Stephen Koukoulas, The Drum, 26 July 2013
The carbon price has been a dud. A dud that has supposedly been fuelling an inflation blowout and is wrecking the economy.
News on Wednesday that the annual inflation rate has been a miserly 2.4 per cent in the 12 months since the carbon price was introduced puts paid, once and for all, to the claims that it was going to be an oppressive addition to cost of living pressures.
Furthermore, since the price on carbon came into effect, more than half a trillion dollars has been added to the combined value of housing and stocks listed on the Australian Securities Exchange. That is $500,000,000,000.00, or the equivalent of $22,000 for every man, woman and child, all of which has accrued in just over a year.
And this half a trillion dollar does not include dividends, in the case of stocks, or actual and imputed rent on dwellings. Dividend payments on stocks over that time are around an additional $65 billion or so.
This has been a period of stunning wealth creation in Australia, and more notable given many of the high-profile predictions that the introduction of a price on carbon would have on the economy.
Indeed, most of the high-profile doomsayers were in the leadership group of the Liberal and National Parties.
Opposition Leader Tony Abbott was forecasting that the carbon price would “act as a wrecking ball across the economy” or be an “absolutely catastrophic”, and would “wipe out jobs big time” with towns like Whyalla “wiped off the map” because of it. Not only that, but it would create “ghost towns” and “discourage investment” in mining.
Shadow treasurer Joe Hockey was similarly alarmist, suggesting, “It’s going to rip the heart and soul out of small business and families.”
The half a trillion dollar lift in the stock market and house prices reflects a 23 per cent lift in the ASX since 1 July 2012 which had added approximately $275 billion to the value of stocks, while a 5.1 per cent rise in house prices has added approximately $235 billion to the value of housing over the same timeframe.
This is hardly the stuff of an economic wrecking ball or outcomes that are ripping the heart out of businesses and families. On the contrary, it is a stunning boost.
Mr Abbott also noted that “every time you buy an apple, buy a banana, you pay under Julia Gillard’s carbon tax”. The recently released inflation data shows fruit prices rose 0.2 per cent in the year to the June quarter 2013, which means that the price of a kilo of apples or bananas has risen by around 1 cent over the past year.
In terms of the jobs results, total employment has risen by 160,400 since the carbon price commenced, which again stands in contrast to the claims from the fear mongers.
Mr Abbott noted that “the truth about this carbon tax is that it’s bad for business, it’s bad for jobs”.
The bottom line of all of this is that the economy is still growing, creating jobs and registering a quite stunning lift in wealth in the period since carbon was priced.
Also important is the recent policy decision of the government to move to an emissions trading scheme a year earlier than scheduled. Treasurer Bowen has estimated that this will cut the inflation rate by 0.5 per cent in 2014-15.
Carbon pricing has had almost no impact on the macroeconomy and inflation remains very low. If it were a “wrecking ball”, none of these outcomes would have been recorded.
And it is also worth noting that because of carbon pricing, emissions are falling and renewable energy generation is growing, which is exactly what the policy was meant to do!
It is a near perfect policy for a substantial problem.
Which begs the question: Why change it?
Stephen Koukoulas is a Research Fellow at Per Capita, a progressive think tank.
Georgia Wilkins, The Age, 24 July 2013
While Treasury acknowledged that data limitations made it difficult to quantify erosion of Australia’s corporate tax base, it said failure of international tax rules to keep apace with changes to the global business environment posed ”significant risk” to Australia’s tax system if not addressed.
The admission comes despite a strong push by tax advocates for local policies that would force companies to publicly disclose how much tax they pay in Australia and around the world in an effort to deter cheats. In a scoping paper that took into consideration the views of a Treasury-appointed taskforce, the Treasury said Australia should endorse the OECD’s plan on profit shifting and explore further options for working with tax authorities overseas for the exchange of greater information.
But while it committed to expanding the public release of tax statistics to include the international dealings of multinational enterprises, it said its ability to prevent companies shifting profits overseas was limited.
”There are some actions Australia can and has taken unilaterally; these are primarily focused on improvements than can be made without significant divergence from international tax settings,” it said.
”But the key focus of Australia’s efforts should be working multilaterally through international organisations to modernise international tax rules.”
The Treasury’s paper comes amid a global push by cash-strapped governments around the world to claw back tax dollars from multinational companies that use complex ownership structures to avoid paying tax.
Last year it was revealed Google’s Australian arm paid just $74,000 in tax in 2011, despite an estimated $2 billion in revenue from Australian ads.
In May, Fairfax Media revealed that all but one of Australia’s top 20 companies listed on the stock exchange had subsidiaries in low-tax or tax-free jurisdictions, including Hong Kong and Singapore. This included Australia’s biggest company, the Commonwealth Bank.
A report released by the Uniting Church’s justice and international mission unit found two-thirds of the top 100 listed companies held subsidiaries in “secrecy jurisdictions” that have been targeted by tax authorities for lax standards.
Last month, the government passed measures to allow the Australian Tax Office to publish the taxable income and tax paid of companies with revenue over $100 million.
But Mark Zirnsak, director of the justice unit and a member of the Treasury’s taskforce, said the government could do more to improve transparency in the tax system.
”If Google was required by Australian law to disclose – on a country
by country basis – what it reports, then you would find out where it had shifted profits.
”If a company is shifting money off to a tax haven somewhere, this doesn’t do anything at all.”
”If you know you are doing something that’s dodgy, and it’s exposed, then it’s going to act as a deterrent.”
Robert Jeremenko, a senior tax counsel at the Tax Institute, warned a ”naming and shaming” approach would require the government to explain the corporate tax system to the public.
”A company doesn’t always pay the top corporate tax rate on every cent it earns.”
The paper said many of the risks posed by multinational profit shifting were being driven by ”deeply entrenched features of Australia’s corporate tax system and policy developments beyond Australia’s borders and/or control.”
In Moscow on the weekend finance ministers from G20 economies backed the OECD’s 15-point plan to fix loopholes in the international tax system. It calls on governments to investigate how corporate tax systems are coping with the growth of a digital economy which has allowed technology companies that operate across multiple jurisdictions to take advantage of favourable tax environments.
Tom Bergin, The Guardian, 24 July 2013
The letter focused on a small change to an obscure document, but one that was significant enough to worry Will Morris, director of global tax policy at US industrial giant General Electric.
The letter, which Morris wrote in his capacity as head of the Business and Industry Advisory Committee lobby, was addressed to Pascal Saint-Amans, head of the Center for Tax Policy at the Organisation for Economic Co-operation and Development (OECD), a group of 34 mainly rich economies including the United States.
It expressed concern about the proposed language in an updated tax convention. Morris wrote – 13 times in all – that his group was “concerned” about the proposal, but had been ignored. Submissions on the OECD’s website show that lobbyists, especially those representing tech firms, had been voicing such fears for more than a year.
With some reason. A Reuters examination of hundreds of corporate filings across a dozen countries shows the proposed changes – now part of an even further-reaching review – threaten tax structures that are used by most of the big tech companies in the United States to shield tens of billions of dollars of income from taxes each year. As Morris wrote then, the proposals could “have the effect of fundamentally changing” the basis on which multinationals are taxed.
The OECD – a forum in which governments work together to agree how to solve economic problems – is grappling with one of the toughest problems in the global economy. National tax rules are out of date and failing to keep up with multinational companies which split their activities across different markets and base themselves in the lowest-tax jurisdictions. Last week, the G20 group of countries backed an action plan drawn up by the OECD, which issues guidelines that most Western countries follow, to come up with ways to bring firms into the tax net.
A key area of concern is that the current laws on tax residency, known as the “permanent establishment” (PE) rules, allow firms such as Google to fix a tax base in a low-tax country – like Ireland – while generating lots of business in a country where tax rates are higher, like France.
The principle of the system now is that companies often pay tax not on the basis of where they do business, but on where they finalise their business deals with customers. With a contract-stamping operation in a low-tax country such as Ireland as its “permanent establishment”, a company can channel revenue from its major markets to be taxed at a lower rate.
The OECD calls that tactic “artificial avoidance of PE status”, and it wants to change things so the international tax system more closely resembles economic reality. It aims to tweak the guidelines – which countries including France want to change – so that countries where companies make lots of money can claim a commensurate share of tax.
At a conference in early July, Mike Williams, the director of business and international tax at the UK’s finance ministry, told tax professionals the existing rules led to outcomes that were “difficult to defend”.
“It’s not right that groups can divorce their profits from the economic activity that gives rise to them and then shift those profits to tax havens where they pay little or no tax on them,” he said.
But GE’s Morris told Reuters that governments should be careful about changing a rule that works well “in most cases.”
“We are concerned about wholesale changes to a rule whose certainty has, up to now, promoted cross-border trade and investment,” he said in an email. GE declined to say if it used such tactics; accounts for a dozen of its European subsidiaries show they have a tax residence in their main markets, so do not rely on the tax-cutting structures Morris was helping to defend.
But many firms do, especially in tech, where they can easily operate across borders. Reuters analysed the accounts of the top 50 US. software, internet and computer hardware companies by market capitalisation and found that PE structures that help them avoid tax are currently used by 74 per cent of them.
Of the 37 companies that make use of such systems, those which responded to requests for comment for this article said they follow the tax rules in all countries where they operate; some said their arrangements were driven primarily by a desire to effectively serve customers, rather than tax reasons.
Chas Roy-Chowdhury, Head of Taxation at the Association of Chartered Certified Accountants, said managers had an obligation to investors to use legal means – such as electing where to declare a permanent establishment – to reduce their tax bill.
“Corporation tax is another cost to the business,” he said. “Higher payments could mean lower wages for staff, higher prices for consumers and lower pension fund dividends received by investors.” Tax management is part of competition.
What is a sale?
In principle, countries have the right to tax any economic activity that takes place on their turf. For that to happen, though, firms have to be resident for tax purposes within a country’s borders. The main factor determining whether a company has a taxable presence, or “permanent establishment”, in a country, is whether it sells there.
So when does a sale occur? In law, a sale is made not when it is negotiated and agreed, but when it takes on a legal nature with a signed contract. That’s the point some OECD members want to review.
Yet some companies want the existing system enshrined in law. In its January letter the Business and Industry Advisory Committee was suggesting draft clauses to add to the updated OECD document, entitled “Commentary on the OECD Model Tax Convention.” Those clauses would have allowed companies to continue to finalize deals in a low-tax country, and thereby avoid paying taxes in higher-tax markets even if that’s where most of the business happens.
“They tried to get us to clarify that their (current) deals work,” said Jacques Sasseville, Head of the OECD’s tax treaty unit. “Fair enough, but we were not prepared to do that.”
Business groups including the United States Council for International Business (USCIB), the main US lobby group on international tax, say revising PE rules risks creating uncertainty. It could spark additional disputes with tax authorities. The risk that profits would be taxed more than once would hit trade.
“Moving to a standard under which a PE is created by mere negotiation of a contract would obviously be something that business would be concerned about,” Carol Doran Klein, Tax Counsel at USCIB, told Reuters.
But some European Union and US officials said the Reuters analysis shows why the OECD needs to revisit its guidance on tax residence.
Reuters found that for 2012, the average tax charge on non-US earnings published by the big tech companies which used such structures was 6.8 per cent – less than a third of the tax rates in their main markets, and below the headline rate of 12.5 per cent in Ireland, which has the lowest tax rate in Western Europe.
“People should find it surprising,” said Philip Kermode, director of the European Union’s Directorate-General for Taxation and Customs Union. He said companies’ ability to do business in countries where they are not taxable is the real problem the OECD needs to get to grips with.
“It’s an illusion for some businesses to think that there shouldn’t be an examination of this.”
Much of the attention in the debate about PEs falls on US firms. The United States has tough rules to dissuade companies from using such structures at home, but many tech companies use them abroad, the Reuters analysis found.
The accounts of the 50 biggest US tech companies and their subsidiaries show that only 13 declare the bulk of their income for tax in the main markets where they generate it. The rest use mechanisms to channel some or all of their revenues to a central tax base in a country with a lighter tax regime.
Sixteen of the 20 biggest US software companies by market value, including Microsoft, Adobe and Citrix, do not declare tax residences for their main businesses in their major European markets, their accounts show. Instead, they report software sales in Ireland, Switzerland and the Netherlands, countries which have smaller populations and offer lower corporate tax rates.
Microsoft told Reuters its Irish operation was “established largely in response to customer demand to consolidate shipments” and that it pays all the taxes it should. Adobe said it “pays the lawful amount of tax owed in the countries where we do business.”
Citrix said in its 2012 annual report that its effective tax rate was below the headline US federal statutory rate “due primarily to lower tax rates on earnings generated by our foreign operations that are taxed primarily in Switzerland.”
A spokesman said: “Citrix companies fully comply with all tax laws, rules and regulations and we cooperate with the relevant tax authorities to ensure we continue to do so.”
US computer hardware makers and internet firms use similar schemes. At least 13 of the 20 biggest hardware firms, including companies such as Dell, and eight of the 10 biggest internet service companies, including Google, Expedia and Yahoo, reduce their European tax burden by ensuring they do not create PEs in major markets. Companies can create PEs in as many markets as they like.
In Dell’s case, sales and other staff are employed in subsidiaries across Europe but sales are conducted on behalf of an unlimited Irish-registered company. That means it does not have to publish accounts, so it is not possible to see what if any taxes it pays. Dell declined comment.
Google said it chose Ireland as its Europe, Middle East and Africa headquarters for a variety of reasons including good logistics, an educated workforce and low tax. Expedia subsidiaries in countries like Germany supply services to a Swiss affiliate which does business with hotels and others who wish to sell through its websites, company filings and websites show. The company declined to comment.
Some companies that channel cash from their main markets to sales units in Ireland, Luxembourg and the Netherlands then send it untaxed to countries like Bermuda and the Cayman Islands, which do not levy corporate income tax. Microsoft and Google are among them.
Apple uses companies that are registered in Ireland but say they are tax-resident nowhere. This incongruous mechanism was revealed by a US Senate panel in May, which called it the “Holy Grail of tax avoidance.” Apple declined comment, but its CEO Tim Cook said in May Apple pays all the taxes it owes and it did not depend on tax gimmicks.
In other cases it is unclear where the money goes, or what, if any, tax is paid on it, because the companies use set-ups that are not required to publish accounts. The unlimited company in Ireland is just one example.
‘Lowest level … under the law’
A close examination of one company that does publish accounts – Adobe Systems, one of the world’s largest software groups – gives a detailed insight into one way the centralized PE arrangement works.
Adobe markets products to create image-rich content such as the ubiquitous ‘.pdf’ format document. The United States is the company’s main centre for research and development, and it operates large R&D facilities in Canada, Germany, Japan and India. But the firm also has an office at a business park landscaped with miniature waterfalls, sculpted shrubbery, trimmed lawns and rockeries, on the outskirts of Dublin.
Adobe said this office is too small to be included in the list of owned or leased “principal properties” that it must disclose in its annual filings. It houses two subsidiaries: Adobe Software Trading Ltd, and Adobe Systems Software Ltd.
According to Irish corporate filings, Adobe employs 120 people in Dublin, around 1 per cent of its global workforce; three are engaged in software R&D.
Yet Adobe’s Irish operation generated 80 per cent of its non-US income in recent years – more than $US500 million annually in 2010 and 2011, the years for which the most recent accounts are available.
Adobe paid only about $US3 million a year in Irish income taxes on that profit, because most of it was earned by one of the subsidiaries, Adobe Software Trading Co Ltd – a company that is Irish-registered but which its accounts say is “not subject to Irish corporation tax.”
Adobe declined to answer any detailed questions about its tax affairs but added it “seeks to pay the lowest level of taxes owed under the law.” It said it paid “the lawful amount of tax owed” in the countries where it operates and believed in “a fair system of taxation.”
Adobe’s units around the world do have a tax residence in each of their markets, but not as sellers of software. Instead they are “service providers” to the second Dublin subsidiary, Adobe Systems Software.
Such an arrangement – where businesses in the main markets only declare profit on a support function – is known as the “Service PE” model. It’s one of several variants which arose in the 1980s but took off in the 1990s with the rise of e-commerce.
Regulatory filings show Adobe has managed an average tax rate on its overseas income of less than 7 per cent in the past three years, which is a fraction of the rates in its main markets.
The Irish tax authority declined to comment.
Like Washington’s tax authority, Europe’s tax collectors can disregard PE schemes contrived to avoid tax. But French, Norwegian and Spanish attempts to exercise these rights have failed in court. Experts say civil law codes make judges reluctant to overrule contractual agreements, such as a sales deal.
This is why governments have asked the OECD to change the guidelines which will then form the basis of future tax laws. If the rules are changed, they hope, more companies will be forced to declare a PE in countries where they generate sales, rather than where the contracts are finalised.
A senior US Treasury official involved in the OECD process said Washington understood concerns that these structures may help US firms short-change other governments by not creating PEs in enough countries where they do business. “We are sympathetic to that,” the official told Reuters. “Because maybe … there ought to be more PEs.”
Back in January, discussion documents said OECD members were split on whether to support a change. Some officials and legal experts aren’t sure it will be possible to come up with a different legally enforceable definition of the moment of sale.
The OECD says it could take another two years before new proposals are drawn up. But the OECD’s Saint-Amans said firms have told him privately they know change is on the way.
He said that when he meets executives in the corridor, they say “‘We know it’s over, we need to fix it.’”
Sarah Lumley and Jim Crosthwaite, New Matilda, 24 July 2013
Despite massive controversy, the Victorian Government is forging ahead with the East-West Link toll road. Over a hundred homes and commercial properties will be acquired by the state to put in the toll road.
Treasurer Michael O’Brien has indicated the project will be a public private partnership (PPP). In a May press release, the Victorian Government indicated it would soon seek expressions of interest and award a contract in late 2014. “There is a clear role for the private sector in delivering this project,”O’Brien said.
Opposition leader Daniel Andrews has committed to scrapping the project, if re-elected, with the proviso that legal delays with the property acquisition hold up the project long enough to prevent a contract being signed.
This kind of drama is a common story with PPPs. While many progress smoothly, some have given cause for serious concern – especially toll roads. PPPs gone wrong include Sydney’s Cross City and Lane Cove tunnels, Brisbane’s Clem and Airport Link toll road/tunnel, and in Victoria, the desalination plant at Wonthaggi and the Ararat Prison project, which had to be rescued.
In most cases taxpayers are footing the bill one way or another and there is a sneaking suspicion that PPPs are sometimes used as a way to hide public debt, about which there is currently much political hyperbole.
Paradoxically, some of the less successful PPPs appear to have placed a burden of debt on Australian taxpayers that we may be paying off for generations to come. According to The Age, Victorians will be paying $650 million a year for 28 years for the Wonthaggi Desalination plant even if they use no water from it, and $130 million a year for 25 years for the Peninsula Link Road regardless of the number of cars that use it.
This is in part due to the phenomenon of shadow tolls (“availability payments”) which are paid to the private partner by the government to cover shortfalls in use. Put simply, the operator gets paid regardless of the whether the service gets used, despite a stated advantage of PPPs being the ability for governments to pass risk to the private sector.
Since 2008, Infrastructure Australia, a Commonwealth statutory authority, has provided the overarching policy framework and guidelines for Australian PPPs, many of which are contracted and facilitated at state level. According to Infrastructure Australia’s National PPP Framework:
“The aim of a PPP is to deliver improved services and better value for money primarily through appropriate risk transfer, encouraging innovation, greater asset utilisation and an integrated whole-of life management, underpinned by private financing.”
PPPs have been used for projects ranging in cost from $13m (Search & Rescue – Darwin) to over $5b (Victorian desalination plant). They are applied to construction of hospitals, prisons and other buildings, water and waste treatment plants, and transport systems.
