31% of companies do not pay taxes in Australia. How do they do it?

Large companies paid the Australian government a record A$100 billion in taxes last year, up 17% on the previous year. But during the same period, 31% of large companies still operated here and did not pay any taxes.

Australian Taxation Office Annual Report corporate tax transparency report published last week, includes data from almost 4000 of Australia’s largest corporations.

This report, now in its tenth year, has been highly praised government and the ATO as a way of increasing corporate responsibility and reducing tax evasion. But there are no details about the tax practices of multinational companies, including how they interact with their offices around the world.

In particular, there is little information about how 1,200 companies did not pay taxes.

What the report tells us

The transparency report provides data on corporations with revenues of $100 million or more, as well as businesses that pay oil resource rent tax (PRRT). This includes Australian government and foreign-owned corporate tax businesses, as well as Australian-owned privately resident companies.

The report details total income, taxable income, tax payable, and PRRT for all entities that meet the reporting threshold. Taxable income is simply taxable income minus deductions. The tax payable as a percentage of taxable income can then be used to calculate the effective tax rate. The statutory corporate tax rate is 30%.

Variation between effective tax rate And statutory tax rate is not evidence of tax evasion. However, one must ask how profitable companies reduce their tax liability to zero.

Zero liability can be achieved by deducting compensation and credits. For example, companies that conduct significant research and development are given tax breaks that reduce the amount of tax they pay.

If a company has an accounting loss or tax loss because it incurred more expenses than income, the tax will be zero. These are legitimate reasons not to pay taxes.

But the limited information provided simply tells us how profitable the company is, the amount of tax deductions claimed on those profits, and the tax due.

What the report doesn’t tell us

The transparency report reveals little about the tax practices of multinational companies.

The question remains what deductions corporations and tax authorities claim. The ATO has this information but can only publish what is permitted by law, which is limited.

For multinational companies, deductions will include transactions with foreign parts of the global company, such as subsidiaries or the parent company. These transactions create legal tax deductions.

Normal transactions include payments to foreign subsidiaries for servicesroyalties for intellectual property and interest on foreign loans.

In the case of the gasoline company ChevronThe money was borrowed in the United States at an interest rate of about 1.2% and lent to a related Australian company at 9%.

After a long legal battle, about 5% interest was allowed to be deducted, which is significantly higher than the original interest rate. This gave Chevron a large tax deduction in Australia.

It is through these types of transactions that profits generated in Australia are moved overseas. Current tax law allows this, but requires a transaction known as transfer pricebe in at arm’s length – that is, the price is agreed upon between independent parties entering into the same transaction.

What is transfer pricing?

Multinational corporations are global in nature and therefore logically maximize global profits. Tax systems work differently.

Taxes are governed by domestic laws, which means that transactions between parts of a global organization are recognized for tax purposes.

When goods or services are sold by one part of an enterprise to another, an internal transaction occurs. For tax purposes, the transaction is recognized as a deduction in one place and income in another. The Australian entity will pay the foreign party for things such as marketing and receive a deduction for the expenses.

In recent years, the ATO settled in marketing disputes with major multinationals including Google, BHP, Apple, Rio Tinto, ResMed and Microsoft.

If the deduction is allowed in a high-tax jurisdiction such as Australia, and the income is included in the profits of a low-tax jurisdiction such as Singapore, the result is an increase in overall global profits.

The tax system recognizes the incentive for multinational companies to redistribute profits in this way and requires that transactions be made at an arm’s length or negotiated price. However, pricing can be difficult and has led to numerous court cases and tax disputes.

The Tax Transparency Report is silent on these types of transactions.

Taxation of multinational corporations in Australia

In the last decade there has been a transition to taxation of income at the place of economic activity. OECD Through its tax reform program, it has attempted to stop corporate profit shifting, which undermines the tax base of high-tax jurisdictions.

Further complicating the transfer pricing problem is the question of whether there is any actual activity in the countries where the various divisions of the multinational corporation are located.

Singapore is known for its so-called service centers. These are places where various services such as sales negotiations and marketing are carried out. Singapore also has a general corporate tax rate of 17%. This amount is often reduced to single digits following deals between taxpayers and the Singapore tax authority.

Intellectual property creates similar problems.

These assets are becoming increasingly valuable to multinational companies because they provide a unique advantage in the marketplace. We only need to look back at Apple, Microsoft and Google to understand how valuable names, logos and designs are.

By its nature, intellectual property has no physical location and can be owned anywhere in the world. Often, intellectual property is stored in countries with low or no taxes.

The transparency report does not provide details on how much funds are transferred to these locations. That’s where Australia is proposed Public reporting on a country-by-country basis can help.

Is the ATO report on corporate tax transparency worth it?

Australia should continue to strive to be a leader in corporate tax transparency.

Eliminating corporate tax evasion requires a two-step approach. Information is valuable, and public transparency measures are an important first step.

The second step, however, is to reform the underlying tax laws so that profits are taxed where they are actually generated.