Oxfam released a report in January that found companies have hidden between $21 trillion and $32 trillion in offshore bank accounts to escape paying tax. That amount is double US GDP or about 20 times Australian GDP.
One of the issues that will be discussed at the G20 meeting in Brisbane is how to set up an international framework to stop this tax avoidance. Unfortunately, it will not work.
This is because the relationship between states is anarchic. There is no overarching democratic or even dictatorial body that can set and enforce rules across the globe, unless nation states agree to it. Even then member nations bend or ignore the rules. As US military excursions around the globe show, when it comes to international cooperation and agreement clearly some states are more equal than others.
An international agreement to stop base erosion and profit shifting (BEPS) is not in the interests of some sections of US capital because the big tax avoiders like Apple and Google overwhelmingly have their homes in the US. These companies benefit from international tax avoidance arrangements and some American politicians, rightly or wrongly, believe this benefits US revenue and more generally the US economy.
SHIFTING WEALTH FROM LABOUR TO CAPITAL
Globally, tax systems are becoming less progressive. This is part of the wider neoliberal agenda of shifting wealth from labour to capital.
The OECD’s report Divided We Stand identified this trend and it is something that will increase. Australian Prime Minister Tony Abbott’s call to raise the GST and the fuel excise increase are two examples of the tax system shifting wealth from the poor to the rich in Australia.
Taxation occurs after the major event in capitalist society — namely surplus value has been created by workers in production and expropriated by capital in that process and in distribution and through the process of turning it into profit, interests, rent, dividends, and of course wages.
The best way to address inequality in capitalist society is therefore to win back more of the surplus value the bosses expropriate, that is, to win real wage increases greater than inflation and productivity increases.
However, the call to tax the rich has an ideological and practical appeal. Tax is important for workers for determining in part their after tax salary and hence economic wellbeing, and the services they receive as part of their social wage from taxes.
THE OECD BEPS ACTION PLAN
The digital economy is undermining many states’ capacity to tax digital firms. Let me use Google as an example. An Australian contracting to put an ad on Google does so with Google Singapore in the ether. Before the Internet, a person would have gone to an office physically located in Australia. Under our treaties that office would be taxed in Australia on the Australian income.
But if there is no physical presence here and the contract is with Google Singapore, under the Australia Singapore double tax agreement Singapore has sole taxing rights over that income, even though its source is Australia.
This is true unless Google Singapore has what is called a permanent establishment in Australia, such as a branch, and the advertising income is attributable to that Australian branch. Of course the idea is that with the contract occurring in the ether, the income is not attributable to Google’s permanent establishment here and so is only taxable in Singapore.
Part of the problem is that tax treaties were developed for a world of bricks and mortar commerce and now we have a world of clouds and the ether as well as bricks and mortar.
We can change our tax treaties to address this but that will take a long time and there is no guarantee of success given the interests involved of countries like Singapore and Ireland. And for the US companies setting up there like Google and Apple.
Singapore’s company tax rate is a nominal 17%. In fact you can also take advantage of tax holidays or low tax rates by setting up there, in some cases paying tax as little as 1%. Then the income will be on-sent to a tax haven either directly or indirectly.
So, digital companies are taking advantage of this. They are also charging for intellectual property use by subsidiaries in other countries, often routed through Ireland or Singapore that may be profit shifting.
Companies dealing with more substantial products like goods, or even services, can try to avoid paying tax in so-called high tax countries like Australia by profit shifting.
Other mechanisms include debt dumping. This is using tax rules to, for example, dump debt from US companies onto their profitable Australian companies, reducing or wiping out their profits here.
Profit shifting is one target of the OECD by ensuring that transfer pricing outcomes are in line with value creation.
This is one of the most difficult areas both intellectually and in administration. How do you value the arm’s length market price of intangible transfers, for example, of trademarks or copyright, between related companies. The OECD wants to ensure the taxing rights arise and are applied in the country where the value arises – a mammoth task.
Even then, the thing about the ATO is that is has wound down its specialist international area over a number of years. At the very time in the mid-2000s that we were arguing for a big increase in staff to address the increasing internationalisation of the Australian economy, the office cut back our funding and halved the number of staff over time.
The report by the Tax Justice Network and United Voice makes a simple point. The effective tax rate big business in Australia pays is very low and many companies do not pay any tax.
How do we get companies to pay an effective tax rate closer to their 30% headline company tax rate?
WHAT COULD AUSTRALIA DO?
What could an Australian government do at the moment? Abolish all the business tax benefits and take away the benefits that are enjoyed mainly by the rich, such as superannuation, in the tax system. That has the potential to yield more than $50 billion in tax revenue.
Superannuation is a rort for the rich and abolishing those super tax concessions just for the top 10% would see the $15 billion gifted to them potentially returned to the revenue.
Impose a minimum company tax based on accounting income and charge big companies such as Google and Apple a fee based on a good percentage of estimated turnover to operate in Australia.
Tax trusts as companies. Make the income tax system more progressive. Tax those who earn more than $300,000 at 100% on income above that. Abolish the GST. That is a loss of about $50 billion, which is already made up for by the measures discussed above. And replace it with a wealth tax on the top 10%.
We could also impose a wealth tax on the super wealthy. The main beneficiaries of the increasing shift of wealth to capital from labour have been the rich. An annual net wealth tax of 1% on the top 10% of wealth holders would yield about $20 billion a year.
Add in estate and gift duties on the rich and we are beginning to construct a partial response to big business tax avoidance and the small amount of effective rates they have and tax the capital gains on their homes.
Introduce an effective tax on miners and banks.
Google’s chairman Eric Schmidt defended his company’s tax avoidance activities around the globe, activities which have seen it funnel almost $10 billion into Bermuda, saving $2 billion in taxes. He said: “I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate … It’s called capitalism,” he said. “We are proudly capitalistic. I’m not confused about this.”
And that is the point. Competition forces them to seek legal and sometimes not so legal ways to reduce tax. If one is doing it, all its competitors will be forced to cut their costs too and one way is tax avoidance.
Company tax avoidance is not a failing of capitalism: it is one of its logical expressions.
The best response from the left has to be not just to put forward proposals for taxing capital and the rich but to build the struggles against the 1% to force the imposition of taxes on them.
Taxing capital and the rich will set in train attempts by business to find other ways to avoid tax or to recoup the tax by increasing prices. So put price controls on them to stop them increasing prices to recoup taxes.
Of course business will threaten to take their money elsewhere. Mining is a good example of this. Despite the fact Australia had an admittedly pathetic minerals resource rent tax, businesses threatened to leave. But these are usually empty threats.
Even if it is not, the left should respond to this threat by nationalising those companies under workers control. We could have done that for mining companies and indeed the Henry Tax review raised nationalisation of the mining industry as one option.
None of this is going to happen without social struggle. The best way to address the shift in wealth from labour to capital is not through the tax system but through fighting for big real wage increases. Our task should be to help build all those economic and political battles to strengthen our class in its fight for equity and justice, including tax justice and tax equity.
The protests against the G20 in Brisbane should be one focus. Tax the rich is a slogan we can take to those protests. Real tax change won’t come from the politicians of the 1%, it has to come from us mobilising along with the mass of people for such change as part of a wider campaign for equity and justice economically and politically.
Fighting for tax justice can be and has to be part of that wider national and international struggle.
[John Passant was an Assistant Commissioner in the Australian Tax Office from 2002 until 2008. This is based on a speech he gave on the G20 and tackling tax avoidance organised by Political Economy at Sydney University, ActionAid and Green Left Weekly. ]