Problems associated with PPPs, including their debt status, have also been experienced in the UK (where PPPs are known as PFIs or private finance initiatives) and the US. In a 2012 report by the Treasury Committee of the House of Commons (UK) it was said that:
“This incentive [to pursue PFIs] remains in place because, first, the current rules exclude PFI liabilities from calculations of Public Sector Net Debt, and, second, privately financed investment allows government departments to spend more than their allocated capital budgets.”
In Australia private companies are required to bid for PPP projects and their bid is compared with the “Public Sector Comparator”, which estimates what the project would have cost if it were to be facilitated, built or serviced by the public sector. Unfortunately the full details of private bids are not always available for public scrutiny because of commercial confidentiality. This means that the financial implications of PPPs are not always transparent.
A 2003 report to the UK Parliament raised concerns about the way in which the Comparator was used saying “the desire to show that the PFI deal is ‘cheaper’ than the public sector comparator has led to manipulation of the underlying calculations and erroneous interpretation of the results”.
The Infrastructure Australia website provides a summary table of all Australia’s PPPs with their associated “value” (cost). We were able to glean the following costs for the projects mentioned earlier as being in trouble:
• Sydney’s Cross City Tunnel – $680 million
• Sydney’s Lane Cove Tunnel – $1,100 million
• BrisConnections (Brislink) – $5,340 million
• Brisbane’s North-South Bypass Tunnel (Clem7) – $3,200 million
• Victoria’s Ararat Prison – $394 million
The Wonthaggi desalination plant, which has been plagued by controversy, missed deadlines, and threats by the proponent to sue the Victorian Government, is listed by Infrastructure Australia as costing $5,720 million. The Peninsula link is shown at $849 million. Canberrans are concerned about the financial burden that the Capital Metro light rail PPP might place on taxpayers.
If the 126 PPPs listed by Infrastructure Australia as currently contracted were included on the public balance sheet, we estimate that PPPs would increase the public debt, which is now around $300 billion, by just $60 billion. It is likely an overestimate given the higher cost of private borrowing that is incorporated into project cost. This needs more research because Infrastructure Australia does not list the cost of all PPPs in a standard way, and we have crudely summed the totals given.
The NSW Government seems to have had a change of heart about PPPs. In an article about the decision to fund the WestConnex toll road through other means, including from the sale of public assets and investment from superannuation funds, an Industry Super Network spokesperson Matthew Linden is quoted as saying “They recognise the PPP structures don’t work going forward. It’s obvious they’re exploring new ways to invest in infrastructure”.
According to an earlier report in the Sydney Morning Herald the NSW government also intends to use tolls on the M4 section “as seed funding to help pay for the rest of the $13 billion WestConnex under plans being drawn up to avoid the financial failure of past Sydney toll roads”.
Arguably, an underlying factor in opting for PPPs is the primacy given to the private sector in Australian politics. Protecting the capacity of major corporations to generate wealth has become central to economic thinking, industry lobbying and government agendas. Infrastructure Australia for example states on its website that “Public Private Partnerships are vital to the development of social and economic infrastructure in Australia.”
In regard to the Capital Metro light rail project, the ACT Treasurer Andrew Barr is quoted, perhaps confusingly, as saying that he still sees advantages in PPPs although borrowing for a major infrastructure project would be cheaper for the government than for a private partner because of the ACT’s AAA credit rating. Potential pressure from international organisations is a major reason for politicians to be concerned about public debt, and the turn to apparent debt reduction through the use of devices like PPPs.
Perhaps we should begin to scrutinise how corporate Australia manages to influence public policy making while it obscures its own debt to the rest of the world, casts doubt on public debt accrued for demonstrably worthwhile purposes, and rips us off in the process.
Dale Boccabella, The Conversation, 23 July 2013
Some of the claims were extreme and they are obviously calculated to put as much pressure on the Government to back down fully, or at least in part. These are the facts in regard to the relevant tax law.
Cost method versus statutory formula method
Where an employer provides a car for the use of an employee, a fringe benefits tax liability might arise. There are two methods of valuing this type of car usage benefit. One is the “cost method” and the other is the“statutory formula” method.
The cost method works out the cost of operating the car for the year (for example, petrol, servicing, insurance). From there, the employer (with the employees help) establishes the percentage of private use (such as a weekend drive to country) and percentage of income producing use (travelling from work premises to clients) of the car by the employee.
This is done on the basis of kilometres travelled on each activity by the employee. This is ascertained by the employee, for the employer, by keeping a log book of income producing trips for 12 weeks in the first year in which the employee had use of the car.
Once the percentage of private use is established, it is applied to the cost of the car to establish the taxable value of the benefit (for instance, the operating cost of $8,000 with 40% private use would mean a taxable value of $3,200).
Putting aside some transitional rules, the statutory formula method applies a flat 20% to the cost of purchase of the car. (If the car is more than four years old, the cost of the car is reduced to 66.6% of the cost of purchase). Under the statutory formula method, there is no requirement on the employer to establish the percentage of private use of the car by the employee.
That is, the statutory formula is not valuing the car fringe benefit by reference to the employee’s private use of the car. For example, if the car has a purchase cost of $32,000, the taxable value of the car benefit is $6,400 under the statutory formula method (that is, $32,000 x 20%).
The employer can choose whichever method suits them, including the one that gives the lowest taxable value. It is clear that the statutory formula method, like other presumptive tax mechanisms, is a simplification measure; it means an employer (or employee) can avoid the tax compliance obligations associated with keeping a log book under the cost method.
Generally, the statutory formula method will give a lower taxable value than the cost method when the car has a high percentage of private use, and the cost method will give a lower taxable value when there is a low percentage of private use. One could question the costs that are included in calculating costs(and therefore, taxable value) under the cost method (e.g. deemed interest, deemed depreciation). However, it is only the cost method that accurately ascertains the private use element of the car benefit.
This is what a principled, equitable and efficient income tax system should be taxing. Fringe benefits tax (FBT) is a surrogate income tax on employees who receive benefits for private consumption, but one unfair aspect of the FBT regime is that it taxes all benefits at the top marginal rate of tax applicable to natural persons (currently 46.5%) even though the recipient of the benefit may be on a lower tax rate than 46.5%).
Removing a tax concession
This means that where the statutory formula method gives a lower taxable value than the cost method, the taxpayer is getting a tax concession.
This is recognised in the annual Tax Expenditure Statements issued by Treasury. The Tax Expenditure Statements contain a list of items where taxpayers are getting a tax concession, along with an estimate of the aggregate of the tax concession.
The statutory formula method is listed as a significant tax expenditure. On the other hand, where the statutory formula method gives a higher taxable value than the cost method and the employer fails to elect into the lower cost method (this will rarely happen), the employer is being (unfairly) overtaxed. This would be a negative tax expenditure.
The removal of the statutory formula method simply moves this part of the tax system back to a principled position by removing a tax concession. These facts have been completely lost in the “debate”.
Start date could have been more prospective
In spite of the above, there is a legitimate issue about the start date of the new rules. The removal of the statutory formula method only applies to all new contracts entered into after 16 July 2013, but even then, the statutory formula can be used for the rest of the current FBT year (that is, until 31 March, 2014). After that year, only the cost method will be available.
All existing employee car usage arrangements can continue to use the statutory formula until the car is changed over. In this sense, these new rules are not retrospective. But, many employers and employees would have been in the process of arranging a new car on the announcement date but that arrangement may fall short of having a concluded contract.
In this sense, it is arguable that the Government measure does operate retrospectively for these employers and employees. To deal with the “immediate start date” issue and “retrospective” issue, the Government could have provided for a more generous deferred phase out of the statutory formula method (for instance, until March 2015).
In 2011, when the Government amended the multiple rates under the statutory formula method to move towards one rate (i.e. 20%), which increased the taxable value on most cars, the Government provided a transitional period whereby tax increases were progressively introduced over three years.
Difficulties of bringing about meaningful tax reform
More important to the national interest, does this episode (which may not be over yet) say anything about the prospects for meaningful and principled tax reform? It is certainly not encouraging. It does send the message that those with tax concessions, and the industry serving those tax concession recipients, will not give up their concessions without a fight. It probably does not help where there is a lack of bipartisanship, which is the case with the removal of the statutory formula as the Coalition have indicated they will oppose this measure.
Similar to many areas of human conduct, the longer tax concessions remain in place as part of the tax system, the higher the level of normality that is achieved. Normality and entrenchment can reach the point where users of the tax concession start believing that the concession is a normal part of a benchmark tax system.
Some of those complaining about the removal of the statutory formula method may genuinely believe that the government is imposing a tax increase on them over and above what a benchmark income tax would impose, rather than seeing the government’s announcement as the removal of a tax concession.
Many complainants though will be moved by pure self-interest and these people know full well they have been accessing a tax concession. Sadly, our tax system is riddled with many significant tax concessions that depart from a benchmark tax system – such as the 50% tax concession on capital gains of natural persons, 100% exemption on all the gain made on the family home, generous tax concessions on superannuation, failure to tax all land under state land tax regimes.
Some not-so-apparent concessions involve negative gearing, or the current generous treatment of discretionary trusts and the lack of death duties. The longer tax concessions remain in our tax system, the more normality they will achieve. In turn, the harder it will be for future politicians to remove or scale back the concessions.
In a future where Australians demand more services from Government and at the same time resist higher taxes, scaling back tax concessions may be the least displeasing option to meet desired revenue needs. One heartening thing for future governments is that there are still many tax concessions worth a lot of lost revenue that could be wound back.
Ian McAuley, New Matilda, 23 July 2013
The reaction to the Government’s promise to close a tax loophole – a loophole which had allowed a tax deduction on the use of private cars – has verged on the hysterical.
The change is no more than an overdue cleaning up of tax laws. It removes an anomaly, or a “rort” in everyday terminology, which had effectively allowed a tax deduction for cars provided to certain employees even if they were not used for business purposes.
We all know that we are guilty of fraud if we claim a tax deduction for our holiday travel or personal telephone. But such behaviour has been legal for cars provided as part of a “salary package”, even if those cars were purely for private use.
A little history explains how this anomaly came about. In 1986 the Hawke-Keating government reformed business and personal taxes to ensure that “in-kind” payments to employees, such as school fees, club membership and utility bills, were treated no more favourably than payments made in cash. In fact, as a discouragement, the tax rate applied to such perks, the Fringe Benefits Tax, was at the highest marginal rate of personal tax.
There are sound reasons for encouraging the employment contract to be in cash. Payment in-kind is a relic from feudal times. Corporate perks belong to a paternalistic and manipulative “employer”/“employee” relationship, and whatever motivational benefit they confer is often offset by their arousal of jealousy and resentment. Taken to their extreme, when they form a large part of remuneration, they come close to the dependency seen in indentured labour – a dependency known as “golden handcuffs”.
As any Economics 1 student knows, you are almost always better off when you choose how to spend your own earnings, rather than having your choices constrained by the limited offering of an employer or a salary packaging contractor. When you are paying your own way you are likely to take more care over the type of car you buy and how you look after it. And, from the company’s perspective, a straight salary is much easier to administer than a set of fringe benefits. It’s a fundamental principle of business that business and personal transactions should be kept entirely separate.
The 1986 reforms were designed to support these business and economic principles, but cars were exempted from these reforms, and were allowed a concessional rate of FBT. This was to give support to the local car manufacturing business – in other words, a subsidy.
You won’t find that in official government statements, because, under GATT rules, which later morphed into WTO rules, we weren’t supposed to subsidise specific industries, and the official line was that we were reducing tariff assistance to the car industry. All countries with car industries find their own ways around WTO rules, and this was our workaround.
Although that subsidy has never been evaluated (that would be to admit our breach of trade rules), it was probably effective in its time, because in the 1980s at least two thirds of cars sold in Australia were locally-made, supported by a 57.5 per cent import duty.
It also helped perpetuate a lazy business practice by local producers, who were making three quarters of their sales to fleet buyers – one half to businesses and one quarter to governments. Only Toyota was making significant sales to private buyers, while at the other extreme only 16 per cent of Ford’s sales were to private buyers. (Try to think of anyone who ever bought a new Falcon.)
That was 27 years ago. Imports now command 80 per cent of our car market (pdf). While many government buyers still have a local preference, no such bias necessarily applies to the private sector. And, as we have been so stridently made aware, a whole industry has grown up around fringe benefits tax concessions. Part of the concession is now supporting the car industry in Germany and Japan, and, until last week, another large chunk was going to salary packaging consultants. It’s a costly way to get a little assistance to our local producers.
So why such a chorus of complaint?
It is understandable that the “salary packaging” industry” would complain, and we naturally sympathise with those who have lost their jobs, such as the 74 retrenched employees of NLC, described by their boss as “a lot of good people working really hard”. But that begs the question: what sort of government policy has resulted in so many good and hard-working people working in an industry which is no more than a bureaucratic overhead on the real economy? Surely such people should be better employed doing something useful.
Understandably the industry is put out by the lack of consultation, but that would not have been feasible, because the very hint of a change would have resulted in a rush of orders. It’s the same reason why governments have to keep some budgetary decisions secret.
Similarly it is hardly surprising that South Australian Premier Jay Weatherill should be upset, but his advisors must have known that at some time this concession had to go. After all, successive governments have been under pressure to clean up loopholes in taxation legislation. Rather than fighting for retention of the concession, he would do better to argue for a more direct form of assistance to the industry – in a way that doesn’t get siphoned off by the tax minimisation industry.
The most hypocritical reaction has been from the Coalition, who have promised to oppose the reform. How can a politician from a party ostensibly committed to choice, the simplification of regulation and the operation of free markets, support such paternalistic and discriminatory employment practices? Even Karl Marx acknowledged that capitalism was superior to feudalism. And how does their support for the “salary packaging” industry relate to their promise to reduce the size of the public sector? Are they really saying “public bureaucracy bad, private bureaucracy good”?
Particularly unedifying has been the argument between Joe Hockey and Chris Bowen as to whether low or high income workers are enjoying the benefits. We don’t know who is right, but it is disingenuous for Hockey to argue that lower-paid workers are the main beneficiaries, because, if that is so, they are the very people who may benefit the most from payment in cash rather than in the form of a new car. And isn’t the Liberal Party supposed to be the champion for farmers, the self-employed, retired people, stay-at home parents and others who don’t have a paternalistic employer paying a salary? Perhaps their indignation is a response to their realisation that a Labor government is implementing a policy from the Liberal Party platform.
Perhaps some of the anger is from those who claim to speak for “business interests”, but are really more interested in preserving ways for managers and other stakeholders to extract personal gain from businesses. We are hearing the same voices as in 1986 when the FBT was introduced, defending tax deductible “business entertainment”. We are rightly annoyed when we have reason to believe that trade union officials have used union credit cards for personal expenses, but we are supposed to take a more permissive attitude when businesspeople do the same.
The only significant group with a legitimate ground for complaint are those state and local governments which have used salary sacrificing for cars as a means of providing employee benefits, while living within their budgetary constraints. Unlike private businesses, they cannot easily pass their costs on to customers. This strengthens the case for reforming Commonwealth-state tax arrangements, rather than retaining a loophole in taxation law. Many charities too benefit from this and other FBT concessions, which have been used, de-facto, as a means of reducing income tax rates in the low-paid NGO sector. But the Productivity Commission, in accordance with orthodox economic principles, has pointed out (pdf) that this is a poor way of helping that sector. (Many smaller NGOs find the administration of these concessions to be a huge bureaucratic load.)
The probable result of abolishing this concession will be a shift of some car sales from fleet to individual purchases, and a better deal for that majority of Australians who don’t have access to salary sacrifice arrangements, or who do have such access but prefer to make their own choices. It may mean a lowering of car prices for such buyers, who, to date, have effectively cross-subsidised fleet buyers, particularly for Australian-made cars, and those car companies may have to pay a little more attention to individual customers. Some people will need to keep travel records, but can anyone seriously argue that logging business trips for 12 weeks every five years is a serious burden? And corporations may at last be able to simplify their payrolls and leave people free to choose how they spend their own money. Isn’t that what a market economy is all about?
Katie Walsh, The Australian Financial Review, 22 July 2013
Tax experts said the ambitious plan could lead to more changes to laws in Australia despite recent tightening to restrict profit shifting, and companies were already paying attention.
“Multinationals are taking it into account when they put together their global tax plans – they have to,” said Clayton Utz partner Niv Tadmore.
The action plan, which recommends 15 new principles for nations to adopt, was drafted by the Organisation for Economic Co-operation and Development and endorsed by G20 finance ministers in Moscow over the weekend, including Treasurer Chris Bowen.
It includes rules to stop companies from deducting debt in high-taxing nations where the interest receipts are not taxed elsewhere, using “conduit” companies that funnel money to tax havens, and shifting intellectual property offshore to avoid tax.
The two-year plan endorses greater transparency of schemes adopted and taxes paid by multinationals.
Dr Tadmore said the changes could include new rules that “deem” values for IP, to address concerns that companies move the valuable assets to havens where they can amass profits. Deeming values could attribute higher prices to an IP asset, meaning its transfer could attract more tax in the origin country.
The past year has seen a surge in appetite among Western nations to attack multinationals, after revelations of complex – but legal – structures adopted by the likes of Google, Apple and Starbucks to minimise tax.
The proposals go further than controversial changes adopted in Australia in the past year, including updated transfer pricing laws, a crackdown on interest deductions relating to tax-exempt foreign dividends, and the Australian Taxation Office publication of profits and taxes of big businesses.
The new transfer pricing rules automatically adopt any changes the OECD might make to its rules.
This week, Treasury is due to release a scoping paper exploring ways to stop the erosion of tax revenues due to complex profit shifting by multinationals.
Dr Tadmore said the OECD plan’s ambitious two-year timeline was not “pie in the sky” and would lead to changes. But its success would depend on “unprecedented levels of co-operation among tax authorities”, he said.
Multilateral support ‘vital’
“This is a big call – historically, co-operation has been touch and go.”
Multinational clients had closely watched the OECD’s work, he added.
Most did not take aggressive approaches due to strict tax risk-management policies and market pressure.
CPA Australia head of policy Paul Drum said multilateral support was vital, but the plan would likely lead to more changes to Australia’s tax rules.
“If it is adopted – and the signal so far is there is unilateral support for this – the golden age where businesses don’t pay tax is coming to an end,” he said.
Lawyers and advisers would work to counter any new rules, he warned.
“This is why individuals pay so much in tax – because of profit shifting.”
In another significant outcome from the G20 meeting, Australia joined a pilot scheme to force banks to reveal the financial details of foreign clients, which are passed to resident nations.
Established by Britain in April, it capitalises on information banks are handing over worldwide as part of the United States’ new regime to catch citizens who hide money offshore.
Other signatories include France, Germany, Italy and Spain.
Australia and Britain used the Moscow meeting to forge a pact to lead the global tax-avoidance crackdown in their respective roles leading the G20 next year and the Group of 8 this year.
Mark Kenny, The Sydney Morning Herald, 19 June 2013
The change, known as the Housing Payments Deductions Scheme, would grant state-run public housing bodies the ability to approach Centrelink to request compulsory rent deductions for tenants judged to be at risk of eviction due to unpaid rent.
Relying on advice showing unpaid rent causes almost half of evictions, the government believes potential rent defaulters are often on their last housing option and face a genuine danger of entering the ranks of the homeless if they get too far behind.
Centrelink would be empowered to sequester up to 35 per cent of an individual’s welfare payments.
But the controversial measure faces a tougher time in the upper house after being opposed by both the Greens and the opposition in the lower house. The Greens believe the proposal is heavy-handed and patronising and will wind up being counterproductive.
The opposition’s Kevin Andrews also spoke forcefully against the proposal.
Prem Sikka, The Conversation, 19 July 2013
It is a follow-up to the G8 meeting last month in Ireland which ended with lots of nice statements on curbing tax avoidance but with little commitment.
Unfortunately, companies such as Google, Microsoft, Amazon, Starbucks and others are able to use the system to avoid taxes in countries where their sales, assets and employees are located, by creating complex corporate structures and transactions. In fact, a considerable part of corporate profits are not taxed anywhere.
