A taxing tale of two peak bodies

Four days out from Christmas, Blind Citizens Australia (BCA), Deaf Australia, Homelessness Australia and Down Syndrome Australia learned they were to be subject to federal government funding cuts.

New Social Services Minister Scott Morrison assured concerned parties that frontline services to the disabled would not be cut, just grants to these and other organisations advocating for the homeless and the disabled.

While one BCA – Blind Citizens Australia – did not fare so well this yuletide, another BCA – the Business Council of Australia – did quite nicely.

Only a week earlier, the government had back-flipped on a proposed tax avoidance reform (Section 25-90) entailing some $600 million in tax deductions that multinational companies could claim on interest on their debts in offshore subsidiaries.

As it turned out, the “stakeholders” with whom the government had “consulted” before it made its decision were the big audit firms (whose best clients are the multinationals) and assorted peak bodies such as the Minerals Council of Australia.

Clearly the voice of assorted business lobbies is being heard more loudly and more clearly in Canberra than the likes of Autism Aspergers Advocacy Australia or the National Council on Intellectual Disability and Physical Disability Australia – two more subjects of the Christmas cuts to social welfare.

In the investment world, the typical product disclaimer runs like this: “Past performance is no indication of future returns.” The same might be said of government but if last year’s performance is any indication, social welfare will be under siege this year while corporate welfare will proceed apace.

While the government has held firm against advances from the likes of Qantas and SPC Ardmona, who were chasing cash handouts (the former suddenly bounced back as oil prices dropped, and the latter received help from Victoria), it has not managed to bring a single meaningful reform to stem the flood of Australian company profits being transferred offshore via aggressive tax avoidance schemes.

The talk has been hot and heavy, the action measly.

Of its two major tax reforms, the abolition of the carbon tax and the abolition of the mining tax, the greatest beneficiaries are multinational mining companies, the great majority of whose shareholders reside overseas.

The decision not to remove the 25-90 deductions is the next most meaningful fillip for multinationals. The others – not proceeding with reforms to the offshore banking unit regime, tax compliance measures, and dumping changes to multiple entry consolidated groups – add up to a further $500 million on Labor’s estimates.

This reporter is no expert on not-for-profits. These advocacy groups for the homeless and disabled are funded by the taxpayer and there may be some fat to cut. We don’t know. What is certain is that organisations representing the most disadvantaged in our society do not give political donations, nor, as demonstrated above, do they hold even a fraction of the sway in Canberra enjoyed by those representing the most powerful.

The corporate tax rate in Australia is 30 per cent yet a host of multinationals – with income of billions of dollars a year – pay nothing near the statutory rate, and that is after transferring collectively billions of dollars in profit offshore with the likes of interest on loans to their foreign associates.

Their peak bodies and their advisers, the big accounting firms, are the very ones who command the government’s ear.

Originally, the back-flip on 25-90 was buried with little explanation on page 117 of the MYEFO statement. Later, upon inquiry by Fairfax reporters, the Treasurer’s office revealed the decision was made after “consultation with stakeholders”.

Upon further inquiry still, these mystery “stakeholders” were unveiled:

“Advisory firms (read the Big Four audit firms),

“Mining, energy and resources industry representatives (read Minerals Council of Australia),

“Finance, property and manufacturing industry representatives” (read other vested interests keen to keep their share of the $600 million tax break)

“Various industry peak bodies” (read other rent-seekers with their arms outstretched for corporate welfare at the expense of ordinary citizens and small business people).

In the lead-up to last year’s federal election, the Coalition promised to kick off the “next wave of comprehensive” tax reform with the delivery of a white paper in its first term in government. This is expected to drop in the next couple of months, and it may surprise. Yet the government’s track record on caving in to vested interests does not augur well.

Taxing take on definitions

Also shortly before Christmas, the Minerals Council of Australia was up to its old tricks as it sallied forth with yet another report despairing of all the tax and royalties its members were forced to pay.

It is a good thing the Minerals Council does not represent the forestry sector as well as foreign-controlled multinational mining companies or they would be lobbying to chop down the trees for free.

Having just had a win when the government abandoned the 25-90 anti-avoidance provisions, the big miners’ peak body was again busy conflating tax with royalties.

“Conducted jointly by the Minerals Council of Australia and Deloitte Access Economics, the survey finds the tax take ratio in that year was 47.1 per cent. This is the highest recorded level since the tax survey was inaugurated … No longer can this industry be seen as a honey-pot for short-term revenue raids.”

What is this mysterious “tax take ratio”? If you delve into the report you will find it is a ratio concocted by dividing royalties and tax by taxable income (before royalties).

Royalties are not taxes. They are a payment a company is required to make for the pleasure of extracting minerals from the ground – gold, copper, coal and the like – things that belong to somebody else, namely, the people of this country.

If this peak body was representing foreign agribusiness rather than foreign miners they’d be in a state of high indignation about having to pay for their cattle and their wheat. They would be bewailing it as a tax.

Nowhere in the Minerals Council’s report was an actual tax figure mentioned. Conveniently, it was all about ratios. Had they deigned to include the actual numbers these would have shown the amount of tax paid by mining companies was dropping sharply. Commodity prices are down, profits are down, therefore tax is down too, sharply.

Needless to say, nowhere in this report could be found the tax contribution of mining companies to government revenue, which is around the 3.4 per cent mark.  Nor is there any mention of the $4.5 billion per year in taxpayer subsidies to the mining industry such as the diesel fuel rebate and assorted tax breaks for exploration and so forth. That is the real honey-pot.

Plundering to continue

Finally, in light of vigorous denials by Treasurer Joe Hockey to Fairfax Media reports that the removal of the Section 25-90 provisions amounted to a back-flip, it is worth noting that the central rationale for the decision was that “compliance costs” would be too high. This defies all logic because if you remove something, you longer have to comply with it or even have a compliance regime. It is gone.

Further to the denials, this from former tax office expert on withholding tax, Martin Lock:

“The Treasurer fails to mention that the so-called Australian company ‘penalised’ if s.25-90 were repealed may be an Australian resident subsidiary company of a foreign-based corporate group. Section 25-90 does not discriminate according to the residency of the ultimate shareholders of the so-called ‘Australian company’: any company incorporated in Australia (done simply) can access the concession that the section offers.

“The failure to repeal s.25-90 will continue to allow a foreign-owned Australian resident company to claim tax deductions for interest paid on debt borrowed from related offshore entities and used to earn s.23AJ tax-free dividends. These are dividends arising from holding 10 per cent or more of the voting interest in shares that the resident company has in offshore companies. The deductions are claimable against any assessable derived from the company’s Australian operations, reducing its overall Australian taxable income, even down to nil if the debt-loading is big enough.

“This practice is ‘profit-shifting’, and the failure to repeal s.25-90 will continue to allow at least some foreign-based companies to go on plundering Australia’s tax base in this way, claiming all the while to bring to this country the benefits of foreign investment.”

Happy New Year.