Tax Justice Network Australia and United Voices, an Australian trade union who I am pleased to work for, very recently published a report on the effective tax rates of Australian companies (full pdf here, with introduction here) that noted:
“United Voice collaborated with the Tax Justice Network to research what Australia's 200 largest companies pay in tax. What we discovered was worse than we expected. A lot worse.
. . .
We examined the last decade worth of taxes by the Countries biggest companies. We found 29% have an effective tax rate of 10% or less. Worse, 14% have an effective tax rate of 0%! That means more than 1 in 10 of the top two hundred companies in Australia pay no tax at all.”
TJN have given the report more coverage here whilst the Australian media have given it a lot of press.
Now the backlash has begun. The Sydney Morning Herald has an article written by Jennifer Westacott, chief executive of the Business Council of Australia and Frank Drenth, executive director of the Australian Corporate Tax Association that calls the TJN report a 'hatchet job.
It seems to me that they have two complaints. The first is that you can't use accounts to check up on a company's tax affairs and the second is you can't expect foreign governments to permit Australia to tax foreign earnings of Australian companies. Both are absurd
First, accounts are only produced to meet the needs of investors alone because big business and their advisers decided this should be the case through the IFRS Foundation - which they dominate. It's been a negation of the duty of government to permit this, and to allow it to be suggested no one else had an interest in this data. When all corporation tax is based on such accounts, but their preparers say they are not suitable for that purpose, then we know the government should have stepped in to demand data suitable for its purposes whilst it was the duty of governments everywhere, not just Australia,to tell the IFRS Foundation and the Big 4 accountants in particular that rigging the accounting system to suit just their own needs was unacceptable.
The question to ask is a simple one, and is "if these accounts aren't suitable for appraising a company's tax position which ones are and can I have them please?" because paying tax is the greatest public duty a company has and if a set of accounts is not confirming its fulfilment of that obligation then they are clearly not fit for purpose. If they won't respond and supply the data that is required what we now need are International Tax Reporting Standards (I am working on them).
The argument on needing a foreign government's permission to tax Australian companies' foreign income is ludicrous. The evidence for this is clear and comes from Australian personal tax where Australia does of course claim the right to tax the worldwide income of its residents without ever seeking a foreign government's permission to do so, whilst of course giving credit for tax already paid elsewhere. If this is good enough for Australia's real live warm blooded people then it is just fine for Australia's cold blooded artificial people too. Why should they have an advantage real Australian's are denied?
When arguments as lame as this are the best your opponents can come up with you really have them worried. Good work TJN Australia, I say.
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Australia does not (or at least did not when I last lived there about a decade ago) tax companies on their accounting profits.
As I recall, they tax them on what’s called ‘taxable income’. This is calculated according to tax law (effectively ‘assessable income’ less ‘allowable deductions’). This calculation is not in the public domain.
Company accounts are produced according to company law and accounting rules. It’s a different calculation (although there are overlaps).
Maybe they should be aligned, but for better or worse, they’re not. As it stands (as I recall), using company accounts to understand tax calculations is at best, a fairly broad brush approach with a wide margin for error. It seems a fairly pointless and misleading exercise.
I am sorry to say that I think this argument is trite, but I also think it appropriate to do so.
The fact is that every single corporation tax computations starts with a line which is described as “profit as per the accounts”. Of course I am aware that in every single country that I’ve been able to survey in the world (147 of them) there are adjustments then made to remove some of the arbitrary judgements included in any set of financial statements to provide the relative certainty that a tax base demands, but the reality is that the single biggest determinant of the likely outcome of any such adjustment remains that very first line, and so to deny that there is a correlation between profit as declared in the accounts and tax paid is, quite frankly, absurd
Accounting standards do recognise this fact. This is why they demand that reported profit before tax is reconciled with tax paid, using as its base determinant that figure for profit before tax multiplied by the headline rate of tax for the jurisdiction in which the reconciliation is taking place. In other words, even our financial standard setters, whose relationship with economic reality is sometimes questionable, think that this correlation should, and indeed does, exist.