So the OECD plan cannot be evaluated without considering the fault lines in the current rules for corporate taxation which were designed nearly a century ago. Three stand out.
First, the rules, often enshrined in international treaties, specify that companies should be taxed at the place of their residence rather than where the economic activity took place.
Second, companies such as Amazon, eBay and Barclays and HSBC have common ownership, control and strategic direction, but they are not taxed as unified entities. Their hundreds of subsidiaries are treated as separate tax entities. The FTSE100 companies have about 22,000 subsidiaries. Thus, for tax purposes it is assumed that the authorities will deal with 22,000 separate entities rather than just 100 companies.
This encourages companies to arbitrage the global tax systems by devising all sorts of intragroup royalty payments for using intellectual property, management fees, interest payments and other transactions and pass them through subsidiaries located in low/no tax jurisdictions. Through such devices, companies bump up their costs in one country (for example, the UK) but collect the same amount in another place (say, Bermuda) which has a low/no tax regime.
Third, in principle, the artificial relocation of profits could be checked by using an accounting technique known as transfer pricing. Under this method, all intragroup transactions were to be valued at what the OECD calls “arm’s length” principle, or prices set by the free market. However, in the era of monopoly capitalism, finding free market prices or even any remotely comparable to it has become difficult. Around 70% of the world’s trade is controlled by 500 corporations. A handful of companies dominate coffee, pharmaceutical, internet and other sectors and thus “arm’s length” prices cannot easily be obtained.
Reconsidering the rules
The OECD report acknowledges that tax avoidance is disabling government’s ability to stimulate the economy and forcing ordinary people to pay higher taxes for a crumbling social infrastructure. It calls for curbs on artificial shifting of intellectual property to jurisdictions with little trade. It calls for limits on the deductibility of expenses from taxable profits relating to intergroup loans and other transactions.
The report also calls for reconsideration of the rules on “permanent establishment”. A case for this has been made by the Public Accounts Committee’s hearings into the tax affairs of Amazon and Google. Companies have been able to devise structures that use a country’s infrastructure, but escape taxes there. For example, Google claims that its London-based subsidiaries only do marketing, but sales orders are taken by the Irish subsidiary and thus sales/profits are booked in Ireland. Amazon claims to provide customer support in the UK, but online orders are booked in Luxembourg and therefore sales/profits are booked there.
Other proposals include strengthening of various international treaties and transfer pricing rules. The OECD action plan makes lots of references to transparency but shies away from recommending the publication of corporate returns.
A healthy alternative
The real problem is that the report is trying to patch up the current tax system rather than promoting any fundamental reform. The fault lines identified above are not addressed. The OECD has rejected the consideration of alternatives.
But the European Union has advocated the consideration of one such alternative. It is known as the Common Consolidated Corporate Tax Base (CCCTB). In the US, this is known as unitary taxation and has operated for over half a century.
The key idea is that a multinational corporation, such as Amazon, should be treated as a single economic unit rather than a collection of hundreds of disparate subsidiaries. The global profit of the company should be calculated. Thus, all internal transfers and royalty payments have zero effect because companies are effectively paying themselves. The global profit of the company can then be apportioned to each country in accordance with a formula that best describes its wealth creation.
The apportionment of profits can be on the percentage of sales, employees and asset location, or some combination thereof. Each country can then tax its share of profits, as it wishes. Such a system for taxing corporate profits is already used within the domestic context in the USA, Canada and Switzerland. A study of these jurisdictions would have been fruitful, but the OECD says that “moving to a system of formulary apportionment of profits is not a viable way forward”. It will be interesting to see how the EU responds.
The OECD report has intensified the debates, but does not offer any immediate solutions. That will depend on the responses of various nation states as they respond to demands of local politics and also compete to attract corporate investment by offering lower taxes though the OECD warns against harmful tax competition. It will be some time before tangible outcomes, if any, can be delivered.
Anna Mortimore, The Conversation, 17 July 2013
The move, part of Prime Minister Kevin Rudd’s announced $3.9 billion of cuts or deferrals to government spending to help the transition of the carbon tax to an emissions trading scheme, will bring a saving of $1.8 billion over the forward estimates.
As highlighted in the Bracks review, over 50% of new cars are acquired under the car benefits tax regime and at least 75% of domestic sales of locally produced vehicles are to government and business sector. Will businesses still buy locally produced vehicles once this tax regime is terminated?
The statutory formula method was introduced in 1986 under the Button Plan to protect the economic viability of the Australian motor vehicle industry. It was indirectly designed to support the local car industry through subsidising vehicle cost. Axing this benefit may make car manufacturers of large vehicles such as the Holden Commodore no longer sustainable.
It is hard to believe that the Australian automotive industry had been consulted on this latest announcement. In the past, the local car industry has rejected any proposal to reform the statutory formula method or any suggestion of removing the car benefit altogether.
For example, Holden expressed their concern to the Henry Review that the operation of the FBT system was vital to the sustainability of the local industry and “without the car FBT concession, there would be little incentive to offer cars as fringe benefit, and employees left to their own devices would be more likely to buy imported vehicles”.
The same was argued back in the 1999 Ralph Review of Business taxation, when the local car industry argued “… any tightening of the formula would damage its sales and encourage employers to choose cheaper, imported cars”. The 2009 Senate Standing Committee in Rural and Regional affairs and Transport believed that support to the Australian MVI extended to the car FBT concession.
In 2009, the Federal Chamber of Automotive Industries urged the Henry Review to carefully consider the implications of their recommendations to Australia’s car industry and the effect that changes to the statutory formula method might have on purchasing decisions by business.
Past submissions and reviews do not support Industry Minister Kim Carr’s assertion that cutting the statutory formula method will not have an adverse impact on Australia’s car industry. The tax changes may prompt Holden to finally decide that manufacturing in Australia is no longer sustainable, which will inevitably lead to job losses. Further job losses may also arise in the automotive industry, given at least half of all new vehicles are acquired under the fringe benefits tax regime.
In terms of environmental policy, axing the statutory formula method is a good policy because it indirectly reduces road transport carbon emissions and reduces the number of vehicles acquired each year. Australian taxpayers will no longer be subsidising the cost of high carbon emitting vehicles, which are mostly acquired under the FBT regime.
A 2009 study by Copenhagen Economics found that the car benefit tax regime increased the number of cars being purchased, which were mostly bigger and higher-emitting vehicles. Evidence in the National Transport Commission’s 2012 Light vehicle emissions report also found that new passenger vehicles acquired by business and government have higher emissions than new vehicles acquired by private consumers.
Axing the statutory formula car benefit maybe a good decision for the environment, but what will be the economic and industrial fallout from removing this subsidy? Did the Australian government consider the impact of its policy decision, or was it made on the run?
ABC News, 16 July 2013
Mr Rudd has released the details of his plan to switch to a European-style floating price system a year early, saying it would lead to a reduction in the cost of living which would save an average family $380 a year from July 1, 2014.
Speaking in Townsville, he said households would continue to receive financial assistance and businesses would pay less for carbon permits.
The cost will be offset by new savings measures, including $1.8 billion raised by changing the fringe benefits tax for employer-provided or salary-sacrificed cars.
Cuts to fund carbon price policy
• Abolishing statutory formula for fringe benefits tax on cars – $1.8 billion over forward estimates
• Energy security fund: bringing forward free permits, then discontinuing program – $770 million over forward estimates
• Changes to coal sector jobs package to adjust value to new carbon price – $186 million
• Changes to clean technology program and carbon capture and storage program – $586 million over forward estimates
• Return unallocated funds from biodiversity fund to budget – $213 million over forward estimates
• Cuts to funding for carbon farming futures program – $143 million over forward estimates
• Changes to public service including 1 per cent cut in executive staff numbers – $248 million
Some environmental programs funded by the carbon tax are also being scaled back, and new savings measures are being imposed on the public service.
“The Government has decided to terminate the carbon tax to help cost-of-living pressures for families and to reduce costs for small business,” Mr Rudd said.
“This is the fiscally responsible thing to do.
“The nation’s 370 biggest polluters will continue to pay for their carbon pollution but the cost will be reduced meaning less pressure on consumers.
“Households and pensioners will continue to receive payments calculated on a higher carbon price, providing additional support to meet cost-of-living pressures. These benefits are permanent.”
Mr Rudd said the $380 annual saving for an average family would include cuts off $150 on electricity bills and $57 on gas.
Treasurer Chris Bowen said the Government was planning $3.9 billion worth of savings over the forward estimates to pay for the change.
He said that would equate to a contribution to the budget bottom line of $177 million over the next four years.
The Government wants to move from a fixed carbon price of $24.15 a tonne to a floating price of about $6 by July 2014.
Mr Rudd says Labor remains committed to cutting emissions despite the lower carbon price. He says his policy would be more effective than the Coalition’s direct action plan, which he argues would cost households $1,200 a year more.
Abbott: Rudd’s not the terminator, he’s the exaggerator
Opposition Leader Tony Abbott disputed Mr Rudd’s claim that he was “terminating” the carbon tax, saying: “He is not the terminator, he is the exaggerator, he is the fabricator, not the terminator.
“What Mr Rudd has announced today is not the abolition of the carbon tax, all he has done is simply brought forward Julia Gillard’s carbon tax changes by 12 months.
“He has changed its name but he hasn’t abolished the tax. All he has done is given Australians one year only of very modest relief.”
Shadow treasurer Joe Hockey also disputed the Government’s figures.
“The Govt. must release ALL the Treasury modelling on Labor’s Carbon Tax statement and his lies about our scheme immediately,” he wrote on Twitter.
Rudd to head to Rockhampton for community cabinet meeting
After the Townsville announcement Mr Rudd moved on to Rockhampton in the seat of Capricornia for his first community cabinet meeting since being reinstalled.
Mr Abbott is scheduled to visit the same electorate later this week.
Explainer: Car fringe benefits tax
• Tax applies to employer-provided car used for work and personal use, or a privately-owned, salary sacrificed car.
• Benefit currently calculated using operating cost method (log book) or statutory formula method.
• Operating cost method: cost of running car multiplied by proportion of personal use of car (recorded in log book).
• Statutory formula method: cost of car multiplied by 20 per cent, regardless of actual personal use of car.
• Statutory formula automatically assumes significant proportion of use of the car is for business purposes.
• Removal of statutory formula method will apply to contracts entered into after July 16, 2013. It will be effective from April 1, 2014.
• Government says car log book apps now make operating cost method easier to calculate.
Yesterday Mr Abbott drew the Government’s ire after describing the ETS as “a so-called market in the non-delivery of an invisible substance to no-one”.
“Ever since Copenhagen, it’s been absolutely obvious that the world is not moving towards taxes – whether they’re fixed taxes or floating taxes,” he said.
“The world is moving towards the kind of direct-action measures to improve the environment which the Coalition has long championed.”
Less opposition to carbon price, survey says
Meanwhile, a new survey on Australians’ attitudes towards climate change suggests the opposition to carbon pricing has softened to some degree.
The Climate Institute has released its latest annual Climate of the Nation survey, showing two-thirds of Australians accept climate change is real and is having an impact.
Chief executive John Connor says many people were more troubled by the Gillard government’s perceived “lie” about bringing in a carbon tax rather than the policy itself.
He says people now seem more open to giving some form of carbon pricing a go.
“We’re not pretending that it’s become popular… opposition to it has dropped considerably,” he said.
“But it’s not well understood, and what we do see is when it’s explained that all the revenue that comes from carbon pricing goes to households and industry and goes to renewable energy, then we see a majority of people supporting that package.”
Hamish McRae, The Independent (UK), 21 July 2013
Your tax incentive is my tax loophole. There is an obvious irony that Britain should be introducing a new corporate tax break at the very moment that we should be supporting an international effort to reduce corporate tax avoidance.
True, our tax break is to encourage fracking, which, by its very nature, takes place within our territory, while the G20 finance ministers are in Moscow this weekend discussing an Organisation for Economic Co-operation and Development (OECD) report aimed at stopping companies shuffling profits to offshore locations where they have little or no physical presence. But the basic point that countries are competing for business by creating attractive tax regimes is undeniable. Exploration for oil and gas is expensive and cut our tax rate because we want the giant companies that do this to explore and develop supplies here rather than somewhere else.
This is about power and in particular the power balance between governments and business. Governments are powerful within their own territory, though they have to operate within constitutional arrangements and comply with broadly accepted international norms. If they don’t, they pay a price – revolution and/or poverty for their people. Outside their jurisdiction, however, they are not that powerful at all, and the smaller the country the less power it has.
Thus the US government has a fair degree of leverage because of the size of its market. Companies and countries want access to it. But that power has limits, and if it imposes conditions that are thought to be too onerous, then they withdraw. For example, Americans abroad are finding it harder to get wealth-management services from non-US advisers because extra-territorial regulations make them unattractive customers. China is similarly in a strong position (though less strong than the US) because companies want access to its market.
Europe is more complicated because it is not a country. Some of the power relationship applies. Europe has a fair degree of leverage over the UK because our companies want access there, but this is tempered because European companies want access here. Smaller European countries have rather more power within Europe than you might expected as they have political leverage. Ireland can give a US company access to the European market and combine that access with a very low corporation-tax rate. Luxembourg and the Netherlands have similarly “gamed” their EU membership cleverly to attract business.
Businesses are powerful because they employ people and governments are desperate for jobs. They also get things done. No government, however competent, can build an aircraft or develop an oil field. It can, as we are seeing, run a bank, but we also see how much it hates so doing.
So each need the other. But the relationship between companies and governments has changed over the years for two reasons. First, globalisation: a generation ago people mostly bought products that were made in their own country. Now you don’t know where something is made.
Second, the added value of a product is not in its manufacture but rather in the intellectual capital that has gone into it: the patents, the design, the marketing, the brand.
The combination of these two features means the power balance between governments and companies has shifted – and towards companies. Their ability to shift profits around used to be limited by their physical business and by agreements on transfer pricing (the price at which companies charged other parts of the business in another country for components). You could also see what was physically transported where. But if the added value is in intellectual property then it is much harder to price – and track.
The result is that it is much harder to tax companies than it used to be, and inevitably, abuses have arisen. The purpose of these new rules is to try and curb that. The aim of the OECD plan is to stop companies avoiding tax by putting patent rights into shell companies, charging interest in one country without reporting taxable profit in another, and forcing them to disclose where they do report their income.
This makes a lot of sense. As the German finance minister, Wolfgang Schäuble, said in Moscow: “Without fair burden sharing, in the end we will destroy even a global, open economy.”
But governments should not kid themselves that it will be easy to establish what is fair.
Actually we as individuals can help – simply by not buying goods and services from companies that abuse the system. But that only takes us so far: we can do without Starbucks coffee but not without a Google search.
Daniel Boffey, The Observer, 21 July 2013
G20 summit backs exchange of tax information between all countries, but critics fear reform may be a long time coming.
The G20 summit has backed the principle of automatic exchange of tax information between all countries, both developed and developing. Photograph: Xinhua/Landov /Barcroft Media
A global agreement to allow developing countries to hunt down tax owed by companies that operate in their territories but hold profits elsewhere appears to have moved a step closer.
The final joint communique of the summit of G20 nations, issued yesterday, backs the principle of automatic exchange of tax information between all countries, both developed and developing. Much of the developing world is left out of bilateral and multilateral treaties that require the exchange of information on the tax affairs of companies and individuals. Some developed countries fear corruption makes it dangerous to widen such agreements to poorer states.
The G20′s supportive words give extra momentum for reform, although critics fear that genuine action will continue to be slow in coming.
At the end of the summit, chancellor George Osborne said he believed progress was being made and revealed that Australia had committed to taking on the agenda when it hosts the G8 next year. He said: “This weekend’s agreement at the G20 to a new global tax standard for fighting evasion and addressing avoidance is an important step towards a global tax system that is fair and fit for purpose for the modern economy. The next step is to take these action plans and agreements and convert them into concrete reality.”
The communique said: “We commend the progress recently achieved in the area of tax transparency and we fully endorse the OECD proposal for a truly global model for multilateral and bilateral automatic exchange of information. We are committed to making automatic exchange of information attainable by all countries, including low-income countries, and will seek to provide capacity-building support for them.”
This year the Observer revealed how a sugar-producing subsidiary of Associated British Foods – the maker of Silver Spoon sugar, Twinings Tea and Kingsmill bread – was avoiding tax in Zambia. Zambia Sugar paid very little corporation tax in the African state between 2007 and 2012, and none at all for two of those years.
The company said it had taken advantage of tax relief and allowances, but an investigation by charity ActionAid revealed the existence of an additional array of transactions that reduce Zambia Sugar’s taxable profits in the state, while the structure of others avoids Zambian taxes that are ordinarily levied on foreign payments.
Jane Merrick, The Independent (UK), 21 July 2013
The economy may be growing, but inequality is rising more quickly than in 1980s, report warns.
The Government’s welfare benefits and tax changes will widen income inequality between rich and poor on a scale similar to that of Margaret Thatcher, new analysis will reveal this week.
Research for the Fabian Society claims cuts to benefits and tax credits, particularly for working-age families with children, will amount to a “speeded-up replay of Thatcherism”, with inequality increasing twice as fast by 2015 as it did under the former Conservative prime minister.
The analysis is published just as signs of optimism about the economy appear, with the latest GDP figures, published this week, expected to show a further quarter of modest growth. At the same time, a poll for the consumer organisation Which? has found that people are becoming increasingly optimistic about both the economy and their own spending power. But household incomes continue to be squeezed, with 1.5m more families feeling the pinch than a year ago.
The report, published tomorrow for the Fabian Review by the economist Howard Reed, sets out a projection of the impact of coalition policies on income equality. The poorest families will lose more than 12 per cent of their net income on average, compared to around 3 per cent of net income for households in the ninth decile (the second most wealthy income bracket), Mr Reed, director of Landman Economics, says. This underscores how regressive coalition tax and benefit changes have been. Council tax, for example, on average charges low- to middle-income families a much higher percentage of their disposable income than the richest households.
Mr Reed said it is “quite possible that the impact of the coalition’s tax and benefit measures would be as bad for inequality as the Thatcher government’s record, despite the fact that, by 2015, David Cameron will have been Prime Minister for less than half as long as Margaret Thatcher was. Looked at in this way, the coalition government’s tax and benefit reforms are like a speeded-up action replay of Thatcherism. This may come as a particular shock to Liberal Democrats in the government, many of whom spent the 1980s railing against [this] kind of increase in inequality.”
Andrew Harrop, general secretary of the Fabian Society, said: “This research reveals that income inequality is set to rise sharply in this parliament. But since 2010 barely a word has been heard from the Labour Party on equality, certainly compared to past generations.
“Faced with a Thatcher-style inequality boom, Labour must rediscover its egalitarian core and never forget that redistribution must be part of the answer.”
Mr Cameron and George Osborne are preparing to seize on this week’s GDP figures, which could show growth of 0.8 per cent for the quarter. But living standards remain constrained.
The Which? Consumer Insight Tracker shows a third of families – 9 million in total – are feeling squeezed, up from 7.5 million in July 2012; but 24 per cent of people think the economy will get better in the next year, up from 16 per cent who thought so a year ago, while consumers are less likely to cut back on non-essential spending such as major household purchases, home improvements and holidays.
However, only 25 per cent of people said their personal financial situation would improve, suggesting an increasing reliance on credit. Food prices have increased by 4.3 per cent on the year, while gas and electricity bills are up by 8 per cent.
Richard Lloyd, Which? executive director, said: “Consumers may be aiding our fragile economic recovery, but using savings and getting into debt is not sustainable, and more people are now feeling the squeeze. The Government must do more to keep spiralling housing, food and energy prices in check.”
Chris Leslie, shadow financial secretary to the Treasury, said: “To get the economy back to where George Osborne expected it to be in 2015-16, we need growth of 5.3 per cent a year, or 1.3 per cent a quarter, over the next two years.
