How do 1/3 of large companies pay no tax in Australia?

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. New data released by the Australian Tax Office has revealed that almost a third of large companies paid zero corporate tax in Australia in the last financial year. In those 800 companies are the likes of Glencore, Qantas, ExxonMobil, Chevron and more. But this is not just something that happens in Australia. Despite massive profits, many multinational companies that report large profits to the share market managed to avoid paying much tax, if any at all. It's Wednesday, the 16th of November. And today I want to know how do profitable companies avoid paying tax? And what are governments around the world doing about it? To talk about this today, I'm joined by my colleague Darcy Cordell. And Darcy, this was a subject that our audience helped us pick today, wasn't it? 

Darcy: [00:00:56] It was the first time we've gone on to polls from the audience. And I'm glad that we're doing this topic because this one kind of annoyed me seeing these companies paying no tax. 

Sascha: [00:01:05] The current United States tax code allows some of the most profitable companies in the world to not pay any federal corporate income taxes. 

Speaker 3: [00:01:15] The present tax system is fair. 

Sascha: [00:01:18] So before we get into the specifics of the ATR report, let's outline the basic principles of tax law. Such an exciting way to start the episode, Darcy. Essentially, companies pay tax on the profit that they make. 

Darcy: [00:01:31] Yeah, I guess contrary to some beliefs, companies aren't taxed on their total revenue, but they're taxed on their profits. So if a company reports an operating loss, they don't have to pay any tax. And there are plenty of massive companies that are still not making a profit. Atlassian is one that comes to mind. They make billions of dollars of revenue but no profit. For years, Amazon was the same, and.

Sascha: [00:01:53] Lots of those giant tech stocks aren't profitable yet as well. Uber comes to mind. They've always been striving for profitability. 

Darcy: [00:02:01] You're probably thinking, okay, so those companies don't make profit. But the names mentioned earlier, like Glencore, Qantas and Chevron, they definitely do. And this is why this story caught our eye. It's the story of large, profitable companies using legal methods to avoid paying tax. 

Sascha: [00:02:16] Now, in theory, if a company makes a profit, they pay tax on that. And in Australia, that's 30%, $0.30 of every dollar of profit that you make is paid to the government in tax. 

Darcy: [00:02:28] Spot on. And there are different corporate tax laws around the world, but Australia actually has some of the most strict laws. We've got a corporate tax rate of 30%, but for comparison, Brazil, they're quite high at 34%. China has a 25% tax rate, the US 21% and the UK 19%. And then there are some jurisdictions with 0% corporate tax rates. That includes the Bahamas, United Arab Emirates and the Cayman Islands. 

Audio Clip: [00:02:54] The problem of global tax avoidance generally is a huge problem. 

Sascha: [00:02:59] But what this report from the Australian Tax Office tells us is that most companies find ways to avoid paying that $0.30 on the dollar. Darcy, can you tell me some of the most common ways that we're seeing? 

Darcy: [00:03:11] There are three really common ways. I guess much like how we can use a charitable donation to reduce our personal income tax. Companies can also claim deductions or find ways to reduce that 30% tax rate to a much lower rate. And the three common ones are using losses from previous years, tax deductions, as we've mentioned, and then there's shifting profits overseas. 

Sascha: [00:03:34] Okay, let's start with using losses from previous years. 

Darcy: [00:03:37] In some cases, companies spend massive amounts of money to try and help the business grow. For example, mining companies will spend lots of money to explore new mines, or tech companies will spend money to hire new team members and develop their software. So these losses that they make can be offset against profit in future years. I mentioned Atlassian earlier. The losses they make at the moment can be offset against profits in the future when or if they become profitable. It's a bit like when investors carry forward capital losses in their tax return. So it means if a company reports a big loss in one year, they can actually spread that loss out over several years to reduce the tax they pay, even if they've made a healthy profit in the current year.

Sascha: [00:04:19] Wow. Okay. That's the first. And then the second we're talking about is tax deductions, which feels quite straightforward and very similar to my individual tax return. 

Darcy: [00:04:28] Yet the government want to incentivise businesses to do certain things. They want businesses to invest in research and development. They want to see businesses expand overseas, say local businesses, you know, move overseas and grow across the world. They want businesses to employ more people and upskill those people. And the government then uses tax incentives as a means to encourage them to do these things. Two examples. In Australia we've got a Jobmaker that encourages businesses to hire young people aged between 16 and 35. And we have a research and development tax incentive. To encourage businesses to invest in new cutting edge technology. It's similar to the way that governments want us to donate to charity, so they encourage it with a tax deduction. Same principle, but for businesses. 

