There are two distinct narratives at the moment around Australia’s company tax rate and its potential reform.
The first revolves around a call to lower the company tax rate, which has been at 30% since 2001, to ensure our international competitiveness. This debate has been reinvigorated by the Business Council of Australia’s Australia Action Plan for Enduring Prosperity and Tony Abbott’s election promise of a 1.5% company tax rate cut. ( Kevin Rudd also promised to cut company tax to 28% as part of his mining and carbon tax package, but moved away from this in the face of increasing budget deficits and tiny mining tax revenues.)
The second is the concern that widespread multinational tax avoidance and profit shifting to tax havens is leading to “base erosion” of the company tax. This has led to calls by governments and international organisations for urgent coordinated action to close loopholes and shore up company tax collections.
The most recent Base Erosion and Profit Sharing report (BEPS) is from the Economics Committee of the House of Lords in the UK. Australian Treasury also released its scoping paper on The Risks to the Sustainability of Australia’s Corporate Tax Base. Both the UK and Australian BEPS reports build on the OECD Action Plan on Base Erosion and Profit Shifting, which concluded the corporate tax bases of national governments were at serious risk.
The OECD report reflects that the “current international tax standards may not have kept pace with changes in global business practices” and “the tax practices of some multinational companies”. One particular BEPS concern is the different tax treatment of debt and equity finance in different countries, which can lead to a reduction in the overall tax burden of a multinational corporate group globally.
How are we to assess these different claims? Is the Australian company tax take, or the company tax rate, too high in a global context? Or is the company tax base eroding because companies are avoiding tax and they should pay more? Or both?
We all agree that Australia relies heavily on company income tax, relative to other countries. In 2011-12, Australia had corporate tax receipts of $66.6 billion, or 4.5% of Gross Domestic Product (GDP). This is 22% of total federal tax receipts. But those statistics just tell us our company tax is successful at raising revenue. How do we know if this is good or bad for Australia?
Ultimately, all taxes are borne by people: companies are a legal fiction. We can’t prove who bears the economic burden of company tax. Historically, it was assumed to be borne by shareholders (or capital generally). Today, there is a growing consensus among economists that the burden of company tax falls partly on workers in a so-called “small, open economy”. The highly respected US Urban-Brookings Tax Policy Center now assumes that the US company tax falls 20% on workers, 20% on capital in general and 60% on shareholders.
Australia is a smaller economy and the company tax burden may fall more heavily on workers here. However, this assessment of company tax incidence depends on assumptions about mobility of investment. Australia’s company tax collects some “economic rents” from miners, bankers and some other big companies. This is not mobile capital: we should keep taxing it.
The company tax also performs a very important function in our broader tax system. Australia is unusual in having an imputation corporate-shareholder system in which shareholders get a credit for company tax paid. This appears to encourage Australian companies, at least those with Australian shareholders, to pay tax here: individual and superannuation fund shareholders like franked dividends.
The company tax also operates as a backstop for the personal income tax, as shareholders get that credit when they declare dividends in their personal tax return. Lowering the company tax rate will lead to increased tax planning by individuals to avoid the personal tax. This already happens because of the gap between the top personal rate (48.5%) and the company tax rate. Increasing that gap will induce more personal services businesses to operate in a company form and increase this kind of tax planning.
The Coalition proposes to claw back the company tax cut in paid parental leave contributions from large companies: its policy may result in a tax cut only for those smaller businesses seeking to avoid personal income tax.
Australia’s company tax is our final tax on foreign investors. The BCA argues that “for many businesses location choices, activity levels and taxable incomes are sensitive to local tax rates so governments around the world are under intensifying international pressure to reduce tax burdens on business activities and investors”. But is it really deterring foreign investment – and if so, what investment?
The BCA report shows that investment in Australia has steadily increased in recent years. For resource or banking profits, the investment is not mobile anyway. In the Asian region, investors will continue to go through Hong Kong (16.5% rate) or Singapore (18% rate) rather than Australia, or will take advantage of low wages and significant tax incentives for manufacturing in the region. A company tax reduction to 28.5% will make no difference for this kind of investment.
The BCA’s proposal to reduce company tax to 25% has its origins in the Henry Tax Review. It’s easy to forget the nuanced discussion of the pros and cons of company tax reform in that report. The review’s recommendation to cut the company tax rate in the “short to medium term” depended on ensuring adequate personal income tax collections and on increasing resource revenue taxation. The Coalition says it will scrap the Mineral Resources Rent Tax, which has just been upheld as constitutional, rather than reform it so it really collects some revenue.
The drive to lower our company tax rate is a response to an international environment in which countries compete with each other by lowering taxes, rather than coordinating efforts to share corporate tax revenues. But does the attention of these countries to base erosion and profit shifting signal a change to better international tax coordination? And could this enable countries to maintain (relatively) higher levels and rates of company taxation? Past experience does not lead to optimism, but the level of international cooperation in tax administration, at least, is unprecedented.
Why don’t we hold off on company tax rate reduction for a while and see how we go with the G20 and increasing international coordination in taxing multinationals? That process could also give us some insight into the kind of fundamental company tax reform that Australia should aim for in the future.
Miranda Stewart is a Professor at Melbourne Law School, University of Melbourne.