The tax cut we have to have

Australia must not be blown off course from getting a company tax rate closer to 20 per cent. Corporate tax transparency figures released in December by the Australian Taxation Office should not slow momentum.

For the first time, the ATO reported the tax affairs of companies with total incomes of more than $100 million. The disclosures do not change the fact that a lower corporate tax rate would reduce budget volatility but also increase growth and investment. The ATO’s report reminds us that “base erosion and profit shifting” is a genuine issue, which requires global and domestic action.

The global approach to profit shifting by the G20 and Organisation for Economic Co-operation and Development will be signed off by 30 countries with great fanfare on Wednesday night in Paris. This is a positive step but it does not diminish the need for a competitive tax rate, which will reduce the incentive to undertake profit shifting from Australia.

The commentary in the wake of the ATO’s data release was poor. The report revealed the unsurprising fact that many Australian companies do not pay tax. Most pundits failed to mention that not all companies are profitable, the role depreciation plays, or that losses from the financial crisis are still offsetting profit.

UNSUSTAINABLE RELIANCE

Our unsustainable and volatile reliance on company tax will be highlighted again in May’s budget, just as the recent mid-year economic and fiscal outlook revealed a $12 billion write-down. Over the past decade, the Treasury has constantly written down the expected company tax receipts, which has drastically affected the annual budget position.

One of the primary reasons is that our reliance on company tax is more than double the OECD average. The Commonwealth receives a staggering 18.5 per cent of its revenue from company tax, compared to the 8 per cent OECD average. Our 30 per cent rate is also unsustainable because it compares poorly to the Asian and OECD averages of 22 and 24 per cent respectively.

Ten years ago we had the fourth-lowest rate in the G20. We are now 11th. The argument against cutting company tax is the budget and the nation cannot afford it when the reverse is true. The core fact is a 30 per cent rate retards our growth in an era where capital is mobile.

While a cut would deliver an immediate reduction in revenue because of our over-reliance on company tax, it would ultimately boost growth and revenue. Nothing moves the needle to drive growth in our economy like a company tax cut. Cutting the company tax rate to 22 per cent will create an economy that is 2 per cent bigger, KPMG says.

NOT FEASIBLE

The economists are not alone. Employers are acutely conscious of the impact of company tax on investment decisions. Rio Tinto head Phil Edmands recently stated: “I guess what the business community is saying is if the UK is moving towards 18 per cent, the OECD is 25 per cent, Asia is moving to 22 per cent, it’s just not feasible to maintain a 30 per cent rate. It doesn’t matter what your philosophical position is, it’s just not practical.”

We cannot escape the fact that 63 per cent of ASX 100 companies operate on an international basis by sourcing revenue offshore or owning assets abroad. Tax rates are top of mind.

Unsurprisingly, tax rates are linked to investment levels. OECD research shows that every additional 1 per cent in the corporate tax rate results in a fall in foreign direct investment by 3.7 per cent. A lower company tax rate would also reduce the incentive to engage in profit shifting.

The G20/OECD framework for profit shifting is a credible approach to a global issue. However, this multilateral process will take years to conclude, with consistent legislation required in each of the member countries. Australia must also act unilaterally by cutting our rate to 22 per cent – the Asian average. The dividend from a deep company tax cut will be less-volatile budgets, with increased growth, investment and employment.

STRENGTHENED THE CASE

December’s mid-year economic and financial outlook strengthened the case for a cut. Another reminder will come with May’s budget. Distractions such as the ATO’s tax transparency data should not blow us off course. Rather, these figures should galvanise our efforts to finalise the newly minted global solution to base erosion and profit shifting.

We can chew gum and walk.

Supporting the G20/OECD profit-shifting framework while making our tax system more competitive is an alignment of Australia’s economic interests.

Andrew Bragg is director of policy at the Financial Services Council.