsidiaries.
Such transactions could incur a cost: many developed nations impose a withholding tax — sometimes as high as 33 percent — on royalties leaving for zero-tax locales with which they don’t have tax treaties, such as Bermuda and the Cayman Islands. By contrast, the Netherlands doesn’t impose withholding taxes on royalties leaving the country, regardless of their destination.
Countries often either eliminate or reduce those taxes when such payments head to a treaty partner. The extensive Dutch treaty network thus protects payments on the way into the country as well.
The Netherlands’ role in facilitating tax avoidance began in force in the late 1970s, when it started so-called advance- pricing agreements to attract multinational companies, said Francis Weyzig, chair of Tax Justice Network Europe, who is finishing a Ph.D. thesis at Radboud University on Dutch tax policy.
Under such agreements, multinational companies agree to leave a tiny amount of income in the Netherlands to be taxed in exchange for being permitted to route profits through the country. This remainder left for the revenue authorities in the Netherlands is known to tax planners as “the Dutch Turn.”
Yahoo, for instance, has an agreement to pay taxes equal to about 1.35 percent of the unit’s total revenue, said the soft- spoken Dooves, who has run the Yahoo unit since 2007. He previously worked as treasurer for a Dutch packaging company for almost 15 years.
“The benefit of the Netherlands is that you know all upfront,” Dooves said in his high-ceilinged home office in the town of Koog aan de Zaan, overlooking a placid commercial street with a scooter store, bakery and Thai restaurant.
Records show that the Yahoo unit reported Dutch income taxes in 2009 of 1.28 million euros — out of the 101.5 million euros in royalties it funneled through the subsidiary that year.
That’s a small price to pay. In return, Yahoo can move profits to virtually any destination without paying a withholding tax.
Tax avoidance has fostered a sizable industry in the Netherlands of so-called trust firms, generating about 1 billion euros in annual tax revenues and about 3,500 jobs, according to a 2009 study by SEO Economic Research. Local companies such as Intertrust Group Holding SA and TMF Group set up high-priced mailboxes for multinational companies, often by providing them with an address at their gleaming, high-rise office buildings near the Amstel River and Amsterdam’s massive soccer arena. Trust firms also provide non tax-related services, such as bookkeeping and payroll administration.
Jan Reint de Vos van Steenwijk, managing director of TMF Holding BV, said he expects the Dutch government to wait until the release this spring of a research report on the economic impact of the corporate services industry before taking any action.
“The benefits to Holland are employment, high-level tax advisers,” said Jos Peters, tax director for Merlyn Tax Solutions & Royalty Conduit Services in Rotterdam. “They come to us and why should we refuse this? We are not doing anything illegal or immoral.”
In December, Blackstone Group LP (BX), the New York-based private equity giant, announced it would buy one of the biggest such firms, Intertrust, for $833 million, according to a person with knowledge of the deal.
Merck, the maker of diabetes drug Januvia and asthma treatment Singulair, lists 54 subsidiaries in the Netherlands. From 2002 to 2010 the company routed more than 7 billion euros in royalties, mostly from European sales, to Bermuda via an Amsterdam subsidiary called Crosswinds BV.
The unit — which had no employees — was named Crosswinds to conjure the image of royalties crossing in and out “like wind blowing,” said a person familiar with the matter.
In late 2010, after Merck acquired Schering Plough Corp., it stopped using Crosswinds to route royalties. Merck cut $1.9 billion off its tax bill that year because of its offshore arrangements, securities filings show.
Ronald Rogers, a spokesman for Merck, based in Whitehouse Station, New Jersey, declined to discuss its tax strategies.
“Merck files its income tax returns in accordance with all applicable laws and regulations,” Rogers said.
One purpose of tax treaties is to prevent companies from paying tax twice in two different countries on the same profit.
Dell, however, uses the Netherlands to avoid paying income taxes in either place. The world’s third-largest personal- computer maker has avoided about $4 billion in income taxes since 2004, thanks partly to its use of a Dutch unit.
The subsidiary, called Dell Global BV, paid income taxes at a rate of 1/10 of 1 percent on profits of about $2 billion in 2011, the most recent year for which records are available. That means the unit took credit for almost three quarters of Dell’s worldwide income. That subsidiary had no actual employees in the Netherlands as of 2009, filings show.
The Dutch company conducts its business through a branch in Singapore (DELL), where it designs and sells laptops and other equipment for the U.S., European and Asian markets.
For tax purposes, Dell says the unit’s profit is generated in Singapore, where it obtained an income-tax holiday in 2004. Although the company pays almost no income taxes in Singapore, the Netherlands doesn’t impose any significant income taxes either because “avoidance of double taxation can be claimed with respect to the” profit earned in Singapore, according to the Dutch subsidiary’s 2011 annual report.
“You don’t want companies to pay double tax but you also don’t want them to not pay any tax at all,” said Merkies, the Dutch parliament member.
The U.S. Internal Revenue Service is seeking back taxes avoided through Dell’s intra-company arrangements, according to a company securities filing. Dell is contesting the IRS’s proposed assessment. While the company didn’t disclose the amount in dispute, it said an unfavorable outcome could have a “material impact” on its financial position.
One result of its tax avoidance: Substantially all of Dell’s $14.2 billion in cash and cash equivalents is overseas, according to a company filing in December. It may now have to tap that cash pile as it goes private, potentially subjecting the money to U.S. taxes.
“We’ve always been clear that Dell has a responsibility to pay its fair share of taxes,” said Jess Blackburn, a spokesman for Dell, based in Round Rock, Texas. “We operate according to all applicable laws and regulations and in accordance with the letter and spirit of those laws.” He declined to respond to a detailed list of questions about Dell’s tax arrangements.
Last month, the European Commission recommended that EU members require in their treaties that income be subject to tax in one country before being exempt in another. That could prevent companies such as Dell from avoiding taxes in two countries simultaneously.
Another EU proposal to combat tax-avoidance strategies has moved slowly through the bureaucracy since 2004. It would allocate multinational companies’ taxable profits into various countries based on factors such as actual sales or number of employees there.