Sascha: [00:05:12] And the third way of doing this is to shift profits overseas. 

Darcy: [00:05:17] Yes, this is a slightly more dodgy way of moving profits. 

Sascha: [00:05:21] Well, let's call it grey. An area of grey morally. Is that a better way of saying it? 

Darcy: [00:05:27] Yeah, well said. 

Audio Clip: [00:05:28] So a new report from a centre that looks at international corporate tax accountability and research has essentially mapped Microsoft's global footprint of where it has all of its many companies based in both the companies, countries where it operates like Australia, but also in tax havens, low tax countries that essentially companies set themselves up in and then create a complex web of relationships between their multinational firms. 

Darcy: [00:05:56] So shifting profits is basically where a company moves the profit it makes in one country into a different country with a lower tax rate. The most common method for shifting profit is for a multinational company to use a subsidiary it has based in a tax haven to charge the cost to the subsidiaries it has in other countries like Australia, for example. There are two notable examples from companies that illustrate how they do this. Microsoft About a decade ago, they persuaded the Puerto Rican government to give them a tax rate of nearly 0%. Then they transferred all of their intellectual property to a small Puerto Rican factory that they owned. And then they moved $39 billion in profits from the United States, where the tax rate is over 20%, to Puerto Rico, where it was close to 0% because they claimed they had to pay the Puerto Rican company for the intellectual property. Sascha, there were only about 85 employees in Puerto Rico. 

Sascha: [00:06:53] And a lot of smart minds in that room, only 85 of them. But the intellectual property must have been ginormous.

Darcy: [00:06:59] They would have been paid a serious hourly rate. 

Sascha: [00:07:02] You said you had two examples. What's that? 

Darcy: [00:07:04] Second? Nike did something similar. They set up a company in Bermuda that was said to own Nike's intellectual property like their shoe designs and and their logo and whatever profits Nike made in other countries, they had to get paid to the Bermuda Company as a royalty for the use of the intellectual property. And you wouldn't believe what the corporate tax rate involved is.

Sascha: [00:07:24] Let me guess. Is it zero.

Darcy: [00:07:27] Zero for said? 

Sascha: [00:07:28] Yeah. 

Darcy: [00:07:28] So there are thousands more cases we could talk about and there are all sorts of funny names for the tactics used, but they've all got a similar outcome and that is reducing the amount of tax paid. Here's a stat. There are estimates that multinational corporations shift about $1.4 trillion worth of profit into tax havens every single year. 

Sascha: [00:07:46] Wow. So as unfortunate and frustrating and maybe disappointing it is when we see major multinationals not paying tax, most of the time they're not actually doing anything illegal, morally dubious, maybe in a grey area ethically, but it isn't illegal. Let's bring it back to Australia and put it all together. The ATO's annual tax transparency report showed the amount of tax paid by 2468 large and medium corporate entities. Of those 782, which is 32% paid no tax at all in that financial year. What else did we learn from the report? Darcy? 

Darcy: [00:08:26] More than half of the mining, energy and water companies included in the report paid no income tax in the last financial year, and that's despite many of them reporting big profits to the stock market. Think of Whitehaven Coal, ExxonMobil all reporting big profits on the back of high commodity prices but paying no tax. Chevron, a massive oil company based in the US. They paid just $30 of income tax in Australia despite having a total income of $9.1 billion and a taxable income of $113 million. 

Sascha: [00:08:57] Wouldn't you just spend an extra something and get it down to zero? I mean, what's. I know it's not funny, but like paying $30, it's like you might as well just not pay anything. 

Darcy: [00:09:08] I know it's drawn attention to Chevron having taken $30 rather than the rest that paid zero. Yeah, but Google's another one who managed to pay 5.2% tax in Australia, despite the tax rate being 30% overall. Through Sascha, the ATO said that the 2468 companies in the report did pay about a combined $70 billion in income tax and that's a significant increase on the year before and actually the highest since reporting began. 

Sascha: [00:09:34] Well, that is something of a positive, Darcy. Let's take a break. And then when we get back, I want to talk about what's being done to change this system. 

