How Paradise Papers show the corporate tax debate is pointless

paradise-papers-custom-image-dataA lot of energy is being expended debating whether Australia should lower its corporate tax rate to remain competitive with the rest of the world.

Donald Trump’s planned US company tax cut from 35 to 20 per cent has reignited calls from big business and the Coalition Government that Australia’s 30 per cent rate for large companies needs to fall to 25 per cent to attract investment.

Whether that’s true or not —the Paradise Papers show how the whole corporate tax rate debate is pointless and misguided.

That’s because most of the big companies, especially the multinationals, pay nothing like the headline 30 per cent rate of tax.

A carefully researched report by union United Voice and the Tax Justice Network found the typical effective tax rate of Australia’s 200 biggest listed companies was only 23 per cent over the decade to 2013.

Whichever one is correct, there’s no doubt many companies pay a lower rate of tax than the headline.

Some companies are masters at it, with a third of Australia’s 200 biggest listed firms achieving average effective rates of 10 per cent or less, according to United Voice.

More than half the Australian-listed companies had at least one subsidiary in a tax haven, perhaps explaining some of the savings.

And the foreign multinationals are likely to be far worse.

They’re generally bigger, already have global networks of subsidiaries and more places to shuffle their money to achieve the lowest tax rate.

The CBO report shows US companies pay an average corporate tax rate of just 17 per cent on their Australian earnings, and an effective rate of only 10.4 per cent.

That puts Australia in the cheaper half of countries for US multinationals to do business in.

The Australian Taxation Office (ATO) is currently auditing Glencore for its Swiss marketing hub.

Basically, the marketers in a low-tax country like Switzerland or Singapore take credit for adding a large amount of value to lumps of red dirt or coal they’re sending from Australia to, generally, China.

It’s pretty hard for the ATO to pin down exactly how much this marketing is worth, opening up an opportunity for companies to overcharge for it and pay less tax in Australia.

The other common way for multinationals to cut their taxes is by loading up their Australian operations with debt — interest paid on those debts is tax deductible.

It works even better when that debt is a related party loan — in other words, it comes from another part of the same multinational company.That related party, funnily enough, is often located in a tax haven like Bermuda, the Cayman Islands or British Virgin Islands.

Interest the Australian company pays on its debts is deductible from its profits here and so not taxed, and if it goes to a zero-tax country then the payments aren’t taxed there either, although there is a 10 per cent tax on interest paid to countries where Australia doesn’t have a tax treaty.

The only problem with the scheme comes if the company gets too greedy.

As outgoing Australian Securities and Investments Commission boss Greg Medcraft told a business journalists’ lunch in 2014: “You have to lift the fear and suppress the greed.”

“This is a bit of a paradise, Australia, for white collar crime.

If all businesses want a lower tax rate, they need to be prepared to agree to severe punishments for those who already game the system to help themselves to one.

The jail sentences shouldn’t just be for the employees who dream up the schemes or the executives who approve them, but also for the advisory firms, accountants and lawyers who aid and abet the rip-offs.

Then you can have your 20 per cent tax rate.