US corporations avoid an estimated $2 billion tax every year in Australia: report

United States corporations avoid an estimated $US1.45 billion ($2.06b) of tax in Australia each year by shifting their profits to low or no tax countries, research shows.

A joint report by advocacy and union groups Tax Justice Network, Oxfam, Global Alliance for Tax Justice and Public Services International says in 2012 US multinationals shifted $500 billion to $700 billion, or roughly 25 per cent of their annual profits, mostly to countries where these profits were not taxed. This means $1 out of every $4 of profits generated by these multinationals is not aligned with real economic activity.

The report’s figures are significantly above OECD estimates of about $US100 billion to $US240 billion being annually lost due to multinational tax avoidance schemes.

The report says Australia is one of the biggest losers in the G20 – based on which nations get disproportionately low profits – coming in 12th after the United States, Germany, Canada, China, Brazil, France, Mexico, India, Britain, Italy and Spain.

Most untaxed profits ended up in Netherlands, Ireland, Bermuda and Luxembourg, where there is virtually no tax, the report said. And the low-tax nations of Singapore and Switzerland accounted for almost the entirety of profit-shifting that can be allocated to individual jurisdictions.

The report, based on a research paper conducted by Alex Cobham and Petr Janský, examines the location of US multinationals’ economic activity versus the location of their profits based on historical data.

But it notes “important caveats”. The analysis relies on public Bureau of Economic Analysis data, which is “aggregated at the national level and subject to many and varying suppressions”.

“Further investigation of many specific points is needed, by researchers with access to the full company-level data,” the report’s authors said. “And also on the general question of how aggregation of losses and profits within each country affects the findings.”

The report also noted that there were key countries with no or insufficient tax data including the British Virgin Islands, Cayman Islands, and Jersey – so these were not individually included in the analysis.

It did note that since these countries have zero corporate tax regimes “they played a key role in cases of large-scale tax dodging by individual multinationals and can be identified from studies using other data sources”.

But based on information that was available the report found the 500 largest American companies hold more than $2.1 trillion in accumulated profits in low-tax jurisdictions abroad.

“In 2012, US multinational companies reported $80 billion of profits in Bermuda, which does not tax corporate income at all – that is more than the profits that these companies reported in Japan, China, Germany and France combined,” the report said.

US multinationals also book large profits in four OECD countries: Ireland, the Netherlands, Luxembourg and Switzerland.

The so-called ‘Double Irish’ loophole might have saved companies collectively billions of euros, it said. “In recent years Ireland has taken positive steps against tax avoidance by phasing out the Double Irish structures,” the report said, although it noted that companies that already use them will continue doing so until 2021.

It also criticised Ireland’s special 6.25 per cent tax regime for income from innovations, saying this simply replaces one loophole with another, because it would create a new low-tax environment that also brings a risk of profit shifting by companies.

Despite the global efforts to curb corporate tax evasion, the G20 and OECD countries have failed to live up to their promise.

“The outcomes are very weak, and more generally, the announced [Base Erosion and Profit Shifting] measures are not enough to ensure that multinationals can be taxed where their real economic activity takes place,” the report says.

While the OECD and G20 group had gradually opened up the Base Erosion and Profit Shifting (BEPS) process to include some developing countries, this participation had been limited.

“Until a global tax body is established, representation of non-G20 developing countries in international tax negotiations must be strengthened in other ways,” it says.

“Many OECD countries as well as tax havens have simply replaced tax practices that had been found harmful with new regimes that do not fall foul of the OECD’s criteria.”

Assistant National Secretary of the CPSU Michael Tull said even a small portion of this $US1.45 billion in unpaid tax could restore jobs elsewhere which have been subject to big cuts including, the CSIRO, Centrelink and the Australian Taxation Office.

Under former treasurer Joe Hockey, Australia boosted anti-avoidance powers that can be used to hunt down multinationals, which the tax and business community says are too harsh, but which tax advocacy groups say don’t go far enough.

At the same time, the Australian Taxation Office has warned companies it will be focusing on money attributed to offshore marketing hubs and will use its stronger transfer pricing powers to go after them.