‘Waiting for Godot’
Whether the EU can implement such a change remains doubtful. Under its rules, the move requires unanimous approval from the 27 member states, including the Netherlands. At a December news conference in Brussels announcing the plan to combat tax avoidance, Algirdas Semeta, the EC’s commissioner for taxation, avoided answering a Dutch journalist’s question about whether the commission would target the Netherlands.
“I regard the Netherlands as the central European hub in corporate tax avoidance,” said Sven Giegold, a member of the EU parliament from Germany’s Green Party. “The main challenge is you need consensus within the EU, and waiting for consensus on tax matters is like waiting for Godot.”
Last year, representatives from the Netherlands fought at least two internal EU proposals to clamp down on tax avoidance techniques, according to a person familiar with the matter.
Other European countries are competing to attract multinational companies with tax inducements. Luxembourg has imitated the Dutch system of conduit companies and advance tax rulings, and Switzerland offers long-term tax holidays and other incentives.
Yahoo is taking advantage of the Swiss tax generosity: In late 2009, the company began shifting profits from its European sales into a small subsidiary in Rolle, Switzerland, a picturesque town 25 miles north of Geneva at the foot of the Alps.
Through Yahoo! Netherlands BV, headquartered at Dooves’s suburban home, Yahoo has also routed European and Asian revenues from Web ads to a subsidiary incorporated in Ireland that claims its residency in the tax-friendly Cayman Islands, according to filings.
In 2009, for example, the Dutch unit collected 101.5 million euros in royalties from around the world — and promptly paid out 98.7 percent of that to the Cayman subsidiary, records show. If those payments went directly from, say, Yahoo’s France sales arm to the Cayman unit, they could trigger a 33.3 percent withholding tax in France.
In 2011, a Yahoo French sales subsidiary reported 66 million euros of revenue, yet paid just 462,665 euros in income taxes, records show.
A typical Dutch tax avoidance arrangement may violate the tax treaties of various countries, said Peters, the Rotterdam tax adviser. Only a small percentage of royalties stays in the Netherlands in these transactions, records show, yet treaties typically require that, in order to avoid withholding tax, the Netherlands unit must be the “beneficial owner.”
“It’s clearly visible in the public accounts in Holland that these Dutch entities are not the beneficial owners,” said Peters, speaking generally about such arrangements.
Yahoo recently introduced another circuitous path through the Netherlands to cut the taxes on profits from its Asian sales: Royalties travel from Singapore, through Dooves’s house, to another subsidiary in Mauritius, a tax-friendly island off the southeast coast of Africa.
In 2011, the Dutch unit collected 110 million euros from Asian sales, according to Dooves — before paying royalties to the Mauritius subsidiary.
On paper, the cash remains with the Dutch subsidiary, which uses it to finance operations throughout the world outside the U.S., said Dooves. In reality, much of it sits in a HSBC Holdings Plc bank account in London, he said.
Colin Kruger, The Sydney Morning Herald, 23 January 2013
LOWERING the tax-free threshold on goods purchased online will do little to change Australian’s shopping behaviour, according to research by MasterCard.
Just 18 per cent of 1250 respondents to a study conducted on behalf of MasterCard said they ”would be more inclined” to shop at local sites if the GST threshold was lowered from its current level of $1000.
Among the online shoppers surveyed, 38 per cent said a change to the threshold would have no effect on their behaviour while 24 per cent said any move ”would only cause them to buy less often”.
MasterCard executive David Masters said the results indicated that changes to the GST threshhold were ”not enough to substantially change the shopping behaviour of Australians”.
This is despite the fact that – all things being equal – most survey respondents expressed little preference between overseas and local online sites for a wide range of popular goods. For make-up and clothing accessories, only 9 per cent of respondents had a preference for overseas online retailers. Around 57 per cent said they were not concerned whether the vendor was local or overseas.
The most significant bias was for book-buying, with 16 per cent of respondents expressing a preference for overseas vendors.
The big swing factor was, of course, price, with 86 per cent saying they preferred to buy from overseas sites due to the fact it was significantly cheaper. A better range of goods was another reason given by 62 per cent of respondents when asked why they preferred overseas sites, but they were also preferred for ease of navigation and for offering better information about a product or service.
The survey did not take into account extra charges that would apply to popular online purchases such as clothing and cosmetics.
According to research from Macquarie, applying both GST and duties to clothing would raise online prices by 21 per cent. The cost of cosmetics purchases online would rise 15.5 per cent, which ”eliminates much of the existing price discrimination that exists”, Macquarie said.
Katie Walsh, Australian Financial Review, 22 January 2013
The Australian Taxation Office cleared complex structures used by multinationals such as Google to cut tax bills before the federal government announced its crackdown in the area.
An ATO briefing paper confirming this was handed to a ¬parliamentary committee two months before the announcement.
Many global companies are set up to ensure sales in Australia cannot be taxed as they are derived over the internet, unconnected to a local outpost, the Tax Office paper shows.
“The ATO has ‘risk reviewed’ several of these structures over the years,” it says.“The tax outcomes in these entities were found to be ‘commercially realistic’ in light of the current law and policy settings.”
The ATO paper was prepared for a Senate estimates committee and released under freedom of information laws late last month. It was provided to The Australian Financial Review on Tuesday.
Complex structures known as the “double Irish” or “Dutch sandwich” are referred to in the document. It was these structures that Assistant Treasurer David Bradbury referred to in a speech in November, naming global giants Google and Apple in his attack against “free-riding” multi¬nationals. He said he was not suggesting the companies were in breach of the law when announcing that a 14-member taskforce would examine what to do about the risks the strategies posed to the tax base. The taskforce will meet for the first time late next month. Treasury will produce a scoping paper, using its feedback, by the middle of the year.
A spokesman for Mr Bradbury said on Tuesday that the ATO paper confirmed the need for the planned work. “We need to make sure that we are doing everything possible through our domestic laws to keep up with the changing nature of global commerce in the information age,” he said.
Global tax rules in essence attribute profit based on the ¬location of activity. A website doesn’t count. Nor does a skeleton staff that provides little more than “low profit margin ancillary functions”, as the ATO says usually happens in global businesses reporting “modest” tax on big sales. That makes collecting tax from technology companies and e-commerce players difficult.
