The so-called Tax Justice Network recently released a very dodgy report into corporate taxation that got a run on the front page of both The Age and Sydney Morning Herald. As we pointed out here at the Cat, and both the Australian and Australian Financial Review indicated, the Tax Justice Network analysis was fundamentally flawed.
Treasury at Senate Estimates have confirmed how flawed the analysis was:
Senator CANAVAN: I have a follow-up on that. I know a few years ago Treasury made a lot of comments about the effect of the economic downturn on accumulated losses and its subsequent effect on tax, particularly corporate tax revenue. How is that washing through the system now? Is that still impacting on companies’ liability for tax, those forward tax losses, accumulated over the years?
Mr Heferen: I am sure there are still some companies that will have losses that are still being carried through the system and, of course, there will still be companies that post the GFC would still make losses in a particular year. With those losses, of course, the company has to carry those losses forward to a future year under the tax system until they have the profit to offset that against, and so there would no doubt be an element that would carry over from the GFC and there would be some generated in years after the GFC.
In an accounting profit sense those losses are accounted for then, but in the tax world they have to be carried forward. Hence you can easily see a situation where a company in a particular year, and particularly as some reports have looked at, say, in the 2012-13 year or the 2011-12 year, would be at the sharp end of still having to account for their carried forward losses.
Senator CANAVAN: So, given that relationship any analysis which relied on gross profit and not taxable income would have even larger errors given the recovery process?
Mr Heferen: It is more fundamental than that. It is not just an error. It is just comparing an apple with an orange and not being about fruit. With accounting profit and taxable income for some businesses some of the time there could be a degree of similarity, and, in fact, a recent report said that if you used accounting profit a lot of firms are earning 26 per cent rather than 30. I must confess I was surprised it was so high. But when you get right down to it, there are intended significant differences. Research and development tax concessions are a classic. Accelerated depreciation is another standard. The carried forward loss is another one.
For our ASX 200 companies, for the large ones, what would be critically important would be the fact that if they have foreign income, so they have an investment overseas, when the dividend comes back it typically would have been paid in the other country, so when it comes into Australia it is treated as non-exempt, non-accessible income. Yet from an accounting profit point of view, it could still show up as a profit. Once you go to that level then it is a situation where for a company to work out its taxable income, which starts with the accounting profit and then says, ‘What do we need to deduct?’. The other one is interest cost.
Senator CANAVAN: Is it your understanding that the Tax Justice Network report did not cover those factors?
Mr Heferen: It did not go anywhere near them.
Senator Cormann: They did not look at taxable income, because if they had looked at taxable income it would have shown that these top 100 ASX companies actually paid the corporate tax rate of 30 per cent. That was very misleading.
Now let us compare that with what Richard Murphy – the founder of the Tax Justice Network – understands about taxation – from an exchange at his blog:
Adrian: … As it stands (as I recall), using company accounts to understand tax calculations is at best, a fairly broad brush approach with a wide margin for error. It seems a fairly pointless and misleading exercise.
Richard Murphy: … Your argument is that because the two figures are not the same we should try to make no reconciliation between the two. That is the standard argument of the tax abuser. My argument is that we should improve the quality of the reconciliation. This is entirely possible and desirable and an essential part of holding corporations to account for the privilege that society grants them, which is limited liability. If that is not possible then the right reaction is not to give up, but to withdraw the privilege.
The only way you’re right is of the company maintains two wholly separate sets of books
Are you saying they do?
That companies have separate sets of books is one way of describing what happens. Accounting systems generate at least three categories of information – financial information for investors, cost and revenue information for managers, and tax information for the taxation authorities. All that information must and will be internally consistent – assuming no fraud or incompetence. Not all of that information, however, will be in the public domain or if it is, it might not be easily accessible. Attempting to reconstruct tax information from financial information as the Tax Justice Network attempt, however, is very likely to result in misleading results.
To sum up, the differences between tax rates as calculated by financial accounting data and tax data are normal, natural, and as intended by the Parliament.
Senator DASTYARI: Your submission, though, is that that is not really a problem?
Mr Heferen: That is right. In fact, I will go further. I would say that to me it is clearly not a problem.
Senator Cormann: It is as intended by the parliament.
Mr Heferen: The intention of those elements—where a firm undertakes the eligible research and development activity—
Senator DASTYARI: I was not saying research and development per se. I was saying the whole series. You listed them yourself.
Mr Mills: I can answer the question and just by way of example, if you have an Australian company where most of its operations are actually based in the US it will pay tax in the US. We will not seek to try to tax it again when it comes back to Australia. Its apparent rate of tax might be zero, but in fact it has been paying 35 or higher in the US. That will not necessarily come through, depending on what the structure is. That is why there is a lot of noise in this thing. The other point that I wanted to make is—
Senator DASTYARI: We are worried that it is more than just noise.
Mr Mills: Unfortunately there is a lot of noise. I do want to make this point.
Senator DASTYARI: So, you guys are saying there is no problem?
Mr Mills: No. I want to make a few points about the structure. Because of changes over recent years we have probably the strongest anti-avoidance and transfer pricing rules in the world. We have a system where companies, particularly listed companies, like to return profits and they like to tell the world that they are making profits. That then goes, in part, although they are different bases, it goes to an encouragement of ensuring that there is a taxable income. Why? Because they pay tax. Why does that matter? Because they can frank dividends. The market wants them to frank dividends and they will punish them if they do not. We actually have some of the structural things in place that encourage Australian companies to pay Australian tax.