The Northern Territory as a tax haven
Posted by John, August 16th, 2013 - under Tax, Tax avoidance, Tax cuts, Tax havens, Tax policy.
As a tax man I have been thinking about Kevin Rudd’s idea to cut company tax in the Northern Territory to 20%.
Let me tell you a story about profit shifting, or transfer pricing as it is known in tax circles. Imagine your company import goods from the US for resale into Australia. You pay the manufacturer $100 for the widgets you import and resell them at $150, making a profit of $50, taxable in Australia.
A clever tax adviser suggests you set up a wholly owned company in Vanuatu, or the Bahamas, of the Caymans. (It doesn’t matter that much where.) Your Vanuatu company now buys the widgets from the US for $100 and sells them to you for $150. It is a competitive market so you can’t sell them for any more than your previous price of $150. So your profit in Australia is zero. But the profit your wholly owned company in Vanuatu makes is $50. So at the stroke of a pen you have shifted the profit from Australia with its 30% tax rate to Vanuatu with its zero company tax rate.
Similar arrangements can be made for exporters from Australia, but here the prices will be below the market price, ie they will be underpriced, to shift the profit to the low or no tax jurisdiction.
There are a whole range of tax rules to address this, but they are complicated and involve lots of work and high powered and expensive experts.
Substitute Northern Territory for Vanuatu and you might get an idea what opportunities open up for domestic profit shifting.
Companies would be tempted to shift some of their back office functions to NT – on paper at least – to provide services to the rest of the Australian group. And they might do so at inflated prices to shift the profit overall to NT.
Apart from profit shifting, where is the economic gain in having differential profit rates if all it does is shift some work from Sydney or Melbourne to Darwin?
Of course it might attract some foreign investment into Australia but they are likely to be lurks and perks men (they are invariably men) doing it for a tax break through a ‘respectable’ tax haven like Australia.
At what cost to the revenue? Billions as the tax advisers structure arrangements through Darwin to pay tax at 20%. Shareholders would receive less dividend imputation too, which would recoup some of the lost revenue through more tax paid by them than if they invested in other Australian companies which paid 30% tax.
Australia has treaties with over 40 mainly major trading countries and those treaties try to not recognise special economic zones. How will Rudd’s proposal work out for our treaty partners as we set up the Holland of the South Pacific?
Australia also taxes some business on a consolidation (or group) basis. How does having some members of your group in the Northern Territory fit in here?
So we’ll need new domestic transfer pricing legislation, hundreds more tax officers to police the new regime and suffer a loss of revenue in the billions. All so the banks and mining companies can move some of their functions to Darwin.