Corporate tax avoidance: Is the Double Irish with a Dutch sandwich over?

Sascha: [00:00:03] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. It's almost the end of June. Can you believe it? But in Australia, that also marks the end of our financial year and every year we see the same headlines. Global companies raking in huge profits and paying nearly nothing in tax. 

Audio clip: [00:00:21] Amazon paid no federal income tax on more than 11 billion in profits in 2018. 

Sascha: [00:00:27] A full third of Australia's largest public companies pay no tax in this country. But it also creates this incentive to shift worldwide profits into that sort of far and low tax bucket. However, earlier this year, the OECD agreed to a 15% global minimum corporate tax and suddenly there was hope that multinational companies would start to pay their fair share. But now this law has been delayed until 2024. It's Wednesday, the 22nd of June. And today I want to know what's the hold-up? Will we ever see this 15% tax implemented on multinationals? And to talk about this today, I'm joined by my colleague here at Equity Mates. It's Darcy Cordell. Welcome. 

Darcy: [00:01:11] Thanks, Sacha. We're going to make tax fun today. 

Sascha: [00:01:13] Well, they say death, sex and taxes. You shouldn't talk about them at dinner parties, but they've never said anything about it at podcasting. So I think it's fair game. So before we understand the solution, I think I need to understand the problem a little bit more. Can you give me the one on one on multinational tax avoidance? I mean, that's not an easy one to wrap up quickly, is it?

Darcy: [00:01:32] It's not. But right now there isn't a global framework on corporate tax. Every country around the world, they set their own tax policy and then companies pay depending on their jurisdiction. But the problem is that some massive multinational corporations managed to limit the amount of tax they pay or in some cases, not pay any tax at all. 

Sascha: [00:01:51] At least 55 of the largest corporations in America paid no federal corporate income taxes on their 2020 profits. 

Darcy: [00:01:59] According to the Organisation for Economic Co-operation and Development, or the OECD, as you mentioned. Corporate tax avoidance cost countries anywhere from $100 billion to $240 billion a year. That's between 4 to 10% of global corporate income tax revenue. 

Sascha: [00:02:16] So how do they manage to avoid paying so much tax? 

Darcy: [00:02:19] There are few techniques that these multinationals use to minimise the tax and most of them involve some form of shifting profits out of high tax jurisdictions into lower tax jurisdictions. I'll mention a few specific examples in a moment, but to put it simply, imagine a multinational is split into one part of the business might be based in Australia where there's a corporate tax of 30%. But the other part is based in the Cayman Islands, for example. And in the Cayman Islands there's a corporate income tax of 0%. So the company basically works out ways to shift or declare their profits to the Cayman Islands and therefore reduce their tax. 

Sascha: [00:02:57] So moving things from the left hand to the right hand, but it's all connected to the same body, essentially. 

Darcy: [00:03:02] Yeah, that's right. 

Sascha: [00:03:03] So taking the ethics out of the picture, it's intricate and delicate accounting work, but it's not illegal. 

Darcy: [00:03:09] Correct. It's not our job to say whether corporate tax avoidance is ethical or not, but it's technically not illegal. In my research, though, Sascha, I found some very interesting names given to the tactics that these multinationals have used over the years. Are you ready for this? 

Sascha: [00:03:25] Absolutely. Hit me. 

Darcy: [00:03:27] Okay. The Singapore Sling. 

Sascha: [00:03:29] Excellent cocktail. Delicious. 

Darcy: [00:03:31] So mining giant BHP actually set up a marketing hub in Singapore, which it managed to send profits from its iron ore sales to and avoid paying tax on those profits over 8 billion USD over the years, according to the Australian Financial Review. So the company will sell its products to their own subsidiary, which is based in a jurisdiction with lower tax rates, in this case Singapore. Microsoft has also used a similar strategy, but in Puerto Rico in the past. The second one we've got is the Bermuda black hole.

Audio clip: [00:04:03] We do have a licencing subsidiary in Bermuda. 