Clayton Utz partner Niv Tadmore, one of the taskforce members, said the ATO’s results highlighted the problem faced by governments worldwide. “The real issue the government is seeking to look at is . . . whether the current law needs to catch up with technology,” he said. “The main challenge of this task is: should we tax those non-residents that don’t have any presence in Australia? “That’s the guts of the policy issue. If the answer is yes, then we should upgrade our tax laws.”
Governments around the globe are intensifying efforts against multinationals that minimise tax using clever– but often legal – structures. Targets extend beyond e-commerce and include coffee chain Starbucks.
The UK and Germany have called on the Group of 20 nations to change tax rules to tackle the problem.
At Google, sales are channelled through its Irish offshoot. Australian staff do not work on the advertising and search products that are the money spinners, which means it is not possible to attribute that revenue to the local group under tax laws.
Estimates put Google’s Australian 2011 tax bill at $781,471 on $1 billion-plus in sales.
Responding to the scorn of governments worldwide in December, Google chairman Eric Schmidt said he was proud of the way the company minimised its tax bills, calling it “proudly capitalistic”.
Phillip Inman, The Guardian, 22 January 2013
Germany, France and nine other eurozone countries have been given the green light to impose a financial transaction tax, despite warnings from banks and business groups that it will drive share, currency and derivative trading out of Europe.
EU finance ministers gave their approval at a meeting in Brussels, allowing 11 states to pursue a levy on financial transactions. The UK abstained in the vote alongside Luxembourg and the Czech Republic.
Eleven countries won the EU’s backing for a financial transaction tax (FTT), with Germany, France, Italy and Spain adding their names to eurozone neighbours Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia.
The UK, which already imposes a tax on share trades, could benefit from a shift in banking business if Germany and France tax foreign exchange or derivatives trading in Frankfurt and Paris.
The levy, which could raise as much as €35bn (£29.3bn) a year for the 11 countries, is designed to prevent a repeat of the conditions that stoked the credit crunch by reining in investment banks. Following the decision, the European Commission will put forward a new proposal for the tax, which if agreed on by those states involved, would mean the levy could be introduced within months. Although critics say such a tax cannot work properly unless applied worldwide or at least across Europe, countries such as France are already banking on the extra income from next year.
“We will be able to put it into place quickly,” said Benoit Hamon, a junior minister in the French finance ministry who was at the meeting.
A tax would raise the costs of individual trades, which economists suspect are carried out by banks to extract commissions and fees from fund managers that handle large pension funds.
Opinion is divided over whether banks would continue to trade at current levels and pay the tax or cut back on the number of trades, potentially saving pension schemes millions of pounds.
Algirdas Semeta, the European commissioner in charge of tax policy, said: “This is a major milestone in tax history.”
Under EU rules, a minimum of nine countries can co-operate on legislation using a process called enhanced co-operation as long as a majority of the EU’s 27 countries give their permission.
Germany and France decided to push ahead with a smaller group after efforts to impose a tax across the whole EU and later among just the 17 eurozone states foundered. Sweden, which tried and abandoned its own such tax, has repeatedly cautioned that the levy would push trading elsewhere.
Critics say the levy could open another rift in Europe, where the 17 states using the euro are deepening ties in order to underpin the currency, and there is the growing risk that Britain could even leave the European Union.
The CBI said the tax, based on an idea proposed by US economist James Tobin more than 40 years ago, would place another barrier to growth in the eurozone because the costs would ultimately be passed on to consumers and savers.
Matthew Fell, CBI director for competitive markets, said: “The UK government is right to reject a FTT as damaging for jobs and growth.
“It is disappointing that eurozone economies are pursuing the FTT, whose costs ultimately fall on consumers and businesses, and will be a drag on the eurozone recovery.
“As the UK’s largest single trading partner, a healthy European economy is in everyone’s interests so we urge participating member states to reconsider this tax.”
AAP, The Australian, 22 January 2013
AIRLINES have made up to half a billion euros in windfall profits by passing on a carbon surcharge to travellers despite an EU decision to freeze its controversial carbon tax, environmentalists say.
Green group Transport and Environment said on Tuesday that airlines chalked up extra revenues estimated at 486 million euros ($A620 million) even though EU climate commissioner Connie Hedegaard in November decided to “stop the clock” on an EU carbon tax angering the global aviation industry.
She offered to freeze the measure for a year on flights to and from non-European nations amid hopes of negotiating a global CO2 emissions in the framework of the International Civil Aviation Organization (ICAO).
But Transport and Environment said that airlines throughout the year had passed on the cost of their permits to pollute to passengers even though 85 per cent of the permits were allotted free, enabling carriers to make up to 1.3 billion euros in windfall profits in 2012.
And the EU freeze had enabled them to make extra profits, the group said.
“The “stopping of the clock” proposal turns revenues raised by airlines to cover the costs of their CO2 permits into additional windfalls,” it said.
Asked for comment, Hedegaard’s spokesman said “all we can do is ask for greater transparency in tariffs,” said Isaac Valero, spokesman for Hedegaard.
The EU imposed the scheme on January 1 last year, but 26 of ICAO’s 36 members, including India, Russia, China and the United States, opposed the move, saying it violated international law.
The EU tax forces airlines operating in the bloc, whatever their flag, to buy 15 per cent of their carbon emissions, or 32 million tonnes, to help battle global warming.
Pay-up time however was due only from 2013, once billing for 2012 had been completed.
George Monbiot, The Guardian, 21 January 2013
You can learn as much about a country from its silences as you can from its obsessions. The issues politicians do not discuss are as telling and decisive as those they do. While the government’s cuts beggar the vulnerable and gut public services, it’s time to talk about the turns not taken, the opportunities foregone: the taxes which could have spared us every turn of the screw.
The extent of the forgetting is extraordinary. Take, for example, capital gains tax. Before the election, the Liberal Democrats promised to raise it from 18% to “the same rates as income” (in other words a top rate of 50%), to ensure that private equity bosses were no longer paying lower rates of tax than their office cleaners. It made sense, as it would have removed the bosses’ incentive to collect their earnings as capital. Despite a powerful economic case, the government refused to raise the top rate above 28%. The Lib Dems protested for a day or two, and have remained silent ever since. In the parliamentary debate about cuts to social security, this missed opportunity wasn’t mentioned once.
