23 September 2015
by Neil Chenoweth
Australia does not tax foreign investment as 'it's all debt'
Professor Richard Vann, Greg Smith and Peter Nash at the tax summit.
The government has declined to close a loophole that allows foreign investors to use "equity described as debt" to ensure they are taxed at zero or at most 10 per cent tax Sydney University Challis law professor Richard Vann told the AFR Tax Reform Summit in Sydney on Tuesday.
In a spirited exchange on tax rates, the chairman of the Commonwealth Grants Commission, Greg Smith, said Australians owned more investments in the rest of the world than the rest of the world owned in Australia.
This apparent discrepancy was because foreign investors pumped their Australian holdings full of borrowings rather than equity.
"We don't tax foreign investment in Australia because it's all debt," Mr Smith told the event, hosted by The Australian Financial Review and KPMG.
"Debt disguised as equity,"
Professor Vann said.
Interest payments generally attract only 10 per cent withholding tax.
Professor Vann said there was a loophole in the "thin cap" provisions, which limit the level of debt that foreign companies can hold in Australian subsidiaries.
The government had moved to tighten the rules "but also there is a let-out that will increase it being used," he said. "The government has decided not to close the let-out."
Singapore's 15 per cent tax rate was a recurring theme throughout the day.
While both Mr Smith and Professor Vann argued that corporate tax should be reduced, they and Business Council of Australia chief economist Lisa Gropp limited proposals to moving the tax rate below 25 per cent.
"We don't want to go down the UK route," Professor Vann said. UK Chancellor George Osbourne, who has announced rates would go to 18 per cent "is just turning the UK into a corporate tax haven".
KPMG chairman Peter Nash was less averse to a Singapore-level tax rate. "It's somewhat naïve to think we don't have to fight fire with fire," he said.
BHP PAYS $65B TAX
The marvellous part about tax forums is the way it brings people together – and by together we mean BHP Billiton's head of tax, Jane Michie, sharing a stage with three of the people least likely to be on her Christmas card list.
It's not that she has anything against Deputy Tax Commissioner Mark Konza, Tax Justice Network's Mark Zirnsak or shadow assistant Treasurer Andrew Leigh – and clearly she retained all of her fingers and toes at the end of the session.
"I'm delighted to have the opportunity to talk about Singapore," she said, before detailing the $65 billion in tax and royalties BHP Billiton has paid in the last decade. "That is a lot of money," she said.
In 2014 BHP Billiton earned $16 billion from Australian production. "We paid tax on every cent. In Singapore we made $US1 billion. That gives you a sense of the proportionality."
Some 58 per cent of its Singapore earnings were taxed under Australia's CFC laws.
Mr Konza declined to comment on the Tax Office's ongoing audit of BHP Billiton's Singapore marketing operation and pointed to an endemic threat from marketing hubs.
"We have 24 audits under way at the moment of hub operators and we are going around trying to verify they do what they say they do," he said.
Mr Konza said in 40 years of tax work he had not heard references to Marx, but that companies were now emphasising the value of their labour.
"They are telling us, 'We believe our labour is worth more than just a cost-plus basis'," he said.
Mr Zirnsak said the Justice Network took a moral approach to taxation because unequal treatment for some companies was unfair.
"It's unfair if [some] companies get away with cheating," he said. "That's unfairness in the market place, full stop."
"When a country cuts special secret deals with some companies, the LuxLeaks stories are an example, then the deals undermine other countries' tax on income earned in their jurisdictions."
Ms Michie flagged that BHP Billiton on Wednesday will release a comprehensive report on the tax it pays country by country, as well project by project, the first resource company to do this globally.
BHP Billiton believed it would not be affected by the G20 action plan for Base Erosion Profit Shifting.
"Those measures are not targeted like companies like BHP Billiton," she said.
"It will mean increased reporting, reporting to the tax authorities; it's going to mean increase compliance costs. We support this. We support BEPS.
"I think it's because we are realistic."