The ABC’s chief economics correspondent Emma Alberici.
In a fairly spectacular piece of ideological constipation the government decided late in the week to have an article pulled from public domain about corporate tax cuts and the relationship of these with wage growth.
The article – still available here – by ABC journalist Emma Alberici, which I thought well written, essentially posited that there was bugger all relationship between corporate tax cuts and wages growth. Beyond that it noted that in Australian’s case corporate taxes were not particularly onerous and that a large number of companies didn’t pay them, that corporate taxes had a marginal relationship with investment decisions, and that if Australian corporate taxes were reduced then the biggest likely beneficiaries would be large multinationals and investors in these rather than employee wages.
It was a fairly stock standard piece of good logic, well written, backed by informed opinion from a variety of sources and supported by some charts, of the type you can see from Leith or David at Macrobusiness, or from Michael West, John Quiggin or Greg Jericho in the Guardian, and in one or two other locales around the traps.
You don’t often see it comprehensively written up in the Rupertarian stable (in fact I cant recall seeing it there at all – though I don’t go near the Rupertarian all that much – WARNING: UNCLE RUPERT, THE RUPERTARIAN and his minions are a Health Hazard) or the AFR. The weekend saw a range of somewhat surreal rants (particularly the Rupertarian and AFR) expressing indignation from the usual members of the gargoyle set. In the interests of at least seeing what substance the argument against takes I have grabbed the Judith Sloan rant (if you are going to wade into gargoyles one may as well wade to gargoyle central).
So let’s see what we have……
Company tax cuts: let’s have a debate based on facts
12:00AM February 17, 2018
Contributing Economics Editor
Interesting that Rupert’s minions went for a big splash using a corporate glossy of Alberici at the top for anyone not knowing she had hosted a noted TV current Affairs program for an awfully long time – the big personal blame apportionment style attack (However it is worth noting Alberici went with something similar using QANTAS CEO Alan Joyce, although she did at least make the point Joyce was being paid an obscene amount of money and had seen his salary double while his underlings were lucky to garner an extra 2% a year).
Then Judith teed off……
To tell you the truth, my job can be frustrating at times. When I see experienced journalists trot out information they know, or should know, is misleading at best or wrong at worst, it’s enough to give me a serious headache.
Always refreshing to see self indulgence paraded out in the first line of anybody’s damnation piece. Judith has a headache and is frustrated and suggests Emma has trotted out something wrong. OK. Presumably this piece isn’t being seen by anybody likely to get a headache from something Judith has written, because most people familiar with the Rupertarian would be well aware to simply ignore it.
The narrative that most sticks in my craw is the supposed widespread incidence of tax avoidance — some might say tax evasion — on the part of companies operating in this country, thereby undercutting the case for an across-the-board company tax rate cut.
Take this howler from Emma Alberici, now chief economics correspondent at the ABC: “It is disingenuous to talk about a 30 per cent rate when so few companies pay anything like that thanks to tax legislation that allows them to avoid paying corporate tax. Exclusive (sic) analysis released by the ABC reveals one in five of Australia’s top companies has paid zero tax for the past three years.”
It is interesting that sticks in Judith’s craw.
What sticks in the craw of much of the general public is that they have had a generation of mainstream politicians preaching some variant of the need to ‘free up’ business, particularly from taxation and regulatory burden, and they keep coming back for more.
At the same time the public is seeing corporate pre tax profits climb (as indicated in the Alberici piece) and executive salaries go stratospheric, while wages for the punterariat stagnate. Judith’s strongest point is Emma’s use of the word ‘exclusive’ – anyone reading Michael West or Macrobusiness would find the nub of Emma’s piece a tad old hat. But beyond that there is nothing to quibble with in what she has attracted attention to in Alberici’s piece. And that does leave the ambient reader wondering what Judith will possibly write about to keep us occupied for the next few hundred words.
In fact, there is nothing exclusive at all about the so-called analysis. It is based on the flimsy data the Australian Taxation Office must release annually since the Labor Party changed the rules.