Audio Clip: [00:09:44] The present tax system. Be fair. The taxman. 

Sascha: [00:09:50] Welcome back to The Dive. I'm your host, Sascha Kelly. I'm joined by my colleague Darcy Cordell. And today we're talking about how companies avoid paying tax, which is a subject that you helped us choose. According to the Organisation for Economic Co-operation and Development, the OECD. Corporate tax avoidance costs countries anywhere from $100 billion to $240 billion a year. That is a huge discrepancy, but it's also between 4 to 10% of global corporate income tax revenue. And as much as we are frustrated by it, so are governments. They need company tax revenue to pay for essential services and to fulfil election promises. So, Darcy, what's being done about this? 

Darcy: [00:10:33] Well, right now, Sascha, there isn't a global framework on corporate tax. Every country sets their own tax policy and companies around the world pay depending on their jurisdiction. However, in October last year, 137 countries and jurisdictions agreed to a deal on a global minimum tax rate for multinational companies. 

Audio Clip: [00:10:53] The fact that G7 economies, you know, some of the biggest economies around the world have agreed to this reform is a very significant step forward in making sure that there is a globally more fair and sustainable taxation in place. 

Darcy: [00:11:08] There are two pillars to the proposal. The first involves the reallocation of some profits from major multinationals, including US tech companies to countries where they made their sales. So profit shifting, like we heard about from Microsoft and Nike earlier, it would become a lot harder. And the second pillar brings in a global minimum corporate tax rate of 15%. It's not overly high, but it is better than what we're seeing in a lot of countries. Australia's 30%, but 15 is a starting point. Unfortunately, it's yet to be implemented and it might be some time until it is. It is pretty hard to get 100 plus countries to agree on something. 

Sascha: [00:11:46] We did an episode delving into this proposal earlier in the year with help from Thomas the Economist, from our fellow podcast Comedian vs Economist. And I will make sure that's linked in the show notes from the previous episode. So while the OECD works it out, are individual countries doing anything that we in Australia could copy and take as inspiration for changing the tax rules? 

Darcy: [00:12:08] Yeah, they are on a state based level. Countries are cracking down on profit shifting. One of the most effective ways to do that is to require multinational companies to publish their country by country reports. And we're seeing that happen in more places around the world now. There's a new law proposed in Australia that would require multinationals to report to the ATO their annual income and taxes paid to every single country where they operate, even if they're headquartered overseas. So this could have a significant impact on large American companies with a presence in Australia. The ATO is also pursuing a number of cases using its diverted profits tax legislation powers. And one of those cases is before the courts. It's known unofficially as the Google tax and it allows the ATO to punish companies it deems to be profit shifting with a 40% tax on all Australian profits. The first case before the courts is public and it's against Pepsi. 

Sascha: [00:13:04] What happens from now in terms of corporate tax around the world? Are we going to see multinationals pay their fair share? 

Darcy: [00:13:11] Clearly there is a concerted effort from governments around the world to see that happen. Companies paying more tax is one of the only things politicians around the world can agree on. But the global 15% tax has been delayed and even if it is implemented, we're probably likely to see multinationals just find new ways to get around paying the tax that they should be. But there is no doubt it's getting harder to avoid tax. And Sascha, I think perhaps one of the most influential things here is the increasing public outrage at multinationals paying low or no tax. We saw a big uproar last week when almost 800 companies came out with zero tax in Australia and potentially the reputational damage of not paying tax might become worse than paying their fair share for these companies at some stage. 

Sascha: [00:13:56] Well, Darcy, I think there is a kind of positive lining there that we're hoping that this will change. We've definitely seen these reports for the last couple of years, so I think we'll be talking about this again in the future. If you've enjoyed this episode, then please tell a friend about it. It really is the best way for us to go. And if you've just joined for the first time, welcome. Go check out our back catalogue. Remember, you can follow us on Instagram. We're at the dive. Business news, all one word. And that's where we publish the poll to vote for this episode today. So go follow. If you want to be part of voting for future episodes. You can contact us by email thedive@equitymates.com and you can subscribe wherever you're listening right now and then you'll never miss an episode. Thank you so much for joining me today, Darcy. 

Darcy: [00:14:39] Thanks, Sascha. 

Sascha: [00:14:40] Until next time.