They tuk ur tax revenue

Damn foreigners. When they’re not taking our jobs or houses, they’re taking our tax revenue.

Last week the AFR ran several pieces talking about so-called profit shifting and base erosion – basically that large multinational corporations like Apple, Google, Microsoft, Starbucks etc. don’t pay their “fair share” of tax. This morning I have an op-ed in the AFR responding to those stories (ungated version here). Cats would recognise the arguments – I’ve been making them here for some time.

Since the G20 finance meeting there has been a lot of chest beating and bleating about multinational corporations not paying much tax in Australia. Joe Hockey even threatened to create a tax hurdle when deciding on foreign investment. The phrasing of that hurdle would have to go something like, “Do you commit to paying more tax than the law of the land actually requires?”

So there are two things going on:

Tax laws are written that allow firms to deduct legitimate expenditure incurred in the production of taxable income. Tax treaties are written so that firms and individuals don’t face double taxation on the same economic activity, and so on. These laws are written by governments, enforced by government officials, and disputes adjudicated by judges. In short, the odds are stacked against the taxpayer.

So that’s the tax system.

Some nations have realised that they can generate more revenue if they protect intellectual property than if they try to tax it at exorbitant rates. Those that haven’t bleat about base erosion. A question for the Australian government is why don’t multinational corporations like Apple and Google and Microsoft and Starbucks feel comfortable enough to locate their intellectual property in Australia? The answer to that question is both damning and embarrassing.

That’s the issue for Joe Hockey. Countries like Ireland and Singapore are eating your lunch. So you going to cry about it, or get off your bum and compete for the business like they have? In the meantime:

The real problem isn’t that some firms don’t pay enough tax; rather that governments have been routinely and systematically living beyond their means. There is no evidence to support the notion that the corporate income tax base is being eroded. What is happening, however, is that the corporate tax isn’t raising as much money as the government would like.

The solution to that “problem” is to cut spending.

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36 Responses to They tuk ur tax revenue

  1. Sinclair, there is a simpilar drum-beat in New Zealand see http://www.kiwiblog.co.nz/2014/01/a_newspaper_that_pays_no_tax_complains_about_tax_avoidance.html

    Fairfax Australia, which owns the local rag, paid no tax at all last year on revenue of A$2.01 billion.

    many newspapers has large revenue streams but pay no tax because they make no profits.

    Let he who is without sin cast the first stone. ever better is rand’s judge and be prepared to be judged.

  2. trax

    Ireland is not eating any lunch, at least not when it comes to Apple, they effectively aren’t paying tax anywhere and it is not about where to locate IP but simply finding the lowest tax rates preferably with some extra loopholes.

    http://www.rte.ie/news/business/2013/1016/480758-tax-stateless/

  3. duncanm

    Here here!

    I work for a multinational that developed (and continues to improve) a significant new technology here in Oz.

    The company realising this technology in the market has incorporated in Ireland for tax purposes.

    They have to spend some of their R&D dollars in Ireland, and they are actively encouraged to do so by the Irish tax laws in order to reduce their overall tax burden.

    We have an ongoing, not unlikely, risk that the Australian R&D base, which currently employs ~10x the number of Irish employees, will be gradually shut down and shifted to Ireland.

    The company will never make a taxable income in Australia, even if it realises the sales dreams of $B of revenue.

  4. duncanm

    Trax,

    Apple may be a special case exploiting a particular loophole.

    But a cursory inspection of corporate tax rates (12.5% in IRL, 30% in Oz), says you’d be stupid to declare profits here if you can avoid it.

  5. Sinclair Davidson

    How the Irish choose to structure their tax system is the competition.

  6. Dan

    Companies shouldn’t pay any tax, it’s enough to employ people.

  7. duncanm

    Actually, Apple isn’t so special — but they were one of the pioneers of the Double Irish Dutch sandwich.

  8. Max

    Agreed 100% the incidence of Corp Tax actually falls on the consumer of the goods and services AND reduces competition in the Market

  9. companies do not pay tax. Either their workers or owners pay the tax through lower wages or lower dividends. see http://www.econlib.org/library/Enc/CorporateTaxation.html

    since capital is mobile, it will flow to investments that produce the highest after-tax returns. The corporate income tax raises the cost of capital and reduces after-tax returns in the corporate sector, and thus leads to a migration of capital into noncorporate or taxexempt sectors of the economy.

