These are the speaking notes I wrote for a talk at a conference on the G20 and tackling tax avoidance organised by Political Economy students at Sydney Uni, Action Aid and Green Left Weekly. They bear some vague resemblance to what I said in the 20 minutes I had.
I am going to do a few things today. I will give a bit of my background. I will look briefly at the OECD BEPS Action Plan, then at the drivers for states and capital in relation to tax avoidance. I’ll conclude that part of the discussion with the suggestion that the OECD measures won’t work because tax avoidance is systemic. It arises from the very structures and drivers of capitalism. More concretely it will be undermined by the US, the state with the most to lose from addressing complex international tax avoidance arrangements.
I will also discuss the TJN, United Voice study of big business tax avoidance called ‘Who pays for our Common Wealth’. I’ll also look at the reactions against it, just to show how entrenched interests will fight in defence of their privileged tax and other positions. And I will mention the GST debate and fuel tax hike as indicators of which class the ruling class want to extract tax from – you and me, not them.
I ran international tax reform (RITA, the review of international tax arrangements) as an Assistant Commissioner in the ATO from 2002 till 2006. Then I headed up the precedent setting International Centre of Expertise and retired in 2008. I have also been a tax teacher and researcher at ANU and the University of Canberra. I am one of those non-PHD academics, or rather, because of that lack of a PHD, a wanna be academic. I am doing a doctorate in Marxism and tax at the ANU while tutoring at the University of Wollongong in political economy subjects in the School of Humanities and Social Inquiry.
I want to briefly look at the OECD BEPS action plan. BEPS stand for Base Erosion and Profit Shifting.
Action plans and anarchy
Action plans are always a good thing aren’t they? Of course they are. For example we in Australia have a government sprouting direct action on climate change. Only a cynic would suggest this is code for pretending to do something without actually doing much at all
Now I don’t want to suggest that the OECD and some states are not serious about addressing international and national tax avoidance. I am sure they are because it is in their interests. However it won’t work.
The relationship between states is anarchic. There is no overarching democratic or even dictatorial body that can set and enforce rules across the globe, unless nation states agree to it. Even then member nations bend or ignore the rules. As US military excursions around the globe show, when it comes to international cooperation and agreement clearly some states are more equal than others.
So – agreed standards still have to be adopted by the states themselves. This is as true of tax as it is say of free trade. Arguably, using the Trans Pacific Partnership (TPP) as an example, powerful states drive, adopt and enforce agreements when it is in their interests to do so. When it is not then they don’t. Unlike the TPP, BEPS isn’t in US interests, or rather isn’t in the interests of some sections of US capital. Why not? Because the big tax avoiders like Apple and Google overwhelmingly have their homes in the US. These companies benefit from international tax avoidance arrangements and some American politicians, rightly or wrongly, believe this benefits the US revenue and more generally the US economy. The alternative argument is that US companies have $2 trillion held offshore, including Apple with $100bn and this is so the argument goes untaxed in the US.
I suspect that is an underestimate. Oxfam argued about six months ago that between $21 trillion and $32 trillion was hidden offshore. That latter figure is double US GDP or about 20 times Australian GDP.
Tax Information Exchange Agreements
Let’s look at ‘global co-operation’ in a recent tax context. Tax Information Exchange Agreements between developed countries like Australia and tax havens were going to sort this tax haven squireling away weren’t they? Ha. One problem of course is that not all tax havens are on board with the project. The second is that tax havens often don’t have the workforce necessary to adequately comply with the requests. Another problem is that the requesting agency, say the ATO has to have reasonable grounds for asking for the information, i.e. something more than a fishing expedition. Aust Bermuda TIEA 5(e)
- The competent authority of the Applicant Party shall provide the following information to the competent authority of the Requested Party when making a request for information under this Agreement to demonstrate the relevance of the information sought to the request
(e) reasonable grounds for believing that the information requested is present in the jurisdiction of the Requested Party or is in the possession or control of a person subject to the jurisdiction of the Requested Party and may be relevant to the tax purposes of the request;
And finally the tendency has been for tax havens to adopt the lowest common denominator treaties, such as those Holland has reached with its tax havens and others.
