Andrew Leigh has an op-ed in the Herald Sun talking about thin capitalisation. Mind you – he doesn’t actually use that terminology; that would be a tough gig in the Herald Sun. Instead he gives an example:
There are several tricks that multinational firms use to shift profits out of Australia and into low-tax jurisdictions. For example, they might arrange for their Bermuda arm to sell their Australian arm a paperclip at a cost of $1 million.
The Australian arm claims that as a $1 million tax deduction and the money is effectively shifted offshore.
Thankfully, that particular loophole is closed, but a similar trick can be played with debt. If the Bermuda subsidiary makes a multi-million dollar loan to the Australian arm, a million dollars a year can be shifted out of Australia in the form of interest payments.
The interest payment is a tax deduction in Australia and the profit is moved to Bermuda, where the company tax rate is considerably lower. Same thimbles, different peas. Now you see it, now you don’t.
To be fair – that is the common view. But it is very misleading. First interest expense is deductible for domestic firms and there is no good reason why foreign firms should be excluded from the same business and taxation rules that domestic firms face. Second that debt coming into Australia constitutes foreign investment, the interest being paid on that debt is the return to that foreign investment. The contribution that multinationals make to the Australian economy is well beyond any taxation that they pay to the ATO.
There is the an additional problem that has dogged the ALP over the last few years. Simply declaring a new tax doesn’t actually guarantee the revenue. This is how Andrew Leigh describes the issue:
Yet one of the most disturbing decisions of the government has been to keep a $700 million tax break to multinational companies. In government, Labor’s economic team – particularly former Assistant Treasurer David Bradbury – took careful measures to ensure that multinationals paid their fair share of tax.
Well – okay. But how does the current government explain its decision?
The Coalition will not proceed with Labor’s proposal to deny deductions made under section 25-90 of the Income Tax Assessment Act 1997 because the revenue is essentially unrealisable and it would impose unreasonable compliance costs on Australian businesses.
So the current government doesn’t think the proposal would actually raise the revenue.
If true this was going to be another mining tax debacle. Remember there too the ALP (and its allies) argued that taxes were not being paid essentially by foreigners. At some point the political classes will have to learn that verballing foreigners may be cheap politics but is economically expensive.