    This migration has two effects: it lowers the supply of capital available to corporations, and it causes a reduction in rates of return in the noncorporate sector as capital becomes more plentiful there. The ultimate effect, therefore, is to lower returns for all owners of capital across the economy.

    One important result of this capital migration is that the burden of the corporate income tax, over time, shifts to workers: with a smaller capital stock to employ, workers are less productive and earn lower real wages.

    in small open economies, workers pay most of the company tax through lower wages.

    after-tax return must be equal across countries. before-tax profits must go up and wages go down to equalise returns in the higher tax countries

  10. max, company tax does not fall consumers. for that to be true, prices for the same product would have to differ depending on the corporate form of the supplier?

  11. as I recall, the ability to avoid U.S. tax comes through the Irish double sandwich from the strange way U.S. tax law treats foreign income that is not repatriated

  12. Squirrel

    “….governments have been routinely and systematically living beyond their means….” – quite true, and Apple, Google, Microsoft, Starbucks etc. have doubtless done quite nicely out of all of those deficit-funded dollars, pounds, Euro, yen etc. in the pockets of consumers.

    Singapore might be explained on cultural/historical/political grounds, but Ireland – western, (now relatively) liberal, truly democratic – surely illustrates the slightly uncomfortable point that while there is always a case for looking hard at what governments do with public funds, with the added spur of international competition, we (open western nations) can’t all game the system in the way that small/micro-states do.

  13. Tapdog

    What’s this tripe about paying your ‘fair share’ of tax ?

    There is arguably a moral obligation to pay your ‘fair’ share but in the real world the Packer doctrine is the only one deserving consideration. Your fair share is no more and no less than your legal obligation.

  14. Tapdog, on packer, the story goes that an American at a casino table was bragging to Packer about how he was worth $100 million. Packer responding by saying ‘I will flip you for it’.

    The Paul Barry 1993 biography of packer is great. Packer’s Dad and Grand-Dad and Packer were as generous and loyal as they were ill-tempered and bold.

  15. Your fair share is no more and no less than your legal obligation.

    Well, that’s bollocks. If you were legally obliged to pay 100% of your income to your guvmint, would that be your fair share? The argument falls at the first hurdle.

  16. Michael Rook

    Actually it’s called “double Irish with a Dutch sandwich”, and its described in the finance literature as an international tax avoidance scheme…

  17. Sinclair Davidson

    We discussed the mechanics of the double Irish Dutch sandwich here.

    its described in the finance literature as an international tax avoidance scheme…

    and? So what?

  18. Michael Rook

    You say its “famed” and yet you don’t know what its actually called or, apparently, what it actually is….

    [I don't want to be horrible here but someone who has started off as rude and aggressive as your good self shouldn't type their email address in the field "Name". Luckily for you I have edited this post so that you don't broadcast your email address to the whole world. No. No. It's quite alright. No need to thank me. Sinc]

  19. Tapdog

    If you were legally obliged to pay 100% of your income to your guvmint, would that be your fair share?

    Yeah well I didn’t really have in mind that possibility…but if it did happen, no it wouldn’t be fair at all.

  20. Sinclair Davidson

    You say its “famed” and yet you don’t know what its actually called or, apparently, what it actually is….

    Michael – do you really want to get into a pissing contest? So I made a typing error. You knew what I meant, and so does everyone else. If you had followed the link you’d see that I have discussed this before in gory detail.

  21. Just kick him in the goolies, Doomlord.
    Obviously a fool. He needs to be punished.

  22. Michael Rook

    Sinclair – its a tax avoidance scheme. Companies with a half trillion dollar market cap and 170 billion in revenues don’t need the Irish to protect their IP – just ask Samsung. The issue of tax avoidance is a moral one – I’d say the beer whisperer sums it up pretty well.

    Apologies for my rudeness and aggression and no, I don’t want to get into a “pissing contest”. Thank you for removing the email address, I blame Apple auto fill.

  23. Carpe Jugulum

    Sinclair – its a tax avoidance scheme

    I don’t think of it as tax avoidance, more so minimising tax.

    Kerry Packer articulated it better than i can;

    https://www.youtube.com/watch?v=EVIOmU3l0Zo

  24. Sinclair Davidson

    Thank you for removing the email address, I blame Apple auto fill.