“While this may feel like a recovery for those at the top, life is getting harder for middle- and low-income families. Wages after inflation are now down by an average of £1,300 since David Cameron got into Downing Street, yet bank bonuses soared to £4bn in April, as high earners took full advantage of the top rate tax cut.”
Tyler Cowen, The New York Times, 20 July 2013
IF you’d like to know where American political debates are headed, the data suggest a simple answer. The next major struggle — in economic terms at least — will be over whether taxes on personal wealth should rise — and by how much.
The mathematical reality is that wealth is becoming more important, relative to income. In a new paper, “Capital Is Back: Wealth-Income Ratios in Rich Countries 1700-2010,” Professors Thomas Piketty and Gabriel Zucman of the Paris School of Economics have performed the heroic task of measuring wealth for eight leading economies: the United States, Canada, Britain, France, Italy, Germany, Japan and Australia.
Their estimates reveal some striking trends. For instance, wealth accumulation in these eight countries has risen relative to yearly production. Wealth-to-income ratios in these nations climbed from a range of 200 to 300 percent in 1970 to a range of 400 to 600 percent in 2010. Behind the changing ratios is some bad news, namely that slow productivity growth and slow population growth have depressed income growth, but also some good news — that relative peace and capital gains have preserved wealth.
Focusing on the wealth of economies lets us reframe our recent debates about government debt in useful ways. A look at the ratio of debt to gross national product, for example, can be scary, but the ratio of debt to wealth is far less forbidding. If, say, a nation’s debt-to-G.D.P. ratio is 100 percent — often considered a dangerous level — and national wealth is 10 times yearly national income, the debt-to-wealth ratio is thus 10 percent, which is comparable to owing $100,000 on a $1 million home. Not so scary.
Using the wealth numbers provided by Professors Piketty and Zucman, we can understand how Japan, despite a debt-to-G.D.P. ratio of more than 200 percent, can maintain low interest rates; Japan has a wealth-to-income ratio of about 600 percent. In essence, creditors think the Japanese political system will be able to drum up enough support for the requisite taxes, pulled out of national wealth if necessary, when the time comes.
But don’t relax too quickly, because fiscal problems remain very real for many countries. While virtually every government could pay off its debts by taxing wealth, such taxes are often politically unacceptable. In other words, fiscal problems are best regarded as problems of dysfunctional governance. In the recent elections in Italy, the incumbent government lost voter support partly because it addressed the nation’s revenue problems by levying a wealth tax on real estate; the policy remains contentious and may yet be repealed or limited.
And here is a related issue: If there is enough national wealth to pay off debts, it may be harder to arrange bailouts from outside.
In the European Union, countries like Germany may regard the union’s more troubled nations as shirking their fiscal duties, and that makes cooperation harder to achieve. Italy, for instance, is in a fiscal crisis, but it also has an especially high wealth-to-income ratio, at 650 percent, indicating that it could pay off its debt if more of that wealth were taxed. Germany, by contrast, has a much lower wealth-to-income ratio: 400 percent. And though the professors caution that the German data, in particular, may be incomplete, the figures do lend support or at least plausibility to the recent argument that Germany shouldn’t be viewed as the rich uncle of Europe.
Some forms of wealth taxation take hidden forms, such as financial repression. This occurs when a nation’s citizens are required to hold deposits in banks under unfavorable terms — meaning at low interest rates. The banks, in turn, may be required to buy government debt to help finance a budget deficit. For better or worse, this is likely part of a longer-run resolution of fiscal problems in the periphery of the euro zone.
In the United States, wealth taxes are currently limited to a few levies, such as property taxes and inheritance taxes. Capital gains taxes that aren’t indexed to inflation also serve as an implicit wealth tax, because they dig into the body of a person’s capital. Most likely those rates will rise. Like the bank robber Willie Sutton, revenue-hungry governments go “where the money is.”
The coming battles over wealth taxation may prove especially bitter and polarizing. Most wealth has already been subjected to income and other taxes, perhaps multiple times. It doesn’t seem fair to the holders of that wealth to suddenly pay additional taxes on assets that they thought were in the clear, and such taxes would signal that previous policy has failed.
Higher wealth in a nation means that there is more to take, and growing inequality means there are more problems that its government might seek to remedy. At the same time, however, this new economic configuration will mean greater political influence for the holders of that wealth, and that will make higher wealth taxes harder to achieve.
Historically, economists — including me — have generally favored taxes on consumption, on the grounds that they would do the least damage to long-term savings, investment and economic growth. Yet in some eyes, rising wealth will become a tempting target for short-term political gain. And note that while most Republicans currently oppose consumption taxes, they may dislike the relevant alternative, namely wealth taxes, even more.
Get ready to choose a side.
Tyler Cowen is a professor of economics at George Mason University.
Simon Bowers, The Guardian, 20 July 2013
Tax reform plan shows G20 how to close loopholes, end ‘race to the bottom’ – but radical idea to take on digital giants rejected.
The G20 tax reform proposals have been heralded by the Organisation for Economic Co-operation and Development as a “once-in-a-century” opportunity to fix the creaking network of hundreds of bilateral tax treaties that have been laid down over almost 100 years, smoothing the way for international trade.
The system has been pushed to breaking point by new ways of structuring cross-border business – some due to advances in technology, but many others the product of what the OECD describes as “the increasing sophistication of tax planners in identifying and exploiting the legal artbitrage opportunities and the boundaries of acceptable tax planning”.
Behind the scenes there are already growing whispers that parts of the reform project will prove unacceptable to certain nations. Meanwhile, several anti-poverty campaign groups claim the project is not radical enough.
The key issues targeted by the OECD action plan are:
• Requiring online multinationals with extensive warehouse operations in an overseas country, such as Amazon, to pay local tax on any profits arising from sales in that country.
• Forcing multinationals to disclose to every tax authority a country-by-country breakdown of profits, sales, tax and other measures of economic activity such as headcount.
• Tougher rules to block transfers of high-value and mobile “intangible” assets – such as brands and intellectual property rights – to tax havens where there is little or no associated business activity.
• A crackdown on tax regimes found to have too soft an approach to multinationals deploying overseas finance subsidiaries through establishing a new international benchmark for appropriate taxation of controlled foreign companies.
• Wider measures to combat predatory tax competition policies emerging in some financially stretched countries, risking a “race to the bottom” climate on tax. The UK’s new so-called “patent box” tax break for intellectual property companies will come under scrutiny.
• A raft of treaty updates to neutralise the tax advantages of complex financial instruments, schemes and structures, including hybrid capital, interest payment deductions and over-capitalisation.
• A requirement on multinationals to disclose the most aggressive “tax planning” structures to the authorities otherwise often relying on limited, local data that does not show the impact of transnational schemes to lower tax.
• New ways to rapidly introduce the OECD recommendations around the world. And a new approach to measuring the extent to which national tax coffers are being drained by multinationals artificially shifting their profits internationally to lower their tax bills
The main areas that have not been addressed by the OECD action plan are:
• French proposals for new tax rules specifically targeting digital companies such as Google, Apple and Microsoft. In addition, France’s finance minister, Pierre Moscovici, had called for a link between tax and the collection of commercially valuable personal data by digital firms.
• Calls from anti-poverty campaign groups to involved developing nations – often the biggest losers from sophisticated tax engineering by multinationals – on an equal footing with representatives from larger economies.
• Wholesale scrapping of existing tax treaty principles, as advocated by campaign groups such as Tax Justice Network. These groups argue that the current system is so open to abuse it should be replaced with a new model – known as unitary taxation – which they claim would better link the apportionment of taxable profits by multinationals to the territories in which economic activities occur. The OECD claimed there was international consensus at the G20 against such a radical approach. Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy, said he was “agnostic” but that member nations regarded such proposals as “unfeasible”.
Natasha Wallace, The Sydney Morning Herald, 20 July 2013
A group of influential Sydney barristers is pushing to be allowed to operate as companies, which could save them tens of thousands of tax dollars each year.
But the move has divided the legal fraternity with NSW Bar Association president Phillip Boulten, SC, describing any move to incorporate barristers’ practices to limit tax liabilities as ”ethically questionable”.
After pressure from a petition of 100 signatures, the Bar Council agreed on Thursday night to hold an extraordinary general meeting to discuss changes to the Legal Profession Act and the Bar Rules to enable the move. A date is yet to be decided.
Companies are taxed at 30 per cent whereas most barristers earn enough to put them into the highest 46.5 per cent bracket.
Incorporating would also limit their liability, in the event they were sued for negligence, to assets held by the company – and not risk personal assets such as the family home.
Other tax advantages would include avoiding a $2000 cap on the tax deductibility of self-education expenses foreshadowed by the federal government.
In a bulletin to members, published on Tuesday, Mr Boulten said the advantages of incorporating barristers’ practices were ”very limited at best”.
”There are important ethical considerations to be borne in mind. It is entirely misguided to pursue proposals that are singularly designed to minimise barristers’ tax exposure. The Bar should seek to provide ethical leadership and set high standards wherever possible and the pursuit of legislative change in order to reduce tax exposure for barristers is, in my view, ethically questionable,” he said. ”I will not support any change involving incorporation which would undermine the standing of the Bar in the eyes of the community which we serve.”
The barrister behind the push, John Hyde Page, sent a letter to members on Wednesday accusing Mr Boulten of obtaining legal advice on the issue from practitioners who were ”emphatically opposed” to the idea.
”I am trying to obtain genuine consideration of my proposal for incorporated legal practice; not the sort of superficial consideration that permits members of the Bar Council to say, without elaboration, ‘we looked at this and decided it was not worth doing’,” Mr Hyde Page wrote.
He and other signatories to the petition want to operate as single-member corporations (where the barrister is director and sole shareholder).
”I believe it is fully compatible with the notions of independence and professionalism that are central to what we do. I also think the way in which individual barristers structure their affairs should be a matter of personal choice,” Mr Hyde Page wrote.
He declined to discuss the issue with the Herald. He released a discussion paper last year that said a barrister earning $300,000 a year could save about $25,000 in tax breaks if incorporated.
Professor Richard Vann, of the law faculty at Sydney University, said professions were increasingly moving towards operating as companies and it was inevitable that barristers would follow.
The bigger issue was the subsequent tax dollars lost, he said.
Simon Bowers, The Guardian, 19 July 2013
Most ambitious programme of reform for almost a century seeks to cut tax avoidance by world’s biggest multinationals.
Finance ministers from 20 of the world’s largest economies have endorsed the first internationally co-ordinated attempt to roll back decades of ballooning tax avoidance by many of the biggest multinational corporations in the world.
Co-ordinated by the OECD, the Paris-based body representing large industrial nations, a new tax reform action plan has won the support of wider G20 members – including the increasingly influential China, India and Brazil.
Through the European Union, countries such as Luxembourg, the Netherlands and Ireland – all of whom have been accused of beggar-thy-neighbour tax policies – are also backing the project, details of which are due to be unveiled at a meeting of G20 finance ministers in Moscow on Friday.
It is the most ambitious programme of reform since the principles for bilateral tax treaties were first laid down by the League of Nations in the 1920s, laying the ground for the modern era of globalised trade.
The initiative follows a string of high-profile tax exposés by politicians, whistleblowers, anti-poverty campaigners and journalists, shining a light on byzantine corporate structures created by household name companies including Vodafone, Google, Amazon, Starbucks, Diageo, Cadbury and Apple.
Campaigning reports by the Guardian stretching back to its 2009 Tax Gap series have been cited by the OECD as contributing to unprecedented public awareness of the problem. “Unfortunately, the rules are now being abused,” said the OECD secretary-general, Angel Gurría. “[Our] action plan aims to remedy this, so multinationals pay their fair share of taxes.”
As well as responding to mounting public outcry, world leaders have also taken up the issue with renewed vigour hoping to repair some of the leaks in their strained national exchequers.
Among the countries driving the initiative have been Germany and the UK, with the British chancellor, George Osborne, and his finance minister counterpart, Wolfgang Schäuble, issuing a joint statement on the fringes of a G20 meeting in Berlin in November calling for radical reform.
“Britain and Germany want competitive corporate tax systems that attract global companies to our countries, but also want global companies to pay those taxes,” they said.
The action plan sets out 15 initiatives for arming tax authorities around the world with the tools to crack down on some of areas international leaders agree are among the most widely exploited by multinational tax avoiders. These targeted initiatives are to produce a range of hard recommendations for changes to the tax treaty rulebook, with deadlines ranging from between 12 months and two-and-a-half years.
Among the highlights are additional disclosures multinationals must make to all tax authorities, helping officials know where to look for the worst avoidance. Proposals to require companies such as Amazon with extensive warehouse networks in a country to pay more local tax; multinationals posting high-value “intangible” assets, such as brands and intellectual property rights, to tax havens will also targeted; as will special tax break policies introduced by individual nations that are seen as predatory.
Despite the ambition of the G20 project – the scale and pace of which still risks breaking the consensus at a political level – some anti-poverty campaigners claim it does not go far enough.
“The OECD has done little to dispel its reputation as the ‘rich men’s club’ by effectively ruling out the active participation of developing countries in shaping the tax reform agenda,” said the Financial Transparency Coalition (FTC), an umbrella group including charities such as Christain Aid, Global Witness, Global Financial Integrity Tax Justice Network and Transparency International.
Some FTC member groups want to explore whether the many hundreds of existing bilateral tax treaties that facilitate global trade should be torn up and replaced with a new model – known as unitary taxation – which they claim would better link the apportionment of taxable profits by multinationals to the territories in which economic activities occur.
Elements of this country-by-country approach have been cherry picked for a narrow aspect of the OECD’s reform agenda.
Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration who has been leading the reform project, said the long-standing debate in this contentious area had become “like a religion” for advocates on both sides, but insisted he remained “agnostic”.
However, he added there was consensus among G20 members that unitary taxation was not a feasible solution.
Another area for which the action plan has already received criticism is its limited ambitions for targeting tax avoidance by a new generation of multinationals operating in a digital economy with business models never envisaged by those who first drafted tax treaty principles.
The Guardian revealed on Monday that the US had frustrated attempts by European politicians, particularly the French, for more radical action in this area.
The OECD has signaled that more analysis needs to be done on the new and varied ways business is conducted in the digital economy before a timetable for firm recommendations can be set. It is setting up a new OECD taskforce to carry out this research in the next 12 months.
The chair of this group is yet to be decided, but France, Germany, the UK and Australia are all understood to be keen to lead the debate. Winning support from the US, where many of the most successful digital economy firms are based, will be seen as the main challenge.
Tim Colebatch, The Age, 19 July 2013
If you’re older than you’d prefer, you might remember the tax that was going to shut down Australia’s restaurants. In 1985 the Hawke government introduced sweeping tax reforms which, among other things, introduced the fringe benefits tax, and applied it to restaurant meals.
Restauranteurs went bananas. Many of their customers were businessmen taking clients, friends or colleagues to long lunches or dinners, and writing off the cost against tax as a business expense. No, it isn’t, the government said; it’s a fringe benefit of the job, and should be taxed as such.
We were told it would be a disaster: restaurants would shut down, waiters and kitchen hands would be thrown out of work, the economy would slump. Then opposition leader John Howard pledged that the Coalition would repeal the FBT ”lock, stock and barrel”.
Prime minister Bob Hawke and treasurer Paul Keating held firm. The tax came in. Restaurants did not shut down. People still went out to eat; the difference was that other taxpayers were no longer sharing the bill.
Activity at hotels and restaurants grew 21 per cent in the next four years, doubled in less than 20 years. John Howard became prime minister for 11 years; he never repealed the fringe benefits tax. A tax rort ended with no pain.
We’re seeing it all again now. The Rudd government has decided to end the favoured tax treatment of company cars or cars bought through salary sacrifice. The industry and the opposition predict disaster. Opposition Leader Tony Abbott pledges that a Coalition government will abandon the reform.
What are the facts?
First, the change would not stop employees being given company cars, or buying them through salary sacrifice. What it would do is to ensure that they can no longer claim a business tax deduction for private travel.
After April 1, 2014, anyone receiving a new company car or buying one through salary sacrifice would have to keep a log, just for three months every five years, recording when the car was used for business and when it was used privately.
This option already exists, and is used by a third of employers offering company cars or salary sacrifice. What would change is that after an eight-month grace period, it would be the only option.
Opponents say it will mean endless red tape and record-keeping. No, says the government: there are now apps that connect to your GPS and mobile phone that keep the records for you, and transmit them to your pay office.
And, obviously, people will choose to use three-month period when they maximise their business use.
Would it hurt the leasing industry? Almost certainly: after April 2014, they would no longer have a tax break to give people an incentive to buy their product. They would have to offer the technology that makes records easy to keep, and find other edges to keep them ahead of car dealers.
But people would still buy cars. Maybe fewer people would buy new cars, and instead buy low-mileage used cars. Maybe some would buy cheaper new cars. Those who use their cars a lot for business would probably stick with company or salary-sacrificed cars and keep records once every five years.
Would it hurt local car manufacturing? Almost certainly: the industry says more than a third of vehicles sold to business or through salary sacrifice are Australian-made – as against fewer than one in 10 vehicles sold privately. Anything that shifts demand from business to individuals would hurt local manufacturers.
The truth is, no one knows what the impact would be, no more than they did in 1985. But the Victorian government’s preliminary estimate that the tax change would cost local manufacturers 10,000 sales a year, cutting sales by about 8 per cent, sounds plausible. Should we therefore scuttle the reform?
Not if you believe Treasury’s estimates. The total subsidies to the Australian car industry are just over $400 million a year. The average cost of the salary sacifice tax break is $800 million a year. If you want to help local car manufacturing, there are far better ways to do it to give a tax break to people to mostly buy foreign-made cars.
You can’t blame anyone for taking up a tax break that’s on offer. And you can’t blame a government for recognising a bad tax break and shutting it down. Remember: those who pay for tax breaks are other taxpayers.
Patrick Wintour and Simon Bowers, The Guardian, 19 July 2013
Governments risk “global tax chaos” as they chase dwindling revenues from multinational companies unless the international tax regime is radically overhauled, according to a report commissioned by the G20 group of nations.
On Friday, the chancellor, George Osborne, will hail a two-year action plan drawn up by the OECD thinktank to clamp down on questionable international corporate tax practices.
The long-awaited report, prepared for a meeting of the G20 finance ministers in Moscow this weekend, says a “bold move by policymakers” is necessary to prevent a worsening in the position. The OECD calls it “a turning point in the history of international co-operation on tax”.
The action plan sets out 15 initiatives for arming tax authorities around the world with the tools to crack down on some of the areas international leaders agree are among the most widely exploited by multinational tax avoiders. These initiatives are to produce a range of recommendations for changes to the tax treaty rulebook, with deadlines ranging from 12 months to two and a half years.
Among the highlights are additional disclosures multinationals must make to all tax authorities, helping officials know where to look for the worst avoidance. There are proposals to require companies such as Amazon with extensive warehouse networks in a country to pay more local tax; multinationals posting high-value “intangible” assets, such as brands and intellectual property rights, to tax havens will also be targeted, as will tax breaks introduced by individual countries that are seen as predatory.
The report sets out 15 separate actions the international community needs to take to modernise a tax system established in the 1920s. It argues the tax system is outmoded and unequipped to deal with mobile multinational firms that have found innumerable ways of avoiding tax, often by shifting profits to low-tax countries.
The work follows the proposals set out by David Cameron at the G8 to attack tax havens and increase the sharing of information on companies’ tax status between tax authorities. Responding to the report, the prime minister said: “This report shows how taxpayers, governments and businesses all suffer when some companies manipulate the tax system to avoid paying their fair share of taxes.”
He added: “That’s why I put the issue at the heart of our G8 agenda. I’m delighted that the OECD have risen to the challenge we set at Lough Erne: committing to set out by next September new rules for a common template that will require multinationals to disclose where they earn their profits and where they pay their taxes.”
The OECD work, funded by the G20, is designed to look at the international changes to tax law and definitions that would be required to allow national governments to bring often legal corporate tax avoidance under control. It says corporations should pay more tax where the value of a product or service was created.
