Are big companies getting a better tax deal? 

October 2014

Big company profits and their seemingly low tax liabilities have frustrated governments around the world, particularly as the impact of falling tax revenues hit the coffers. 

The Tax Justice Network Australia recently released a report into the practices to Australia's Top 200 ASX companies, revealing that: 
  • Nearly 1/3 have an average effective tax rate of less than 10%
  • 57% have subsidiaries in tax havens or low taxing jurisdictions 
  • 60% report debt levels in excess of 75% of equity.

What this equates to is that 29% of ASX listed entities have an effective average annual tax rate of 10% or less and 14%, including James Hardie, have an effective tax rate of 0%. 

Australian media mogul Kerry Packer once said when asked if he was minimising tax: "Of course I am minimising my tax. And if anybody in this country doesn't minimise their tax, they want their heads read, because as a government, I can tell you you're not spending it that well that we should be donating extra!"

Tax is like any other cost in your business.  It should be managed effectively so you don't pay any more than you need to. But here's the problem, a company has to make a profit to pay company tax.  

The problem of profit and company tax

Coming out of the GFC where jobs were shed and investments shelved, it was a bit harder to do than the boom times – particularly if you weren't in the resources or banking sectors whose buoyancy made Australia's headline economic figures look a whole lot better than they felt for the rest of the economy.  

Plus, if you are investing in and growing a business, this consumes profit.  Unless you look below the surface, the tax paid is an ineffective measure of the contribution a company makes.

So the question is, is it likely that the biggest companies are paying a lot less tax than the average Australian business?  The answer is yes, of course.

Why do big companies pay so little tax?

The reason is simple: tax is a local jurisdiction issue and international corporations have the capacity to look across the tax minimisation opportunities globally, not just locally.  As long as everyone operates within the local laws, they are not doing anything illegal by minimising tax.  

Additionally, Governments often offer tax incentives for large entities to establish in their region for the stimulus and job opportunities they provide. 

When does 'minimisation' become 'evasion'?

The issue for Governments across the board is what happens when it's no longer minimisation but evasion. Transparency is one issue.

The recent G20 endorsed a common reporting standard for the automatic exchange of information.  The new reporting standard will be introduced in Australia in 2017 with the first exchange a year later. 

It's a debate that is playing out globally and anyone with a business with international connections should take the time to review their current position across different entities in different locations and ensure that they are not at risk of being drawn into a widening net.  

Got international connections? How to avoid problems

Whether you're in business or an individual taxpayer, if you have funds flowing between countries, the tax office is going to be interested in you.  

For individuals, Project Do It provides an opportunity to voluntarily disclose unreported foreign income and assets before the tax office discovers them. With the amnesty deadline rapidly approaching, it's important to look at proactive disclosure. 

For business, trigger points include:
  • Excessive debt levels in Australia - The thin capitalisation rules place a limit on the level of interest and other debt deductions that can be claimed in Australia when Australian operations are heavily funded by debt rather than by equity.  Legislation recently passed by Parliament retrospectively tightens these rules further for entities with very large debt deductions ($2m and above).   
  • Excessive costs paid by local subsidiaries - The Government is particularly concerned with arrangements where Australian entities transfer intellectual property to a low tax jurisdiction for a relatively small amount of money and then pay considerable sums for the use of those assets on an ongoing basis.  Large management fees paid by Australian entities are another trigger for the ATO. 
  • Use of tax havens or low taxing jurisdictions.  
International tax is complex

Whenever funds or assets cross borders, there is a risk of triggering the interest of the ATO, particularly if the transactions, sources of income and asset management isn't documented properly or is not transparent. 

It's worth getting specialist advice on residency, responsibilities and reporting if your business or personal situation crosses borders. Contact us on 02 9957 4033 for more information. 

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Last updated October 2014. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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