    :) I realised straight away what had happened. Damn Apple – doesn’t pay taxes and embarrasses its customers.

  25. Sinclair Davidson

    Sinclair – its a tax avoidance scheme.

    Well that is how it is described by many. As you pointed out. By contrast I argue its a return to IP. If you examine the double Irish Dutch sandwich structures you see it is driven by the location of IP. The so-called tax minimisation scheme is inherent in each countries definition of source and inherent in each countries voluntarily signed double taxation agreements.

    Income earned by foreigners that isn’t sourced in Australia isn’t taxed in Australia. It is taxed somewhere else. Not only is this the law of the land, it is a sensible law too. Randomly taxing foreigners on their foreign income would be a strange thing to do.

  26. Michael Rook

    Income earned by foreigners that isn’t sourced in Australia isn’t taxed in Australia. It is taxed somewhere else. Not only is this the law of the land, it is a sensible law too. Randomly taxing foreigners on their foreign income would be a strange thing to do.

    In a strong field, perhaps the most stupid thing you have ever written (aggressive, to be sure). For the avoidance of doubt, the “income earned by foreigners that isn’t sourced in Australia” isn’t sourced in Australia in this case because, its a tax avoidance scheme. “Randomly taxing foreigners on their foreign income” based on their local sales is not strange at all.

    Again, its a moral issue. Discuss…

  27. Sinclair Davidson

    No Michael – if you are not liable for any tax under Australian tax law, you can hardly be avoiding it. As I indicated in the article, the Australian government writes the law, Australian government employees administer the law, and judges – appointed by the Australian government and paid out of Australian tax revenue (okay I didn’t include those pieces of important information) – adjudicate disputes and enforce the law.

    Now if you want to make a moral argument that’s fine – but which morality are you suggesting? If you want to argue that large multinationals should give money to governments that can’t organise themselves sufficiently to tax MNCs well that’s fine, but is it moral?

  28. Sinclair Davidson

    “Randomly taxing foreigners on their foreign income” based on their local sales is not strange at all.

    That is a very strange idea – the Australian corporate income tax system targets accounting profit (defined as taxable income) not sales.

  29. is the the double Irish Dutch sandwich structure illegal?

  30. Sinclair Davidson

    is the the double Irish Dutch sandwich structure illegal?

    No. In fact the Dutch actually collect a fee for using their jurisdiction. So the DID structure forms part of their revenue base.

  31. Michael Rook

    Now if you want to make a moral argument that’s fine – but which morality are you suggesting? If you want to argue that large multinationals should give money to governments that can’t organise themselves sufficiently to tax MNCs well that’s fine, but is it moral?

    Oh puh-lease, that is so last century. Try reading Barwick CJ and Murphy J in FCTv Westraders (1980) if you need to, but please don’t suggest your ‘think tank’ actually stumbled across anything new…

  32. Michael Rook

    “Randomly taxing foreigners on their foreign income” based on their local sales is not strange at all.

    That is a very strange idea – the Australian corporate income tax system targets accounting profit (defined as taxable income) not sales.

    That is such rubbish. Without getting into your “pissing contest”, I graduated in economics and laws too. This is a moral issue – we can sign up for whatever tax treaties and laws we please…

  33. Sinclair Davidson

    Yes – I’m well aware of your bachelor degrees.

    Simply asserting something to be a moral problem doesn’t make it one. Why is it a moral problem? How is is it a moral problem, as opposed to say a legal problem or an economic problem?

    Rather than simply making assertions or sending us off to read, or claiming to be qualified, why not make the argument?

  34. Sinclair, choices are normative issues. but not all choices are moral issues.

    On the other hand, all public policy choices musts be within a moral framework

  35. Sinclair Davidson

    all public policy choices musts be within a moral framework

    Yes – that’s fine. But make the argument? What is the moral principle at stake here? It’s just as easy for me to argue that 1. stealing is immoral, 2. all tax is theft, therefore paying any tax is immoral. Not very convincing, but it is an argument. Michael hasn’t even done that.

  36. This has become almost an ethical question. These big firms are trying to pay as less taxes as possible. They are always searching for new ways and constructions to do this and searching for the borders of what is possible.

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