Companies are shifting profits offshore to pay less tax

FULL SPEECH

Chamber: Senate on 15/11/2023
Item: BILLS – Digital Assets (Market Regulation) Bill 2023 – Second Reading

Senator RENNICK (Queensland) (18:53): I rise to speak on the Treasury Laws Amendment (2023 Measures No. 1) Bill 2023. I’ll first focus on schedule 2 and the sustainability standards. Having spent many hours preparing financial statements, I know the last thing we need to be worried about is trying to measure impacts and sustainability and all those fluffy things that are very hard to actually quantify. As an accountant, I know financial reports should be just that: they should be about the finances of a company rather than having a lot of words. If you read a set of financial reports today, it’s more like reading War and Peace, and there is next to no information on the actual internal workings of the company. By that, I mean there’s not enough management accounting information in there. I would vote against all of this bill just on the basis of schedule 2.

I will call out the hypocrisy of Labor. I’ve said this a few times now, but we have 40 different models to calculate net zero, and the CSIRO is not prepared to acknowledge the risks and benefits of the model that we use versus the other 39 models out there and whether or not there’s any regulatory arbitrage between countries on that. For example, they don’t include phytoplankton. Just last week, we spent the entire week talking about legislation that’s going to look at putting carbon dioxide in the bottom of the ocean whilst we completely ignore phytoplankton in our ocean, which absorbs 70 per cent of CO2. But, despite the fact that the bureaucrats don’t want to be held to account on the way they measure carbon dioxide, you’re talking about bringing in legislation that seeks to hold the private sector to account on their sustainability practices and how they’re going to deal with climate change, measure CO2 emissions et cetera. It’s a bit rich for the government to be asking the private sector to measure all of their impacts on the environment whilst at the same time not being held to account on how they calculate net zero.

I’ll move to the other sections of the bill. Personally, if it wasn’t a broken promise, I’d actually probably support schedule 4, but it is a broken promise. The Labor Party said that they weren’t going to touch franking, and they are now touching franking. The reason I would actually support schedule 4 is that, for big Australian companies who have large foreign ownership holdings, those franked dividends aren’t distributed when they pay dividends offshore. So the franking credits accumulate in the franking accounts, and every five or six years or every decade BHP will do a share buyback or a capital raising and effectively redistribute or stream those dividends out to domestic shareholders.

The problem I have with that is that franking in itself is nothing but one great big paper shuffle. There have been reports over the years—I followed this closely throughout my finance career—that the real net company tax rate is, depending on what you read, somewhere between 13 and 17 per cent. We’re seeing over time that the superannuation funds get bigger and have a much larger shareholding of our ASX 200 blue-chip companies. That means that when they pay out dividends to super funds the franking credits then get refunded. So, overall, companies are paying less and less tax, and we’re also seeing that with charities and everything like that.

But, in the means of collecting and distributing the dividends, a company will pay its tax in May one year. There’s an enormous amount of paperwork in calculating that tax, doing the accounting on all the franking credits and maintaining those franking credit accounts. Then, about eight months later, when the individuals go and lodge their tax returns, they get the money refunded to them. Let’s take halfway between 13 and 17 per cent. Let’s say it’s 15 per cent. That means that half the company tax that gets collected in Australia—I haven’t looked at it in a while, but I think it’s pushing close to $100 billion, so half of that would be $50 billion—gets refunded or recycled back out. So, if you really wanted to reform the tax system—and I’ll qualify all of this by saying that, whatever you do with the tax system, you’ve always got to cut income tax first and make sure that the rate of income tax for the average wage is always lower than the company tax rate—you should get rid of franking credits altogether and just have a lower, flatter company tax rate.

The reason for that is that we cannot compete with offshore capital. We currently have an onshore tax rate of 30c in the dollar, but, generally speaking, our offshore tax rates with most of our major trading partners, depending on the tax treaty, are between zero and 15c in the dollar. That creates what they call a ‘taxation arbitrage’, where the rate of tax on onshore profits is 30c in the dollar and the rate of tax on offshore profits is between zero and 15c in the dollar. That encourages companies to shift their profits offshore, and we saw that just recently. I think the tax office has cracked down on this, but for a long time, for most of this century, the three major iron ore companies had marketing hubs for their iron ore in Singapore. As far as I’m aware, Singapore has never produced one tonne of iron ore, yet somehow these people were the experts in selling it on to China. That was nothing but a tax scheme to shift profits offshore to Singapore. It’s that profit shifting that we need to stop, and the only way we can do that is, ideally, by lifting the rate of withholding tax.

I noticed earlier today that Senator Walsh was talking about streaming. Let me tell you, there is no greater streaming in this country when it comes to taxation than the streaming of profits offshore for a much lower rate of tax than what a good patriotic company who wants to keep their profits onshore has to pay here. We need to deal with this taxation arbitrage because it is killing the ability of companies who have their domestic equity here in Australia—and that’s mainly small business—to compete with offshore businesses. We have to look at fixing that.

I want to give you a couple of examples of how the system’s being rorted. I have here a copy of Google’s accounts for 2020. Their overall income for the year ending—and you’ve got to pay for this, by the way; this isn’t public. You can get it, but you’ve got to pay about 50 or 60 bucks for a set of these accounts. In 2019 Google had $1.2 billion in revenue, and they ended up making a paltry $133 million, so their operating margin was about 10 per cent. In other words, for them the cost of doing business here was about 90c in the dollar. I find it very hard to believe that Google would be incurring 90c in every dollar they earn here. What they do is basically boost or increase their above-the-line profits offshore—interest, royalties and rent—because they know that, if it’s paid offshore to the US, they don’t have to pay 30c in the dollar, because the withholding tax rates for most items in the US are somewhere between zero and 10c.

