03/08/23

TAX EVASION: Australia's upcoming global minimum tax is intended to stop offshore tax evasion

As published on: abc.net.au, Thursday 3 August, 2023.

Next year, Australia will introduce a global minimum tax aimed at preventing multinationals based within its borders from evading tax.

As announced in the last federal budget, the new tax will include an additional levy charged to these companies, who have an annual global revenue of at least $1.2 billion.

Australia was one of the 130 OECD countries and jurisdictions that pledged in 2021 to introduce a 15 per cent global minimum tax, which it intends to implement from January 2024.

The intention is to prevent multinational companies from evading domestic taxes through offshore subsidiaries, a long-term problem across the world. It's estimated to raise $330 billion annually in revenue.

According to the Australian Tax Office (ATO), around one third of large public companies in Australia paid no tax in the 2021 financial year. 

"[A global minimum tax is] designed to address the really aggressive tax shifting strategies that multinational entities do", Kerrie Sadiq, professor of taxation at the Queensland University of Technology's business school, tells ABC RN's The Money.

She says a tax like this would mean that "putting money into tax havens where there's zero tax rate will have no effect anymore".

But while an initiative to close tax loopholes is considered by many to be a positive move, some experts say a global minimum tax may not prevent corporate tax avoidance.

"I'm a supporter of the global minimum tax," Professor Sadiq says.

"And I'm very much a supporter of global initiatives. I think it's a very small step in addressing the underlying problem of multinational entities avoiding tax through legal means.

The idea of a global minimum tax has been promoted by renowned economist Joseph Stiglitz as well as political leaders in Australia and abroad.

"What we don't want to see is an economy where multinational companies are looking for a shortcut to success by finding another tax loophole," Andrew Leigh, the assistant minister for competition, charities and treasury, wrote in the Australian Financial Review last year.

Across the world, countries have offered companies reduced corporate tax rates to encourage them to conduct business within their borders. It's been dubbed the "race to the bottom".

In 2016, reportedly half of US corporate profits were stashed in seven countries with low tax rates: Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland.

In 2019, this behaviour is estimated to have cost countries across the world US$1 trillion ($1.47 trillion) in lost tax revenue.

Countries with low tax rates, such as Singapore, often attempt to attract international business through financial incentives.(ABC News: Giulio Saggin)

One of the strategies multinationals use to avoid paying tax is by creating subsidiaries — also known as "marketing hubs" — in countries with no or low tax rates.

Marketing hubs charge their parent companies for services at an inflated price, allowing for profits to shift to a low-tax environment.

Some countries encourage these business tactics to boost economic activity in their country. Singapore, for example, has a corporate tax rate of 17 per cent, compared to Australia's 30 per cent.

However, Singapore's effective tax rate can be much lower, as its government has incentives that greatly reduce or remove tax obligations for multinationals that set up operations and services in that country.

A global minimum tax could help get around the challenges of preventing multinational companies from using this tactic, given that these loopholes aren't technically illegal.

Currently, there are parameters intended to prevent multinationals from exploiting this system. Known as the "arm's-length principle", if subsidiaries go beyond a certain fee, there could be a case for the ATO to chase unpaid taxes.

In 2018, mining giant BHP settled with the ATO to pay $538 million in taxes it skipped through its Singapore marketing hub.

Last year, the ATO reached a settlement of almost $1 billion with mining giant Rio Tinto over its Singapore-based subsidiary.(Reuters: David Gray )

The following year, Google settled with the ATO to pay $481.5 million in taxes for the same reasons. And in 2022, mining company Rio Tinto agreed to pay almost $1 billion.

Supporters of the global minimum tax argue that the 15 per cent minimum tax across the world will effectively make tax havens pointless.

However, there are questions over what the tax will actually achieve.

Professor Sadiq says the tax will "raise very little" for Australia, providing $210 million by the 2024 financial year, "less than half a per cent of the $93 billion in company tax revenue" expected for that year.

Another potential is that the global minimum tax could backfire, by minimising the tax paid by multinationals and their offshore subsidiaries to just 15 per cent. If that were to happen, it could then make it difficult for other countries to potentially justify a higher tax rate, Professor Sadiq says.

It's also likely that multinationals will simply work around this new tax, as they have done with previous taxes, and countries will still provide tax incentives and exemptions to attract offshore business.

Professor Sadiq says a better approach to addressing tax avoidance could be taxing multinational companies as the singular entities they are, through a system that taxes global profits.

This revenue could then be allocated to the countries or jurisdictions where these companies' main activities are taking place, such as multinationals mining in Africa.

In 2021, the International Monetary Fund reported that multinationals mining in Africa could be shifting potentially more than $1 billion worth of corporate tax revenue out of the continent every year.

It was also estimated in 2019 that Australian mining companies had legally shifted $1.1 billion out of Africa in a single year.

Taxing multinationals as singular entities "would ignore all those internal transactions that currently allow profit sharing" while simultaneously supporting the areas responsible for these profits, Professor Sadiq says.

"We want to ensure tax is paid in the location of the actual activity."

 

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Tax Evasion Tax Avoidance Global Minimum Tax Australia