The report warns that “inaction in this area would likely result in some governments losing corporate tax revenue, the emergence of competing sets of international standards and the replacement of the current consensus-based framework by unilateral measures which could lead to global tax chaos”. That in turn could see the large-scale re-emergence of double taxation, where two countries seek to tax the same corporate income.
The report lists the actions required, sometimes involving painstaking work to re-establish a measure of control over multinationals such as Google, Starbucks, Amazon and Apple which have found it relatively easy to exploit the current loose rules, and sometimes pay no tax on billions of revenue.
The OECD was asked by the G20 to undertake the work as the premier organisation responsible for international tax treaties.
It says that the “current weaknesses in the rules and the interaction of different tax rules leads to double non-taxation or less than single taxation”. It also says the rise of the digital economy raises fundamental questions about where and how enterprises generate value.
It warns: “The way in which multinationals have greatly minimised their tax burden has led to a tense situation in which citizens have become more sensitive to tax fairness issues.”
Critics of the OECD report are likely to argue that it is stronger on analysis than specific solutions, but the OECD says it has managed to create a framework in which to address the main issues confronting governments, including the critical need for greater international co-operation between tax authorities.
At its most ambitious, the report suggests countries should be willing to put most of their bilateral tax treaties into a multilateral framework, to block companies from getting round bilateral arrangements.
The report points out that “the involvement of third countries in the bilateral framework established by treaty partners puts a strain on the existing rules, in particular when done via shell companies that have little or no substance in terms of office space, tangible assets and employees”.
The OECD says it wants to “examine how a company has a digital presence in the economy of another country without being liable to taxation due to lack of nexus under current international rules”. It suggests “existing domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income”.
It highlights loose rules on the definition of a company’s “permanent establishments” that allow “contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from their sales being taxable”. It adds: “Multinationals have been able to use or misapply those rules to separate income from the economic activities that produce that income and to shift it to low tax environments. This most often results from transfers of intangibles and other mobile assets for less than full value.”
The OECD says: “There is an increasing disconnect between the location where value-creating activities and investment take place and the location where profits are made.”
Despite the ambition of the G20 project – the scale and pace of which risk breaking the political consensus – some anti-poverty campaigners claim it does not go far enough.
“The OECD has done little to dispel its reputation as the ‘rich men’s club’ by effectively ruling out the active participation of developing countries in shaping the tax reform agenda,” said the Financial Transparency Coalition (FTC), an umbrella group including charities such as Christian Aid, Global Witness, Global Financial Integrity, Tax Justice Network and Transparency International.
Some FTC member groups want to explore whether the many hundreds of existing bilateral tax treaties that facilitate global trade should be torn up and replaced with a new model – known as unitary taxation – which they claim would better link the apportionment of taxable profits by multinationals to the territories in which economic activities occur.
Elements of this country-by-country approach have been cherrypicked for a narrow aspect of the OECD’s reform agenda. Pascal Saint-Amans, director of the OECD’s centre for tax policy and administration, who has been leading the reform project, said the longstanding debate in this contentious area had become like a religion for advocates on both sides, but insisted he remained agnostic.
However, he added there was consensus among G20 members that unitary taxation was not a feasible solution.
The Guardian revealed on Monday that the US had frustrated attempts by European politicians, particularly the French, at more radical action in this area.
The OECD has indicated that more analysis is needed of how business is conducted in the digital economy before a timetable for firm recommendations can be set. It is setting up a taskforce to carry out this research in the next 12 months.
The chair of this group is yet to be decided, but France, Germany, the UK and Australia are all understood to be keen to lead the debate. Winning support from the US, where many of the most successful digital economy firms are based, will be seen as the main challenge.
The Economist, 19 July 2013
AS PUBLIC ire has grown over the aggressive tax planning that allows many multinationals, from Starbucks to Google, to pay rates of income tax far below the statutory level, pressure has grown on policymakers to move beyond rhetoric. The Group of 20 countries (the world’s most advanced economies plus some large developing countries) asked the Organisation for Economic Co-operation and Development (OECD), a rich-country think-tank, to draw up a roadmap for reforming the current patchwork of rules and tax treaties, which is so easily gamed by big business. The OECD unveiled its “Action Plan on Base Erosion and Profit Shifting” on July 19th. G20 ministers are expected to endorse it this weekend at a meeting in Moscow.
If implemented, the 15 proposals in the document would change the face of cross-border taxation by making it much harder for companies to exploit loopholes. Some of the proposals are highly technical, but the overall goal is to curb practices that artificially separate taxable income from the economic activities that generate it.
The plan seeks to tackle abuse of treaties that were originally designed to avoid double taxation but which can be used in combination to ensure double non-taxation. One target of the OECD is hybrid instruments that can be classified differently in different jurisdictions, thus enjoying multiple tax benefits. Another is the mispricing of intra-company transactions (transfer pricing), often involving intangible assets like intellectual property and royalties, in order to shift profits to tax havens. The “arm’s length” rules on these transfers are in desperate need of an overhaul, though the OECD rejects the idea of replacing them with a brand new approach, such as “formulary apportionment”, advocated by some NGOs (it would allocate profits according to a formula based on the location of sales, employees or other such metrics).
Thinking has come a long way in a short time. “A year ago, few of our proposals would have had a chance,” says Pascal Saint-Amans, head of tax at the OECD. An example is its embrace of country-by-country reporting of profits, revenues and taxes paid—an idea that none but a few radicals had any time for a few years ago.
The devil will be in the details, and many are yet to be worked out by committees of technocrats from countries that do not see eye to eye on some of the big issues. For instance, America, home to some of the largest technology firms, is much warier than France of throwing a spanner in the works of the digital economy. Meanwhile, smaller countries that have carved out niches as corporate tax havens, such as Ireland and the Netherlands, will do all they can to frustrate the reformers’ efforts. And a global accord will remain beyond reach unless large emerging markets such as India and China are brought on board. Even if ministers can find common ground, the technocrats will have a hard time turning the current tangle of national rules, international standards and bilateral treaties into a coherent, equitable framework.
Despite these challenges, Mr Saint-Amans is optimistic that meaningful reform can be achieved within two years—an ambitious timeline by the standards of tax diplomacy. The politicians are already on board, he says, providing “support from the top” that will offer cover for those engaged in the fiddly work to come. The golden years of corporate tax avoidance may be drawing to a close.
Mark Kenny and Stephen Ottley, The Sydney Morning Herald, 19 July 2013
Treasurer Chris Bowen has defended this week’s move to tighten fringe benefits tax rules on cars used partly for work purposes, likening it to former treasurer Paul Keating’s crackdown on rorted restaurant meals in the 1980s.
The comparison came amid news of job losses in the fleet sector. Mr Bowen said the decision, which would return $1.8 billion over four years, was justified on the grounds of fairness, and would mainly affect high-income earners leasing luxury imported cars.
The Hawke government’s move on restaurant meal deductions in the 1980s brought wild claims of imminent ruin for the hospitality sector, but it never occurred.
”It wasn’t popular, it was controversial, [but] I don’t hear people today clamouring for a policy change back, because it was the right thing to do to put the budget on a sustainable footing,” Mr Bowen said.
The closure of the tax loophole on cars, which let motorists declare 20 per cent business use without documentation, was the main savings measure linked to a decision to call an early end to the carbon tax by starting the emissions trading scheme from July 1 next year.
Lease company NLC announced 74 redundancies from its 143-strong workforce on Thursday after the change.
Fleet companies said that, while the change applied only to new contracts and had a phase-in period, the costs of growing employee entitlements and the declining prospects for new sales meant staff were already being let go.
The Australian Financial Review, 18 July 2013
The fringe benefits tax concession for motor vehicles is an indirect subsidy for the car manufacturing industry, propping it up to the tune of $1.7 billion a year today, academics say.
Sue Mitchell, The Australian Financial Review, 17 July 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.
“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.”
Jonathan Swan, The Sydney Morning Herald, 16 July 2013
Prime Minister Kevin Rudd has announced nearly $4 billion worth of cuts or deferrals to government spending, including to environment programs, to pay for his promise to bring forward by one year the move from a carbon tax to an emissions trading scheme.
Cuts to the public service sector – including 800 senior public servant positions in Canberra – will deliver $248 million in savings, while several environment programs have been targeted to help offset the cost of the early move to the ETS.
The car fringe benefits tax will be tightened, saving $1.8 billion over the forward estimates and expected to hit 320,000 car owners.
Mr Rudd’s decision to move from a carbon tax to an ETS on July 1, 2014 will cost the budget about $3.8 billion over the next four years, the government says.
Under the previous arrangements, the carbon price was to be $25.40 per tonne next July. Under a floating price, the figure is expected to be around $6 a tonne.
”The government has decided to terminate the carbon tax, to help cost of living pressures for families and to reduce costs for small business,” Mr Rudd said in a Townsville press conference on Tuesday morning with Treasurer Chris Bowen and Climate Change Minister Mark Butler.
Despite cuts to environmental and clean energy programs to fund his promise, Mr Rudd insisted that this was a ”good day for the environment”.
The claim angered Greens leader Christine Milne.
”Mr Rudd, you don’t protect the environment by cutting environment programs,” she said.
Treasury modelling shows that in the 2014-15 financial year an average family will be $380 a year better off due to the decision to move sooner from a carbon tax to an ETS, Mr Rudd said.
The government said the move would save the average household about $3 a week, or over $150 in the year, on its electricity bills and about $1.10 per week, or $57 over the year, on its gas bills.
The Prime Minister has promised his decision will be “budget neutral” – meaning his cabinet has been searching over the past weeks for spending cuts to fill the $3.8 billion gap.
The government’s cuts include:
• Tightening the car fringe benefits tax with savings of $1.8 billion over the forward estimates;
• Reforms to Australian public service management structure and more efficient procurement of agency software ($248 million in savings for as many as 800 public service job cuts in Canberra).
• Ending the Energy Security Fund two years early with savings of $770 million over the forward estimates;
• Trimming the Coal Sector Jobs package allocation in 2014/15 ($186 million in savings);
• A deferral of $200 million of funding from the Carbon Capture and Storage program and the return of $24 million to the budget;
• Return of unallocated funding from the Biodiversity Fund to the budget ($213 million over the forward estimates);
• Return of $143 million of unallocated funding from the Carbon Farming Futures program to the budget;
• Savings of $200 million of funding from the Clean Technology Program and return of $162 million of unallocated funding to the budget.
Explaining the detail of the cuts, Mr Bowen said the household assistance package associated with the carbon tax would not be affected.
Car industry warns decision will have ‘dire consequences’
Mr Bowen suggested the most difficult cut made by the government was the decision to abolish the formula that allows people to claim fringe benefits tax on cars they use for work.
The current formula allows people who are claiming fringe benefits on their cars to nominate a figure of 20 per cent and ”not justify that claim”, Mr Bowen said.
The Treasurer admitted that as many as 320,000 Australians would be affected by the $1.8 billion in ”savings” on the car fringe benefits tax.
It will affect those on new contracts from April 2014. Those on existing contracts are not affected, unless their contract is substantially modified.
The car industry reacted immediately to the change, urging the government to reconsider its decision.
The Federal Chamber of Automotive Industries (FCAI) said removing the tax concession on vehicles will have dire consequences, affecting both imported and domestically manufactured car sales.
”The effects will flow right through the industry, including to dealerships and service centres,” FCAI chief executive Tony Weber said in a statement.
Rudd challenges Abbott to carbon tax debate
In announcing the cuts, Mr Rudd on Tuesday morning challenged Opposition Leader Tony Abbott to a debate on the carbon tax at the National Press Club next week.
This comes after Mr Abbott last week refused to join Mr Rudd for a debate on the economy, with the Prime Minister attending the event alone.
”Mr Abbott, you didn’t want to debate me on debt and deficit at the National Press Club, even though that forms a large part of your political ads on television at the moment,” Mr Rudd said.
”Here is the challenge. You pick the day next week at the National Press Club to debate the carbon price. The emissions trading scheme under this government versus your scheme and let the people decide through that debate whether we have the facts supporting our case or yours.
”Any day next week.”
Mr Abbott, holding a press conference in Tasmania shortly after Mr Rudd’s announcement, played down the significance of the Prime Minister’s accelerated switch to an emissions trading scheme.
He also would not comment on the specific cuts Mr Rudd had announced to pay for the $3.8 billion hole left in the budget by the move to an ETS in July next year.
”What Mr Rudd has announced today is not the abolition of the carbon tax,” Mr Abbott said.
”All he’s done is simply brought forward Julia Gillard’s carbon tax changes by 12 months.”
Responding to Mr Rudd’s claims that he had ”terminated” the carbon tax, Mr Abbott said: ”He’s not the terminator; he’s the exaggerator. He’s not the terminator; he’s the fabricator.
”He’s changed its name but he hasn’t abolished the tax.”
Senator Milne said by bringing emissions trading forward by one year, Mr Rudd was trying to ”make a political point” and was ”making it cheaper for polluters to pollute”.
”What we’re hearing from Prime Minister Rudd is a lot of talk about the environment but when it comes to action he’s actually slashing environmental support programs,” she said.
Australian Chamber of Commerce and Industry chief executive said the decision to move to an ETS earlier won’t give business added certainty.
Mr Evans said the move to an ETS was a short term fix and the price could quickly rise to around $24.
”The government is heralding the benefits of a lower price in 2014 but this is far from locked in and it is reckless to make such predictions where historic prices have been so volatile,” Mr Evans said.
Mr Evans was also concerned about the $1.8 billion of fringe benefit tax changes relating to motor vehicles because it would be a new and significant compliance burden for business.
Bernard Keane, Crikey, 16 July 2013
Kevin Rudd has declared he has ‘terminated the carbon tax’ by moving to an ETS a year early, with a $3.8 billion price tag. Here’s how he’ll pay for his promise.
The government has confirmed it will move to a floating carbon price from July 1 next year, 12 months earlier than scheduled, in a move expected to cost the budget $3.8 billion a year.
Prime Minister Kevin Rudd announced the decision this morning, disingenuously describing it as “terminating the carbon tax”, and released a series of budget cuts to fund the shift.
The current European Union carbon price is just under A$6 a tonne of CO2, compared to next year’s Australian carbon price of $25.40. The Gillard government announced in 2012 that it would link to the EU trading scheme from 2015 (the European price is expected to rise when the European economy begins to recover).
The cost of Australia switching to an ETS earlier will be funded through a number of measures:
• $248 million saved from cutting public service senior management and improving IT procurement;
• An overhaul of fringe benefits tax arrangements for vehicles, to apply prospectively, saving $1.8 billion over four years;
• Bringing handouts to electricity generators from the Energy Security Fund to an early end, saving $770 million over the forward estimates;
• Cutting assistance to the coal mining sector ($186 million);
• A “deferral” of $200 million from the Carbon Capture and Storage (CCS) program;
• $213 million of unallocated funding returned from the Biodiversity Fund;
• $143 million of unallocated funding returned from the Carbon Farming Futures program; and
• Delaying $200 million from the Clean Technology Program and returning $162 million to the budget.
CCS was one of Rudd Mark I’s big commitments. Hundreds of millions were lavished on it, and an international institute was set up for developing technologies that, even if viable, were many years from commercial status — but which had the allure of potentially enabling the continued use of coal, one of the most emissions-intensive sources of electricity.
US President Barack Obama even singled out Rudd for his leadership on CCS. Since then, however, the funding allocated for it has proven an irresistible source of savings, first for the Gillard government, and now under Rudd again.
And another quarter of a billion dollars cut from Australian public service budgets will redouble the pressure on departments and agencies, with many having already cut into middle and senior management ranks and ceased functions to meet recurring efficiency dividends imposed by the Gillard government.
Changes like the FBT savings (which come on top of Wayne Swan’s 2011 FBT changes for vehicles) and deferring spending, as well as bringing forward the shift to an ETS by a year, will require legislation, although it can be introduced after the election given the unlikelihood of Parliament returning before the election. The Greens have already flagged opposition to bringing the floating price forward and concern about the cutting of environment programs to fund it. Gillard had secured the Greens’ support after the 2010 election with a commitment to establishing a carbon pricing scheme.
Katie Walsh, The Australian Financial Review, 16 July 2013
Multinationals and big businesses that shift profit offshore to slash tax bills will receive more scrutiny than ever before, the Australian Taxation Office has revealed in its annual hit-list of targets.
More than 150 companies will face risk reviews and audits from the ATO in the coming year, as it scrutinises global transactions as part of the federal government’s crackdown on tax-avoiding multinationals and the broader global movement against the activity.
The ATO will team up with about six peer nations to conduct multilateral audits of global businesses in addition to its domestic efforts.
“Not only are revenue authorities aligned and signed up to taking an active role in this, you’ve got governments doing the same [and] the community [asking] ‘why do I pay tax, and large businesses are apparently not paying their fair share?’,” ATO second commissioner Bruce Quigley said on Monday.
“In the UK you’ve got protests on the streets, apparently, against big businesses not paying the right amount.”
The ATO has recruited economists to back its efforts to counter the excessive prices some companies attribute to offshore deals, particularly marketing and royalty payments. It is armed with beefed-up transfer pricing laws that it will use to try to impose different prices.
“We’re also interviewing and talking to the customers of these large corporates,” Mr Quigley said.
Crucially, that included asking customers – themselves corporations – whether they thought they were dealing with an Australian-based company or with one based elsewhere, such as Ireland.
Google and Apple have made headlines since it was reported last year that they were prominent users of a structure that channels profits to Ireland and the Netherlands and then to tax havens.
Tax havens targeted
In addition to its profit-shifting work, the ATO will review another 800 rich people and companies for activity undertaken in tax havens, as the ability to hide money offshore away from the tax man diminishes.
The ATO is eager to take a leadership role in addressing profit shifting, which is a focus of the Group of 20 and the Organisation for Economic Co-operation and Development.
On Friday, G20 finance ministers meet in Moscow, where Mr Quigley said he expected new Treasurer Chris Bowen would raise some of the issues.
Tax commissioner Chris Jordan was originally scheduled to attend.
Some other countries had shown an interest in undertaking multinational audits in conjunction with Australia and five or six had signed up to a pilot program, Mr Quigley said.
The ATO received a funding boost in the May budget to tackle profit shifting, given a target of raising $1.5 billion over the next four years. Although big businesses are well-resourced and advised, Mr Quigley expressed confidence it the ATO’s efforts which he said would involve more profit-shifting reviews than ever before.
“You’re never 100 per cent sure of course, [but] the mood globally has shifted.”
Including the profit-shifting reviews, about 521 audits and reviews of big businesses are planned for the year.
The ATO has moved towards real-time compliance in recent years. That had led to a shift in behaviour from corporations, Mr Quigley said, with around 12 moving down from the highest risk, most closely watched category by increasing transparency.
They have been willing to discuss mergers and other transactions with the ATO ahead of time rather than waiting for an audit down the track, he said.
Ernst and Young partner Glenn Williams said that some companies had made a lot of effort to improve transparency, backed by concerned boards.
On the movement against multinationals, he said companies were already turning their minds to their global structures and warned against moving too quickly, creating a risk of competitive disadvantage.
“The broader risk to the ATO in this area is to move too far ahead of the rest of the globe,” Mr Williams said.
“Whilst the ATO will always be able to generate some revenue in this area, there are sound commercial bases for having in place the structures that are in place.”
Other focuses in the big business area are on exploration expenses, resource rent taxes and research and development costs.
The ATO has recruited economists to help in the area of profit shifting and plans to hire experienced auditors from private accounting firms, targeting specialist areas including banking and finance, to help run reviews.
Stephanie Peatling, The Sydney Morning Herald, 16 July 2013
Prime Minister Kevin Rudd’s decision to dump the fixed price on carbon was always going to be made based on politics rather than policy.
In that sense it is smart politics.
The policy – and politics – of carbon pricing have dogged the federal government since 2010 when Opposition Leader Tony Abbott demolished former prime minister Julia Gillard’s credibility by constantly calling her a liar.