But at least that tax has risen. In just two and a half years, the government has cut the rate of corporation tax three times – from 28% in 2010 to 21% next year. George Osborne, the chancellor, boasted last month that this “is the lowest rate of any major western economy”: he is consciously setting up a destructive competition with other nations, creating new excuses further to reduce the British rate.
Labour’s near-silence on this issue is easily explained. Under Tony Blair and Gordon Brown, who were often as keen as the Conservatives to appease corporate power, the rate was reduced from 33% to 28%. Prefiguring Osborne’s boast, in 1999 Brown bragged that the rate he had set was “the lowest rate of any major industrialised country anywhere, including Japan and the United States”. What a legacy for a Labour government.
As for a Robin Hood tax on financial transactions, after an initial flutter of interest you are now more likely to hear the call of the jubjub bird in the House of Commons. According to the Institute for Public Policy Research, a tax rate of just 0.01% would raise £25bn a year, rendering void many of the chamber’s earnest debates about the devastating cuts. Silence also surrounds the notion of a windfall tax on extreme wealth. And to say that Professor Greg Philo’s arresting idea of transferring the national debt to those who possess assets worth £1m or more has failed to ignite the flame of passion in parliament would not overstate the case.
But the loudest silence surrounds the issue of property taxes. The most expensive flat in that favourite central London haunt of the international super-rich, One Hyde Park, cost £135m. The owner pays £1,369 in council tax, or 0.001% of its value. Last year the Independent revealed that the Sultan of Brunei pays only £32 a month more for his pleasure dome in Kensington Palace Gardens than some of the poorest people in the same London borough. A mansion tax – slapped down by David Cameron in October – is only the beginning of what the owners of such places should pay. For the simplest, fairest and least avoidable levy is one that the major parties simply will not contemplate. It’s called land value tax.
The term is a misnomer. It’s not really a tax. It’s a return to the public of the benefits we have donated to the landlords. When land rises in value, the government and the people deliver a great unearned gift to those who happen to own it.
In 1909 a dangerous subversive explained the issue thus. “Roads are made, streets are made, services are improved, electric light turns night into day, water is brought from reservoirs a hundred miles off in the mountains – and all the while the landlord sits still. Every one of those improvements is effected by the labour and cost of other people and the taxpayers. To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is enhanced. He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived … the unearned increment on the land is reaped by the land monopolist in exact proportion, not to the service, but to the disservice done.”
Who was this firebrand? Winston Churchill. As Churchill, Adam Smith and many others have pointed out, those who own the land skim wealth from everyone else, without exertion or enterprise. They “levy a toll upon all other forms of wealth and every form of industry”. A land value tax would recoup this toll.
It would have a number of other benefits. It stops the speculative land hoarding that prevents homes from being built. It ensures that the most valuable real estate – in city centres – is developed first, discouraging urban sprawl. It prevents speculative property bubbles, of the kind that have recently trashed the economies of Ireland, Spain and other nations, and that make rents and first homes so hard to afford. Because it does not affect the supply of land (they stopped making it some time ago), it cannot cause the rents that people must pay to the landlords to be raised. It is easy to calculate and hard to avoid: you can’t hide your land in London in a secret account in the Cayman Islands. And it could probably discharge the entire deficit.
It is altogether remarkable, in these straitened and inequitable times, that land value tax is not at the heart of the current political debate. Perhaps it is a sign of how powerful the rent-seeking class in Britain has become. While the silence surrounding this obvious solution exposes Labour’s limitations, it also exposes the contradiction at the heart of the Conservative party. The Conservatives claim, in David Cameron’s words, to be “the party of enterprise”. But those who benefit most from its policies are those who are rich already. It is, in reality, the party of rent.
This is where the debate about workers and shirkers, strivers and skivers should have led. The skivers and shirkers sucking the money out of your pockets are not the recipients of social security demonised by the Daily Mail and the Conservative party, the overwhelming majority of whom are honest claimants. We are being parasitised from above, not below, and the tax system should reflect this.
Michael Pascoe, The Sydney Morning Herald, 18 January 2013
WHAT’S in a name? Potentially the solution to a couple of our more pressing fiscal challenges, if anyone really wants sustainable budget surpluses. Rename the GST as the HST and make the NDIS a real NDIS and you’re well on the way.
Being an election year, any chance of dealing with our demographic destiny remains on hold – stack it over in the corner, next to Sydney’s second airport. But the medicine Australia has to have in the not-too-distant future is an increase in tax collections to pay for what we already demand, let alone the extra stuff politicians can’t help promising.
So here are a couple of ideas not in the Henry review to achieve the politically difficult:
â– GST becomes HST
Rename the “Goods and Services Tax” as the “Health Services Tax”, explicitly linking the revenue raised to health spending. Electors are more willing to pay tax if they understand where the money goes, effectively knowing what their tax dollar is buying instead of watching it disappear down government’s dubious maw to go the way of party politics, Cabcharge vouchers and suspected welfare cheats. As the growing needs of the health system become obvious and the cries for more/better beds/drugs/nurses/doctors/surgery/aged care mount, the necessary solution of expanding the GST base and raising its rate becomes politically possible.
â– Make the NDIS the NDIS
The proposed National Disability Insurance Scheme is a misnomer as it is not an insurance scheme – there are no premiums, it is not actuarially based. Both sides of politics want to give the electorate another big serving of social welfare but neither side presently has a clue about how it could be sustainably paid for if rolled out to more than its test sites. The solution is that, if the electorate wants the NDIS, it has to pay the premiums the same way it has to pay life insurance. Again make the premiums an explicit part of the taxation system, including a charge (albeit at a humanely reduced rate) for those on social welfare.
â– Play hard ball with the states
This idea was implicit in the Henry review, fairly explicit in the 2011 tax forum and quite explicit lately in Treasurer Wayne Swan’s rhetoric. The Commonwealth, whichever party is in government, has to force the states to fix their revenue base by moving from dud stamp duties to a broad-based land tax. They all know it’s the right thing to do on economic, equity and ethical grounds, but only the ACT government has had the integrity to start the process. As has been written here before, the states are on the real front line of tax reform as they are all, to a greater or lesser degree, hitting the fiscal wall. While they’re at it, they’ll have to reinvigorate their payroll taxes.
