A Corporate Tax (Avoidance) Lesson from Down Under

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With much anticipation and very little fanfare the Australian Taxation Office quietly released information about corporate tax entities with a total income of $100 million or more for the 2013–14 income year and how much tax they paid.

With much anticipation and very little fanfare the Australian Taxation Office quietly released information about corporate tax entities with a total income of $100 million or more for the 2013–14 income year and how much tax they paid.

If you’re not doing anything dishonest then you should have no fear of public disclosure. Nonetheless, although we are all meant to be equal under the law, until now many firms have been employing accountants and lawyers to shroud their true corporate and social behaviour under the cover of privacy whilst the Government stood by quietly (that is, the information was deemed confidential by the ATO).

The media frenzy surrounding the release of information demonstrates that the public demands disclosure from all. So do these new tax transparency regulations finally lift the lid on so that the public can peek inside? Critically, these disclosures come with many limitations.

For instance, included are companies, corporate unit trusts, public trading trusts and corporate limited partnerships with a total income of $100 million or more. However, excluded from are firms that have not lodged their tax returns before September.

Certain Australian-owned resident private companies are excluded from reporting if they are Australian-owned residents with a total income of $250 million, or not a member of a foreign holding company, and some simply for unspecified reasons.

Another limitation is that the data set released by the ATO has only three columns of numbers: total income, taxable income and income tax payable. This is where it gets tricky. First, the deductions claimed against total income to arrive at net profit are not disclosed.

Second, there is nothing to explain why a firm like Qantas (with huge carry forward of their previous fleet write-downs) had no taxable income in that year. In addition, simply multiplying taxable income by the company tax rate of 30% rarely explains income tax payable because there is nothing to explain how firm deducts tax offsets, such as the research and development (R&D) incentive and franking credits.

Hence, data from the ATO list is not simply comparable to that from the financial statements. Reasons for this range from different consolidation requirements and choices, different rules within the tax system, and the effect of tax incentives.

For the Macquarie Group for instance, the financial statements reported revenues of $12.743 billion but the ATO list reported total income of $8.1 billion. This is a reduction of over 36% and there remains no publicly available information to explain this discrepancy.

Here is a brief summary of the facts, as the significance of the event has to some degree clouded much of the analysis.

In total 1,539 entities are included, including wholly owned subsidiaries of MNC such as Apple, Google and Cisco (all of which are large proprietary companies), the largest publicly listed Australian companies such as BHP and Rio Tinto, as well as large proprietary companies such as healthcare insurer BUPA Australia, mining giant Glencore, and beverages company, Lion.

Of these 1,539 entities listed by the ATO, 466, or 30% of these firms report no tax payable for the 2013-2014 tax year. This includes some large, well-known companies such as Qantas, GHP Pty Ltd, ExxonMobil Aust, Lend Lease, Glencore, General Motors Aust., Vodafone Hutchison, Anglo American Aust, Chevron Aust, Ford Australia, Hewlett Packard, Sydney Airport, Goodman Fielder, Macquarie Telecom Group, TEN Network, NBN Co., Goldman Sachs ANZ, JP Morgan Aust, and publisher News Australia, part of Rupert Murdoch’s empire.

Aggregate analysis reveals that gross income of $1,629 billion earned by these firms is reduced down to $169 billion in taxable income. This equates to a tax “net margin” of only 10.4%. While this calculation of a “net margin” is rudimentary, it should equate closely to the financial statement calculated net margin of net profit before tax on total revenues. The tax “net margin” is well below the financial statement net margin for a number of large US subsidiaries.

For instance, subsidiaries of Apple, Hewlett Packard, Chevron, Cisco Systems, Microsoft and Google that are included on the list with their average tax margin from the ATO at 3.5% compared to their parent group net margin of 20.8%. This indicates that these firms seem to be increasing expenses and reducing revenues in Australia.

A reduced amount of tax payable doesn’t necessarily mean tax avoidance. However, many firms, using legal tactics, are not even filing financial reports with THE Australian Securities and Investment Commission (ASIC), let alone attempting to explain their tax affairs.

At least now they will be forced to explain their aggressive tax arrangements publicly, otherwise we suspect that the capital markets, which are the ultimate arbiter of public sentiment, may punish those who remain recalcitrant. While the ATO’s data set is a positive step forward, it’s only the first in a series of many needed to better inform the Australian public about the tax affairs of all “publicly accountable” for-profit businesses operating in this country.

Significantly, will these firms will continue to be as tax aggressive given that a light has now been shone into their hollow, and will the government expand the limited disclosures and improve public accountability in the run-up to next year’s federal election?

So now, we know which companies did not pay tax; time to target aggressive avoidance is republished with permission from The Conversation

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