What was an electoral plus for Labor in 2007 was a big minus three years later.
As soon as Mr Rudd regained the prime ministership in late June he indicated the fixed price phase was as good as gone.
He wanted to neutralise the issue as soon as possible and this is what he has done.
Tuesday’s announcement comes after the government had already coasted on 48 hours of media coverage confirming its decision (without providing any details).
All it said on Sunday – after leaking the story to select newspapers – was that the fixed price phase would be shorter than originally planned and that the household assistance package would stay.
That was confirmed on Tuesday, but it was also accompanied by the details about where the $3.8 billion would come from to keep the budget’s equilibrium.
Such a big figure suggests the government would be scrambling to try and find further savings should it make good on its signals to fix other problematic policy areas.
It should certainly make people who want something done to increase the unemployment payment, Newstart, less optimistic.
It also raises the question of where the money would come from if the government does, as it has indicated it will, offer some kind of solution to the issue of the 84,000 sole parents whose payments were cut earlier this year.
The areas where the carbon policy savings are coming from are another indication that this is about politics not policy – scrapping of fringe benefit tax arrangements for cars and about $1 billion in practical environmental programs such as biodiversity and assistance for farmers.
Environment groups have been calling for years for the major parties to reconsider tax concessions for company cars.
The government has finally listened and done this but there is little mention in Mr Rudd’s press conference about the contribution cars make to greenhouse gas emissions and the neat way the two decisions complemented one another.
Instead the government was at pains to point out that people who are already beneficiaries of the scheme would be okay – it’s just new contracts that will be affected.
At one point Mr Rudd listed the importance of different groups in forming his decision – cash-strapped families were first, followed by small business and then the environment.
Mr Rudd then promptly issued a challenge to Opposition Leader Tony Abbott for another debate – this time on climate policy.
This is a challenge he knows full well Mr Abbott won’t accept.
But it gets coverage and takes up space that might otherwise be devoted to coverage of other aspects of the announcement.
There is no benefit to Mr Abbott in accepting Mr Rudd’s challenge any more than there would be in Mr Rudd deciding that Mr Abbott is right to demand he name the election date.
Greens leader Christine Milne said on Sunday that the carbon tax decision was ”all about politics and not policy”.
Despite Climate Change Minister Mark Butler’s attempt to sell the decision ”from the environment’s point of view” the environment rated fewer mentions than the people worried about the cost of action on climate change.
After all, they are the voters.
The Economist, 13 July 2013
An imperfect proposal could still improve America’s awful tax code: back it, Mr President.
NO ONE denies that America’s tax code is a mess. It is unintelligible, which is why 90% of taxpayers use an accountant or commercial software to file their returns. It is a labyrinth of loopholes, which is lovely for tax lawyers but bad for America. Public outrage tends to focus on specific abuses. How is it, people ask, that multinationals such as Apple can legally avoid billions of dollars of tax? Why is it, conservatives fume, that the Internal Revenue Service just so happened to select anti-tax groups for intrusive scrutiny? But the real problem is much broader. A tangled code is unfair and inefficient. Loopholes for some mean higher tax rates for everyone else. The 6.1 billion hours Americans waste each year complying with tax rules could have been spent inventing new products. Exemptions promote unproductive activities, such as buying big houses, while high rates penalise work and drive companies abroad.
America sorely needs tax reform. Two legislators are trying to deliver it. Max Baucus, the Democrat who heads the Senate’s tax-writing committee, and Dave Camp, his Republican counterpart in the House of Representatives, have been taking testimony and floating ideas for almost three years. They have yet to release a full plan, but their principles look sound: lower tax rates for both corporations and individuals, paid for by limiting or scrapping tax breaks.
Ideally, no tax break should be spared, even the popular ones for charity, housing, health insurance and research and development. (All these things are desirable, but their privileged treatment imposes a cost, in the form of higher taxes, on other desirable things.) The political reality is that some of these tax breaks will survive, just as there is no hope for a carbon tax, one of the more sensible ways to raise money. Yet Mr Camp and Mr Baucus have found enough common ground to build a more efficient tax system. Where they differ is on the crucial question of whether tax reform should raise more revenue. Mr Camp, being a Republican, says no. Mr Baucus, like the rest of his party, including Barack Obama, says yes. On this, the Democrats should concede, for two reasons.
First, tax reform is so important that lawmakers should not let the perfect be the enemy of the good. A revenue-neutral tax simplification would raise the same sums to pay for Leviathan, while imposing a lighter burden on taxpayers. A simpler code would create fewer distortions and spur faster growth. Getting rid of all loopholes would allow individual income-tax rates to fall a whopping 44% and still raise the same revenues.
One thing at a time
Second, although the Democrats are right that higher taxes will eventually be needed to stabilise America’s debts, this is a separate issue. By using tax reform as a bargaining chip for higher revenues, Democrats probably doom it to fail.
Better to pass it into law quickly. That would still allow Mr Obama to pursue a separate grand bargain, with the Republicans tolerating higher taxes in return for the president accepting curbs on the growth of entitlement programmes such as Social Security and Medicare (pensions and health care for the elderly), as suggested in his own budget. For the moment, the chances of the Republicans swallowing that are slim. That is a shame for a party that used to believe in balancing the books. But it is not a reason to let the Baucus-Camp reform die. A simpler tax system with lower rates and fewer loopholes is good for America. Push it, Mr Obama.
Chris Johnson, The Age, 7 July 2013
Kevin Rudd is coming under increasing early pressure from his own frontbench to reverse Labor’s controversial cuts to single parents’ welfare payments.
Fairfax Media understands some ministers have approached the Prime Minister directly, insisting the matter be given immediate priority.
The issue was discussed during the new-look government’s first cabinet meeting since Mr Rudd returned to the leadership, and options are being pursued over how best to financially help those affected.
Cabinet is looking at how to reverse the cuts and recoup the the $728 million the tough measure was meant to save the budget’s bottom line.
The representations, along with the Prime Minister’s own public comments that he had thoughts on the subject, suggest a shift is imminent.
“Yes, he knows we need to look at this closely and move quickly on it,” one cabinet minister said. “He knows that because I am one of them who have told him so. And we are looking at it.”
A member of Mr Rudd’s outer ministry has also confirmed approaches had been made to the PM.
This follows a host of backbench MPs publicly and privately expressing anger over the laws implemented by former prime minister Julia Gillard that moved about 84,000 people, mostly mothers, off the single parenting payments and onto the less generous Newstart allowance.
As a recent backbencher himself, Mr Rudd called on Ms Gillard’s cabinet to have “a bit of heart” when dealing with the single mothers.
The new laws force single parents on to Newstart when their youngest child turns eight, makes the parent look for work, and gives them between $60 and $100 a week less in payments.
A spokeswoman for the Prime Minister would only say that Mr Rudd was “discussing the issue with colleagues”.
Ian McAuley, New Matilda, 6 May 2013
Australians don’t want more taxes, but we’re happy to cough up when we know where the money’s going. It’s no surprise that the Disability Care levy has been popular, writes Ian McAuley
Psychologists refer to the “Abilene Paradox” – a situation in which people hold false beliefs about the beliefs of everyone else in a group. We have all been at parties where we long to go home, but we hang on because we don’t want to be the party pooper – not realising that everyone else feels the same way.
So it is with taxation. There is a strong belief among politicians and their advisers, and among journalists that it is politically dangerous for a government to propose new taxes. That assumption needs checking against reality, because it is far from a valid generalisation about social behaviour.
It is true that if a social researcher goes doorknocking and asks people “would you like to pay more tax?”, the positive response rate would be around the same as the question “would you like a motorcycle gang to move next door?”
But when conditions are put around that question, the results are very different. There is a compilation of Australian surveys on attitudes to taxes and public expenditure in a 2011 research paper by James Whelan of the Centre for Policy Development. These surveys show that in certain conditions people are very willing to pay more in tax to support certain public services and benefits to those who fall on hard times.
The key point is about how people think their taxes will be spent. Those services with very high support, usually well above 80 per cent, invariably include health care and education. Environmental protection, roads and public transport generally get high ratings, with variations often reflecting local conditions. Support for defence tends to fluctuate in line with our shifting place on the comfort-paranoia spectrum. There is little support for “public administration”, partly because people consistently over-estimate the size and cost of the public bureaucracy (a perception into which Tony Abbott has successfully hooked).
Responses to questions about distributive welfare depend very much on framing. “Age pensions” get strong support, but there is little enthusiasm for “unemployment benefits”, unless the question is framed in terms which imply some form of social insurance (which is how we see the NDIS). If we are employed, unemployment is something that has happened to someone else, but if we think about the risk of unemployment, then that is a risk we all share. Other wording is important. A “levy” has much more acceptability than a “tax”, for example.
A general conclusion from such research, particularly the contrast between responses to the general question “would you like to pay more tax?” and specific questions, is that people want public goods and are willing to pay for them. They are not, however, happy to leave that allocation decision to governments who they believe, rightly or wrongly, will waste their money or spend it on things they don’t want.
That contrast in responses has to do with trust in government. In most democracies where there are long time-series of surveys, evidence suggests that trust in government has been falling for more than 50 years. In the US, for example, loss of trust has been strongest for the federal government, less for state governments, and even less for local governments. In Australia we don’t have a “trust in government” time-series, but in a Morgan survey on people’s belief in “honesty and ethical standards” by profession, government shows up poorly. On a scale up to 100 per cent, where health care professionals score well above 80 per cent, public servants come in at 36 per cent and members of Federal Parliament come in at 14 per cent – just behind union leaders and stockbrokers, and just ahead of insurance brokers. (Lest anyone thinks this to be a specific comment on the present Labor Federal Government, state government MPs score only 13 per cent.)
In such a climate, it is understandable that there should be support for a tax quarantined for a specific purpose. Economists call such taxes “hypothecated” taxes, and the NDIS levy falls into such a category.
Perhaps it was Bob Carr who convinced Julia Gillard to change her mind about a levy, because he had first-hand experience with such taxes. In 1989 he was NSW Opposition Leader when Premier Greiner introduced a levy of 3 cents a litre on gasoline to fund roads, which were in even worse condition than they are now. The program was originally intended to last three years: hence it was known as the “3 x 3” levy. In Sydney, and around the state, signs appeared at roadworks announcing “3 x 3, your levy at work”. A few stand to this day.
In the 1991 state election campaign the 3 x 3 levy came under questioning, and some in Greiner’s Liberal Party canvassed the idea of abolishing it, but it backed off once its internal polling found that the levy was quite popular. The levy lasted quite a lot longer than three years, and funded a significant improvement in the state’s roads.
Further afield, in the UK the BBC is funded in large part by an annual television licence fee. The conventional texts on tax policy would say it is a dreadful way to fund public broadcasting – as a virtual “poll tax” it’s highly regressive, and it’s expensive to collect. But it’s popular, for it quarantines the BBC against calls for its privatisation.
Another example comes from the USA, which we generally regard as having an entrenched opposition to taxes, but in November last year Californians voted in a referendum to support a specific proposition to raise state sales and income taxes with the funds specifically directed to school funding.
The general message is that taxes meet with more acceptance when they are linked to specific benefits.
Governments however are unenthusiastic about hypothecated taxes, partly because they rob politicians of the opportunity to direct funding to areas that may be politically important, such as special programs in marginal seats. Politicians on the far right dislike them because they negate the notion that all taxes are an intolerable burden: it is no good if people come to believe they get value for money from their taxes. Economists tend to oppose them because they mean that at the margin it becomes difficult to shift expenditure from programs with low benefits to programs with high benefits.
But that opposition contrasts with the tendency of economists to favour user charges over taxes to fund government services, on the basis that user charges tend to align with people’s choices. Are not hypothecated taxes and special levies similarly manifestations of specific choices to spend their taxes for some public goods and not for others?
Those on the “left” who often oppose user charges as a matter of principle may do well to re-examine their attitudes. Some user-charge proposals such as comprehensive road user charging as recommended by the Henry Review, if implemented well, could see significant improvements in urban transport and environmental outcomes, while improving equity in the way we fund roads and public transport. (Comprehensive road user charging is not to be confused with the present patchwork of toll roads in an otherwise uncharged system, which results in waste, inequities, monopoly profits and unnecessary levels of pollution.)
The more general lesson from last week is that we must face up to the fact that our public revenue base, be it through “taxes”, “levies”, “user charges” or whatever else we want to call them, is inadequate to fund the public services and social welfare transfers which we have come to expect and which are to be found in comparable prosperous countries.
SBS News, 14 July 2013
Taxes for mining companies, millionaires and banks would be increased to fund an extra $43 billion in social spending proposed by the Australian Greens.
Under the Robin Hood-style policy, the money would be used to boost payments to the unemployed and single parents, while nearly $6 billion more would be spent on education.
Launching the party’s election platform on Sunday, Greens leader Christine Milne said the vision was not just about the next three years, but about the next 50 to 100 years.
As policy launches go, the Greens’ was definitely a no-frills one.
A few dozen party faithful crammed into a small room in Melbourne’s Docklands where Senator Milne and deputy leader Adam Bandt stood in front of a simple backdrop and announced a four-step plan to raise $42.7 billion.
The Greens plan to raise an extra $21.8 billion by increasing the mining tax and $12 billion by abolishing tax breaks for the fossil fuel industry.
A levy on banks would raise $8.4 billion, while increasing the marginal tax rate on incomes over $1 million to 50 per cent would raise $500 million.
The money would fund a $50 per week increase in unemployment payments and the Youth Allowance and a $40 a week increase for single parents.
Cuts to university funding would be reversed and an extra $2 billion would be spent on school funding.
The policies have been costed by the independent Parliamentary Budget Office, the Greens say.
Senator Milne said only the Greens had a sustainable plan for the future.
“We want to see an environment that can sustain us, a society that cares for us and an economy that responds to the major challenges of this century, because the Greens are not just about the next three years, we are about the next 50 to 100 years,” she said.
Mr Bandt said the Greens would stand up to the big miners and big banks, which were the world’s most profitable.
“We have got a clear choice at this election: we can either go down the road of keeping cutting government services as the old parties want to do or to have guts and to stand up and raise the revenue that this country needs,” he said.
The Australian Education Union welcomed the Greens’ commitment to public education and their strong advocacy for the Gonski reforms.
Liberal senator Eric Abetz said the Greens were simply repackaging old policies with some costings that were not comprehensive.
Judith Ireland, The Sydney Morning Herald, 13 July 2013
As Greens leader Christine Milne launches the party’s national policy platform on Sunday, the budget office has costed the party’s figures for its major revenue-raising initiatives.
The office found $42.7 billion would be raised by the Greens’ proposed levy on the big banks, its mining tax restructure, ending tax breaks to “big miners”, abolishing funding for so-called clean coal technology and increasing the marginal tax rate on incomes above $1 million.
The Greens say they would use the money to inject more cash into the school funding reforms and boost funding for Newstart, overseas aid, regional arts and the homeless.
These revenue initiatives are not new for the Greens and have so far failed to gain support from the major parties but they have recently been re-examined by the budget office in the wake of the May budget, which projected a deficit of $18 billion in 2013-14.
“Raising money is about choice,” Senator Milne said. “It’s about choosing what’s fair and what’s appropriate and who can afford to pay.
“We’re challenging the old parties to say why are they so afraid to take on the mining corporations, the fossil fuel industry, the big banks and the wealthiest in our society?”
The Greens’ 52-page policy document, Standing up for What Matters: Healthy Environment, Caring Society and Clean Economy, will form the basis of the party’s election fight.
Four new policies will be announced on Sunday, including a plan to roll out more money, more quickly under the Gonski education reforms.
The Greens want an extra $2 billion in federal money over the first four years of the school funding reforms, on top of the $3 billion already earmarked by the government for the period.
“Australian students and public schools need more, faster,” the document says.
As well as the education reforms, the Greens want the extra money they have identified spent on reversing the recent $2.3 billion cut to universities, increasing Newstart and the youth allowance by $50 a week, increasing overseas aid to reach 0.7 per cent of gross national income by 2020, providing $3 billion to house the homeless and giving an extra $10 million for regional arts.
The three other new policies to be announced on Sunday will relate to the environment, research and development, and welfare.
Senator Milne said she had not talked to Prime Minister Kevin Rudd about the Greens’ plans, saying she had met with him only once since he was voted in as Labor leader late last month.
The Greens face a tough battle to hold on to the balance of power in the Senate, with particular concerns about seats held by Sarah Hanson-Young in South Australia and Scott Ludlam in Western Australia.
Senator Milne said that with Mr Rudd back in power, it was “less likely that Tony Abbott would have such a resounding victory in the lower house as he seemed to be on track for.
However, it is critical that neither of the major parties get control of both houses of Parliament.”
Timothy Devinney, The Conversation, 11 July 2013
As governments across the globe have struggled with growing government debt, the pressures of austerity and stagnant economic systems, ire has been thrown at the corporate fat cats who – according to the court of political opinion – have avoided paying their fair share of taxes.
However, the battle over taxation is an old one. The political authority of the day — King, Church, Congress, Parliament, etc — invariably scrapes and pillages to fund noble and ignoble activities while rich and poor alike bury their silver in trenches, barns and corporate tax havens.
The modern variant of these dramas have been most recently played out in the British Parliament and US Congress. Chief executive officers of various multinationals have been brought into the dock to explain their nefarious attempts to keep corporate cash out of the hands of taxman.
The circus that has surrounded these discussions is mainly emotional and devoid of a real understanding of the complexity of taxing multinational corporations.
To the layperson the debate is simple: if they pay their share of taxes on the income they earn, why is it not fair that “rich” corporations do the same? However, such a viewpoint is a naive personification of the corporation. As too is the logic of those like Joseph Stiglitz, who argue that corporations should pay their fair share of taxes because they utilise societal infrastructure.
While Stiglitz acknowledges the complexity of figuring out how much to tax a corporation in a specific jurisdiction, he fails to understand that the point of a tax system is not to generate a pay-as-you-go system but to ensure that a society shares in the wealth created by economic activities generated within that society.
It is clear to nearly anyone following this debate that the current global tax system is dysfunctional. However, that dysfunctionality is not new, nor is it, like Stiglitz’s argument, fundamentally the result of private interests. Politicians ultimately decide on the tax system structure, and its failure to account for the activities of multinational corporations reflects: (a) the failure of politicians to understand the management of multinational corporate and economic networks (b) the naive attempt to develop quick-fix domestic tax solutions to global problems and (c) the lifeblood on which politicians trade off legislation and political favours for votes, money, influence and their legacy.
The result has been a hodgepodge of tax rules and rates in different jurisdictions, which are completely at odds with modern economic structures and increasingly incapable of funding societies’ basic needs.
For many the solution is yet more rules and regulations that will “force” corporations to pay more of their “fair share”. However, this is an impossible endeavour and one likely to do more harm than good – any one solution will, by definition, simply preference one jurisdiction over another.
If we decided to force corporations to pay income taxes based on where they sold their products, we effectively would dissuade demand and tax individuals/workers in the jurisdictions in which the product is produced. Similarly, if the producing nations decided they were going to tax corporate profits based on the level of production, they would dissuade production and it would amount to a partial tax grab from the consuming nations customers. In the end someone pays and it is not really the corporations.
Any such system would be both overly complex and lead to tax systems operating as little more than cash grabs, with countries attempting to figure out what they could tax that would keep tax revenues local. The only thing more regulation like this would ensure would be a boom in the tax advisory business, more government employment and the potential of a global tax war.
An alternative is to recognise that corporations are not people (in spite of the Citizens United ruling in the US Supreme Court) and that what needs to be taxed are the components of the process that lead to production of goods and services. This implies that the corporate tax rate would be reduced to zero and that any income generated by any component would be taxed equally (no capital gains taxes, just one simple tax rate structure). What would such a system look like? It would be quite simple.
