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03 March 2015
by John Passant

Labor’s ‘crackdown’ on tax avoidance: Shorten fiddles and revenue burns

Yesterday Bill Shorten released details of Labor’s crackdown on tax avoidance. It was small beer stuff.

Under changes to what are known as the thin capitalisation rules, (think interest deduction limits for business based on their net assets), Labor will put in place measures that will in many circumstances restrict the level of interest deductions big business can make. The current arrangements allow a ‘safe harbour’ deduction of interest up to 3:1. The changes will limit that to whatever is the global debt/equity ratio of the company below that.

These thin capitalisation changes will bring in, according to Labor, an extra $1.65 bn over 3 years. This is an amount not to be sneezed at, but this is, to mix metaphors, just the tip of the iceberg, an iceberg Labor appears to be staying well away from. Other measures in the package will increase the return to $1.9 bn over 3 years. Again, this other $0.25 bn is not an amount to be sneezed at but not really very much in the much larger picture of big business tax avoidance.

The reality of the package was highlighted for me in what it didn’t mention – base erosion and profit shifting, or BEPS – and the piddling amount it gave to the Australian Tax Office.

On the latter first. Labor will provide ‘funding for increased compliance by the Australian Taxation Office to ultimately deliver a net saving of $67m over the budget cycle.’ It doesn’t say how much the funding will be but assuming budget cycle means the forward estimates (the wording is ambiguous) an extra net $67 m over 3 years is just $22 million a year. If the marginal return to revenue of ATO staff is only two to one (a very very conservative figure in my view given the $3 bn we spend a year on the ATO brings in about $350 bn annually) then the figure is likely to be around the $22 million per year mark for increased compliance. If all of this were spent on staff (and the statement is so vague it doesn’t commit to that) it would mean about an extra 200 ATO staff all up hired in year one and still employed for the next 2 years. An extra 200 staff. Whoopee doo!

Considering the current Commissioner has just sacked 3000 staff and plans to sack another 1700 by 2017/18 (almost one fifth of the ATO workforce), bringing in an extra 200 staff to address the collection shortfall that will inevitably arise from these savage cuts of almost 5000 tax officers is a joke. The joke unfortunately is on us. Shorten wants to give the impression of doing something about tax avoidance while not actually doing anything.

This becomes clear when we look at what else, apart from tacitly accepting the jobs massacre in the ATO, the statement doesn’t say. It doesn’t mention BEPS at all. Nothing about profit shifting. Nothing about base erosion. This shows how meaningless the statement is.

The stories about Google, about Apple and the like are all about base erosion (Google) or profit shifting (Apple). So Shorten has no plan for addressing the arrangements Google has in place whereby in 2012/13 it paid just $467,000 tax here on turnover from Australia of about $2 bn. He has no plan for taxing Apple which in the decade from 2002 has shifted billions in profits to Ireland on $27 billion in sales in Australia to end up paying only $193 million in Australian income tax over that time.

As the Luxembourg leaks and the Tax Justice Network/United Voice Report ‘Who pays for our common wealth?’ have shown, Google and Apple aren’t on their own. According to Neil Chenoweth in the Australian Financial Review ‘Nearly 28,000 pages of leaked documents reveal how 343 Australian and foreign corporations used accounting firm PwC to slash their tax bills to nearly zero in some cases.’

Who pays for our common wealth? makes clear that almost one third of the top 200 ASX listed companies have an effective tax rate below ten percent. How could that be when the company tax rate in Australia is 30%? Fifty seven percent have subsidiaries in tax havens. Why would that be?

And to top it all off the statement made no reference to the $600 million that Labor has already committed to claw back by repealing the outrageous section 25-90, a provision which allows big business to deduct interest on loans raised to produce certain exempt income. That leads me, along with the other aspects of what they didn’t say, to conclude that Labor’s tax avoidance crack down statement was the old pea and thimble trick. It wants to give the impression of doing something about big business tax avoidance (always a popular issue among ordinary workers) without really frightening the big business horses. Pathetic is the word that comes to mind.