Introductory remarks
Hello, my name is Andrew Leigh and as Deputy Minister responsible for multinational taxation, I am very pleased to have the opportunity to speak to you at this important forum.
I will begin by saluting the traditional owners of the lands on which I make my remarks in Canberra, the Ngunnawal people, as well as the place where you gather today on the lands of the Gadigal people of the Eora nation. I pay homage to their past, present and emerging elders.
It is a pleasure to be part of this event supporting the work of the Forum on Tax Administration. The work of tax administrators is a crucial element in ensuring a well-functioning economy and a fair society.
As an economics professor, much of my work focused on public finance, particularly at the intersection of taxation and inequality. I learned a lot from my co-author Tony Atkinson, who has worked in a lot of countries, drawing insights into big questions by looking at different nations. This is one of the great strengths of the OECD: sharing ideas between countries with the aim of improving policies everywhere. If Tony Atkinson were still alive, I think he would love to join your conference today, as he has done for many other OECD events.
Why corporate taxes exist
Like modern business, corporate taxes emerged relatively recently. Although there were several attempts to create taxes that we could recognize as corporate taxes in the 19th century, they often failed. The United States introduced a corporation tax in 1898 – it was quickly challenged by outraged moguls and struck down by the Supreme Court a year later. A corporation tax entered the books in 1913 but the tycoons were clearly outraged, it was set at a meager 1%.
In Australia, a corporate income tax was introduced in 1915 by then Attorney General and future Prime Minister Billy Hughes. Introduced at the same time as the first Australian income taxes, in his second reading speech Hughes said the new taxes were “necessary to meet the enormous and growing liabilities created by war”. Hughes said that this form of direct taxation was “not only an effective means of raising funds for the conduct of government, but served as an instrument of social reform”.
He went on to say, “I don’t know of any other way we could raise the necessary revenue. Certainly there are none which would disturb the economic balance of the community so little, and impose so little pain on individuals.
More than a century later, while the essential purpose of corporate tax remains the same, the challenges of collecting corporate tax have grown enormously.
Corporate taxes are much simpler in a manufacturing economy. Companies have a clear location of production. It has become more and more difficult in a weightless production world. In 1915, the manufacturing industry accounted for about 15% of the economy. Now it comprises about 5 percent.
In the modern age, some moguls remain outraged at paying corporate taxes. Some tax havens are ready to welcome them.
Estimates of the amount of corporate tax revenue lost each year due to large multinational corporations minimizing taxes through low- or no-tax jurisdictions range from $500 billion to $600 billion.
A race to the bottom between nation states has seen average corporate tax rates fall from 49% in 1985 to 24% in 2019.
The challenge for governments
These challenges have led some to wonder whether efforts to tax corporations fairly can be doomed to failure.
Australia relies more heavily on corporation tax than other OECD countries, although Australia’s overall tax burden across all levels of government is below the OECD average .
Given that corporate taxes make up 19% of Australia’s revenue base, accepting the accounting tricks and questionable behavior that multinational companies engage in would have a massive impact on Australia.
The accounting details can be complex, but the principle is simple: all companies, large or small, must pay their fair share.
Among the shenanigans we have seen are shell companies set up in low- or no-tax jurisdictions, allowing multinational corporations to funnel huge profits into secret locations where they have no employees and no physical offices.
We have seen one part of a company claim to have a huge debt to another part of the same company, shift profits by paying itself large interest payments in another country and deducting those payments from its tax bill.
These examples of companies exploiting tax evasion are only possible for companies with cross-border operations. This gives them an unfair advantage over local businesses and comes at a cost to other players in the economy. This unfair advantage ultimately weighs on the overall health of the economy, limiting productivity, economic growth and real wages.
The Australian Taxation Office has tackled some of these issues, including through its Tax Avoidance Task Force.
Yet some argue that transfer pricing has become so prevalent that we should forego corporate taxation altogether. Last year, academics from the University of Albany and the University of Missouri published an article arguing that corporate taxes should be abolished.
What is at stake here is nothing less than the future of corporation tax itself. I think it is economically good to save corporate tax, but it will take skillful policy and proper tax administration to achieve it.
It threatens to upset the economic balance of our society when our wealthiest corporations refuse to pay their share.
The principles of the international corporate tax system were created by the League of Nations nearly a century ago. Modern problems require modern solutions.
Multinational Government Tax Integrity and Transparency Measures
This is why the Australian government will introduce new rules to close the loopholes regarding debt deductions and deductions for royalty payments; we will implement the OECD/G20 two-pillar solution and ensure greater tax transparency.
Deductions from debts (interest limitation rules)
The Australian government will tackle the problem of multinational corporations that artificially inflate the amount and cost of debt they hold in Australia to claim higher deductions and reduce the amount of tax they pay.
This will be consistent with the approach recommended by the OECD to limit debt-related deductions based on income.
This will ensure that an entity’s interest deductions are directly linked to its economic activity and taxable income, rather than allowing deductions based on false debt structures.
Deductions for royalties and intangible assets
We will prevent multinationals from claiming tax deductions when they exploit royalty and intangible asset payments to channel profits to low- or no-tax jurisdictions, as some other countries have done.
Intangible assets, such as brand names, patents and copyrights, are valuable and mobile. Their exploitation can generate both high returns (if you are the entity that owns them) and high expenses (if you are the entity that must pay royalties for their use).
These intangible assets have been exploited by multinational corporations under tax avoidance and avoidance schemes.
Multinationals can locate their profit-generating intangibles in jurisdictions with lower tax rates and charge a fee to the Australian entity for the use of those intangibles in Australia. Current tax laws allow the Australian entity to claim an income tax deduction for the cost of these payments to further minimize the tax it pays.
We will prevent the Australian entity from claiming a tax deduction for the cost of accessing intangible assets in arrangements that result in paying too little tax.
This will result in the multinational paying a fairer level of tax here to better reflect the profits it makes in the Australian market.
Two-pillar solution OECD/G20
Australia is also working vigorously in international fora to support the OECD/G20 two-pillar solution.
The allocation of the first pillar of taxing rights to market jurisdictions and the global minimum tax of 15% on second pillar corporate profits aim to ensure that multinationals pay their fair share of tax in the countries where they operate.
Australia will continue to work with other countries to implement these changes.
Transparency
The Australian government will also ensure greater tax transparency for multinationals and large corporations.
The government’s goal is to invite behavioral change among large, highly profitable corporations in how they view their tax obligations, including their decision-making regarding tax planning strategies.
Increased public scrutiny of tax information will help provide the community with a better understanding of how much tax multinationals pay in relation to their activities.
Our measures will ensure greater transparency between significant global entities, publicly traded companies and companies bidding on major government contracts.
We consulted widely on these measures, and we will have more to say about them in the October 25 budget.
Final remarks
In Australia, as in many other advanced countries, corporate tax is under pressure. Debt shifting, royalty payments and tax havens undermine the ability of countries like Australia to use corporation tax to fund vital social services.
Your discussions are essential to ensure that taxes in OECD countries adhere to the fundamental principles of good public finances: that taxes are as fair, efficient and simple as possible.
I regret that I cannot join you in person and wish you well for a productive series of conversations today.