In the report of entity tax ¬information, the taxation details of all Australian public and foreign-owned corporate tax entities with total income of $100 million or more and Australian private companies with total income of $200m or more are published ¬annually.
Note there is a long time lag: this week’s release relates to 2014.
Good healthy bile right from the get go. ….Although actually it is just a moan about the fact that companies have to report to the ATO, and the ATO has to report on the data companies provide to the wider public, and that the data being coughed up here is rather old. But there ain’t no gloves laid on Emma’s piece.
However we should thank Judith for drawing our attention to the data collection and release process. Judith has a point when you think that in this day and age it really should be possible to have a publicly available running ledger, and that companies should post all sales volumes and costs in real time. This would enable us members of the public to analyse the data and keep track of the value the company adds to the economic welfare of the society it is extracting value from, and where it returns most value to (including its contribution to the state). That sort of data might help us keep closer track of our political and legislative developments as well.
There are good reasons some companies pay no tax, the most obvious being that they have not made a profit. Just because sales revenues seem high doesn’t mean large black numbers appear at the bottom of the profit and loss statement year in, year out.
The wily Sloan has loaded up the decapitation sucker punch medium paced outswinger here, about companies not making profits being a reason for not disclosing profits. After 2 fifteenths of a seconds thought, the reader knows that is true and is ‘engaging’ with it, as a marketing lecturer explained to me recently. The aim is actually to discourage any further thought, and it is only when you give it a little extra thought that the initial, beautifully delivered, bullshit becomes apparent.
What Judith doesn’t want anyone asking of themselves is ‘Would any company prefer to keep money in its hands that the tax authorities think was due to them, and, if they would, are there options open to them to facilitate this?’ and of course this is well before asking to oneself anything as socialist as ‘would a company management, facing a profitability so limited as to be unable to satisfy all three, favour shareholders and management rather than taxation or labour in terms of delivering value? and certainly before unleashing the inner uber Marxist by posing to oneself the question about the political process and its activities over a generation ‘Have regulatory changes implemented in the name of economic growth over the course of a generation since the early 1980s facilitated the scope for managements and capital owners to discriminate in favour of themselves over labour and taxation in allocating the proceeds of corporate economic endeavours?’ which we could, if we were Vladimir I. Lenin, distil into ‘Do companies see paying tax on their activities as a core requirement of operating within the societies they do, or as an optional branding strategy to be funded from the PR budget?
What Judith probably doesn’t want anyone asking is ‘Are there other reasons companies don’t declare profits other than them not making a profit?’. There would be rooms full of accounting students rolling around on the floor at the thought of that question, wouldn’t there…..
One should also acknowledge that Judith has kindly identified a number of fundamentally flawed assumptions which a range of vested interest bake into their interpretations of company accounts. When Judith states Just because sales revenues seem high doesn’t mean large black numbers appear at the bottom of the profit and loss statement she also means Just because numbers appear at the bottom of the profit and loss statement doesn’t mean they reflect anything terribly much above them or (my favourite as someone who has written a few company statements) statements such as these rippers:-
Statements contained in this Annual Report that refer XXXXXXXX’s estimated or anticipated future results or future activities are forward-looking statements which reflect the Company’s current analysis of existing trends, information and plans. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially depending on factors such as the availability of resources, the timing and effect of regulatory actions and other factors. XXXXXXXX undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after the date of issue of this Annual Report. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the issue of this Annual Report. All forward-looking statements are qualified in their entirety by this cautionary statement
XXXXXXXXX results are reported under International Financial Reporting Standards (IFRS) including Underlying EBIT and Underlying EBITDA which are used to measure segment performance. This release may also include certain non-IFRS measures including Adjusted effective tax rate, Free cash flow, Gearing ratio, Net debt, Net operating assets, Underlying attributable profit, Underlying basic (loss)/earnings per share, Underlying EBIT margin and Underlying EBITDA margin. These measures are used internally by management to assess the performance of our business, make decisions on the allocation of our resources and assess operational management. Non-IFRS measures have not been subject to audit or review and should not be considered as an indication of or alternative to an IFRS measure of profitability, financial performance or liquidity.