So when the OECD talks about transparency just keep in the mind the middling success of TIEAs, reflecting the fact that neither tax havens, nor some major tax avoidance countries and centres like the UK through the City of London and Holland, and the US to some extent, are necessarily that keen on actually doing something really concrete about greater transparency. Giving the impression of doing something, yes, but actually getting the info, not necessarily.
That may not be true of countries like Australia but we are a taker of the terms nutted out by the big boys and girls, including the reasonable grounds restriction. However to give you an idea of how committed Joe Hockey is to taking on tax avoidance by his mates, the current Treasurer recently ruled out going ahead with the repeal of section 25-90, the infamous provision which allows deductions for earning exempt income, a complete violation of basic tax principles. It, combined with exemption provisions like 23AJ (which exempts dividends from wholly owned foreign companies paid to Australian companies) are at the heart of some major tax avoidance arrangements.
Falling profit rates and shifting wealth from labour to capital
One final point in all of this. The trend to less progressive tax systems is global. This is part of the wider neoliberal agenda of shifting wealth from labour to capital, one response of capital to the tendency of the rate of profit to fall, a tendency which reasserted itself from the late 1960s and early 1970s in the developed world and have been fluctuating up and won since then but with an overall downward trend. The OECD in its Divided We Stand report identified this trend and it is something that will only increase (Abbott’s GST ‘mature debate’ call and fuel excise increase being two recent examples of wealth shifting through the tax system from poor and working class to rich and capital in Australia). In Australia’s case the decline in progressivity of the tax system has lessened our capacity to address inequality through the system markedly (by a factor of about half according to the OECD.
Tax occurs after the major event in capitalist society – namely surplus value has been created by workers in production and expropriated by capital in that process and in distribution and through the process of turning it into profit, interests, rent, dividends, and of course wages. The state is one of the band of hostile brothers fighting for a share of the surplus value workers produce. The best way to address inequality in capitalist society is therefore to win back more of the surplus value the bosses expropriate, that is to win real wage increases greater than inflation and productivity increases. However the call to tax the rich has an ideological and practical appeal. Tax policies can improve or worsen workers’ lives (and the GST and recent fuel excise increase are two examples of this.) Tax is important for workers for determining in part their after tax salary and hence economic wellbeing, and the services they receive as part of their social wage from taxes.
Now back to more concrete matters. So what does the OECD BEPS plan, driven by the G20, talk about? It isn’t rocket science.
Some aspects of the OECD BEPS Action plan
The digital economy is undermining many states’ capacity to tax digital firms. Let me use Google as an example. An Australian contracting to put an ad on Google does so with Google Singapore in the ether. Before the internet you’d have gone to an office physically located in Australia. Under our treaties that office or Branch or subsidiary would be taxed in Australia on the Australian income. But if there is no physical presence here and the contract is with Google Singapore, under the Australia Singapore double tax agreement Singapore has sole taxing rights over that income, even though its source is Australia. This is true unless Singapore Google has what is called a permanent establishment in Australia (e.g. a branch) and the advertising income is attributable to that Australian branch. Of course the idea is that with the contract occurring in the ether, the income isn’t attributable to Google’s permanent establishment here and so is only taxable in Singapore.
Part of the problem is that tax treaties were developed for a world of bricks and mortar commerce and now we have a world of clouds and the ether as well as bricks and mortar. We can change our tax treaties to address this but that will take a long time and there is no guarantee of success given the interests involved for countries like Singapore and Ireland. And for the US companies setting up there like Google and Apple.
Singapore’s company tax rate is a nominal 17%. In fact you can also get advantage of tax holidays or low tax rates by setting up there, in some cases paying tax as low of 1% from memory. Then the income will be on-sent to a tax haven either directly or indirectly (e.g. Double Irish Dutch sandwich).
So digital companies are taking advantage of this. They are also charging amounts for intellectual property use by subsidiaries in other countries, often routed through Ireland or Singapore that may be profit shifting.
