An interesting article was published today in a major Australian newspaper, The Age. In the article “How 76 big firms saved $5.6b in tax” it says that according to certain groups, many profitable companies haven’t paid the appropriate level of tax due to the adoption of strategies that are essentially either ‘inflating losses’ or ‘shifting profits’.
While times are such that changes to tax systems in many jurisdictions are being reviewed, it is not necessarily to call ‘foul’ against those companies when the existing laws provide for corporations to deal with their taxes in the most efficient manner possible, so long as the laws are not violated.
The Australian Senate inquiry on corporate tax avoidance distinguishes between tax minimisation, evasion, tax avoidance and tax planning. The tax minimisation via appropriate planning is legal, allowing corporations to reduce their tax obligations. This tax planning is legitimate when it is done within the law.
On the corporate side, it is the obligation of management to ensure all aspects of the business are managed in the best interest of the stakeholders and this includes taxation. The current debate often centres around the IT and pharmaceutical sectors. For corporations that have invested vast amounts of money to develop new products (such as in the pharmaceutical industry), a commercial return for the use of those products, even by a subsidiary, is a foundation of many business transactions. To suggest that such practices are inappropriate is not commercial. If the payment under the law can be structured to be more efficient, then why would the corporation elect a less efficient solution to the detriment of the shareholders?
In Australia, transfer pricing and thin capitalization are some of the major focal points of tax authorities and these are consistent with the OECD & G20 agenda. There is an inference that tax practices adopted by the larger corporates are in breach of legislation. This is not necessarily correct. Despite the complex nature of legislation in Australia (and other countries), the Australian system is sound and is able to adapt to a changing environment as the need arises. It is most unlikely to be able to avoid complexity when there is a need to deal with multiple jurisdictions; each with their own laws in addition to wanting to protect their revenue base.
The final report on corporate tax avoidance from the Senate Standing Committee on Economics is due the end of this week on 22nd April 2016.