Foreign multinational companies and large private Australian companies involved in technology were able to get away with paying an effective corporate tax rate of 7.6 percent, a report by a trio of University of Technology Sydney academics has said.
Written by Ross McClure, Roman Lanis, and Brett Govendir, and released by GetUp, the report states that in 2013 and 2014, Australia lost AU$5.36 billion in corporate tax revenue from just 76 multinational corporations.
Between them, the companies made a total net profit of AU$11.6 billion, and paid AU$1.9 billion in tax, representing a tax rate of 16.2 percent.
Broken down by industry, the report said energy and mining corporations paid an effective tax rate of 20 percent, while technology companies only paid 7.6 percent, and pharmaceutical companies paid the lowest with an effective tax rate of 5.7 percent.
Well-known tax avoiders and double Double Irish Dutch Sandwich users, Apple and Google, came in for special treatment by the report's authors.
"Apple is able to load intellectual property rights charges into the cost of its products so that there is very little profit," the report said. "It is difficult to put a realistic price on those intellectual property rights in order to ascertain a non-contrived cost base for its products as that information is not publicly available."
According to the report, Apple's Australian operations show a "very low" gross profit margin of between 8-9 percent, while overall the company is closer to a 40 percent gross margin across its operations. Similarly, Apple's net profit margin before tax in Australia is a mere 4-6 percent compared to 30 percent margin.
"The cost structure embedded in the price of Apple's products in Australia is just sufficient to cover the costs of their operations here," the report said.
For Google, while it was called out for being "more generous" than Apple with Australian taxpayers by having a margin of 13 percent, it was only on revenue recognised in Australia. The company books its advertising revenue from Australia in Singapore.
"Out of Google's global revenues in 2014, only 0.54 percent was booked through Australia. The Australian economy generates almost 2 percent of the world's GDP," the report said. "For a company so closely integrated into all aspects of business, it would be expected there would be a closer correlation between Australia's share of GDP and our share of Google revenues."
The report said that companies are highly sensitive to reputation damage when found out to make use of tax havens.
"Companies such as Google, Oracle and FedEx have begun declaring fewer of their ongoing offshore subsidiaries in their public financial filings. This reduces the visibility of these companies using entities in known tax havens, and the visibility of tax havens in general," it said.
"The negative effects on a company's reputation from being associated with tax aggressive behaviours, leads companies to limit their disclosures and become less transparent."
Of the 100 corporations looked at in the Analysis of Tax Avoidance Strategies of Top Foreign Multinationals Operating in Australia report [PDF], 24 were found to have had an overall loss for the two year period, and were thus eliminated, leaving 48 technology, 15 energy, and 13 pharmaceutical firms to be examined from an initial 62, 23, and 15 companies respectively.
To calculate the data contained in the report, its authors used the latest financial reports available from the Australian Security and Investments Commission (ASIC), and was averaged over two years. However, the quality of those reports came in for some criticism.
"Some of the financial reports analysed were not legible and thus non-compliant which raises questions as to whether ASIC even looks at what the private companies submit," the report said.
Earlier today, the Australian government announced ASIC would receive a AU$127 million funding boost over four years. Of the money set to be mostly raised from a levy on the nation's banks, AU$61.1 million be will be used to equip ASIC with the latest data analytics and surveillance capabilities, and modernise its data management systems, as well as increase staff numbers to carry out data matching and surveillance; while AU$57 million will ensure ASIC will have the capabilities to maintain ongoing surveillance following the upgrades.
"It will allow for more systemic data collection. There will be data matching to detect if there are any particular problems with financial advisors or segments in the issue. It can look at systemic and specific issues with individual practitioners. It will mean ASIC will be able to target those areas of concern," Assistant Treasurer and Minister for Small Business Kelly O'Dwyer said.
Late last year, the Australian government was able to pass legislation with the help of the Australian Greens that would see multinational companies with annual revenue above AU$1 billion report income, tax, and transfer pricing arrangements to the Australian Taxation Office, and the penalties for tax evasion increased.
The maximum penalty for a company found to have engaged in a tax avoidance scheme will be 120 percent of the amount owed, while using a profit-shifting scheme will attract a maximum 60 percent penalty. Penalties are reduced if companies disclose their actions before or during examination, or if its position is "reasonably arguable".
It is expected that between 800 and 1,200 multinationals will need to report, with 30 to 50 businesses being headquartered in Australia.
Despite the increased penalties, the report noted the laws are not back-dated and allow existing schemes to continue, and called for a scheme closer to the United Kingdom's Diverted Profits Tax, also called the Google Tax, which saw the company agree to pay the UK government £130 million in back taxes. For its part, France is looking to get €1.6 billion in back taxes from Google.
The report calls the laws adopted as responses to the Organisation for Economic Cooperation and Development's base erosion and profit-shifting (BEPS) project a good start, and it notes that base erosion, profit shifting and loss continue, especially through the use of the Double Irish with Dutch Sandwich.
"Immediate action is necessary to reduce the avoidance and if such action is proper could net the government billions of dollars in additional corporate tax revenue in the coming years and beyond, which will in turn reduce the burden on individual tax payers," it said.
Among the solutions recommended are a harsher Diverted Profits Tax, limiting the deductibility of interest, and increasing transparency, as well as applying Australian accounting standards to company financials without exception.
"Other countries have already adopted these measures, which is a first necessary step in defeating BEPS and loss creation," the report said. "No doubt Australia can do the same if the government is serious about reducing corporate tax avoidance."
Last week, the Australian Greens released an 18-point policy plan aimed to stamp out tax avoidance by multinationals operating in Australia, claiming it will raise at least AU$1.69 billion in additional revenue.
"Whether you are Google or Chevron or Glencore, the time for paying your fair share starts now," said Greens spokesperson for Finance, Senator Peter Whish-Wilson on Friday. "When businesses don't pay their fair share of tax then governments can't provide the services we all rely upon."