I’ve got another one here, from my favourite company, Pfizer! Their 2022 total revenue was almost $1.4 billion, yet they only made $90 million profit that year, so their operating margin was only seven per cent. If you compare that to their worldwide set of accounts, they made $100 billion in revenue and had an operating profit before tax of 34c in the dollar. You have to ask yourself why Pfizer had an operating profit or an operating ratio of 34 per cent on their worldwide income, but here in Australia their operating profit was only seven per cent.

The reason for that is that they shifted their profits or their above-the-line profits—interest, royalties and rent—offshore. Ironically enough, they were shifted offshore to Ireland. If you look at their related-party balances for the year end with Ireland—and that’s the trick; you’ve always got to look at the related-party transactions because what often happens is that they’ll shift those profits offshore to a subsidiary, or it might be to a holding. If we look at the related-party transactions for Pfizer, for Pfizer Service Company Ireland it was $1.1 billion. My father-in-law caught COVID, and they gave him a dose of that molnupiravir, and on the box it was $1,000. Pfizer want you to believe that it cost $930 of the $1,000 sale to make that tablet and that they only made a tiny seven per cent profit, or $70 profit, on that $1,000 tablet. I don’t think so. That is profit shifting 101. I’ve already written to the Treasurer about this and I’m looking forward to getting a reply, because that is a breakdown in our transfer pricing.

Those of you who follow tax will know that a few years ago Chevron got busted. It’s always very hard to prove transfer pricing, but Chevron got busted because they had intercompany loans charging the Australian business nine per cent interest when the interest rates were two or three per cent. The only reason they got caught was that there was an email from one of their staff talking about a scheme to avoid paying tax by bumping up the interest paid here in Australia and shifting it offshore. They got caught under part IVA of the Income Tax Act.

All of this stuff is very traceable. When you do your tax return, those of you who have a rental property will do a rental property schedule. If you have a capital gain, you’ll do a capital gains schedule. If you have transactions with offshore businesses, you have to do what’s known as an international dealing schedule. All of that is recorded by the tax office, and they are quite capable of tracing this information. You’ll see here on page 3 of International Related Party Dealings, section A, that it actually asked these questions: Did you have any related party dealings involving royalties or licensees? Did you have any related party dealings involving rent or leasing? Did you have any service arrangements with international related parties? You all remember the name of that Irish company, Pfizer Service Company. The reason they like to go through Ireland is that Ireland has a company tax rate of 12½ per cent. Of course, the EU isn’t too happy with that either. I think Apple was forced to pay $20 billion or something. What happens because they’ve got such a low company tax rate is that all the companies set up their head offices in low-taxing jurisdictions. That’s one of the reasons I’m adamantly against giving income tax rates back to the states. If that happened, I assure you that head offices would all come back to Canberra and the ACT would charge a very low company tax rate. We do not want a system here in Australia like they’ve got in the States whereby a lot of company head offices are set up in Delaware. I’ve offered my services to whoever wants to take me because of my experience in tax and about how to reform the tax system.

If we’re going to talk about streaming, I want to talk about a couple of other sections of the Income Tax Assessment Act that I’d love the Labor Party to look at. Those sections of the tax act are sections 59, 15 and 50 that basically say that land councils don’t have to pay tax on royalties and native title payments made to them. Section 50.50 of the 1997 Income Tax Assessment Act says universities don’t have to pay income tax on the fees that they collect. It’s one thing maybe in terms of Australian students because they shouldn’t have to collect fees. But, when it comes to international students, they should be taxed on the profits they make from international students. Then there’s subdivision 855, the non-real-asset test. Basically, if you’re a foreigner and own less than 10 per cent of the shares in a company, you don’t have to pay any capital gains tax. The ATO did a ruling a couple of years ago where they have applied that also to water rights. The name of that title is non-real-assets portfolio test, and if you have a portfolio interest of less than 10 per cent as a foreigner you don’t have to pay capital gains tax. That’s not right.

Another good one is section 25.90, where you can claim an interest expense against non-assessable non-exempt income. An example is when my old employer, Westfield, built those big shopping centres in London and Westfield in Australia lent the money through Ireland into the UK. The income that those shopping centres made was assessable in the UK, as it should have been, but the interest tax deduction was actually offset against our Australian business here. That meant they paid less tax here in Australia. That’s not the right thing to happen either. The last one is 128b of the 1936 Income Tax Assessment Act, the public offer test. That was the whole reason why, when I was sitting at the University of Sydney Law School doing my masters of tax, I decided I needed to run for politics. That effectively says that if foreign banks lend money into Australia through the primary market—and to be in the primary market you’ve got to have a financial securities licence and a minimum parcel of $500,000 or $1 million, I think—you don’t have to pay withholding tax. I think it’s totally wrong that our pensioners or anyone that earns interest income here in Australia has to pay tax on that income, yet we give foreign banks a break. They don’t have to pay any tax on the interest we pay them offshore. We need to get rid of that because we don’t have a corporate bond market here in Australia. We’ve got $3 trillion in superannuation. If you want to tap capital, tap domestic equity rather than foreign debt.