Companies would bear no taxes and hence need to account for nothing from a tax point of view. Workers would be taxed on their income and all benefits. Executives would also be taxed at the relevant tax rate on all monetary and non-monetary compensation. Investors would be taxed based on the capital gains of any shares sold (again at the rate at which any income would be taxed without any preference) and all dividends would be taxed as income. If a company chose to pay fewer dividends and invest the money in new corporate ventures, it simply would not be taxed until it was released to the owners/shareholders as future dividends or employees as future pay and compensation.
Such a system has many benefits. First, it would not matter about the jurisdictional structure. If one country wanted to tax consumption via a VAT or ad valorem tax, this would be a separate decision. However, the taxes accruing to a country from any company would be driven by whether or not there were workers and owners/shareholders in the jurisdiction.
Second, the “infrastructure” usage argument would also be a separate decision. If political institutions wanted to charge companies for infrastructure, this would be a separate decision that would have nothing to do with “potential” real or actual economic gains. If there were actual gains, these would show up in revenue through the consumption taxes or the value generated via employment and dividends from the company directly or via the network of economic activities it generates.
Third, there would be no gaming of this system. All benefits and income would be taxed with a single set of tax formulas for money earned. Fourth, if the government was worried about power being concentrated in the hands of a corporate elite, a simple solution would be to require minimum dividend payouts, which would ensure that capital owners were always taxed and hence corporate profits taxed.
This idea is not new. Many others have outlined variations of this logic. However, the point I am emphasising is that a counter-intuitive solution may be the best solution. In many ways the politicians and various informed pundits are falling into the fallacy of expertise acknowledge by Sherlock Holmes in The Adventure of the Abbey Grange: “Perhaps, when a man has special knowledge and special powers like my own, it rather encourages him to seek a complex explanation when a simpler one is at hand.”
This solution may be politically impossible to implement, despite its simplicity, logic and value. It addresses the direct problem of where it is fair to impose taxes. However, it also removes, in one fell swoop, one of the most powerful and popular tools in the political toolkit — the ability to hand out economic goodies to politically supportive clienteles that are paid for by political opponents and those lacking in political power and influence.
Gemma Daley, The Australian Financial Review, 11 July 2013
In its report titled “future[inc]: An economic Policy Platform for the Next Term of Government” the institute says Australia faces challenges including an ageing population and slowing productivity growth against the backdrop of economic uncertainty.
The report was released as Prime Minister Kevin Rudd prepared to appear at the National Press Club on Thursday in his first major speech since being reinstated to the Labor leadership on June 26.
The speech will centre on Australia’s economic performance and how it has outperformed other developed nations. It comes after Mr Rudd has spoken about the possible impact of deteriorating economic conditions in China unless Australia manages it carefully.
The institute’s chief executive, Lee White, said: “We cannot afford to get distracted by the politics of the day.
“What matters is that both major parties properly engage the Australian public on what steps they will take to make our economy more resilient and productive.”
The report focuses on recommendations around fiscal sustainability, international best practice, boosting productivity and the stability of financial markets.
Recommendations include giving greater emphasis to financial literacy in the national school curriculum, lowering the company tax rate, adopting a user-pays system for infrastructure investments and giving the chair of the Productivity Commission the ability to present priorities to parliament annually.
Andrew Thompson, ABC News, 9 July 2013
The Government wants to cap the deductions at $2,000 a year.
The Australian Nursing Federation says nurses and midwives are required to do a minimum of 20 hours of continuous professional education a year.
Territory branch secretary Yvonne Falckh says many remote nurses will have trouble affording the education.
“If you look at booking an airfare, to get a return flight to a capital city, you can be looking at $500 to $1,000,” she said.
“Then you throw on a couple of hundred or $150 dollars a night … for your accommodation, and then put on the conference fees, it’s a lot of money.”
She says that, in the long run, the public will be the losers.
“Nurses and midwives will certainly have to think hard about how expensive it’s going to be for them to complete certain courses and conferences and studies,” she said.
Naomi Woodley, ABC News, 8 July 2013
The budget measure will put a $2,000 cap on self-education claims from next July, and is due to save $500 million once it is in place.
But a diverse range of professional groups say the changes will mean many employees cannot afford to meet strict training requirements.
They say that in turn will damage productivity.
Around 20 groups are meeting in Canberra today to try to convince new Treasurer Chris Bowen to make some changes.
Lee Thomas from the Australian Nursing Federation will be among those at the meeting.
“I think the current position of $2,000 a year is a disgrace,” she said.
“Nurses and midwives, like many other professions, are required to complete, every year, mandatory continuous professional development. None of that comes cheaply.”
Ms Thomas says the cost of training for a regional nurse or midwife can be up to $10,000, and patients will suffer if they cannot claim a deduction.
Engineers, teachers, doctors also affected
The impact on professional development also worries Brent Jackson from Engineers Australia.
“For engineers, it’s 150 hours over every three-year period,” he said.
“A lot of this of course the government has said is funded by employers.
“However, we are seeing increasingly in the current economic environment that employers are less and less likely to fund this.”
The meeting’s host, Belinda Robinson from Universities Australia, says the proposed cap is counter-productive.
“We want to encourage higher quality teachers; we want to ensure that our rural doctors have the breadth of experience that they need to meet the needs of their local communities,” she said.
“We’re encouraging the development of very highly skilled IT professionals, technology professionals, engineers, and so on to meet the demands of what we hope will be a much more advanced and diversified economy in the future.
“And this is a measure that’s really going to make that a lot more difficult.”
Ms Robinson says in 2010/11, 172,000 people claimed more than $2,000 in self-education expenses.
She says an estimated 60 per cent of those were students, usually studying post-graduate degrees.
“Many of the courses charged considerably more than $2,000, and so clearly, this will act as a very significant disincentive to those people,” she said.
Government says consultation process underway
The Government has issued a discussion paper and says it will consult closely to make sure essential training is not affected.
Steve Burrell from the Australian Institute of Company Directors says they all agree the scheme can be better targeted, but the cap goes too far.
“If the Government is concerned that there are people claiming first-class travel or luxury resorts or whatever the problems may be, there are better ways of doing this, much more targeted ways of doing it, than simply denying deductibility for everyone,” he said.
He is hopeful Mr Bowen will take a second look at the changes.
“I think he has indicated – and the Prime Minister has indicated – that they want to talk to business and they want to talk to business about serious things like productivity, and this is one of the issues that is integral to that,” he said.
A spokesman for the Treasurer says the proposed changes are “sensible”‘ and reflect an appropriate level of claimable expenses.
He says the Government is encouraging everyone to make a submission to the discussion paper by the end of this week.
Ben Eltham, New Matilda, 4 July 2013
Kevin Rudd will abandon the carbon tax. That’s the word from Canberra as the Rudd 2.0 Government attempts to reboot Australian politics.
Carbon has not been kind to Labor since 2007. While climate change was a big factor in the election that unseated John Howard, the campaign to price pollution that followed was long and politically bloody. Under Rudd, Labor twice tried and failed to implement an emissions trading scheme, and the failed negotiations with the Coalition over carbon pricing were ultimately the catalyst for the rise of Tony Abbott as Opposition Leader.
Once confronted with an effective campaign against carbon pricing, Labor struggled to craft a strategy and stick to it. In early 2010 Rudd peremptorily abandoned the ETS, a decision seen by voters as a damaging backflip, and moved to tax big mining companies instead. It was the beginning of his decline.
The newly installed Julia Gillard couldn’t quite make up her mind about carbon. Labor’s 2010 election policy on carbon was a mess of contradictions. The party promised to introduce an ETS. But Gillard also promised a citizens’ assembly to give ordinary voters a chance to deliberate on carbon policy. And, notoriously, she told Network Ten that “there will be no carbon tax under the government I lead”.
Once the circumstances of the hung Parliament forced Gillard to commit to carbon action, her record was admirable. Labor’s second effort at pricing carbon was much better than its first one, and the final package of carbon legislation featured significant innovations, including strong public investment in renewable energy through agencies like the Clean Energy Finance Corporation and the Australian Renewable Energy Authority.
Indeed, you argue that Tony Abbott’s scare campaign has largely come and gone. Whyalla has not been wiped off the map, and the effect of carbon pricing on electricity bills has been overwhelmed by the massive cost increases levied on businesses and consumers by greedy electricity companies passing on the costs of gold-plated infrastructure. Polls show it is not nearly as unpopular as it once was.
Now carbon policy is volatile again. There is widespread speculation that Rudd will dump the tax and move directly to a floating carbon price.
If it’s not broke, why fix it? The answer, of course, is politics. Rudd’s scheme was never implemented, so he can plausibly claim he never supported the carbon tax. Because carbon policy is so complicated, no-one will bother to check back through the old legislation and remind themselves that Rudd’s CPRS also included a fixed-price period. That’s right, Rudd’s scheme would have been a kind of tax too.
But carbon politics has never had a lot to do with reality. If it did, Australia and the world would be moving to much higher carbon pricing and much tougher pollution regulations, and fast.
However, for Rudd, this very unreality gives him some considerable tactical opportunities. For instance, if Labor did decide to link the Australian scheme to the European scheme immediately, or at any rate very quickly, he could use that manoeuvre to put some real pressure on Tony Abbott and the Coalition. In a stroke, Rudd could turn carbon from one of Labor’s biggest liabilities into a weapon with which to beat up on the Coalition.
There’s no doubt the Coalition is vulnerable to carbon scrutiny. As we’ve remarked here before, the Coalition’s so-called “direct action” plan on carbon is risible. Because Abbott’s overriding priority has been to paint himself as the crusader against carbon taxation, the Coalition’s plan is effectively a mirror image of an orthodox emissions trading scheme, in which a pollution permit on carbon provides a price signal for decarbonisation.
Tony Abbott and Greg Hunt’s rickety scheme will instead use taxpayers’ money to pay big polluters to reduce their current pollution levels, effectively creating a shadow price on carbon anyway. It will be a bonanza for brown coal generators and aluminium smelters, who will probably take the money and run. Few experts believe “soil magic” can credibly reduce Australia’s greenhouse gas emissions enough to meet the Coalition’s state goal of a 5 per cent reduction.
Indeed, on some estimations, the Coalition’s shadow carbon price might even be higher than a floating price on carbon linked to the European ETS. Given how little anyone understands about the whole thing, Rudd could certainly make that argument – it’s a lot more plausible than suggesting a regional city will be wiped off the map.
What will the effect of linking to the European scheme be? In a nutshell, lower carbon prices. That’s because the international price is effectively set by the European market, which remains in the doldrums. The price of European permits are currently trading at around €4.70. That’s about $6.75 and a huge discount on the $24 currently mandated by the Clean Energy Future legislation.
The European carbon price has plunged in recent years. Despite this, emissions in Europe are declining.
But here’s the catch: most big polluters are not really paying the full price for carbon anyway. The Australian legislation gives big polluters that are “trade exposed” a special discount of up to 94 per cent on the nominal price. On top of that, certain industries have received big cash grants from the Commonwealth in the form of “compensation” for the supposedly dastardly effect of carbon pricing. Brown coal electricity generators, for instance, have received around $1 billion under former energy minister Martin Ferguson. For all but the very dirtiest emitters, carbon pollution is already cheap.
In fact, one of the biggest losers of a cheaper carbon price might be, paradoxically, black coal generators. That’s because, due to the complex interaction of the Renewable Energy Target and the carbon price compensation, black coal would suddenly be more expensive than brown coal. Expect plenty of calls for extra hand-outs from that sector if the change does materialise.
While this is being debated, Europe has finally shown signs of propping up its own carbon price, overnight passing legislation to “backload” carbon permits there, boosting the European price. Eventually, Europe may even decide to cancel existing permits that aren’t required, which would remove the big supply overhand currently depressing the EU price.
Back home, Rudd and Labor have some tricky numbers to crunch on the matter. If the fixed price is abandoned, Australian carbon prices will plunge, punching a further hole in the government’s tax revenues – a development new Treasurer Chris Bowen would hardly welcome.
One of the reasons why the Australian carbon price was set at $23 a tonne, rising gradually each year to 2015, was to try and put a floor under carbon permit prices. The stability would allow companies a period of certainty before carbon was exposed to the volatility of a freely-traded market in 2015. Some companies have now written forward contracts based on the fixed price out to 2015.
They might have to be compensated. It could all get messy fast.
But these are all problems for a third term of government – if Labor gets one. In the meantime, killing off the carbon tax might be too tempting an opportunity to pass up.
Georgia Wilkins, The Guardian AU, 6 July 2013
The investigations will add to the 26 cases of offshore restructuring already under review by the government body.
Under scrutiny are companies that deliberately restructure their business to route profits through low-tax jurisdictions or tax havens to avoid paying higher taxes in Australia, often through the use of post box companies or marketing hubs that have little real substance.
”The government has given the ATO a further appropriation of money to do more about this restructuring risk,” Deputy Commissioner Mark Konza, who is heading the ATO’s new taskforce into offshore tax schemes, said.
”We are looking at probably over the next few years, doing another 60 investigations of restructuring … of which another 20 will be energy and resources.”
While mining companies are not a deliberate focus, Mr Konza said they made up a third of cases due to their size.
”Mining has been very profitable in the last decade,” Mr Konza said. ”They’re still making good profits, and of course the question arises, well, is there some way we could pay a lower portion of tax on these profits?”
The government’s latest effort to crack down on corporate tax cheats comes as the Organisation for Economic Co-operation and Development, non-government organisations and the African Development Bank call for greater transparency around multinational resources companies that are operating in poor countries.
There are about 240 Australian mining companies with operations in Africa.
Advocacy group ActionAid claims poor countries are losing more than $130 billion in tax revenues a year by giving generous tax breaks to big companies, including Australian miners.
”We know Australian miners are benefiting from these deals,” said Mark Chenery, head of campaigns at ActionAid Australia.
”In most cases, these are backroom deals signed directly with politicians with little or no parliamentary scrutiny.”
Perth-based uranium miner Paladin Energy, came under scrutiny for its tax arrangements in Malawi where it runs a mine in Karonga. A report by the group Norwegian Church Aid alleges there are discrepancies between Paladin’s reported tax and its tax paid. It also alleges other payments by Paladin in Malawi are lower than the company reports.
A Paladin spokesman said the company was ”fully aware of the report and we strongly dispute all the claims made in the report”.
Paladin has subsidiaries registered in Mauritius and the British Virgin Islands, both tax havens. Last year’s annual report showed the company accumulated losses that mean it will need to make profits totalling $208 million in Australia before paying any tax.
Development groups are calling for Australia to introduce disclosure laws that would force companies to report what they pay governments in every country where they operate.
Such laws have now been passed in the US, European Union and Canada.
David Crowe and David Uren, The Australian, 6 July 2013
Chris Bowen intends to revive some of the key findings of the federal government’s 2010 tax review in the hope of reaching agreement with the states to cut the number of taxes on businesses and consumers.
But as Labor adjusts its policies for the federal election, the Treasurer ruled out action on any of the 20 ideas his predecessor Wayne Swan rejected in May 2010 when he released the review chaired by former Treasury secretary Ken Henry.
Mr Bowen said he believed the Henry review was a long-term plan and that tax reform was an “ever-receding finishing line” that needed further work.
“We do need to be ensuring our tax system is as sufficient as it possibly can be,” he told The Weekend Australian. “And that means the states and the commonwealth working together, working co-operatively to do so.
“But I’m not intending to revisit the elements of the Henry tax review which have been previously ruled out.”
Mr Bowen said there were “strong views” about the number of taxes in Australia and he would like to see the commonwealth and the states work together to tackle the matter.
The Henry review found there were 125 taxes paid by Australians every year and that 25 of these were levied by the states. Yet it also found that 90 per cent of all tax revenue came from just 10 taxes.
Mr Bowen repeated the government’s blunt rejection of any change to the GST but he said there was room for further reform to the number of taxes.
“In terms of an efficient tax system, that is something for further discussion across the jurisdictions,” he said.
The Treasurer’s remarks renew Labor’s commitment from the last election to ignore about 20 of the Henry review’s recommendations, including means-testing the family home, putting a land tax on the family home, ending the tax-free treatment of superannuation payments for those over 60 and reducing capital gains tax discounts.
Mr Bowen cautioned against further reform to the nation’s banking and finance sector in the wake of major reviews in recent years and substantial changes to superannuation. He said the superannuation industry needed a period of consolidation.
While he vowed to act on past reports to turn Australia into a financial services hub, he dismissed the need for a major inquiry into the banking and finance sector in the wake of the global financial crisis.
“I think the system is stable, well-managed and well-regulated. I don’t see at this point the case for further reviews,” he said.
“I think the fact that the banking system came through the GFC solidly is a testament to it and its regulations.”
Mr Bowen said the government’s message was that it was “open for business” by working with companies and unions to make the nation more competitive.
“We regard ourselves as a pro-growth government and business is the engine-room of growth,” he said.
“So, we want an open and transparent relationship with business.”
However, he said the government would not meet business demands to revise legislation passed last month, including new checks on the 457 skilled-worker visa program and amended workplace relations laws.
Mr Bowen said the government would monitor the 457 changes and supported skilled migration.
The amended Fair Work regime was now government policy, he added.
Mr Bowen would not comment further on ideas canvassed by Kevin Rudd on bringing forward the shift from the carbon tax to an emissions trading scheme.
“We’re committed to a price on carbon, in terms of further details there’s an appropriate discussion within government,” he said.
Georgia Wilkins and Ben Butler, The Sydney Morning Herald, 6 July 2013
But to those in business attuned to the language, the Tax Office’s warning to the Minerals Council of Australia in April could not have been any clearer: we know what you’re doing, and we’re coming after you.
And since Deputy Commissioner Mark Konza met the powerful mining group to warn that offshore restructuring was coming under the microscope, the Tax Office has gone even further.
It is working hard to catch up with the sophisticated profit-shifting techniques that developed among miners as rapidly as the mining boom itself.
”There’s a view among some companies that if everyone is doing the same thing, then they’re all relatively safe,” Mr Konza told Weekend Business, describing the logic that has led up to two-thirds of Australia’s top-100 listed companies, many of them miners, to rely heavily on tax havens and low-tax jurisdictions.
”It’s concerning when you see people take things that are legal, put them on steroids, and try to get so much out of the arrangement that they lose contact with reality.”
Mr Konza’s investigations add to the pressure on multinational resources companies operating in the developing world, with the OECD, non-government organisations and the African Development Bank all calling for more transparency around their activities.
In the Tax Office’s 26 investigations into suspected profit-shifting, 15 of which are in the energy and resources sector, Mr Konza is looking for what he calls ”absurd” financial information.
Fuelled by a funding boost received in the last federal budget, he signalled an additional 60 investigations, 20 of which will target energy and resources companies.
While mining companies are not a deliberate target, they make up a third of cases because of their sheer size and profits.
”Mining has been very profitable in the last decade,” Mr Konza said. ”They’re still making good profits, and of course the question arises, well, is there some way we could pay a lower portion of tax on these profits?”
On Monday, BusinessDay revealed that a new Tax Office taskforce would trawl through the contracts of suspicious subsidiaries and offshore accounts used by some of Australia’s biggest companies.
Mr Konza, who heads the taskforce, said while miners were by no means alone, it had become common for those in the resources sector to set up complex ”value chains” that extended way beyond their operations in Africa or south-east Asia and their headquarters in Perth.
The British Virgin Islands and Bermuda are well-known tax havens, but Fairfax Media has discovered that ASX-100 companies have no fewer than 22 subsidiaries registered in Mauritius, a tiny island in the Indian Ocean that often acts as a conduit for investment in Africa and India.
”They’ll say, OK well, yes we dig up the minerals here in Australia, but this company located in another country – they’re the ones that find the buyers,” Mr Konza said.
”So we wonder whether these functions really are being done in the other place.”
Mr Konza said the Tax Office was scrutinising companies that established offshore ”marketing hub” arrangements, an increasingly common move among multinational energy and resources companies. But he warned that investigations could take several years because of the required economic analysis, and the difficulty of getting ”secrecy jurisdictions” to co-operate.
