Australia’s federal government has targeted major corporations in what it said is a crackdown on loopholes in the country’s corporate tax system that will deliver A$4bn in budget savings over the next four years.
The crackdown is at heart of a business tax ‘integrity package’, which the government believes will raise A$14.3bn in additional revenue over the next decade. Despite the economy enjoying 21 years of uninterrupted growth and surviving both the Asian crisis of 1997-98 and the worldwide downturn 10 years later, the government’s finances have recently moved from surplus to fall sharply into the red.
Multinational corporations (MNCs) with operations in Australia, banks and mining groups are likely to feel the greatest impact from measures targeted at what the government’s treasurer, Wayne Swan, called areas that have been abused and are eroding tax receipts. Swan has also been lobbying other G20 countries to intensify efforts to crack down on international profit shifting and tax avoidance by major corporates.
The Labor government gave notice last month that it planned to
compel MNCs such as Google and Apple to publish their tax details
to curb alleged avoidance, when assistant treasurer David Bradbury accused them of using complex structures to allocate more of their profits to countries with lower tax regimes.
Tax receipt shortfall
The measures were part of Swan’s sixth budget on 14 May, which he defended against critics by saying that Labor had been the victim of “unforecastable”, once-in-50 year economic circumstances, that had transformed his promised budget surplus into a A$19.4bn deficit this year, mainly reflecting an A$17bn writedown in expected tax receipts over the 2012-13 financial year.
The government’s changes will prevent foreign MNCs artificially loading debt into their Australian operations and claiming tax deductions. They will also implement a A$1.1bn programme that will make it more difficult for mining groups to claim up-front tax deductions on exploration work that they never carried out, usually when the discovery was made by a junior miner that sells them the rights.
Foreign miners and other investors are also being targeted for not paying foreign-resident capital gains tax, by taking 10% of the sale proceeds from the purchaser of Australian property. Other targets included banks shifting income offshore to reduce tax and sophisticated investors carrying out ‘dividend washing’, or repeatedly claiming tax benefits on dividend payouts.
Swan believes that the mining sector has been paying a lower rate of corporate tax than is commensurate with its share of the economy. He has claimed that mining groups account for 30% of corporate gross operating profits, yet contribute only 15% of corporate tax receipts.
Pressures on business
The Australian government expects corporate tax receipts to rise from A$66bn last year to $71.6bn this year, both figures revised down from the estimates in last year’s budget papers of A$67.5bn and A$73.5bn respectively. The estimate for 2013-14 currently stands at A$72.8bn although analysts suggest that this may also have to be lowered as the corporate sector remains under pressure from the strong Australian dollar – which rose nearly 9% against the US dollar between June 2012 and April this year – high input costs and slowing demand.
The mining sector, which until recently enjoyed a decade-long boom on the back of strong commodity prices, has suffered as demand for minerals from China and elsewhere has eased. Earlier this month the Reserve Bank of Australia (RBA) cut its key rate from 3% to 2.75%, the lowest level in 53 years, to counter slowing growth.
PwC Australia’s chief executive officer (CEO), Luke Sayers, commented that Australia was overly reliant on corporate tax as a source of government revenue. “The measures confirm we are still on a slow moving fiscal cliff, imbalances appear to be chronic, and our standard of living is at risk,” he said.
Prior to the budget, businesses were lobbying for a reduction in Australia’s corporate tax rate from the current level of 30%; albeit with little hope of success. Australia’s Corporate Tax Association, the key representative body for companies on tax issues, has argued that projects in the country geared at close to the allowable debt-to-equity ratio (D/E) should be given transitional relief, particularly those operating in the resources sector where companies are undertaking expensive projects.
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