â– End largesse
The first step to improving tax collections is to improve the perceived quality of government spending. It’s time to end all the political slush funds, grants and handouts so beloved by your local MP. Government exists to do collectively what can’t otherwise be done. To use one example, if a professional sport wants to open a franchise, it is not up to taxpayers to subsidise it. There are many cuts yet to be made to the middle-class welfare bandwagon that ran wild under Howard and Costello and continued under Rudd and Swan, never mind those sucking on the corporate welfare teat. Whatever Peter Slipper did with his Cabcharge vouchers, it makes people less willing to pay their fair share of tax.
â– Scrap the family trust
This is another bridge too far for a parliament full of members (and their backers) enjoying tax minimisation through the rampant use of trust structures. The tax industry will promise Armageddon if the family trust is touched – but it is a lurk for the few at the expense of the rest of us to the enrichment of accountants and tax lawyers.
There’s more and better in the Henry review, but that’s enough to get on with, and it’s not as if we have a choice, as Treasury secretary Martin Parkinson has been trying to warn people.
Whatever your ideology, the demographic reality bell was rung when Kevin Rudd was trying to take over the funding of state hospitals. It was admitted that just the hospitals would soon enough chew up the entire GST and that understates this one part of the problem.
New South Wales has a health budget for 2012-13 of $18.3 billion. If all states had that per capita spend, the total bill would be nearly $57 billion. The total GST pool this year is about $50 billion. The Commonwealth’s health portfolio budget is running at $61 billion. You get the idea?
This is before demographics start to bite, before the proportion of old people soars and our dependency ratio (the proportion of working age people to the rest) drops, never mind the need for a greater education investment if we want to maintain our living standards. Hop to it.
Anna MacDonald, ABC News, 17 January 2013
Three of Australia’s biggest health groups want the Federal Government to follow the lead of some other countries and introduce a tax on sugary drinks.
The Cancer Council, Diabetes Australia and the Heart Foundation of Australia have joined forces to increase public awareness of the potential health impacts of soft drinks and energy drinks, and encourage consumption of healthier alternatives such as water.
They are calling on all schools in Australia to ban the sale of soft drinks to tackle the growing rate of obesity.
A 2007 national survey found 47 per cent of Australian children aged between two and 16 consumed sugary drinks daily.
“What many people don’t realise is just the sheer amount of sugar that is in a regular can of soft drink,” the Cancer Council’s Craig Sinclair said.
“The default purchase is not 375 millilitres in a can, it is 600ml and in 600ml alone, there is 16 teaspoons of sugar.”
The Heart Foundation’s Kellie-Ann Jolly says a tax could be an effective option.
“We want to investigate some of the tax options and get the Federal Government to have a look at this to see whether increasing the price of sugary drinks can have an impact on consumption,” she said.
“We’ve seen this through tobacco and there are reviews that have been undertaken in America that actually shows that if we can increase the price, then there is a likelihood that we can actually decrease the consumption.”
The three groups would also like to see governments introduce tough restrictions on the advertising of soft drinks and on the sale of them in schools.
“There is still too many schools, both particularly in secondary schools, that have vending machines and they’re selling sugar-sweetened beverages within the school canteens,” Mr Sinclair said.
“That’s clearly unacceptable.”
But the groups acknowledge that the onus is on parents to help steer their children away from sugar, and instead towards water or low-fat milk.
‘They do contain energy’
The Australian Beverages Council, which represents soft drink makers, says it has already done “a fair amount of work” to address the issue of distribution in schools.
“About 10 years ago the industry restricted the sale of sugar-sweetened soft drinks to primary schools,” chief executive officer Geoff Parker said.
“Let’s not forget as well, these drinks do contain energy and that’s exactly what kids need to run around particularly in high schools, but we haven’t sold sugar-sweetened beverages to primary schools for quite some time.”
Mr Parker denied that sugary drinks were contributing to childhood obesity.
“What contributes to childhood obesity are all kilojoules from the diet,” he said.
“No one food or beverage causes obesity and this is why we think this particular campaign is somewhat misguided.”
He says the industry is already meeting the concerns of health organisations.
“We’d like to work towards educating people about the concept of the total diet,” Mr Parker said.
“This single focus on a particular nutrient, in this case sugar, is a misguided approach.
“It didn’t work 10 years ago with ‘avoid fat’. It’s not going to work now with ‘avoid sugar’.
“What people need to understand is that all kilojoules matter, regardless of where they come from in the diet.”
The Federal Government has ruled out putting a tax on soft drinks and Mr Parker says his industry is also opposed to such a measure.
“We’re not anti-tax but we’re against discriminatory taxes,” he said.
“The Henry Tax Review said that these types of taxes don’t work. The 2010 Productivity Commission into childhood obesity and the economic perspective said these types of taxes don’t work so again, we’re not against taxes but we’re against discriminatory taxes.”
Duncan Quirk, The Huffington Post, 17 January 2013
This past week Governors Bobby Jindal and Dave Heineman of Louisiana and Nebraska, respectively, have called for the abolition of their state’s income and corporate taxes. These plans are picking up steam in many more states. The plans propose to make up for this lost revenue through increasing state sales tax. While tax reform is essential to our country’s economy and our long-term debt issues, replacing sate income and corporate tax rates purely with sales tax is doomed to failure.
Putting aside the debates between the effectiveness supply-side economics and whether an increase in sales tax would disproportionately negatively impact the poor, state sales tax only plans cannot make up for the lost revenue under current laws. The reason?
Online shopping is continuing to grow at exceptional rates and year over year is taking a larger percentage of total American retail. The rapid growth of the tablet market and larger smart phones will help drive this trend further and further over the coming years.
While current laws for taxing online purchases vary by state, the general rule of thumb is that sales tax is only collected if the online retailer has a physical presence in the state — a brick and mortar store, a warehouse, a sales team, or an office. You can find a more detailed account of how it works as well as a state-by-state guide here. This is a result of the 1992 Supreme Court Ruling of Quill Corp. vs. North Dakota.
Many states have enacted laws to collect sales tax from online retailers like Amazon, but most of these have been mired in litigation and appeals. Amazon has agreed to collect sales tax in some states like New York, but this does not apply to the third party retailers on Amazon or other websites, and Amazon has been one of the biggest plaintiffs in trying to overturn these laws.