The following presentation contains forward looking statements by the management of XXXXXXXXXX, relating to financial trends for future periods, compared to the results for previous periods. Some of the statements contained in this presentation that are not historical facts are statements of future expectations with respect to the financial conditions, results of operations and businesses, and related plans and objectives. Forward looking information is based on management’s current views and assumptions including, but not limited to, prevailing economic and market conditions. These statements involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those in the statements as originally made. Such statements are not, and should not be construed as a representation as to future performance of XXXXXXXXX. In particular, such targets should not be regarded as a forecast or projection of future performance of XXXXXXX. It should be noted that the actual performance of XXXXXXXX may vary significantly from such targets.
In applying the Group’s accounting policies, the directors are required to make estimates, judgements and assumptions that affect amounts reported in this Financial Report. The estimates, judgements and assumptions are based on historical experience, adjusted for current market conditions and other factors that are believed to be reasonable under the circumstances and are reviewed on a regular basis. Actual results may differ from these estimates. The estimates and judgements which involve a higher degree of complexity or that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next period are included in the following Notes:
Indeed it doesn’t take too much to step from Judiths statement about the numbers at the bottom to questioning the veracity of the entire accounting process, certainly as it involves reporting.
But meanwhile, back with Judith…..
The mistake made by too many commentators, including Alberici, is the assertion that large sales revenues must surely be linked to paying a lot of tax. That is, companies that sell a lot should pay a lot of tax. This is piffle, but she picks on Qantas notwithstanding.
Qantas has not paid any company tax for some years because of the accumulation of heavy losses it has made in previous years.
In 2013 alone it made a loss of nearly $3 billion. The company still has accumulated losses of nearly $1bn before it begins to pay company tax again. This should happen next year.
Before we go for a wade into the piffle we should at least ask ourselves why companies selling lots but not making much money (it certainly does happen) continue to sell, and what use can be made of sales volumes in terms of (for example) sustaining debt, or buying time or in some way adding value to previously invested capital, because if it wasn’t doing any of that then the company would be asking if it should be doing something else to get a return on its invested capital.
Judith may have been miffed about Emma picking on Qantas notwithstanding, but Emma has made the point that Qantas hasn’t paid tax in an awful long time – 10 years in fact – and Qantas is notable for its CEO (Mr Joyce) have seen his salary grow particularly exorbitantly in recent years while Qantas consumers haven’t really been bathing in discounted flights and Qantas employees (the ones not being outsourced) have seen their labour grow circa 2% per annum. The 10 years without paying taxes factoid certainly adds to the enthusiasm for seeing whether Judith’s ‘This should happen next year’ line – particularly when Michael West has only recently made fairly clear that Qantas is an Australian corporate tax avoider nonpareil, while observing the following.
Buried in the notes to Qantas’ financial statements for 2016-2017 are two items which have been “Adjusted for Temporary Differences”.
The first is “Property Plant and Equipment and Intangible Assets” which went from $18 million in 2016 to $92 million in 2017. The second is “Revenue Received in Advance” which swung from -$64 million to $16 million.
The effect of these “timing differences” is to have preserved a mighty chunk of tax losses for Qantas to use this year and next. Some smart person in the airline’s tax department has surely earned a good bonus this year.
‘Qantas: $46 billion, zero tax and a neat timing caper’, Michael West, Dec 27 2017
So let’s head back to Judith for her next spoonful of Rupertarian gruel………
Company tax is levied on taxable income and tax is payable only when companies make profits. There is a range of legitimate deductions companies can make, including ¬expenses, interest costs, ¬depreciation, research and development concessions, carry-forward losses and the like.
That first sentence is as clear a statement as one could ever see on why large multinationals (in particular) may see it in their interest not to make a profit in Australia, or, more pertinently to not declare profits, or even minimise profits by payments to related parties, large borrowings (and the interest payments thereon) or shunting core activities to some low taxation domicile based entity.
