Shorten plays loose with the truth on company tax integrity measures Judith Sloan Contributing Economics Editor AUSTRALIAN 14,10 2014 HANDS up all those against improving the integrity of the tax system. OK, I can’t see too many hands. But hands up all those who think they understand the tax system, particularly as it applies to companies. Again, not too many. So who thinks that the Labor government would have delivered $5.3 billion in additional tax revenue from its “business tax integrity measures”? Not surprisingly, Bill Shorten would have us believe that the low-hanging fruit of additional company tax revenue was there for the picking if only Wayne Swan’s measures were in place. The Opposition Leader recently wrote: “There’s no doubt that sensible discussion of revenue needs to look at the integrity of Australia’s company tax base. That’s why, in government, Labor announced reforms to close loopholes and crack down on profit-shifting. We introduced business tax integrity measures that would have clawed back more than $5.3bn from these companies.” It’s not exactly clear where Shorten gets the figure of $5.3bn. In Swan’s last budget, he announced savings of $4.2bn over the forward estimate by “protecting the corporate tax base from erosion and loopholes”. According to the budget papers, “the package contains a series of measures to address abuses that take advantage of design flaws, vulnerabilities and unexpected interactions in the corporate tax law from changes made in the early 2000s”. It may be that Shorten is also including another 2013 budget measure: “better targeting support for research and development. This would have limited access to R&D tax incentives so that it only applies to companies with annual aggregate Australian turnover of less than $20 billion”. This measure was expected to increase tax receipts by $1.1bn over the forward estimates. But given that Labor is blocking essentially the same measure being put forward by the Coalition government, surely Shorten wouldn’t have the hide to include this saving in his figure of $5.3bn. Shorten is also being a bit loose with the truth when he claims that the Labor government introduced business tax integrity measures. In fact, when the Coalition took office, it found an almighty mess, with most of the new tax measures unlegislated. There was a backlog of 92 announced but unlegislated tax and superannuation measures, some dating back several years. After systematically reviewing these measures, the government took the decision to proceed with some, alter a few and ditch most of them. According to Arthur Sinodinos, when he was still assistant treasurer, 55 were abandoned on the basis that the “measures were mainly undeliverable and imposed considerable compliance costs”. The impact on the confected booked revenue was put at $3.1 billion over the forward estimates. At this stage, some readers may conclude that the Coalition government is simply pandering to its big business mates but most of Labor’s measures were so badly designed that they may never have raised the additional revenue — let’s face it, Labor has form on this with the mining tax — and had extremely undesirable consequences in the meantime. One example was Labor’s proposed changes to the thin-cap rules, ostensibly designed to prevent foreign corporations minimising tax by piling high-priced debt on to their Australian subsidiaries. However, because of the way the proposed law was drafted, the main effect was to impose additional tax burdens, amounting to hundreds of millions of dollars, on Australian companies with overseas investments. As a result, any overseas expansion plans of Australian companies would have been put on hold. When it comes to Australian company tax, the discussion is often conflated with the term “base erosion and profit shifting”, which applies to mainly American technology companies that are able to use various devices to transfer the profits attributable to their R&D spending to low-taxing jurisdictions, among other things. In fact, Joe Hockey is using our status as chair of the G20 to have a good crack at sorting out the issues. The fact Australia will deliver on the pledge to exchange financial information one year after a several other countries is neither here nor there, even though Shorten is critical of the government. According to him, “Australia won’t sign up the automatic exchange of financial information across borders until 40 other countries are already doing it, leaving Australia lagging behind.” But it is our financial institutions that will be required to meet the additional compliance costs associated with this measure and to bring forward the start date would have involved an estimated additional $200 million. Moreover, the reality is that the exchange of financial information is only one of the steps required to sort out BEPS. And, ultimately, if the Americans refuse to co-operate, nothing much will happen. It is simply not possible for countries to go it alone on this matter. When the company tax rate in Australia was reduced from 36 per cent to 30 per cent, it was possible to remove several loopholes and specific concessions to ensure that the loss of revenue was relatively minor. But this is a trick that cannot be done more than once. So when Swan commissioned a business tax working party to come up with a revenue-neutral way of effecting a further five percentage point reduction in the company tax rate, the conclusion was that it was simply not possible to achieve this outcome by altering the rules and regulations that applied to company tax. Australia is heavily reliant on company tax relative to most developed economies. While the government needs to ensure that our system of company tax operates with integrity, there is scant evidence that there are systematic or significant failures on this front. The real aim of government should be to lower the rate of company tax as soon as possible.
Posted on: Tue, 14 Oct 2014 06:59:41 +0000
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