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Company Tax

Bruce Barbour - this updated version - April 2021, Multinational Tax Minimisation Reduction - July 2022

Tax Rates

We should not chase the lower rates of other countries, on some idea that companies will move off shore. Some may but most won't.

We must stop companies using related overseas company payments to minimise their Australian tax liabilities.

Suggested Reform of the Company Tax Structure

I suggest that a company's tax rate be adjusted depending on the number of people that the company directly employs locally within Australia. The more they employ, as shown through their total annual wages bill as a ratio to their profit, then the lower their company tax rate should be. It would be a sliding scale. For example, Company A has a local wages bill of $2 million and they make a profit of say $200K. They might be required to pay a tax rate of 20% ($40K). For comparison Company B has a local wages bill of $1 million but still makes a profit of $200K. They might be required to pay a company tax rate of 35% ($70K). The current company tax rate is a flat 27.5%, scheduled to decrease to 25% in the next few years - this is on lower turnover companies. What the highest and lowest rates should be would require further investigation. I would anticipate the company tax rates would vary in the range of say 15% to 40%. (The average company tax may be lower than the current 27.5% due to this model encouraging local employment and the higher overall tax that is achieved because of higher employment - growth in PAYG tax and other turnover taxes. The increase in tax payable by some companies should be largely offset by a decrease in tax payable by other companies.)

These are figures plucked from the air - what the actual figures are would take a great deal of modelling - so please don't dismiss this idea out of hand because of the numbers I have chosen here.  

The justification for this proposal should be obvious. It would encourage local employment rather than benefiting the companies outsourcing to oversea low wage countries or companies simply operating an importation business. If a company pays a million dollars for the import of some manufactured items then none of that million goes to the Government in local taxation. If a company pays a million dollars to its local staff to manufacture the items then a significant proportion of that million dollars goes to the Government through the PAYG tax system and also through the payments made by the company to other local companies, for the purchase of materials and services, who then employ people that pay tax and that pay company tax as well.  It acknowledges and rewards local companies for employing more people.

The other benefit is the generation of higher the local employment and consequently the lower the likely unemployment benefits payable by Government. The benefits of higher local employment to Government, to Australia as a whole and to the newly employed needs to be recognised and the companies that employ more people locally rewarded. It is a social good to employ local people. The arrangement would also discourage sham contracting arrangements as payments to contractors would not count in their local wages bill. It is beneficial to Australia as Australia gets much higher tax receipts as a result. Consider the earlier example of the operations of Company A that has the $2 million wages bill and compare that to Company B that has a wages bill of $1 million. If the average PAYG tax payable by employees of both companies was 25% then for Company A employees the Government could receive $500K in PAYG tax on the 2 million dollar paid in wages, plus additional amounts of tax such as GST and payroll taxes and also due to increased economic activity/expenditure from the purchase of local materials and services though other local companies to enable the local manufacture. For Company B with a local wages bill of only $1 million the government would get $250K in PAYG taxes - a full quarter of a million dollars less. This dwarfs the amount that could be lost to government due to company tax decrease on Company A, which anyway would, at least in part, be made up for by the increased company tax on Company B. (Assuming the current company tax rate of 27.5% of Company A would pay $15,000 less company tax and Company B would pay $15,000 more.) Company A benefits Australia a lot more than Company B. Company A has worked a lot harder than Company B to make its profit - employing people is a lot harder than just ordering materials and equipment from overseas or even locally. This should to be recognised in our system of taxation. Companies that generate more local employment and economic activity need encouragement through a tax system rewards them for this benefit.

With this sort of calculus it can easily be seen why it is worthwhile for the commonwealth government to purchase locally manufactured plant and equipment and local services if at all possible, even if it has a 25% or more higher price than the overseas manufactured equivalent. The Federal Government would recoup that amount and more from the additional local economic activity and the consequent increased tax take generated. It therefore also ensure that other levels of government - State and Local - also purchase local by providing them with a rebate on their significant local purchases of manufactured goods. Unemployment benefits payable by government would also decrease due to greater employment in the community.

While I have talked primarily about manufacturing the company tax adjustment proposed would also benefit local employment in the services sector. For example it would act as a disincentive to out source call centre operations to overseas. In fact the services sector would be one of the prime beneficiaries as they are typically highly labour intensive.

Would this result in some companies keeping greater profits? Possibly. If they are paying a low tax on profit due to their high employment level (relative to profit) then prima facie they get to keep higher after tax profit. But traditional market competition may mean that they may be forced to lower their profit margins to maintain market share in the face of their local competitors also being able to cut prices to boost their market share due to the more favourable tax environment. Over time it may mean that their level of after tax profit remains about what it was under the flat company tax environment. However they will gain a competitive advantage over rival companies that are mainly sourcing stock by importing overseas manufactured goods.

Would this result in the companies that are facing higher taxes wanting to move overseas? Possibly. But perhaps not. A company that qualifies for the higher taxes has lower local employment. The prime type of company that would fit this description would be importers. An importer could move overseas but they would no longer be importing into Australia. They would then have to compete in a different market with out any local knowledge. Perhaps some would choose to do that. But as Australia still needs imported goods the hole left would probably be filled by some other company that would import the product. What would probably happen is that the importing companies that choose to stay would instead probably raise their prices a bit to maintain profit. And they would be able to get away with this if there are no local manufacturers of the goods they import. If there is a local manufacturer then if the importer raises its price it may impact their market share as the price as the price of the locally manufactured good is comparatively better. Another industry that could be impacted would be the high tech industry that relies on innovation. If one of their innovations is highly successful that company could make super profits with a smaller workforce. They could perhaps consider overseas relocation to chase lower taxes. Consideration would have to be given to ways of discouraging this.