By the way, neither Louisiana nor Nebraska are among the states that have enacted laws to collect sales tax on out-of-state online purchases.
Trouble overturning Quill Crop. vs. North Dakota
In the 1992 ruling, the Supreme Court stated that Congress could enact legislation to overturn the decision. The last few years have seen a number of attempts at passing such legislation, most coming from Senator Dick Durbin, but to no avail. In December of 2012, the “Market Place Fairness Act” was rejected as an amendment to the 2013 National Defense Authorization Act. While the act has support from some members of both parties, it’s unlikely that the legislation will be turned into law this year. Especially considering the fight House Republicans put up against increasing income taxes to avoid the Fiscal Cliff. Even with major reductions in spending, they will have a hard time justifying to their constituents why they fought tooth and nail to stop tax increases for the wealthiest of Americans while passing legislation to greatly increase taxes for all citizens.
If last year’s backlash against and failure of SOPA and SUPPORT IP is a barometer for the web industry’s ability to take on established business lobbies and politicians, the road is even harder.
In the off-chance that the “Market Place Fairness Act” or something similar is passed this year, the legislation will undoubtedly face many legal battles both from online retailers and potentially class action suits from online shoppers.
If a Federal law overturning Quill Corp. vs. North Dakota is not enacted, then the states will continue an uphill battle to collect online sales tax.
If states do pass their own versions of these laws, they face lengthy legal battles where the Supreme Court has already sided against their arguments and are going up against some of the biggest retailers and drivers of the economy. A costly endeavor that has the potential to slow the economy down further and create a lot of enemies that are currently only gaining in power and marketshare.
If they don’t, then they are faced with having to lure these very same companies to set up a physical presence in their state. While no corporate income tax is certainly a nice incentive, the more states that replicate the policy, the less of an incentive it becomes and something even bigger will be needed. If Nebraska gets rid of corporate and income tax, its neighbor Kansas, which cut income taxes last year and is considering cutting them further, will surely follow pursuit. But these companies do not need or want a physical presence in every state — brick and mortar stores are dying for a reason. In fact, Amazon Prime’s free 2-day shipping works perfectly fine with a physical presence in only 13 states.
The bottom line is abolishing state corporate and income taxes will create even more massive holes in state budgets that simply cannot be closed by an increase in state sales taxes in the digital age, let alone close the gap on current deficits.
The Australian, 17 January 2013
THE head of French telecommunications company Orange said on Wednesday it had been able to impose a deal on Google for generating vast amounts of traffic on its telecoms networks.
Orange CEO Stephane Richard said on France’s BFM Business TV that with 230 million clients and areas where Google could not get around its network, it had been able to reach a “balance of forces” with the Internet search giant.
Richard declined to cite the figure Google had paid Orange, but said the situation showed the importance of reaching a critical size in business.
Network operators have been fuming for years that Google, with its search engine and You Tube video service, generates huge amounts of traffic but does not compensate them for using their networks.
Richard put Google traffic over Orange’s Internet networks at around 50 per cent.
“That is to say an important part of traffic is generated by a big transmitter like Google, which is the subject of a discussion concerning a form of compensation for the volume of traffic,” he said.
The Orange chief executive said that Internet companies and network operators were interdependent and criticised a recent controversial move by a French competitor, Free.
Free blocked internet ads, drawing strident protest from websites reliant on advertising that the move would kill their business model, until the French government ordered it stop the practice.
Google has also been faced with demands for compensation from content providers such as newspapers, who charge the search giant makes lots of advertising revenue from referencing their material.
France and Germany are considering imposing compensation schemes on Google as the company has refused to reach any deal with media outlets.
French President Francois Hollande warned Google on Wednesday that his government would legislate a so-called Google tax if the company doesn’t reach a deal with French media companies.
He said “those who make a profit from the information” produced by media companies should participate in their financing.
David Crowe, The Australian, 15 January 2013
CALLS for tax reform in the $43 billion not-for-profit sector gained ground yesterday when an influential Christian group threw its support behind a contentious proposal to scale back concessions for up to one million workers.
The Australian Christian Lobby backed the concerns of the Community Council of Australia that the special rules for fringe benefits tax favour the wealthiest workers in churches and charities.
The move adds to concern that the tax breaks, commonly used to supplement salaries in the sector, are not helping the poorest workers in the way expected.
ACL spokesman Nick Overton also backed the Community Council’s push to simplify rules for charities to receive tax-deductible donations, which requires a formal status that can cost tens of thousands of dollars to attain. The Weekend Australian revealed the council’s reform proposal was lodged with a federal government working group in response to a process launched by Assistant Treasurer David Bradbury to revisit the rules.
The FBT concessions allow employees at recognised not-for-profit groups to claim up to $30,000 in meals, cars, school fees, childcare or other expenses on their pre-tax income, gaining benefits unavailable to other workers.
The Salvation Army is warning against adjusting the rules, saying it was “greatly concerned” with the mooted changes aired in a discussion paper released last year.
Mr Overton said the ACL also wanted to see that the FBT entitlements were not abused, acknowledging that the greatest tax benefits go to workers with the greatest disposable income to spend on restaurant meals and other items.
Patrick Butler, The Guardian, 15 January 2013
Monitor responds to critics by confirming recommendations on tax exemption will not be part of NHS competition review
The economic regulator of the health service has ruled out tax exemptions for private firms that deliver NHS services.
Reports this week had suggested Monitor was to propose that commercial providers should not have to pay corporation tax, in order to ensure fair competition for health service contracts between private firms and NHS hospitals.
But the regulator said on Tuesday recommendations on tax exemption would not be part of a government-commissioned review of NHS competition expected to be completed by the end of March.
It said: “Monitor has yet to decide what recommendations it will make to the secretary of state. However, in the light of recent media speculation, Monitor has decided to clarify the position on one specific issue. While it is the case that corporation tax is one of many distortions that the review is looking at, Monitor will not be recommending that private sector providers should be exempt from paying corporation tax.”
Private sector and charity providers have argued that public sector hospitals have an unfair advantage in healthcare markets because they are exempt from paying corporation tax. This, coupled with other pensions and capital “distortions”, leaves them with costs that are £14 higher for every £100 of cost relative to NHS providers.