Darcy: [00:04:07] Apple and Google are amongst the multinationals that have used Bermuda, which is considered a tax haven to shift profits and minimise their tax. The black hole name is not unique to Bermuda though. The Cayman Islands, Panama and some other countries are also considered tax havens for multinationals, especially the cruise industry. I've got one more. The double Irish with a Dutch sandwich combination. 

Audio clip: [00:04:31] This isn't a lead into a joke or a new food you'll find, but a tax strategy that can help international corporations save money on US taxes. 

Darcy: [00:04:38] And this would often end with a Bermuda black hole. So this tactic uses a combination of Irish and Dutch subsidiary companies to shift profits to low or no tax jurisdictions. The one that jumps out to us here is Google. In 2017, they reportedly sent €20 billion through a Dutch company, then forwarded that to an Irish company that. Is based in Bermuda, where they paid little to no tax on the 20 billion. So what you need to understand is that this is pretty common practise for multinationals. There are lots of different methods of tax avoidance. 

Sascha: [00:05:12] So I think you've given me a pretty good rundown on different tax avoidance strategies. That's how multinationals avoid tax. And this obviously has been a point of frustration for years, hasn't it? It's a bit of an open secret. 

Darcy: [00:05:24] Yeah, it's a huge issue. 

Audio clip: [00:05:26] The present tax system, a fair.

Sascha: [00:05:28] A minimum corporate tax based on book profits. 

Audio clip: [00:05:33] For the billionaire corporations. This is what a rigged economy is about. 

Darcy: [00:05:38] Politicians around the world can all agree on one thing. They hate foreign companies not paying tax.

Sascha: [00:05:44] So it's clear there's plenty of political will to solve this. Tell me about the OECD deal then. 

Darcy: [00:05:51] It was a landmark agreement in October last year. 137 countries and jurisdictions agreed to the deal on a global minimum tax rate for companies. But there are two pillars to the proposal. The first pillar involves the reallocation of some profits from major multinationals, including some of the US tech companies we've mentioned to countries where they actually made their sales. And the second pillar is about bringing in that minimum global corporation tax of 15%. 

Sascha: [00:06:20] Alright, so that's the basics of the deal. Darcy It's no secret you and I are not economists, but luckily here at Equity Mates we have access to an in-house economist, Thomas, who's one half of comedian Vox eCommerce. So we're going to have a chat to him about his thoughts on this deal after the break. Welcome back to the dive dossier. And I have been talking about the proposed global corporate tax of 15% that the OECD has put forward. And as I said before the break, Darcy and I are not economists, but luckily we know someone who is. So we'd love to welcome Thomas, who is one half of comedian, best economist to the dive today.

Thomas: [00:07:03] Oh, no worries. Always a pleasure. 

Sascha: [00:07:04] So we'll start off with just getting you to give us your understanding of what this OECD deal is all about. 

Thomas: [00:07:11] In essence, like as you saying, like it's a 15% base rate globally, saying like try to make sure there's no countries in the world where you can where corporation can operate, paying less than 15% tax. So that's sort of trying to get that floor in place. But effectively, what we're trying to do here is eliminate tax competition. And this is sort of a trend that emerged, particularly in the sort of the 2000 as sort of multinational corporations were able to sort of go fully digital and lift their footprint from anywhere in the world and put it back wherever they wanted. And then started to see some competition for that sort of domicile thing. And sort of like the big example is Ireland's Ireland set a corporate tax rate of 12 and a half percent, which was super competitive in, quote, Marx. The idea that that is competitive even to, you know, competitive tax rates are sort of a problematic idea in itself, but that yet they said a 12 and a half per cent and then a lot of the large tech companies who wanted to access Europe accessed it through Ireland and landed themselves there. And you had this idea of Silicon Valley had become Silicon Glen was sort of the talk at the time and and that worked really well for Ireland. Like Ireland got to had a tech boom going on. It really juiced the economy. Everything sort of picked up on the back of that. But the problem is that it works well for one country. But if every country starts to do it, then you get a race to the bottom, what they call a race to the bottom, where every every country is then trying to offer a better tax deal until effectively you erode the tax base almost entirely. And that's what the OECD is trying to get ahead of and kind of seeing that that's that's where we're going and trying to say, well, let's let's not let that happen. Let's put in a floor to make sure we don't go past that. 

