There is an old joke, "Don't steal. The government hates competition". This is certainly true when it comes to competition between governments for tax revenue.
Since the G20 finance meeting there has been a lot of chest beating and bleating about multinational corporations not paying much tax in Australia. Joe Hockey even threatened to create a tax hurdle when deciding on foreign investment. The phrasing of that hurdle would have to go something like, "Do you commit to paying more tax than the law of the land actually requires?"
That question is at the very heart of all the angst around so-called profit shifting or base erosion. Those multinational corporations that are being targeted for this political abuse are fully compliant with all taxation laws. They are also fully compliant with international tax treaties. In short, they are not exploiting loopholes in the tax system — they are compliant with how the tax system was designed and meant to operate.
The real problem isn't that some firms don't pay enough tax; rather that governments have been routinely and systematically living beyond their means. There is no evidence to support the notion that the corporate income tax base is being eroded. What is happening, however, is that the corporate tax isn't raising as much money as the government would like.
As much as Canberra might like to promote the idea of taxation as a form of tribute, the facts on the ground are very different. Tax laws are written that allow firms to deduct legitimate expenditure incurred in the production of taxable income. Tax treaties are written so that firms and individuals don't face double taxation on the same economic activity, and so on. These laws are written by governments, enforced by government officials, and disputes adjudicated by judges. In short, the odds are stacked against the taxpayer.
What prevents governments from fleecing taxpayers is competition from other governments for revenue. In this sense government is no different from any other organisation — if you want people's money you have to earn it.
SINGAPORE: TAX SMART
The Irish government has established a tax regime that makes it profitable for firms to locate there. It recognises the value of economic activity beyond simply paying the corporate income tax. Ireland is hardly alone in this endeavour; the Singaporeans are tax smart too.
But it isn't just tax that is important — it is the attitude towards intellectual property that drives a lot of this activity. The famed Double Dutch Irish Sandwich is a strategy to maximise the value of intellectual property. Intellectual property is especially vulnerable to expropriation — either through outright theft, for example piracy, or through excessive taxation.
The $8.9 billion that Apple has allegedly transferred to its Irish subsidiary is a return to intellectual property and is not taxable income in Australia. It might be taxable income somewhere else in the world. To be sure, it may be taxed at much lower rates than Australian tax rates or even not at all. But that is a matter for those foreign taxation authorities. As the Wall Street Journal opined last year when the American government was investigating Apple, "We wonder what the Irish think of the spectacle of an American Senator expressing outrage that an American company doesn't pay enough Irish taxes."
Some nations have realised that they can generate more revenue if they protect intellectual property than if they try to tax it at exorbitant rates. Those that haven't bleat about base erosion. A question for the Australian government is why don't multinational corporations like Apple and Google and Microsoft and Starbucks feel comfortable enough to locate their intellectual property in Australia? The answer to that question is both damning and embarrassing.
To be clear — there is no bank secrecy or dishonesty involved in these strategies. It beggars belief that large well-known corporations could escape the scrutiny of the various law-enforcement agencies and taxation authorities. The domestic and international tax architecture exists to promote economic activity, trade and investment. That is what we are seeing and it turns out that governments that are cash-strapped and hungry for tax revenue are attempting to monster the private sector into paying more tax.
As it turns out that is probably their only viable strategy; attempting to rewrite the basic principles of taxation and unravelling and rewriting international tax agreements would be a huge task that is likely to result in business uncertainty and sovereign risk. Best that government actually concentrate on cutting spending and living within their means.
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