Companies dealing with more substantial products like goods, or even services, can try to avoid paying tax in so-called high tax countries like Australia by profit shifting.
Other mechanisms are debt dumping, which is using tax rules to dump say GFC debt from say US companies onto their profitable Australian companies, reducing or wiping out their profits here.
Profit shifting is one target of the OECD by ensuring that transfer pricing outcomes are in line with value creation.
This is one of the most difficult areas both intellectually and in administration. How do you value the arm’s length market price of intangible transfers (e.g. of trademarks or copyright) between related companies. The OECD wants to ensure the taxing rights arise and are applied in the country where the value arises – a mammoth task.
Even then, the thing about the ATO is that is has wound down its specialist International area (once called ISO) over a number of years. At the very time in the mid-2000s that we were arguing in the Office for a big increase in staff to address the increasing internationalisation of the Australian economy, the Office cut back our funding and halved the number of staff over time. So ISO ended up with about a quarter of the staff we thought we needed. On top of that the ATO embarked on a strategy of devolving international expertise to the branches, e.g. to the audit teams. It didn’t and hasn’t worked.
ATO staff cuts
On top of that of course the ATO has got rid of 3000 mainly experienced staff and plans to dump another 2000 or so over the next few years. These are often the middle managers, the EL2s and EL1s with 20 or 30 years’ experience. Their knowledge and expertise is irreplaceable and despite what the ATO says this will impact on the ability to police tax avoidance. Insiders tell me that is already happening with some of the brightest and best having left, and having left in such a short time frame that succession planning, training and knowledge dispersion wasn’t possible.
Let’s crunch the numbers. If, including contractors and the like there were 23000 staff in the Office and that has been cut back to 20000 today and will be cut back in the next few years to 18000 , tell me again how losing more than 20% of your staff won’t impact on revenue collections? From memory the Government spends about $3bn on the ATO and about $2bn is staff costs. The ATO collects well over $300 bn in taxes. Even if the marginal rate of return is nowhere near 100 to 1, and is more like five to one, saving $400 million in staffing costs leads to a reduction in collections of about $2bn. It won’t be you or me who benefits from that. It will be the rich lurks and perk men and women.
Maybe the left should be campaigning for more ATO staff to hunt down the big tax avoiders.
One of the plans the OECD BEPS Action Plan has is to strengthen Controlled Foreign Corporation rules. I mention this because the RITA reform process was actually about weakening them from their already not that strong a position. The irony is that in response to the TJN/United Voice tax avoidance by big business paper, one response from the likes of big accounting firm KPMG was that Australia has some of the strongest CFC rules in the world. I nearly choked when I read that. Bullshit comes to mind. And that is what most of the criticisms of it – deliberately misleading and outright bullshit.
Bagging ‘Who owns our Common Wealth?’
Why does the 1% bag out that TJN/United Voice report? Because the report makes a simple point. The effective tax rate big business in Australia pay is very low…
And many companies don’t pay any tax. Deputy Commissioner Jim Killaly told us in 2011 that 40% of big business paid no income tax between 2005 and 2008. Oh but the paid popinjays of profit like KPMG argue that some businesses are in loss so that is OK. This misses the point. Why is it for example that Fortescue Metals Group hasn’t paid income tax in the past 18 years and with accumulated losses won’t for another few years? Maybe the point is to say something is rotten in the state of Denmark when so many big companies pay so little or no tax. Twenty years a loss maker? Isn’t it time the ATO questioned whether FMG is in fact carrying on a business since it appears to have no intention or ability to make a profit.
I also like the crowing from the paid popinjays about how some big business are trusts and trusts don’t pay tax. Der again… That is the point. Maybe it is time to tax all trusts as companies. Outrageous you say? So outrageous that Opposition Treasurer Joe Hockey argued for it in 2011.
These paid popinjays also tell us that effective tax rates are the amount of tax paid compared to accounting profit. They argue that business does pay 30 percent of their taxable income, which is different to accounting income. Well, der. That’s the point. Why is accounting income higher than taxable income? Partly because of all the grants to business through the tax system is one answer. And tax avoidance.