Your argument is that because the two figures are not the same we should try to make no reconciliation between the two. That is the standard argument of the tax abuser. My argument is that we should improve the quality of the reconciliation. This is entirely possible and desirable and an essential part of holding corporations to account for the privilege that society grants them, which is limited liability. If that is not possible then the right reaction is not to give up, but to withdraw the privilege.
I did tax returns as part of my training many moons ago (late 80s, one of the big accounting firms in Sydney), and don’t recall seeing “profit as per the accounts” as part of a company tax return. There was a box for assessable income, something for allowable deductions, a few other boxes, and then a box for ‘taxable income’. I don’t recall ‘accounting profit’ being mentioned anywhere.
Changed career pretty quickly (couldn’t waste my life on the tax avoidance thing).
Maybe things have changed in Australia since then. Other commenters can confirm.
“Your argument is that because the two figures are not the same we should try to make no reconciliation between the two. That is the standard argument of the tax abuser.”
You can try to make the reconciliation, but due to lack of information, you’re attempt will have a fair margin for error (as I recall). And if you have a big margin for error, any conclusions will be misleading.
So what was the first line on the return?
How the heck do you think the return was related to the activity undertaken by the company?
As I recall:
First line was: assessable income.
Next line was: allowable deductions.
Then other boxes for various credits etc.
Then: taxable income as the magic number against which the company tax rate is applied to determine the amount of ‘income tax’ (not ‘corporation tax’) payable.
As companies got larger (and their affairs more complex), I recall the chance of ‘taxable income’ equalling ‘accounting net profit’ was remote. 2 distinct calculations.
This was particularly true for companies in particular industries where there were very specific tax regimes (eg mining, agriculture, films, R&D). I’d assume mining companies will be well represented in the top 200.
It’s stretching the memory back to 1987-89, but I don’t recall ‘accounting profits’ being mentioned anywhere on the tax return.
There was a wholesale re-write of the Act in 1997 – some confirmation that this line of logic has broadly continued can be found here:
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/
With the passage of time my memory of this has faded, so I am open to correction from your Australian readers.
So how did you get to assessable income if it was not profit?
Did you just make it up?
To suggest there is no link with accounting profit is, very politely, just wrong
‘Assessable income’ is not profit. It is not even analogous to profit.
The tax legislation & case law tell you what to include and exclude in calculating ‘assessable income’. That’s what you follow.
Ditto for allowable deductions.
It’s a different calculation according to its own rules (with some overlaps).
That’s why trying to reconcile from accounts alone (without being privy to other information) is a fairly meaningless exercise, especially for larger companies. This is one of the things Jennifer Westacott is suggesting. Given she is unlikely to have submitted this article without consulting Australian tax experts, I suspect she is probably right.
Well it does not come out of thin air does it?
This is a ridiculous debate
Of course somewhere it is based on profit
PWC say so in their international tax survey
Now stop wasting my time
And as for the tax experts – I have spent a decade proving them wrong
See sections 4.10 and 4.25 in the link I gave you for the legislation. This tells you how a company’s tax liability is calculated. Can you point to me where ‘profits’ fits in?
I suspect (?) PWC were using profits interchangeably with ‘taxable income’ in a loose sense for an international audience to avoid having to explain ‘taxable income’.
Yes, there is overlap between the concepts, particularly for smaller companies. For big companies, the overlap gets less and less. The point is that they are 2 separate sets of measures and not suitable for a ‘comparison’ study of the kind conducted by TJN.
The only way you’re right is of the company maintains two wholly separate sets of books
Are you saying they do?
Yes!
2 independent calculations, with some overlap (some items will be treated the same way in both).
One for the users of financial accounts based on one set of rules to decide profit.
Another for the ATO to achieve ‘taxable income’ based on another set of rules (tax law). This calculation (as I recall) remains private between the taxpayer and the ATO.
Let’s stop the nonsense
You are just wrong
Completely wrong
Now do not waste any more of my time