Darcy: [00:08:49] Can you touch on that a little more, Thomas? Why does tax competition hurt domestic businesses? 

Thomas: [00:08:54] Yeah, what happens? Like you can think about the tax that that a company pays as part of their cost base. And if two companies have different cost bases, then one of them has a natural advantage. And so you can think about like in the Australian context, you might have like competing businesses, like a Facebook marketplace going up against a Gumtree or something like that. Now Facebook is able to sort of pay an effective tax rate of 10% because of where they're basing themselves. And then Gumtree based in Australia too. So they're paying something in the high twenties. Then Facebook's got quite a big advantage over Gumtree, other things being equal, what that effectively does is it penalises domestic businesses and that hurts a local economy. So if you if you're allowing foreign companies to come in and operate in a local market with a different tax regime and a different tax cost base, then you give them a competitive advantage and that hurts your local industries. So they sort of there's this way. A lot of these push is coming from the developed nations and the OECD has picked it up because with a recognition that it does hurt domestic businesses and hurts the sort of overall competition levels in your economy, which isn't great. 

Sascha: [00:09:59] So Thomas, from what you just said, because it hurts a specific sector of the global economy, that kind of goes hand in hand for why a coordinated approach is necessary then, isn't it? 

Thomas: [00:10:10] Yeah, that's right. That's right. I mean, the drive to it is also sort of the Amazon ification of everything. It makes sense. Like you talk about like digital businesses, but the interface between digital and the real economy is getting much more fluid. So Amazon is a big tech company. It's a digital business, but it's selling real goods into the real economy and competing with domestic manufacturers and domestic retailers. And so to prevent that eroding your your economic base, you need to sort of get a get a handle on that. But you need a coordinated approach because it's a competitive thing. There's an incentive there to cheat. It's kind of a prisoner's dilemma, game theory kind of thing, that if everyone sets the base at 15% and then you cheat and you offer 14%, then you get an advantage. But then someone cheats in office, 13% and 12 and 11 and down you go and you get that race to the bottom. So it really needs a coordinated approach to get everyone together and go, okay, let's let's not let this happen. And that's what the OECD has been trying to do. And they're really did quite an amazing job of getting, you know, 140 odd countries on board with a really ambitious timeframe for 2023 launching pillar one. Yeah, it was really ambitious and they're probably not looking to hit that now, but there's probably still I would say that was a good thing to sort of set that really ambitious target and get the ball rolling. 

Darcy: [00:11:25] And Thomas, is 15% a good benchmark to hit. Do you think that will actually even the playing field for domestic companies with these multinationals? 

Thomas: [00:11:34] I think I think the thing to remember is that 15% is a very low bar and a very low hurdle, particularly in the Australia. Context. But even globally, like in the OECD, there's not going to be many nations that are going to be have to do any adjustment on that 15%. It's not going to change much for that for their local businesses. And corporate corporate tax rates have been on the way down since, you know, they're back up in some nations are up around 50% back in the fifties and sixties. Down towards sort of twenties is pretty standard now is probably where I think the average would be some mid-to-high twenties and they've been on the way down. And so 15% isn't a high hurdle to set. And I think that's why it was able to get such buy in because it wasn't it was it was a low bar. But one of the interesting things that happened with that when they set that 15% is that a lot of the conservative think tanks, which just happened to be funded by large corporations, by and large, no sort of connexion there, I'm sure went went on the offensive and said, well, look, yes, a 15% like that's a good benchmark. We're paying 20 plus per cent here in Australia, therefore we're paying way too much. And so I think it's a bit of ended up, I think being a little bit of a double edged sword. Like it's great that it's trying to set that base and then try to maybe build up from there. But by setting 15% as a benchmark, it does make existing tax rates look relatively high and people have been making that argument, whereas historically they're not that hard at all. 