That is an important point from the TJN/United Voice study. How do we get companies to pay an effective tax rate closer to their 30% headline company tax rate? Or to borrow a famous phrase, what is to be done? Let’s leave aside discussion of co-operation between the G20 robber barons for the moment.
What is to be done?
What could an Australian government do at the moment? Abolish all the business tax benefits (think CGT concessions, 25-90, 23AJ etc) and take away the benefits for the rich (think super) in the tax system. That has the potential to yield over $50 bn in tax revenue all up.
Superannuation is a rort for the rich and abolishing those super tax concessions just for the top ten percent would see the %15 bn in revenue gifted to them potentially returned to the revenue. The total value of revenue foregone from the super concessions is about $45 bn, more than we spend on pensions ($44 bn.)
Impose a minimum company tax based on accounting income (which also wipes out some of those business tax benefits.) Charge the likes of Google and Apple a fee based on a good percentage of estimated turn-over to operate in Australia. Reverse the worst aspects of the RITA process such as section 25-90 and 23AJ, the exemption of non-residents from CGT for non-land assets etc and tighten up the CFC rules. Tax trusts as companies. Make the income tax system more progressive. Tax those who earn more than $300,000 at 100% on income above that. Abolish the GST. That is a loss of about $50 bin which is already made up for by the measures discussed above. And replace it with a wealth tax on the top 10%.
Why not also impose a wealth tax on the super wealthy? The main beneficiaries of the increasing shift of wealth to capital from labour have been the rich. An annual net wealth tax of one percent on the top ten percent of wealth holders would yield around $20 bn a year. Add in estate and gift duties on the rich and we are beginning to construct a partial response to big business tax avoidance and the small amount of effective rates they have. Tax the capital gains on their homes.
Really tax rent seekers on their economic rents. That includes not just miners but banks.
But it is a bit like rolling the rock up the top of the hill only to see it roll down. The task of addressing big business tax avoidance is Sisyphean.
Google’s chairman Eric Schmidt defended his company’s tax avoidance activities around the globe, activities which have seen it funnel almost $10 billion into Bermuda, saving $2 billion in taxes. He said:
“I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.”
The company isn’t about to turn down big savings in taxes, he said.
“It’s called capitalism,” he said. “We are proudly capitalistic. I’m not confused about this.”
And that is the point. Competition forces them to seek legal and sometimes not so legal ways to reduce tax. If one is doing it all its competitors will be forced to cut their costs too and one way is tax avoidance.
Company tax avoidance is not a failing of capitalism: it is one of its logical expressions.
The best response from the left has to be not just to put forward proposals for taxing capital and the rich but to build the struggles against the one percent to force the imposition of taxes on them.
Taxing capital and the rich will set in train attempts by business to find other ways to avoid tax or to recoup the tax by increasing prices. So put price controls on them to stop them increasing prices to recoup taxes.
And of course business will threaten to take their money elsewhere. Mining is a good example of the bullshit this is. Despite the fact Australia had an admittedly pathetic minerals resource rent tax, and business threatened to leave – how can you take your mining investments away immediately? They didn’t. Behre Dolbear in fact rated Australia at this time of the debate about resource taxes and its imposition as the best country in the world for mining companies to invest in. So an investment strike is often just bullshit. Even if it is not, the left should respond to this threat with their own. Nationalise those companies under workers control. We could have done that for mining companies and indeed the Henry Tax review put nationalisation of the mining industry as one option.
None of this is going to happen without social struggle, not necessarily over tax but for example over wages, jobs, safety, against University ‘reforms’. The best way to address the shift in wealth from labour to capital is not through the tax system but through fighting for big real wage increases. Our task should be to help build all those economic and political battles to strengthen our class in its fight for equity and justice, including tax justice and tax equity.
The protests against the parasites of the G20 in November in Brisbane should be one focus. Tax the rich is a slogan we can take to those protests. Real tax change won’t come from the politicians of the one percent. It has to come from us mobilising along with the mass of people for such change as part of a wider campaigns for equity and justice economically and politically. Fighting for tax justice can be and has to be part of that wider national and international struggle.