Opponents say it is unacceptable for providers who seek to make a profit out of NHS work to claim it is unfair that they should pay tax on those profits. Critics said this week they feared Monitor had been “captured” by the private health lobby.
In a letter to the Guardian, Monitor’s chief executive, David Bennett, said no drafts of the competition report had been written. He wrote: “Monitor has received representations concerning tax from providers from the charitable sector as well as the private sector.
“In addition, we have received representations that other factors disadvantage the public sector, such as complying with [Freedom of Information] requirements or employee benefits. We have had responses and held detailed conversations with providers from all sectors and we are taking time to analyse the evidence before drawing our final conclusions.”
He added: “Monitor has a statutory duty to promote and protect the interests of patients and any suggestion that we are working on behalf of the private sector misrepresents our core duty.”
Julie Novak, The Australian, 15 January 2013
THE death last week of Nobel prize-winning economist James Buchanan captured newspaper headlines around the world, and for good reason.
Taught economics by some of the leading figures of the Chicago School, Buchanan later staked his own path of intellectual originality by suggesting that politicians, just like market participants, act in their own self-interest, and that institutional reform is central to improving the integrity of fiscal and monetary policymaking.
These features of Buchanan’s work deserved the recognition they received over the past week, but his original, but somewhat unheralded work, on the economics of federal systems of government, is also relevant, especially for countries such as Australia.
A key feature of Buchanan’s thought on federalism is his unflinching advocacy of fiscal decentralisation: that is, the assignment of taxing and expenditure functions to lower levels of government as much as practicable.
In his iconic book The Power to Tax, co-authored with Australian economist Geoffrey Brennan, Buchanan indicates that decentralisation erodes the natural tendencies of governments wanting to maximise their revenue collections at the expense of private-sector economic activity.
Federalism suppresses leviathan’s revenue appetite because otherwise fiscally persecuted owners of capital and labour can relocate to lower-taxing jurisdictions, so long as free trade and migration within the federation is maintained.
Buchanan’s essential prediction was that in a federal system, “total government intrusion into the economy should be smaller, ceteris paribus, the greater the extent to which taxes and expenditures are decentralised”.
But to reinforce the compatibility of political action with the interests of the citizenry within a federal system, Buchanan also advocated that communities be permitted to secede from an existing federal country.
Writing in 1995, he said “secession, or the threat thereof, represents the only means through which the ultimate powers of the central government might be held in check”.
Based on Buchanan’s theory, one could speculate that the refusal to grant Western Australia secession in the 1930s subsequently reduced the threat to both federal and state governments that large numbers of people would seek to break away politically in response to high taxes and onerous regulations.
In addition to the idea of federalism as a political constraint mechanism, whether through mobility or secession, another major contribution by Buchanan concerns the question of fiscal equalisation.
One of Buchanan’s earliest papers, published in 1950, shows how fiscal transfers between jurisdictions can be designed to internalise the fiscal externalities arising from the movement of labour in response to different taxing and spending levels presented by the state governments.
While this contribution on achieving fiscal equity within a federation remains influential, the 1950 paper was by no means Buchanan’s final words on the matter.
Buchanan later recognised that a fiscal equalisation system could be adopted as a vehicle to enforce a high-taxing “fiscal cartel”, within which the central government monopolises access to the major taxing bases and disburses excess revenues back to the states in the form of grants.
In effect, the risk is that fiscal equalisation could be used to suppress competitive federalism, thereby allowing all governments within the federal system to grow to a level beyond that otherwise preferred by citizens.
It is not unfair to claim that the modern Australian federal system, with its extreme degree of vertical fiscal imbalance, combined with the world’s most complex fiscal equalisation process, reasonably approximates the fiscal cartel model depicted by Buchanan.
In a paper written in 2002, Buchanan defends the theoretical integrity of his original 1950 fiscal transfer scheme but poignantly observes that problems posed by political incentives and policy implementation must be explicitly accounted for when evaluating equalisation models.
The failure of governments and economists alike to sufficiently recognise these caveats represents a blind spot in the ongoing Australian debate about GST distribution between the states. Recently a number of prominent Australian political figures, such as former prime minister Bob Hawke and former Queensland premier Peter Beattie, have argued the case for abolishing the states altogether.
Such arguments are at the pointy end of the peculiar disconnect between Australian and international narratives, and indeed practices, concerning the acceptance of federalism as an organising principle for collective action.
Indeed, most other mature federations around the world put Australia in the shade when it comes to the decentralised nature of their fiscal and policy decision making.
The US may be falling in economic freedom rankings, thanks in no small part to its federal government, but competitive, low-taxing states such as Texas shine as beacons drawing in capital and labour, helping to maintain some semblance of American dynamism.
The Canadian provinces are similarly influential within a decentralised government structure where Ottawa largely keeps its hands off provincial affairs such as education, while Switzerland has maintained a system of vigorous tax competition, aiding its unrivalled position as a global financial centre.
Given our emaciated federalism, in which the federal government keeps the power of the purse and runs policy roughshod over the service-delivering states, calls to allocate at least the most important governmental functions to Canberra regrettably have widespread, albeit superficial, appeal.
But instead of surrendering everything of consequence to the likes of the Gillard government, Australia should take a leaf out of James Buchanan’s book and decentralise, placing the centres of political powers and responsibilities as close to the people as possible.