Sascha: [00:12:57] Thomas You said in researching this topic that the high level was really quite straightforward, but the further and further you got into this or the media, the subject seemed to be. Do you have any closing thoughts about how likely it is that this goes ahead or the complications that are going to arise down the road? 

Thomas: [00:13:14] Yeah, I mean, I think I think it probably is a case of build a better mousetrap and they'll build a better mouse with avoiding avoiding tax. I mean, I think one of the reasons why, like in noting that it had got so weedy, is it's the domicile of businesses and avoiding tax that way that's already relatively complex. Like it's not a just a simple thing of taking a box and saying we're in the Cayman Islands and that's the end of it. Like there's a lot of work that goes on into to sort of arranging those tax affairs that way. And so, yeah, this is going to get quite complex to be able to capture all of that. But I think I think one of the things that Mathias Cormann, who was, you know, former finance minister here, he's now heading up the OECD. He's saying that he's relying on self-interest for countries to drive this because there isn't with with the sort of the top up incentives. If you're if you have a corporation that moves to a low tax regime, you can then tax them in order to top up to make sure they're paying the 15% and you keep that. So there's incentives built into this for countries that have tax regimes where it's above 15% to implement it and drive it and to hold other nations to account. And so that's why that's where I'd be putting my faith. That's where Mathias Cormann is putting his face. And I think I think that's about right. But as I said, like it's a low bar so we're not sitting around too high. And I think that's what does make it achievable. 

Sascha: [00:14:32] I think that's all we've got time for today. Thomas, I just want to give you a huge thank you from everyone here at the dive for coming and spending the time with us today. Darcy I always love when we have an expert in the room. It just makes life for us a lot easier, doesn't it? 

Darcy: [00:14:45] It does. Thomas was great. That really puts things in a in an easy to understand where exactly.

Sascha: [00:14:51] And if you ever want to hear Thomas talk about more things in an easy to understand way, then make sure you go follow comedian pass economist. They release a new episode every Wednesday morning, so there's one in your feed right now. We'll put a link to their show in our show notes. But I did want to just turn to you, Darcy, and say Thomas has given us some great insight from an economist perspective, but you've been researching this topic all week. What are your takeaway thoughts? 

Darcy: [00:15:15] I think we can be confident that if the okay deal is implemented, these smaller domestic businesses will be absolutely rejoicing as well as politicians. It's going to even the playing field a little with these major multinationals. But as Thomas said, you can build a better mousetrap and they might build a better mouse. And of course, we need to touch on the delay that's holding this deal up. Poland is digging in their heels, saying it wants some changes made to the deal before they agree to it. There's also opposition to the deal in the US Congress, mostly from Republican senators. So the delay is not a great sign, but a 2023 implementation was a pretty optimistic timeline for such a landmark deal. So it's a situation to monitor at the moment, but there is confidence that we will see some form of global tax in the coming years. 

Sascha: [00:16:03] Well, I think that's all we've got time for today. I want to say huge thank you to Thomas from comedian of economist for joining us. As I said, details are on the show notes below, and that's not the only detail I showed it. You'll also see our email address where you can contact us with any questions, any thoughts about the episode, the dive at Equitymates.com/contact or follow us on any of the social media channels. Also, please give us a rating and a review in your favourite podcast app. I know I ask for this every single episode, but there is a reason I do. It makes a massive difference to us in the charts and discoverability and getting in front of other people and with. Currently sitting on number two on a couple of charts. And I would love to take out the number one spot so you can help us get a little bit higher by just visiting your podcast player right now, hitting that five star and writing lovely glowing review. We would greatly appreciate it. Thanks so much for joining me today, Darcy. 

Darcy: [00:16:59] Thanks, Sascha.