In 1906, the formidable US president, Theodore Roosevelt, wrestled with the dilemma of how to regulate burgeoning monopolies which resisted paying tax, affording decent wages and government regulation. Insisting that corporations provide transparent reports to government on their capitalisation, profits and financial structures, Roosevelt declared that the state “has got to possess the right of supervision and control as regards the great corporations”.
Roosevelt stared down his many opponents within the Republican Party, challenging that it deserved electoral loss if it “took the attitude of saying that corporations, should not, when they receive great benefits and make a great deal of money, pay their share of the public burden”. He pioneered the concept of mutual obligation; not the notion that is nowadays used to denigrate the unemployed as “job snobs” but instead an insistence on a reciprocal relationship of rights and obligations between the state and corporations.
In 2016, governments of developed nations are wrestling with the dilemma of how to regulate burgeoning multinational corporations that exploit loopholes in tax laws and shift money into tax havens with astonishing ease.
At hearings before the Senate standing committee on economics in April, company executives dissembled, pleaded ignorance or simply refused to answer questions about company tax arrangements. Those responsible for the tax minimisation, company directors, were nowhere to be seen and were not held to account for approving the schemes under investigation.
The experience of Parliament reflected that of the Tax Office which gave evidence of being delayed and “stooged” in its dealings with these companies.
Multinationals are not the only companies aggressively avoiding tax. As the campaign for tax transparency painstakingly progresses, we now know that other large private companies are engaging in the same behaviour. Tax Office data released in March suggests that up to one third of large private companies earning more than $200 million in revenue pay no tax at all.
Prime Minister Malcolm Turnbull is no Roosevelt. His recent budget sent a powerful mixed message to the private sector, undermining any meaningful sense of mutual obligation. On the one hand, the government flagged a “crackdown on multinational company tax avoidance” by the introduction of a new profit-shifting tax and restoration of the funding that it had slashed from the Tax Office just two years ago.
On the other hand, the 2016 budget delivered a company tax cut bonanza with a 10-year plan to cut company tax at an estimated cost to the budget of $48.2 billion. In the midst of so much aggressive tax minimisation, why are large companies being extravagantly rewarded? The Turnbull government is offering corporations a bunch of very large carrots while waving about an impotent stick.
The tax cuts will dwarf any lost revenue derived from the crackdown; just $3.7 billion is projected to be clawed back over the next four years, a fraction of the amount lost to the budget coffers from company tax avoidance. That companies will try to outmanoeuvre proposed new legislation using a phalanx of expensive lawyers and top accountants is certain.
Companies are not people, but it is people who direct their actions. Company directors are responsible for the range of aggressive tax avoidance schemes now operating. The same company directors yearn and receive all the trappings of respectability and recognition that society has to offer. They enjoy easy access to governments, politicians and the front pages of newspaper. They are frequently to be found on the boards of sporting and arts bodies, academic institutions and other respectable bodies.
While the cat and mouse game between the state and corporations continues, company directors continue to escape accountability. While prominent business leaders routinely complain to a largely supine media of Australia’s “uncompetitive” company tax rate, they invariably also ignore the considerable taxpayer support that assists them.
Taxpayers subsidise companies every day. Energy and transport companies, for example, need a reliable network of roads, rail and ports to distribute their products. Your taxes fund them. Mining companies get access to discounted fuel prices because our taxes all subsidise a fuel tax credit scheme for them. Pharmaceutical companies rely on another taxpayer funded scheme, the Pharmaceutical Benefits Scheme, to subsidise the cost of their medicinal products to consumers.
Deductions, allowances, industry support, incentives and grants are all funded by taxpayers.
At the same time as repudiating a fundamental obligation to contribute to Australia’s economic and social wellbeing by paying their fair share of tax, those same companies and their directors enjoy an enormously influential role in the institutions that shape public policy, the economy and society.
Prominent big business lobby group, the Business Council of Australia, which permanently campaigns for tax cuts, has ready access to government including through its membership of government consultative bodies. Its chief executive, Jennifer Westacott, is a member of the Business Tax Working Group, which makes recommendations to government about the business tax system.
In 2013-14, one third of BCA member companies, including Transfield and Newscorp, paid no company tax at all.
In 2015, Chevron was represented on a working group advising the federal government on a review of Tax Office transfer pricing investigations. Just two years earlier, Chevron earned more than $3 billion in revenue, paid no company tax and donated generously to both major political parties.
In 2010, BHP and Rio Tinto unleashed a battalion of lobbyists into Parliament House and millions of dollars for a campaign that ultimately succeeded in destroying a super profits mining tax. As the campaign unfolded, and away from the public spotlight, the Tax Office was investigating whether both companies had shifted profits to Singapore to avoid company tax. Rio Tinto, for example, paid as little as 5 per cent tax on profits shifted to Singapore and has since been forced to make substantial payments to the Tax Office. The investigation into BHP continues.
Such egregious behaviour undermines the glue that binds the community together: a functioning tax system. As Wayne Swan has observed: “The billions of dollars of tax that multinationals avoid holds back billions of dollars in health, education, and infrastructure investment….When multinationals avoid their tax obligations, one way or another, the Australian people pay.”
Changing tax laws is not enough. Improving corporate citizenship involves changing corporate culture, a process that requires endurance and experimentation. Effective reform will require explicitly rewarding those that expose aggressive tax avoidance schemes and and penalising those responsible for them.
Why not start with rewarding whistle-blowers who provide information to the Tax Office about tax avoidance schemes? Not only do they deserve comprehensive protection for any retaliation but such whistle-blowing could be encouraged by a reward of 10 per cent of any funds obtained by the Tax Office as a result of their assistance.
And what can be done to deter company directors from ignoring their ethical responsibilities?
A creative approach means hitting wayward company directors where it hurts – in their egos.
Changing the Australian award system so that it no longer venerates those business leaders involved in aggressive tax minimisation would send a powerful message of public disapproval.
Each year, prominent company directors are among the recipients of individual awards, including the Order of Australia. The current directors of BHP and Rio Tinto are among the recipients. Directors of companies engaged in aggressive tax avoidance should not be eligible for such awards. Modifying the criteria that the Council for the Order of Australia uses to bestow such awards is a relatively straightforward process. Going one step further, company director recipients of such awards could be stripped of them if the relevant company was required to make payment to the Tax Office because of its aggressive tax avoidance.
Echoing Roosevelt’s mutual obligation, the ASX argues that good corporate citizenship involves acting ethically and goes well beyond mere compliance with legal obligations in a manner consistent with the reasonable expectations of the community. The community expects large profitable companies to pay their fair share of tax and company directors to be accountable for their actions.
Original article appeared in the Sydney Morning Herald.