Certainly only the meanest intelligence would consider corporates would engage in any activity to not make a profit, but only a similar wattage intelligence could fail to identify the advantages for any company in being able to massage that stated profit so as to pay that marginal bit of tax less. Beyond that Judith outlines some of the standard tax avoidance write offs masquerading as core corporate activities which companies utilise.
These deductions have been put there for rational public reasons such as encouraging investment and R&D spending. Do commentators think it would be appropriate to prevent companies from deducting wages, for ¬instance, before tax is calculated?
‘Investment and R&D’ is the next mantra trotted out by Judith, and they are well worth thinking about too.
Australia currently has an economy which has been largely stripped back to mining, agriculture and debt peddling via housing. When it comes to ‘investment’ that has us investing in resources production (more mines or more holes – or more white elephants to gouge the people of Australia from their hitherto comfortable energy cost status) agricultural production (anyone seen any new strains of wheat? Or a cure for whatever blight is wiping out global bananas – for sure it is needed but one has some suspicions about how much is done outside various agriculture departments or universities in Australia in the corporate world – and we certainly don’t do corporate research into the effects of global warming which certainly will affect our agricultural production) and the ‘investment’ in debt peddling using real estate involves negative gearing and capital gains concessions, which ostensibly facilitate ‘investment’ in new housing but goes 94% on existing housing. If one takes Judith’s statement to mean she thinks there needs to be a national overhaul of what on earth ‘investment’ or ‘Research & Development’ actually means in Australia then she for sure has my full support, but I am not sure that is what she is getting to.
R&D in Australia is a political motherhood consideration. Politicians like to encourage it so that they can plausibly say that the rocket scientist of tomorrow might get a gig in Australia, but for the most part corporate Australia R&D’s as little as they can in Australia, except when desiring to encourage taxation write offs, because Australians are expensive and a long way from anywhere else, with what remains a small market – which all adds up to a line I spotted in a recent Department of Defence publication which wafted across my desk asserting that about 90% of all ‘real’ R&D in Australia was carried out by state entities (including universities) or one notable ex-state entity (CSL).
Meanwhile, back with Judith….
(Some types of companies pay tax in different ways. This is true of some insurance companies, mutuals and property trusts. You need to know what you are doing when interpreting the gross figures the Australian Taxation Office releases. Sadly, the ABC analysis misses this point entirely.)
Would we want to alter this state of affairs? Would we really want to eliminate these deductions? What would be the consequences of eliminating or tweak¬ing these deductions? Hint: less capital investment, less R&D spending, fewer company starts, lower employment growth.
Next up, Judith smears those doubts about corporate accounts and the meaning of ‘investment’ and ‘R&D’ in Australia all over herself while pointing at the ABC for having baulked at doing likewise.
When she poses ‘Would we really want to eliminate these deductions?’ she is begging us to consider what real value they add beyond their value as tax write-offs? And I applaud such sentiments – the vast bulk of investment and R&D in Australia adds not a skerrick to the national economic substance apart from enabling tax write offs. We should indeed squirrel grip them fiercely.
But the most frightening and possibly unintended implication of Alberici’s rant is her implicit claim that the ATO is just not doing its job and is possibly not up to the job. If all these companies are not paying their “fair’’ share of tax, whatever that may mean, this is surely a serious indictment on the professionalism of the ATO and its activist commissioner, Chris Jordan.
The ATO does take exception to this criticism by outlining its ¬efforts to ensure company tax liabilities are correctly calculated and paid. There are complications associated with foreign companies operating in Australia but changes to the thin capitalisation rules (ensuring Australian subsidiaries are not loaded with debt and charged excessive interest rates on intracompany loans) as well as the multinational tax avoidance legislation are making a difference.
Next we move onto the ATO, and a serving of faux outrage.
Judith opens up with the sanctity defence, pooh-poohing any suggestion there is a question of the professionalism of the ATO while hosing down the very idea that there may in fact be a ‘fair’ angle to tax payments. For anyone wondering, she hoses down the notion of fair because once anyone starts to question fairness in relation to almost any corporate activity then that corporate activity is possibly going to smell.
