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A Grand Pause for Australia’s Company Tax Laws

The Morrison government has been sluggish and inactive in the roadmap to Australia’s actions on sustainability. The government has received immense criticism, justifiably so, in the wake of the recent bushfires and support of dirty energy industries. The arm of sustainability is more than a stretch towards environmental actions and includes Australia’s company tax regime. Yes, company tax is the symphony’s conductor to which the immensely attractive sustainability ensemble must play their music to if Australia is to participate as true global citizen in the coming decade.

It seems unfathomable that Australia’s greater sustainability goals hinge on something as mundane as the rise or fall of company tax. Big companies often complain about Australia’s high company tax rate on their profits as one of the highest in the world. What most companies and company lobby groups conveniently shy away from is the impact that corporate tax deductions have on discounting their actual profits. Employee salaries, depreciating assets and tax offsets including for research and development are all tax offsets that are claimed by companies. The most interesting tax offset available under Australian company tax law is the bringing forward of previous company losses indefinitely; as long as the company maintained the same ownership and control and carried on the same or similar business at the time since the loss was incurred1. It’s easy to finger point at international companies with respect to loss allocation as a means to reducing company tax, but Qantas has certainly taken advantage of this prolific offset. The flying kangaroo has not paid company tax in Australia since at least 2015, restructured and minimised jobs, sold its Australian terminals and happily hopped away with the profits nestled in its pouch.

This is not a singular approach taken by the Australian juggernaut. The Australian Chamber of Commerce and Industry has submitted that reducing the company tax rate will “make a material difference to the competitiveness of medium, small and large businesses and their ability to invest and employ more people.2 The logic of ‘trickle-down’ economics submits that companies will reinvest their tax benefits back into their company, employ more people, or provide pay rises. The same employees spend more, generating greater revenue through GST collection. In advocating for trickle-down economics, companies pivot the collection of government revenue squarely to the individual taxpayer. Although the argument appears rational, it bypasses the basics of creating a sustainable corporate tax structure that isn’t highly reliant on individual consumption. The International Monetary Fund has openly declared that companies who receive taxation benefits rarely pass these benefits down to their employees. The ensemble is broken apart by the electric guitar player who smashes the hotel room and leaves others to clean up after them.

A low company tax rate has worked for some countries. Indeed, Ireland has attracted some of the world’s richest companies as a result of their company tax structure, which taxes companies at 12.5% on company profits. The Irish have been able to create a symphony with high profile players. In 2015, the Irish government announced a further tax treatment that now sees companies only pay 6.25% of tax on profits derived from intellectual property revenue streams. The Irish government is proud of their number 1 ranking with companies in relation to ease of paying business taxes. The top 100 companies in Ireland accounted for 73% of company tax revenue for the Irish government in the years 2016 to 2018. In 2016, approximately 12-13% of the Irish workforce were employed by foreign multinational companies and that excludes the indirect employment that ancillary services, such as lawyers, accountants and auditors provide to the foreign corporations.

The problem with creating a symphony with powerful players is that the music can only be played by those unique players. If the players leave or start making unreasonable demands, there are gaps in the musical piece that cannot be compensated for or hidden by the other players. Ireland might have created a service-based economy based on low company tax, but how long can it continue this tax model if another, similar country decides to follow suit. The implementation of a long-term sustainable tax reform in Ireland is likely to have an adverse impact on its economy simply because the country is overly dependent on its generous company tax law regime. Ireland might be in a race to the bottom if another country lowers their corporate tax rate and the international companies shift headquarters. Ironically, this is exactly how Ireland attracted the US tech companies to it shores.

A sustainable tax reform sounds like a socialist ideal that is unachievable. The United Nations 11 Sustainable Development Goals seems entirely unrelated to the score of company taxes and economic progress. Yet the United Nations has come forward numerous times confirming a sustainable and trustworthy tax regime underpins sustainable actions, be it climate change, diversity and inclusion and labour laws. Let’s remember that Australia has been a world leader on sustainable actions: in 2011 it introduced plain packaging laws for tobacco products and most recently, was and still is only the second country in the world to pass anti-modern slavery legislation.

For once in its government life, the Morrison government can hold out doing nothing in changing Australia’s company tax laws and claim sustainability. Despite the grumblings from big companies, the Australian Bureau of Statistics reported an increase of 6% of foreign investment in Australia from 2017 to 2018. The current tax regime can continue in its role as the symphony’s conductor, holding the pause until the next page of the musical score can be written. The question then turns to whether a government led by Scott Morrison has the integrity and fortitude to think about the welfare of the symphony and its audience, rather than the fizzle and sparkle of an election year.

1 Commonwealth of Australia: Australian Taxation Office (2019) How to Claim a Tax Loss https://www.ato.gov.au/General/Losses/How-to-claim-a-tax-loss/#companies
2 Australian Chamber of Commerce and Industry (2019) Getting on with Business 2019: Business Policy Priorities for the next Federal Government https://www.australianchamber.com.au/wp-content/uploads/2019/05/ONLINE-GOWB-May-2019-1.pdf.