It’s simple: business pays tax on profit

The inquiry into “tax avoidance and aggressive (tax) minimisation (by companies)”, headed by the energetic Labor senator for NSW from ABC central casting and Graham Richardson power-broking wannabe Sam Dastyari, has generated an impressive amount of heat and even more frothing, especially in the Fairfax press.

It has also thrown considerable light on to the reality of corporate tax in Australia — but with the indication of overwhelming non-avoidance arguably taking the evidence in a direction not necessarily to the committee’s advantage or intent.

Indeed, as the Australian Taxation Office noted with its very first words in its submission to the inquiry: “Most corporates pay the tax they are required to under Australia’s law.”

Now you might reasonably see that as a classic “Mandy Rice”: that “they would say that”, in the famous words of Rice-Davies. The ATO was hardly likely to announce its comprehensive failure by stating the opposite.

But, this said, there are legitimate issues being posed about the coverage, effectiveness, the sheer sustainability of corporate tax in the globalised, real-time, online world of Apple, Google and Amazon — and of BHP Billiton, Chevron and even a seemingly totally domesticated Commonwealth Bank.

This is a subject of huge import, not just for the Tax Commissioner or the government and its budget more broadly, with company tax slated to raise $68 billion this year, or about 20c of every dollar of commonwealth tax revenue, and as such more, even, than the vexed GST.

It is a subject of even more pressing import for you. That compares with $190bn that will be raised this year from personal income tax. Do the math; were that company tax revenue to evaporate, you wouldn’t just have to be worried about bracket creep.

A number of things need to be understood about companies, their tax payments, avoidance and/or evasion if we are to have not just a serious discussion about tax but, far more importantly, any hope of crafting a future tax system that delivers increasing revenue fairly and efficiently and minimises any impact on growth.

It is matter of concern that the crazed exaggerations, complete misunderstandings and outright falsehoods on corporate tax displayed repeatedly in what might be described as the two “tabloid tabloids” in the Fairfax stable, The Sydney Morning Herald and Melbourne’s The Age, have started to leak into the “serious” tabloid The Australian Financial Review and then on to Dastyari’s committee.

One would have presumed the AFR would have had at least the basic understanding of corporate tax realities and the dynamics of investment decisions, critically, in the best interests of Australia’s future growth, and so future tax revenues, that are clearly lacking in its stablemates.

First and foremost that corporate tax is paid not on revenues or cashflows but on profit. Yet repeatedly in those papers reference is made to a company’s tax being such a low percentage of exactly those revenues or cashflows.

Last year, the recently retired chief executive of our parent company News Corp Australia, Julian Clarke, was asked by the committee if it had “paid a rate of just 4.8 per cent in income tax on its $6.8bn in operating cashflows in this country”.

The Age/ Sydney Morning Herald even “took credit” for the question; worse, of course, was the fact the question was posed by the committee “on their behalf”.

As I pointed out, the basic reality was that News had made a total profit of $815.9 million over the relevant five years under examination and paid $292.5m company tax on that — a tax rate of 35.8 per cent, in a context of a 30 per cent corporate tax rate.

With US oil and gas giant Chevron, the AFR first “exposed”, then similarly took credit for, the committee focusing on a supposed $248 in tax paid on an “estimated” $1.7bn of profit. This prompted the energetic senator from central casting to exclaim excitedly: “We’ve found it (Australia’s biggest tax dodger)!”

There are legitimate questions about Chevron’s tax affairs, but they are questions that go in both directions. And we need to understand both, lest in plucking the most possible feathers from the golden goose we kill it and forgo its future golden eggs.

Chevron has engaged in aggressive tax minimisation — principally on its level of gearing (debt) and the differential interest rate between what its US parent borrows at and the rate it charges the Australian subsidiary for on-passing the money.

But the AFR bizarrely seems unable to understand that the parent borrowing in US dollars and the Australian company borrowing (from that parent) in Australian dollars is not just entirely normal but appropriate.

And that, second, the rate paid to the US dollar lenders will be low because US dollar interest rates are so low; while the Australian dollar rate is legitimately much higher. The ATO alleged, and won, in the Federal Court in the first instance, that it was set too high, effectively transferring income to the parent.

But this pales into relative insignificance compared with the future tax impact of the $80bn-plus Chevron and its partners are investing in the Gorgon and Wheatstone gas projects.

The AFR and the committee need to understand that, first, for the next few years Chevron and its partners will start to generate large revenues and pay no tax. That should be a cause neither of surprise nor objection — it’s not avoidance, it’s legitimate deductions against any income of the money spent.

Subject to future gas prices, after that will come the “taxable profit” and the tax. Chevron argued that analysis by ACIL Allen Consulting showed “more than $380bn” would be added to federal government revenue over the period 2009 to 2040.

This is, first, critical development and economic growth — do we want it to go elsewhere? But, second, it will be income that can be (relatively) easily taxed in Australia.

The same cannot be said about today’s, or tomorrow’s, Googles and Apples. It is a fantasy to believe Dastyari and co can render it otherwise.