Henry J. Aaron, The Huffington Post, 14 January 2013During the political knife-fight known as the ‘fiscal cliff debate,’ there was one topic on which virtually everyone seemed to agree — that the income tax is a mess and needs reform. The idea on tax reform was straightforward. Broaden the tax base by curbing what are variously called tax expenditures, loopholes, special breaks, or simply deductions, credits, and allowances. Then, use the resulting revenues in part to lower rates and in part to lower deficits. The template for such reform was the Tax Reform Act of 1986 when Congress broadened the tax base and cut rates. We did it then, and we could do it again.Now that most of the Bush tax cuts have been made as permanent as anything in the tax code can be, interest in tax reform has abated somewhat. But, the income tax remains a mess and still needs reform. So, it would be worth understanding why reform succeeded in 1986 — if only barely — and what it will take for it to succeed in the future. Unfortunately, the job will be even harder this time.The key to success in 1986 was that Congress cut personal income tax collections. Although overall tax collections were to remain unchanged, tax burdens were supposed to be moved from individuals to corporations. The shift was large, equivalent to moving about $1 trillion in taxes in today’s economy from individuals to corporations over ten years.Cutting taxes always makes reform easier. Tax reform is income redistribution. Tax breaks are of value to some people, rate cuts to others. Some gain, some lose. Of course, reform advocates always promise that everyone will gain because economic growth will increase and tax simplification will spare everyone needless hassle and compliance expense. But people know that some of these promises are not true and that even when they are true, the benefits take time to materialize. But who pays more and who pays less when tax breaks are ended is instantly clear once the legislative specifics are known.Cutting personal income taxes greatly increased the appeal of reform. It reduced the number of people were net losers and the amounts they would lose, and it raised the number who were net gainers and the amounts they would gain. Nonetheless the Tax Reform Act of 1986 almost died several times and the outcome was in doubt until the very end. Many regarded its ultimate enactment as something of a political miracle.Today, the job is even harder. Shifting taxes from individuals to corporations is now out of the question. The increased international mobility of capital and the proliferation of multinational corporations means that any attempt to raise business taxes will be largely frustrated by companies that can readily transfer profits to low-tax jurisdictions. Even worse, the need to narrow projected budget deficits means that taxes have to be increased.To be sure, there are other ways to raise revenues. A new tax could be levied on energy or on value-added — a sort of national sales tax — and some of the resulting revenue could be used to cut the deficit and some to lower personal income taxes. But opposition to a new tax on energy or on value-added is currently fierce and unbending. New taxes of this sort are politically fanciful in the current environment.Or the nation could avoid the need to raise taxes by walking away from its commitment to provide basic income and health care support to America’s elderly, disabled, and poor. But a majority of members of both parties opposes cutting Social Security or Medicare.All this means that successful tax reform today will be tied to raising personal income tax revenue, not, as in 1986, to cutting it. Until such time as the nation is prepared to entertain a new tax on energy or value-added, tax reform means that most filers will see themselves as losers. Even if the partisan divide were not as wide and deep as it is today, there would be little chance that serious reform of the personal income tax could get through Congress without some way of lowering total personal income taxes to lessen the opposition from those who would lose the special tax breaks. With partisanship at current pathological levels, the chances are nil. A rock and a hard place, indeed!
The Independent, 14 January 2013
Chalk up another victory for the PR departments of the global investment banks. Some – including Goldman Sachs – are reportedly considering deferring bonuses for their UK staff until after 6 April to take advantage of the lower top rate of income tax. The prospect of too-big-to-fail banks using such a sly bit of avoidance to save their already over-remunerated staff a tax bill – and at the expense of the struggling British Exchequer – has understandably provoked disgust. Labour’s Chris Leslie has warned them to “think carefully” about their reputations.
Sadly, one suspects that if the banks were capable of being shamed out of this kind of antisocial behaviour, it would have happened long ago. In any case, there’s something unsatisfactory about politicians urging corporations to do the moral thing on tax. The same was true of Starbucks’ recent announcement that it would pay £20m in corporation tax. The coffee giant sounded as though it was making a generous donation to the UK’s collecting tin rather than discharging its obligations.
What Britain needs is a robust and unambiguous tax system that requires corporations to pay their share, without the need for negotiations with HMRC, or moral urgings from politicians, or gestures of largesse by pressurised managements. On income tax, it was particularly foolish of the Chancellor to delay the 45p rate for a year. He was warned this would create an incentive for people to defer registering income. And so it has proved.
On corporation tax, what is required is international co-operation to close down tax havens and to prevent multinationals from artificially shifting profits between jurisdictions. Ed Miliband’s proposal to require corporations to publish a single figure showing how much corporation tax they pay is sensible. The objective of all politicians should be to eradicate opportunities for aggressive avoidance and sharp practices by multinationals and their employees. A tax regime that relies on corporations choosing to do the right thing is not tenable.
Rory Callinan, The Sydney Morning Herald, 30 January 2013
WEALTHY resource companies operating overseas are tapping into Australian taxpayer funds to set up aid projects potentially benefiting their corporate social responsibility credentials.
Aid and mining watchdogs have expressed concerns about the practice, arguing the corporations are wealthy enough to bankroll their own aid and that linking donations to controversial mine operations is a conflict of interest.
Nine mining companies all operating in Africa have been linked to the successful applications via the Foreign Affairs Department’s Direct Aid Program – a scheme that allows heads of missions to give up to $30,000 to local causes.
About $215,000 of taxpayers’ money went to the mining company-conceived projects last financial year, including a school for the deaf, providing trade skill training to local workers, establishing women’s groups and digging wells.
Two applications involved uranium mining companies, Paladin Energy in Malawi and Bannerman Resources in Namibia.
Other successful applicants included the nobium miner Globe Metals and Mining in Malawi, gold miner Endeavour Mining Corporation in Ghana and copper miner Mawson West in the Democratic Republic of Congo.
The coalminer Intra Energy Corporation, gold miner Resolute Mining in Tanzania and Middle Island Resources, which is involved in gold mining in Burkina Faso, also were associated with successful applications.
Paladin, which has been the subject of some controversy in Malawi over job cuts, was last year linked to a funding application through its employees’ charity – Friends and Employees of Paladin for African Children.
Paladin’s (African) Ltd general manager, international affairs, Greg Walker, who was invited late last year to be Australia’s honorary consul to Malawi, was involved in the process, according to 2012 correspondence from Australia’s ambassador to Zimbabwe, Matthew Neuhaus, to Mr Walker. The letter obtained under freedom of information confirmed Mr Walker’s successful application for the employees’ charity funding proposal.
The Aidwatch director Thulsi Narayanasamy said it was not the place of the Australian aid program to fund the corporate social responsibility programs of wealthy mining companies.
The Mineral Policy Institute’s executive director, Charles Roche, said the programs created a conflict of interest with aid linked to the mining proposal rather than the fact it was coming from Australia.
But DFAT and the companies rejected the claims. “It is in everybody’s interest to encourage Australian companies to operate in a socially and environmentally responsible manner,” a DFAT spokeswoman said.
Several companies said they spent large amounts on aid which the DAP funding merely complemented.