By Katie Lahey
Business Council of Australia
Without a continuous reform agenda to make sure Australia's economy remains globally competitive, the benefits of Australia's recent economic record will not be sustainable.
The Business Council of Australia (BCA) represents the chief executives of 100 of Australia's leading companies. Collectively, the companies they run account for 30% of the nation's exports and employ nearly 1 million people. As such, the BCA has a deep interest in promoting policies that seek to sustain strong growth for Australia over the long term.
Tax key to growth
That's why tax – and in particular Australia's corporate tax regime – is an issue to which the BCA continues to devote a considerable amount of its research efforts and policy advocacy.
Taxation rates and structures play a fundamental role in providing the right environment for Australian businesses to operate effectively and efficiently, improve productivity and take advantage of market opportunities in an increasingly globalized and competitive world.
The corporate tax regime has an impact on a vast array of business decisions, from employment and investment to the location of corporate headquarters. Consequently our taxation system will have a significant impact on the long-term prosperity of Australia.
Despite strong growth and investment returns by the corporate sector in Australia, the BCA's research articulates patterns that clearly point to an erosion in the competitiveness in the country's corporate taxation regime.
Australia's corporate tax rate of 30% compares favourably to the statutory rates of other economies.
While the statutory (headline) rate is an important indicator of how companies are being taxed and is often the first indicator that companies look at when making choices about where to invest, it is only part of the picture. The other side is the treatment of business income, which varies significantly from country to country. The combined result provides the overall taxation burden that companies face in one country compared to another. The total taxation burden faced by Australian companies will make a significant difference to Australia's prospects for the future.
The BCA's research shows Australia's overall corporate tax burden is considerably higher than the averages of all competitor groups. Disregarding Norway and Luxembourg due to features particular to those economies, Australia has the highest corporate tax burden out of all of its key competitors.
The BCA is concerned that if this issue is not addressed, Australia will become increasingly uncompetitive as an investment destination, and employment and capacity for innovation and risk will also be affected. The significance of these competitive barriers is not just related to business.
The Australian government increasingly relies on corporate taxation revenue. Company taxation is the second largest revenue stream and the fastest growing. Company tax revenue has nearly doubled from A$27.1 billion in 2001/2002 to an forecasted A$52.2 billion in 2006/2007. This increase has paid for much of the new spending and other budget initiatives announced by the Australian government in recent times.
A company tax system that constrains rather than promotes a strong business sector and economy clearly will have revenue consequences that have an impact on Australia's capacity to finance responses to challenges such as those posed by its ageing population.
Perhaps even more significant for Australia's future prosperity, an unhealthy business sector could result in Australia being unable to afford other much-needed reform measures, including the reduction in our excessively high personal taxation rates.
Given the fundamental role that Australian business plays in improving the prosperity and competitiveness of the nation, what we urgently need is a clearer and more robust debate on competitiveness of our company taxation system.
This is difficult.. Company taxation is not well understood in the community. That is why the BCA has been calling for the Australian government to undertake a major review of Australia's corporate tax regime.
Such a review should be wide-ranging. It should take into account both international competitive pressures and specifically, progress in lowering headline corporate tax rates in other countries.
To address the issue of the overall tax burden on companies, the review should also focus on reducing the effective tax rates on income from capital; examining the relationship between federal and state company tax regimes and their impact on business; and examining ways to significantly reduce business tax complexity.
Given the pace of change among corporate tax regimes around the world, the review, rather than being a one-off, should be continual so Australia can anticipate or react quickly to tax trends emerging around the world.
The BCA has called for this review to be announced as part of the Australian government's 2006/2007 budget in May. In light of Australia's growing tax uncompetitiveness and the limited window for reform which our current strong economic position affords us, Australia cannot afford to let this opportunity pass by.
On February 26 the Australian government announced a study into to examine how Australia's tax system compares with other developed economies. The BCA has welcomed the review.