Organisations are inherently self-centred (and that’s just the way the investors in them like them) and turning people into corporate identities is the one sure fire way to get them to focus on themselves and their profitability, with thinking about others sometimes distracting these from maximising their returns, and turning all distractions into promotional outlays so they can be written off as business expenses to reduce profits – it’s all good.
She rightly points to the ATO mounting an often spirited defence of its abilities.
But she doesn’t once go near acknowledging that it is these capabilities that politicians – particularly conservative politicians –have been most keen to tone down, limiting the ATO’s ability to do much more than processing PAYE taxpayers, and run compliance checks over about 5% of all claims, and ensuring it isn’t resourced to head off on wild goose chases for multinationals skipping away with undeclared profits.
When large multinational sit down with ATO representatives about their tax bills, there is always the vague sense it may be a recruitment audition. The next line of defence is the legal budget and a load of jurisdictional issues which nobody really wants to go near – so focussing on how ‘professional’ the ATO is, is always a safe way to play taxation regulation and investigation sentiments. This of course is against a backdrop of PAYE Australians expecting that the ATO will be as vicious with the multinationals as possible, but having a vague sense of being taken to the cleaners by outfits such as Chevron and the major accounting firms – let alone Australian resources majors.
A loud bark, but the ATO wont bite, is what capital generally expects.
So let us assume the ATO is competently undertaking its role in collecting tax and list some other considerations in the debate. Contrary to Alberici’s assertion that it is large companies that are avoiding paying tax, there is little doubt that most of the tax-fiddling occurs within small businesses, a point Jordan concedes. The scope for cash trans¬actions, calling private benefits business expenses (the lease cost of the wife’s car, for instance) and living out of the till are all examples of small businesses minimising their tax obligations. None of these options is available to large businesses.
Jordan also has made the point that when it comes to tax revenue forgone, a large source relates to phony work-related expenses made by individual taxpayers.
“The risks of noncompliance are mainly around deductions, particularly work-related ex-penses. There are many errors and over-claiming for work-related expenses,’’ he says. “In 2014-15, more than $22bn was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact could be significant.”
Yes, let us assume. far easier than actually working through the issue.
Judith’s workmanlike defence of large capital interests next sees her wheel out small business as the major tax fiddling culprits, and not the large end of town.
This line of reasoning has the upside of the defendants being well known to everyday Australians as the tradesmen sipping cups of tea amidst repairs to their houses and staff in their local shops. Any right thinking individual knows these aren’t major tax avoiders – or at least not worth unleashing the wheels of state upon. Fortunately, has an entire political organisation to represent their interests in the form of the Liberal Party.
Judith is rightly assuming that the said Liberal party will be far more vigorous in defence of these than it may be under pressure than in defending large multinational capital interests avoiding paying Australian taxes. So her reference to these here is a clarion call to the small business community to get the wagons in a circle, while underlining the cat herding like political implausibility of anyone serious contemplating a real look – allowing big capital to hide behind (and fund if need be) the righteous indignation attending the sentiment.
Company tax revenue in Australia is one of the highest as a proportion of gross domestic product among developed economies. It is also surely passing strange that so many countries, many of which have clear socialist tendencies such France, Denmark, Sweden and even Britain, have been cutting their rates of company tax for some time. Some of them have plans for further reductions. There is surely a lesson there for us.
Next up is a technique beloved of the right wing gargoyle set, known as ‘socialists see the light and we should too’. Judith wheels out some high taxing locales, throws in some Poms and blithely suggests that as they are reducing the corporate tax takes we should too – without for a second contemplating how their economies stack up against Australia.
Some charts here are useful and the first is the sources of revenue according to the last budget
Next up is taxes as a share of GDP across the OECD (note Australia one above the United States).
……..and that brings us to another interesting chart of tax structures across the OECD.
