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The Verdict: some progress on the looming multinational tax dodging reforms but “enormous” task ahead
Against stiff opposition from the Big Business lobby, Parliament is due to vote on the Albanese Government’s multinational tax avoidance reforms this month. Mark Zinsak and Jason Ward deliver their verdict on the reforms.
The Albanese Government came to office promising an ambitious reform agenda to address multinational corporate tax avoidance. It has made progress on some measures but has faced stiff resistance from multinational corporations, tax advisers, lobbyists and political allies.
An essential reform currently before the Parliament is legislation requiring large multinational corporations to publicly report revenue, profits, taxes paid, number of employees, and assets broken down by the locations where it has a presence for a list of specified tax havens.
Stakeholders will be able to determine if genuine business operations align with where profits are booked and taxes are paid, or not. Corporations that have created artificial structures to dodge paying taxes in Australia – and elsewhere – will be exposed. The government’s legislation will lead the world in increasing multinational corporations’ tax transparency and pave the way for further reforms.
Country by Country, a win
Multinational corporations will be encouraged to report financial data for every country with operations, which is essential for full transparency. For now, mandatory public reporting for all jurisdictions remains an unfinished reform. Large multinational enterprises already report similar information on a confidential basis to OECD tax authorities, including the Australian Taxation Office (ATO), but is not available to civil society, investors, academics, other government bodies or most global tax authorities.
Requiring this information to be made public would greatly increase tax transparency, and public exposure would be a strong incentive for multinational corporations to stop shifting profits offshore. Increased transparency would expose the current scale of profit shifting and inform debates on further reforms needed to close loopholes and increase funding for essential public services.
The Government had planned for a more ambitious piece of legislation that would have required the large multinational corporations to publicly report financial details by every jurisdiction in which it has a presence, not just those on a specified list. Yet they were forced to walk back from that ambitious agenda due to threats from other governments that Australia would be punished by being cut off from the OECD system of confidential country-by-country reporting by multinational corporations.
The result would have been a loss of vital intelligence that assists the ATO in addressing tax avoidance by multinational corporations. Thus, the current bill before the Parliament is as far as the Australian Government could go in the current international environment.
Beneficial ownership – backflip with pike
An area where the current government has failed to make any meaningful progress is a public register of the ultimate owners of corporations, known as “ultimate beneficial owners”.
The Panama Papers have provided a small window into the world in which shell companies with concealed ownership are used as vehicles to facilitate a range of serious human rights violations, from human trafficking, money laundering, financing terrorism, commercial online child sexual abuse, illicit arms trading, corruption and bribery.
In Australia, it has been possible to register a company with ASIC and conceal the real owners of the corporation. Research from 2012 found that Australian businesses that set up companies for others were near the top of such businesses globally in terms of being willing to set up an untraceable shell company even when there was a significant risk the company in question would be used for illicit purposes.
A 2022 study by the Stolen Asset Recovery Initiative of the World Bank and the UN Office on Drugs and Crime reported a UK business that established companies for international clients provided a front nominee for a UK shell company complete with a pre-signed but undated letter of resignation and a power of attorney agreement.
Thus, if necessary, the beneficial owner could fire the nominee retroactively. The nominee committed not to pursue legal action against the nominee for damages caused to the company or its assets. Beyond these arrangements, the nominee had no relationship with the beneficial owner or role in running the business. The UK business explained the role of the nominee was only to prevent the beneficial owner from having to reveal their control of the company.
The Albanese Government ran a consultation on public disclosure of beneficial owners at the end of 2022. However, nothing further has been heard of progressing the initiative. The model put forward was extremely weak. It would require corporations to voluntarily disclose larger beneficial owners, which is unlikely to be complied with when the ultimate beneficial owner is a known criminal or corrupt politician. The government promised the model would be the first step and would be improved over time.
Subs disclosures good
The Australian Government has also legislated changes requiring all public companies in Australia to disclose all subsidiaries and the jurisdictions in which they are incorporated. This is a significant increase in transparency for Australian corporations, as the previous requirement was to only disclose ‘material’ subsidiaries, which is highly subjective. As new annual reports are published, it will be revealing to see some corporations report previously undisclosed subsidiaries.
The Albanese Government also promised to restrain the use of royalty payments by multinational enterprises, a very common form of profit shifting, but met with stiff international objections. The commitment has been abandoned, under the argument it will be addressed for larger corporations by the introduction for a minimum global tax rate of 15%.
Royalties still rorted
The recent loss of the Pepsi case by ATO, on appeal, at the Full Federal Court, makes a clear case for the need of reform of misuse of royalty payments. Multinational corporations consistently abuse royalty payments to shift profits offshore and avoid income tax in Australia and globally. It remains to be seen if the new global minimum tax rate will adequately address the abuse of royalty payments.
In summary, while some progress has been made in Australia and globally to tackle tax dodging, it remains an enormous problem that disadvantages responsible businesses and undermines faith in public institutions.
In 2022, it was estimated that multinationals shifted US$1 trillion into tax havens, equivalent to over one-third of all profits booked outside headquarters countries. The impacts of multinational tax dodging are felt everywhere but especially devastating in the global south, with less enforcement capacity and greater reliance on corporate tax revenues.
We look forward to the Australian Government implementing all its pre-election promises to rein in multinational corporate tax avoidance and other corporate crimes.