Article on Company Tax by Jennifer Westacott and Frank Drenth

This opinion article by BCA Chief Executive Jennifer Westacott and Corporate Tax Association Executive Director Frank Drenth was published in The Sydney Morning Herald under the title ‘Misleading Report May Set Back Vital Tax-Reform Debate,’ and in The Age under the title ‘Report on Business And Tax Is a Hatchet Job’ on 7 October 2014.

The Tax Justice Network’s misleading and error-ridden report Who Pays for Our Common Wealth? unfairly tarnishes the reputation of many Australian firms as well as the Australian Taxation Office, and risks setting back the tax reform debate that Australia desperately needs.

The bottom line is that businesses have to accept their obligations when it comes to paying tax and being transparent.

There is an important debate taking place at the G20 and OECD level on base erosion and profit shifting involving large multinational firms.

Business will not shirk from challenging issues, but we ask others to respect facts and not disrupt debate with scurrilous accusations based on little or no evidence.

The uncritical acceptance and coverage the report has received by some media unnecessarily damages the community’s confidence in the integrity of Australia’s tax system.

One fundamental flaw of the report is its failure to separate out Australian earnings and taxes from foreign earnings and taxes. This produces ludicrous results for groups with significant foreign operations. The notion that other countries would agree to let Australia tax the profits derived in those countries might be appealing but it is hardly realistic – yet this is what the report suggests.

The property industry in particular has been singled out for unfair and internally inconsistent treatment. While the report acknowledges property trusts are not companies and that individual unit holders pay the tax, it still asserts the trust should also pay company tax on the same income. The TJN cannot have it both ways, unless it thinks property income should be taxed twice.

It is important to remember that audited accounts are produced mainly for the purpose of providing assurances to shareholders and creditors about solvency. In their raw form, they are not well suited to the sort of analysis being attempted by the authors.

There are many legitimate reasons a company’s effective tax rate might appear to be different from the statutory rate, such as franked dividends, tax offsets for R&D and timing differences.

Many companies produce detailed notes in their published accounts reconciling current and deferred tax and explaining tax issues. But rather than taking the trouble to analyse this additional information, the report takes the lazy approach of applying the 30 per cent headline rate to reported profits and labelling the difference as tax avoided or evaded.

That is not an analysis, but a hatchet job.

For anyone who cares to look, the facts show that corporations make a very significant contribution to government revenues – as they should. In 2014–15, companies are expected to contribute about $72 billion to Commonwealth revenues, two-thirds of it coming from large companies. As a proportion of GDP our corporate tax collections are the second highest in the OECD.

According to the Finance Minister as well as senior Treasury officials, Australia has one of the most stringent set of tax integrity rules in the developed world and we have probably gone as far in that direction as we sensibly can.

Under the previous government we saw the tightening of the transfer pricing rules and the general anti-avoidance rules. Only last week, the Parliament passed legislation tightening up the rules around interest deductibility.

And from where business sits, the regulator (who actually understands the company tax system) is hardly asleep at the wheel. In spite of a recent redundancies, the ATO is well-resourced and has a sophisticated risk-based approach to corporate compliance that involves identifying and resolving material tax risks in real time.

Australia’s G20 presidency gives us a leadership role in achieving a coherent global approach to addressing legitimate concerns around base erosion and profit shifting.

At a time when Australia badly needs a sensible, well-informed debate about how the tax system serves our modern economy, the inaccurate assertions and coverage arising from the TJN report are unhelpful.

This debate requires us to look at the tax system comprehensively and to recognise its dual role of raising revenue while supporting incentives to work and invest in a competitive global environment. The community deserves much better than the TJN report.

The parliamentary inquiry that has just been announced will give business the opportunity to set the record straight.