The Business Council of Australia today called for an accelerated consideration of tax changes to improve the competitiveness of Australian-based companies and facilitate greater integration of Australian companies into the global economy.

In an article in the BCA papers, Philip Anderson and Alf Capito of Arthur Andersen argue that particular features of the way Australia taxes foreign-sourced income provide a tax disincentive to Australian entities becoming truly global in their operations and shareholdings.

“This treatment encourages Australian entities to move their headquarters out of Australia,” the article says. “The problem basically centres on Australia’s anti-dividend streaming arrangements, and a solution is possible at a relatively modest cost to revenue.”

The article proposes a limited form of dividend streaming where dividends paid out of foreign-sourced income are streamed to non-resident shareholders of the company.

“The justification for this change in treatment is that the existing arrangements provide a distortion that increases the cost of equity capital for Australian companies, discouraging global expansion.”

The article says that an approach that allowed foreign shareholders to be paid dividends from foreign-sourced income would avoid wastage of imputation credits, improve after-tax returns for domestic investors and provide an effective incentive for Australian companies to pursue global expansion.

The Chairman of the Business Council’s Tax Reform Task Force, Mr Chris Knoblanche, pointed to difficulties the present system created for Australian-based, global companies.

“As Australian companies become more involved in foreign markets and seek to attract foreign equity, the ability to deliver both franked dividends to Australian shareholders and attractive growth prospects to non-resident shareholders is becoming increasingly difficult,” Mr Knoblanche said.

“As a result, Australian multinationals are being forced to consider alternative strategies.

“The most likely responses involved either the relocation of the listed company out of Australia or the setting up of a dual listed structure whereby non-resident shareholders hold shares in the foreign listed vehicle rather than the Australian listed vehicle.

“Both have disadvantages for Australia. The first involves an immediate disadvantage as it means our major Australian multinational companies will move out of Australia. The second is a second-best solution that falls short of being efficient and involves similar disadvantages to Australia, but spread over a longer period.

“Australia’s national interests are served by the global penetration of Australian business as the overseas growth of multinational companies feeds back into the development and growth of Australia.

“To encourage that global penetration, Australia needs to revisit the taxation treatment of foreign-sourced income.”