And finally from there from there is a nice set of charts from the OECD about corporate taxes as a share of GDP across a range of countries including the ones Judith mentions
And income taxes across those same nations
These latter do show the corporate tax take as a percentage of GDP in Australia (& New Zealand) as being higher on average than those in other nations but as the corporate tax structures chart above suggests it is by no means an outlier.
From there it is also worth thinking about what any corporate in Australia is actually doing. Our banks operate in an essentially closed market, our resources and gas plays are largely natural monopolies, as is telecoms, energy, and the retail sector. After CSL and Nufarm, which certainly do sell products internationally in competitive markets (and certainly do carry out real R&D), it is difficult to think of Australian companies which compete in global market places in circumstances where the marginal corporate tax rate may be an influential factor in their competitive environment. Anyone looking at the large investors in the banks, retailers, large resources plays etc can see that they are essentially vehicles of the global capital set and aren’t really competing with much, apart from the scope to deliver a return to the global capital set, with other entities domiciled elsewhere, owned by the global capital set. That may be all good and well but does the global capital set deserve a tax break from Australia?
Judith returns with a generous serving of Donald Trump
Of course, the really big story is the cut to the company tax rate in the US under the Trump administration. From a headline rate of 35 per cent plus, the rate of company tax will now be 21 per cent. There also will be expensing of all capital spending in calculating tax liabilities. This latter change has huge ¬implications because large licks of capital spending will be immediately deducted by companies in calculating taxable income rather than depreciating this spending across many years.
It is hardly surprising there has been some tweaking of other deduction arrangements in the US, including in relation to ¬interest payments, given the short-term fiscal cost of the company rate cut and the expensing of capital spending. Another related ¬dev¬elopment is effective demise of the global base erosion and profit shifting project, the aim of which was for countries to extract more tax revenue from big, mainly US, companies such as Apple and Google.
Not that the US had ever signed up to BEPS. All that excessive cash held by these companies outside the US will now be repatriated on concessional terms and there will be little for every other country to argue about.
Thanks for that Judith. Anyone following the markets and vaguely aware of the circumstances in which trump has acted can tell you it is rocket fuel for the US economy now, but does leave it with a structural budget deficit issue of some magnitude over the longer term, and that our own RBA’s Phil Low has in the last couple of days spoken eloquently about the risks a similar approach here may entail for Australia .
Let’s also acknowledge that companies such as Apple and Google only sell products here. They don’t develop intellectual property here; they don’t manufacture here; there are licence fees to pay; they are basically retailers. As such, their activities are never likely to generate much local tax revenue, notwithstanding their substantial sales revenues.
I could be wrong but it appears that Judith doesn’t care too much about taxing any profits of Google from Australian operations, apart from suggesting they wont make too much here – which essentially comes back to Judith agreeing that in these circumstances at least sales revenues will determine the profits in play……..
By all means, we should debate the case for cutting company taxes in Australia. But we need to do this from an accurate factual base, not one concocted by those with an agenda to push and a complete lack of understanding of how the company tax system works.
I completely agree with Judith here. We should debate the idea of reducing corporate taxes and ensure that we have absolutely tonnes of data and information. And it should be just concocted by those with a vested interest in minimising their taxes, or their stooges, but from all parts of the economic and social spectrum.
So there we have it. An entire Judith rant about Emma’s article and the only real glove she has laid is about the use of the word ‘exclusive’. For sure she has a point there -Emma and the ABC have been exceptionally naughty to use the word ‘exclusive’ in relation to Emma’s piece. But that hardly warrants pulling the article from the public domain and that sort of action does give rise to the certainty that it has been pulled at the request of government figures, including the Prime Ministers office for reasons which have been exhorted but havent been articulated at all to the public, and do give rise to contemplation of a particularly pernicious form of censorship.
The rest of Judith’s piece hasn’t identified anything significantly wrong with Alberici’s article, but it has fortunately helped identify some major issues which should be considered with Australian corporate taxes.
Thanks Judith –
But now could someone please explain why the Alberici article was pulled?