”What we’re finding are instances where we think the prices being paid to the company in the low-tax jurisdictions are very, very high.
”Often intangibles are moved, things like rights to market, so you have to find out whether they have really moved … You need to interview their officers to see how they actually conduct their business.”
With about 240 Australian mining companies operating in Africa, the Tax Office is being forced to consider the problem on a much more global level.
”The reality is, Africa is being ripped off big time,” African Development Bank president Donald Kaberuka told Reuters last month.
Speaking before the G8 summit, which brings together the leaders of the world’s richest nations, Mr Kaberuka was giving a frank assessment of the foreign companies that mine Africa’s resources – a business that non-government organisations complain enriches shareholders but does little for local people.
”Africa wants to grow itself out of poverty through trade and investment – part of doing so is to ensure there is transparency and sound governance in the natural resources sector,” Mr Kaberuka said.
International pressure on Australian miners operating overseas is rising, with a new report by social justice group ActionAid claiming poor countries are losing more than $130 billion in tax revenues by giving generous tax breaks to big companies, including Australian miners.
”In most cases, these are backroom deals signed directly with politicians with little or no parliamentary scrutiny,” ActionAid Australia head of campaigns Mark Chenery said.
”We know Australian miners are benefiting from these deals.”
Uranium producer Paladin Energy is one Australian miner under scrutiny for its tax arrangements in Malawi, where it runs a mine in Karonga.
A report by Norwegian Church Aid alleges there are discrepancies between Paladin’s reported tax and the tax it actually pays the Malawian government, and says other payments by Paladin in Malawi are lower than the company reports.
The group alleges that although Paladin claims to have paid $US9.6 million last year, figures obtained by the aid organisation show it paid just $US5.75 million.
As part of a detailed response, a Paladin spokesman said the company was ”fully aware of the report and we strongly dispute all the claims made in the report”. He said taxes paid to the Malawi government last year totalled $7.8 million and raised issue with other figures provided in the report. The company did not respond to questions about its subsidiary in Mauritius.
Paladin is just one of the Australian companies using Mauritius as a stepping stone, where it has a subsidiary, Langer Heinrich Mauritius Holdings, as do eight ASX-100 companies.
In addition to its white sand beaches, casinos and luxury resorts, the tiny island’s attractions include a favourable tax treaty that exempts Mauritian investors from capital gains tax in India.
In 2011, it was ranked 33rd on the Tax Justice Network’s Financial Secrecy Index, criticised for its banking secrecy, lack of company ownership records and lax trust rules.
In recent months, Indian politicians have turned their ire on the tax treaty, saying ”post-box companies” in Mauritius are used by both foreign multinationals and rich Indians to avoid paying tax in India.
These allegations have been denied by the Mauritian authorities and the island’s financial services industry.
However, Fairfax Media found that all but three of 22 Mauritian subsidiaries of ASX-100 companies were classic ”post-box companies” that gave a registered address care of an accountant or company registration service.
Of them, News Corp is the biggest user of Mauritian companies. Before its split last month into a publishing arm and a broadcasting company, the Murdoch empire controlled 14 entities in Mauritius, most giving an address care of offshore company formation group Multiconsult in the island’s capital, Port Louis.
Some of the News companies seem related to Murdoch’s pan-Asian TV service, STAR. However, others bear cryptic names such as Buzzer Investments, Acetic Investments and Riddle Investments.
A News Corp spokesman declined to comment.
Telstra, Transfield Services and AMP have used their Mauritian subsidiaries to invest in India.
Telstra declined to comment specifically on its Mauritian subsidiary, Reach Holdings, but has previously said it was a holding company for operations in India.
Recycler Sims Metal Management said its subsidiary in Mauritius, Sims Group Mauritius, was also used to invest in India but was in the process of being wound up.
Rio Tinto’s two Mauritian companies, ProMark Services and Carrier Holdings, were acquired by the group in its 2011 takeover of Riversdale Mining, which has operations in Mozambique. Rio Tinto declined to comment.
”To be candid, it should have been shut down years ago – we simply haven’t got around to doing so,” Transfield Services spokesman David Jamieson said.
”No funds have ever moved through it.”
AMP spokeswoman Lara Evans said its Mauritian subsidiary was used to invest in Indian assets on behalf of the group’s clients.
”This subsidiary has been liquidated and the proceeds repatriated back to investors,” she said.
The government is under increasing pressure to introduce disclosure laws that would force companies to report what they pay governments in every country they operate in. Such disclosure laws would bring Australia in line with the US, the European Union and Canada.
Under the US and EU legislation, companies are required to reveal how much they pay a foreign government in taxes, royalties, fees, licences and bonuses. In Europe, they are also forced to disclose any social payments they make, such as building a school.
Advocacy group Publish What You Pay says ”country-by-country” disclosure laws would protect poor as well as wealthy nations from corporate tax-dodging. ”We’re talking huge sums that dwarf aid,” spokeswoman Claire Spoors said.
ABC News, 5 July 2013
Single tenants with spare bedrooms will be asked twice to move to a smaller residence or pay $20 and couples $30 extra a week.
The payment is expected to act as a financial incentive to encourage the freeing up of larger public houses.
But Warren Wheeler from the Illawarra and South Coast Tenants Advice and Advocacy Service says the tax will add pressure to already struggling individuals.
“For some people a spare bedroom is necessity,” he said.
“They can be crucial for those family and social networks.
“You might have grandparents who look after grandchildren when their parents go out and work, you might have adult children returning to the home after a relationship breakdown.”
The Member for South Coast Gareth Ward has defended the government scheme.
He says there are 17,000 properties across the state with 35,000 spare bedrooms
“In many instances there are people singles and couples living in Housing NSW properties with 3, 4, 5 or even 6 spare bedrooms,” he said.
“Now with 55,000 families on the waiting list we need to try to do something about that.”
Andrew Birmingham, The Australian Financial Review, 4 July 2013
The Australian Industry Group suggests that proposed changes to the scheme in February risk undermining efforts by business leaders and research organisations to maintain a national focus on innovation.
The R&D tax concession scheme is considered Australia’s primary national productivity and innovation driver. However, questions are now being raised about the health of the wider research eco-system.
Dr Peter Burn, Ai Group Director, Public Policy, said Australia’s R&D spending has averaged double-digit growth since the R&D policy was first introduced in the 1980s.
“It has been fantastically successful,” said Burn. “In the earlier years, we might not have been doing very much research and development at all, but we are now above the median of the OECD, and indeed in the top third. “
The question is whether these gains will be eroded.
“In February, when the government announced it would not allow very big businesses to claim the R&D tax incentive, that sent a bit of a shockwave through the R&D system,” he said.
The impact of this exclusion spread beyond the affected companies to the wider R&D ecosystem of interconnected organisations, including universities and research institutes such as the CSIRO.
The effect was to undermine the already patchy collaboration between business and research centres.
However, Mr Burn said despite the challenges, significant goodwill remains between business and research organisations.
“Applied research shouldn’t be considered a second-class citizen,” he said. “Pure research has a very important long-term role to play but applied research is where the rubber hits the road, and we need a lot more rubber hitting the road.”
Companies need to look internally
Meanwhile, management is also in the hot seat amid the changing R&D environment.
Quality of management is top of mind for Alan Thomas, joint managing director at Ortec Australia & New Zealand.
“There is an awful lot the logistics industry could do to improve productivity by looking within their own companies,” Thomas said.
Ortec is a specialist software provider to the logistics sector, and uses complex mathematical models to improve how trucks are routed through the road network. Clients include Linfox, Coles Supermarkets and Rio Tinto.
Despite significant developments in the technology and planning software used to improve productivity within the transport sector, business leaders remain risk averse and conservative.
“A lot of people in the trucking industry are born-and-bred truckers. That means they haven’t seen good examples from outside the industry,” he said.
Gartner research director Rand Leeb-du Toit echoed Thomas’ views about management quality. He also highlighted the need for business leaders need to engage the enthusiasm of their workforces and empower them to innovate from the bottom up. The evidence is clear that those who pursue this strategy are making big strides over their competitors, he said.
Leeb-du Toit quotes Australian government research that companies that innovate are almost 50 per cent more likely to report increases in productivity.
“They are three times more likely to export, four times more likely to increase their range of goods and services on offer, and they are more than twice as likely to increase the number of jobs.
“Management has to heighten staff passion for the business by allowing them to have a voice and to have input and ideas about the products, services and business models.”
HITCH CLIMATE TAX TO THE ACTUAL CLIMATE, SAYS TOP ECONOMIST
THE WARMER THE PLANET, THE HIGHER THE GREEN TAXES GET
Andrew Orlowski, The Register, 4 July 2013
Ross McKitrick, Professor of Economics at the University of Guelph in Ontario, an IPCC expert reviewer and one of its leading critics, proposes a carbon tax with the rate tied to climate response. He explained the idea at the House of Lords yesterday before an audience that included the architect of the UK’s Climate Change Act.
The idea of an evidence-based tax alarmed some in the audience. And it was fascinating to see who was most alarmed by it.
McKitrick’s plan replaces the piecemeal regulation and taxes, which are arbitrary and random (ranging from patio heater bans to a “carbon floor price”) with a tax linked to the temperature of the troposphere. According to IPCC scientists this is the “fingerprint” of greenhouse gas-induced global warming and the most rapid indicator of climate change. If temperatures go up, then so does the tax.
With the introduction of tradeable emissions certifications alongside the new, evidence-based tax then powerful incentives are in place to be right. “Nobody will benefit from using false or exaggerated science,” McKitrick said.
“Sceptics who do not believe in global warming will not expect the tax to go up, and might even expect it to go down. Those convinced we are in for rapid warming will expect the tax to rise quickly in the years ahead,” McKitrick explains in a paper outlining the idea.
“Companies managing factories and power plants will have to figure out who is more likely to be right, because billions of dollars of potential tax liabilities will depend on what is going to happen.”
As he elaborated at Westminster yesterday:
Nobody has an incentive to ignore the forecasts – while everyone has an incentive to check them for accuracy… As a scientist, instead of complaining that nobody’s listening to you, you could put your pension in it. If a scientist can’t persuade himself to put his pension on his own science, he shouldn’t try to persuade other people to.
He also ran through some of the pitfalls and objections. Was it backward looking? No, he thought, since investors were placing big bets on future investment by factoring in the tax. A futures market in emissions certificates would allow traders to treat “climate lags” as an arbitrage opportunity.
So did he think markets are smarter than scientists, asked one questioner?
“Markets are just people, and they’re making use of the information,” he said. “Markets may be more objective than scientists – each scientist is going to have their own bias and their own agenda. But the market will not make correct predictions.”
But if scientists are mistaken then the public doesn’t pay for the wrong policy – since it won’t be paying to mitigate a climate “problem” that doesn’t exist.
Climate models have exaggerated the response of the troposphere: temperature time trends against pressure (degrees per decade) vs 22 averaged model predictions; Douglass et al (2007). Attending the talk, arranged by the Global Warming Policy Foundation, a think tank critical of climate mitigation policy, were Chris Rapley and Bryony (now Baroness) Worthington (BA, Eng.Lit.), the climate activist seconded to DEFRA from Greenpeace to write the UK’s Climate Change Act for Ed Miliband, then DEFRA minister. Both asked the same question of McKitrick: why not use a different measure of climate response? Worthington suggested using Arctic ice melt figures.
McKitrick responded that the Arctic was “a tiny geographical area” and less reliable as an indicator of climate change. It has an amplified response to changes in the Sun, he said, “which makes it noisy for our purposes”.
Much of the Arctic melt a few years ago can be attributed to circulation changes rather than a warmer Arctic. The troposphere, on the other hand, was half of the Earth’s free atmosphere.
“90 per cent of the energy inbalance goes into ocean so why not use that?” asked Chris Rapley, a former head of the Antarctic Survey. McKitrick said that it risked being too slow.
What about sea levels instead? Rapley said the rate of sea level rise had been constant for 2,000 years and suddenly shot up, while oceans provided a rapid indicator of global warming. (Which must be why that elusive ocean warming is so hard to find)
For McKitrick, a tax represents the least costly means of curbing emissions. However, for it to work it must displace other taxes, otherwise the deadweight costs make the exercise expensive and pointless. And there’s the rub. Politicians rarely repeal taxes, and love to pile them up.
Adding a footnote, Lord Lawson acknowledged the political challenge facing anyone introducing a carbon tax. Yet it wasn’t impossible to imagine politicians seizing on the idea as a face-saving ay out of suicidal green taxes and regulations, when the planet isn’t warming on the scale predicted.
McKitrick’s evidence-based proposal might prove too grounded in reality for others to stomach.
ABC News, 2 July 2013
The $2,000 cap on work-related self-education was announced by former treasurer Wayne Swan in this year’s budget as part of its education reform.
The Government said it would save $520 million a year when comes into effect in July next year. Currently there is no cap on self-education courses.
The Australian Medical Association (AMA) is calling on Kevin Rudd to use his return to the Labor leadership to review the cap and abolish it.
AMA vice president Professor Geoffrey Dobb said the cap was poorly conceived and would undermine the ability of doctors to undertake the training needed to keep their knowledge and skills up-to-date.
The AMA says it has been inundated with responses from thousands of doctors concerned the cap will cripple their professional development.
“The cap is anti-education and stifles excellence,” Professor Dobb said.
According to the AMA, a young doctor in a public hospital generally spends $5,000 a year on training courses plus an extra $20,000 a year for specialist training.
Neurosurgeon Brian Owler, from the AMA’s NSW branch, said education in medicine did not end after university but was a career-long necessity.
“It’s a condition of medical registration that doctors participate in continuing professional development, including conferences and courses,” he said.
“Who wouldn’t prefer their family member to be operated on by a surgeon who has regularly attended conferences on the latest techniques?”
Remote and rural health ‘at risk’
The president of the Rural Doctors Association of Australia (RDAA), Dr Sheilagh Cronin, said the new cap contradicted programs designed to attract medical experts to isolated places.
“We find it extraordinary that, at a time when the Federal Government is investing in a range of initiatives to… attract suitably skilled doctors to rural areas, it is also implementing a new tax policy that directly undermines this investment,” she said.
“The Federal Treasury needs to understand that there is an enormous and unquantifiable public benefit associated with having a highly qualified medical workforce that maintains its skills and educates itself on new and emerging medical advances and technology.
“This is particularly the case in rural areas, where there are generally higher levels of disease risk factors and illness, a shorter life expectancy and poorer health outcomes.”
Doctors are not the only profession that could be impacted by the new cap.
There are also concerns from small businesses, apprentices, IT professionals, accountants, dentists and architects.
The Sydney Morning Herald, 3 July 2013
The South Australian Council of Social Service (SACOSS) will tell a state parliamentary committee on Thursday that current tax revenue is too low and the tax base too narrow.
“Our state tax system is sick and we have to address this if we want to have a healthy funding base for all the services that our community needs, the schools, hospitals, police and support for vulnerable members of our community,” SACOSS executive director Ross Womersley said in a statement.
“It is not providing the money to fund our essential services and infrastructure and it is not always efficient or fair.”
SACOSS will ask the government to consider replacing stamp duty on the purchase of a home with a broad-based land tax and introduce an unused building tax on property not serving the public benefit.
Chris Seage, Crikey, 2 July 2013
The Australian Taxation Office has vigorously pursued an offshore insurance company through the courts as, one lawyer involved in the case told Crikey, a ”backdoor attempt to get multinationals like Google and Apple to pay more tax in Australia”.
That attempt failed; the High Court last month threw out the case against Crown Insurance Services Limited — fought all the way on appeal from the Administrative Appeal Tribunal via the full federal court. Now, as Fairfax reports today, a new ATO taskforce will be fast-tracked to “investigate whether highly profitable international companies doing business in Australia are deliberately avoiding Australian tax by moving profit centres overseas”.
There is considerable pressure on political parties of all major countries and tax authorities to be seen to be doing something as national and international attention is directed at big companies using complex tax-planning arrangements to defeat tax laws. Assistant Treasurer David Bradbury last year took the extraordinary step to name Google and Apple as possibly not paying enough tax in Australia. “If enormous multinational corporations aren’t paying their fair share of tax on economic activity in Australia, then that’s not fair game,” he said.
As Crikey explained last year, while Google’s tax affairs are complex, they are nonetheless almost certainly completely legal.
David Hughes from SMH tax lawyers told Crikey: “In running their appeals in this matter, the ATO ignored several High Court and other authorities over many years. There is no doubt that they were trying to change long-established law on how Australia treats the source of foreign income.
“Had the ATO succeeded in the High Court, there would have been major taxation repercussions for foreign companies that deal with Australian companies and made Australia a less attractive business destination.”
Crown Insurance Services, based in Vanuatu, provided funeral benefits on the death of Aboriginals who were members of various funds operated by associated Australian companies. The ATO claimed that because Crown Insurance dealt with related Australian companies, which made their income from Australia, Crown Insurance’s income was indirectly derived from Australian sources.
But the Administrative Appeal Tribunal in November 2011 found Crown was not an Australian resident and was not in receipt of income having an Australian source as its central management, and control was clearly in Vanuatu. The Tax Office appealed because “an adverse decision could encourage taxpayers to enter contracts offshore”, the ATO said in its 2012 annual report, where the matter was recorded as a significant case.
In November last year the full Federal Court found the ATO’s appeal was incompetent — that is, the ATO should not have attempted to appeal the factual findings of the Administrative Appeals Tribunal, which found that the source of Crown’s income was not in Australia. The ATO then appealed to the High Court.
Tax Commissioner Chris Jordan says the new taskforce, headed by Deputy Commissioner Mark Konza, will target the “highly aggressive structures people are putting in place”. The ATO’s pursuit of them appears similarly aggressive.
Mark Gongloff, The Huffington Post, 1 July 2013
Profitable companies with more than $10 million in assets paid an average rate of 12.6 percent of their global profits in 2010, the latest data available, according to a new study by the Government Accountability Office, a nonpartisan congressional watchdog. That compares to the statutory corporate tax rate of 35 percent.
“When some U.S. corporations use unjustifiable loopholes and offshore gimmicks to avoid paying Uncle Sam, their tax burden is shifted onto hardworking American families and small business,” Sen. Carl Levin (D-Mich.), who commissioned the study, said in a statement, according to The Hill. “Today’s GAO report quantifies just how much of the corporate tax burden has been shifted onto other taxpayers: America’s large, profitable corporations are now paying a lower tax rate than our teachers and firefighters.”
Even when foreign, state and local taxes were added, the average corporate tax rate rose to just 17 percent, according to the GAO. And when unprofitable companies were added to the mix, the average tax rate still rose to only 22 percent of profits.
The study, which the GAO conducted at the request of Sens. Levin and Tom Coburn (R-Okla.), comes at a time when U.S. companies are complaining that their tax rate is among the highest in the world and should be cut to help them stay competitive.
Their heavy lobbying has impressed President Barack Obama, who has said the corporate tax rate should be cut to 28 percent. But it has not convinced most Americans, who oppose lowering taxes for corporations, according to a new survey conducted by a corporate lobbying group called RATE, short for Reforming America’s Taxes Equitably. (Though a majority support cutting the tax rate if it’s accompanied by closing unnamed loopholes.)
The GAO study is consistent with a slew of others, mainly done by reform-minded groups, that have shown actual corporate tax rates are consistently well below the statutory rate. Another recent GAO report found that corporate tax avoidance might cost the U.S. government $180 billion per year. Many companies not only do not pay taxes, but they actually get money back from the government. An earlier GAO study found that 55 percent of big U.S. companies had avoided paying taxes altogether in at least one year between 1998 and 2005.
Companies have lots of legal loopholes that help them avoid paying taxes, including the ability to stash foreign profits offshore indefinitely. A recent study by the reform-advocacy group Citizens for Tax Justice found that at least 18 big U.S. companies, including Apple, Microsoft and Nike, are avoiding paying a combined $92 billion in taxes by using offshore tax shelters.