There is an issue with online service providers that have basically no staff in Australia and may not even be a company/legal entity in Australia. They can make profit from Australians buying their goods or services online however taxing of this profit for the benefit of Australia is problematic. This is a problem regardless of the company tax structure adopted in Australia - it has to be addressed somehow.

Would the proposed company tax structure discourage "efficiency improvements"? This is possible if the efficiency improvement involves the introduction of technology that displaces some employment. That is often what "efficiency improvement" means practically. But if the efficiency improvement just means the company is producing more widgets without lower staff it may mean that if they can keep their profit margin the same they are going to make more profit for the same labour costs then they might have to pay a higher tax rate. But market forces may counteract that as their competitor also introduce efficiency gains. Are we less internationally competitive if the companies elect not to introduce the efficiency gains? Not at least in the short term. The lower tax rate for the company may mean that they can sell their goods overseas at a lesser price. Anyway "efficiency" in itself should not be the goal. The health and happiness of the society as a whole is the overriding goal.

There would be environmental benefits, as well as employment benefits, in that it encourages local manufacture and production therefore lowering international trade and the associated transportation energy use.

I acknowledge that this is a substantial change to the company tax structure. It would have to be introduced in stages over, say, 5 to 10 years to allow businesses time to restructure their operations as they see fit to work in with the new tax structure. It would also mean that there may be greater volatility in the amount of company tax received by government annually - which may mean government would need strategies to handle the years of lower tax receipts to balance them against the years of higher receipts.

After tax profits (from Australian businesses) paid to the owners/shareholders would be tax free in their hands on the basis that the profit should not be taxed twice.

Multi-National Company Tax Minimisation and Avoidance Reduction

Tax minimisation by multi-national companies operating in Australia is a huge problem. Many multi-national companies shift the profits they have undoubted made in Australia to overseas countries that have very low tax rates. I am sure there are many ways of doing this - far more than I have heard of. And I am sure that as one tax minimisation scheme is blocked then another will likely be implemented by the companies who I am sure pay their "smart" tax minimisation experts large amounts to work out even more complex artificial schemes to avoid tax. However this is not an excuse to do nothing. Australia has to try even if it seems like a never ending game of "whack a mole".

There are big multi-national companies in Australia that claim they make no profit in Australia and therefore pay no tax - and they haven't for years. If this was really the case then there would be no reason for them to remain operating in Australia - they would leave and set up on shores where they could make money. That they don't leave indicates that they are making significant profits in Australia - they just don't want to share them with the Australian people through paying a fair tax rate.

The first approach to this should be naming and shaming. The tax paid by each of the top 100 or 200 companies (by turnover) should be splashed on the front page of every newspaper and news website with the amount of tax they paid or didn't pay. With a bit of encouragement for consumers to look elsewhere for their products if the company did not pay a reasonable amount of tax.

But that by itself will not be enough. Blocking tax minimisation holes should be a high priority for governments of whatever persuasion. Some should be straightforward but others perhaps not as easy.

One example of a hole that should be easy to block is for excess payments for intellectual property to overseas related companies. For example a multi-national fast food company might require large payment for the intellectual property of the use of logos and other marketing property.  A company might have a real multi-million dollar profit in Australia. In order to minimise the tax payable on this the overseas parent company would charge the Australian company multi-millions for the use of its intellectual property. Through this totally artificial means there is no more local profit (or so they say) and therefore no tax payable locally. This is a deceit on the Australian people. However fixing this is so basic you wonder why it hasn't been done. The Government could just charge an import duty or tariff on intellectual property supposedly sold to the local arm of the multi-national. The rate could be say 25%. Suddenly the government is only loosing a small fraction of the tax it should be being paid. Or it could be made a bit more complex. The government could deem what maximum payment is acceptable for the payment for intellectual property to an overseas related entity. This could be based on turnover or some other metric. Then any payment over the deemed amount could be subject to a tariff/duty equivalent to the company tax rate.  Deeming is used by government in other areas so it should be acceptable in company taxing situations.

Another area of tax minimising is by transfer of profit to overseas related entities by overcharging the local arm of the multi-national company for products that are to be sold in the Australian market, effectively eliminating local taxable profit. Again a deeming regime should be implemented. It would not be too hard to determine what the real value of imported product is. Look at comparable products for other companies. Or require the multi-national company to justify the price that they are charging their local company in terms of what it actually costs them to acquire or manufacture to product. Full transparency of pricing. In conjunction with market value research. Could be done in collaboration with overseas countries that may be having similar problems with their multi-national companies

Multi-nationals will always try to minimise the tax they pay. It does not mean that Australia should bend over and takes what ever the multi-nationals deem is appropriate to give to Australia - because that is often close to zero. If the multinational does not like it they can leave the Australian market - and good riddance. In fact Australia should be able to kick out any multi-national company that is not contributing their fair share of tax. There will be plenty of other companies willing to fill the niche left - and employ any local staff made redundant.

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