I didn’t expect there would be a third part to my musings about the internal inequities and hypocrisy of our tax system this soon, but then The Panama Papers were leaked to The International Consortium of Investigative Journalists.
In my earlier writings I discussed the inconsistent policy and political treatment of taxes such as the Mining Tax, the Carbon Tax and the Goods and Services Tax, and the myriads of legal tax loopholes corporations, and wealthy individuals, avail themselves of utilising, while the government is chasing ‘welfare cheats’, and telling average Australians they must live within their means.
The Panama Papers had laid bare the colossal inequities faced by the average tax payer, and yet again highlighted the huge drain on public revenue caused by perfectly legal, but socially outrageous, tax minimisation schemes.
“Panamanian law firm Mossack Fonseca’s files include the offshore holdings of drug dealers, Mafia members, corrupt politicians and tax evaders – and wrongdoing galore.”
The International Consortium of Investigative Journalists
Setting aside the global criminal organisations, and despotic and corrupt world leaders, who allegedly availed themselves of the services of Panama-based Mossack Fonseca, which could hardly be a real surprise to anyone, reportedly there are also over 1000 Australian corporations and individuals implicated in the leaked list of participants in the various offshore schemes ran by the obscure Central American law firm.
Mossack Fonseca issued strong denials of its involvement in anything untoward. Speaking to AFP, co-founder Ramon Fonseca labelled the leaking of the materials ‘a crime, a felony,’ and ‘an attack on Panama because certain countries don’t like it that we are so competitive in attracting companies,’ and expressed an interesting view on the ethical obligations of his firm:
“We simply take care of the legal part we don’t participate in the activities of the company. We are not responsible for what the company does. Many times we don’t even know who the owner of the company is, because we sell it to a lawyer or to a bank or a society. Those are then their final clients. We only participate in the legal part. It is deeply unjust that they are now trying to connect us to the activities of those companies when clearly we have nothing to do with it.
Of course we have to be careful because those [companies] are instruments that can be used for misdemeanors. But this goes in the same way with a car: I buy a car from an agency that belongs to a lawyer and this suddenly kills a person with the car. The manufacturer of the car is like us, clearly they are not guilty of that.”
Spanish to English translation provided by Ruptly TV on YouTube
Without doubt the Australian, and global, media will reveal salacious details about the tax affairs of a number of Australian and international corporations, and individuals, in the coming days and weeks.
We will also see the Australian Taxation Office (ATO) swing into action, investigating the revelations in The Panama Papers, to what will be varying levels of success. It will be interesting to see whether the ATO will be able to prosecute anyone as a consequence of this latest leak, and the amount of money it will be able to recover from those who may be found to have overstepped the boundaries of our already generous legal tax loopholes.
Over the past few years the ATO had done an outstanding job pursuing tax evaders through its Project Wickenby task force, recouping a total of $985.67 million, and resulting in charges against 76 people, and convictions in 46 cases.
However, I am more interested in the longterm policy and political response to this long-festering issue of economic inequity and social injustice, which successive governments of all persuasion continued to conveniently ignore for decades.
If the information in question revealed the systematic abuse of our welfare system, a formal inquiry probably would have been announced by now, and a conga-line of outraged politicians would have threatened dire consequences to the perpetrators on the morning news and breakfast shows.
The real, and only, test of The Panama Papers will be whether we can look back in a few years’ time and say with confidence our legislature had responded strongly and appropriately, by closing legal tax loopholes enabling multinationals, and wealthy individuals, to significantly reduce, or even eliminate, their tax obligations in Australia, resulting in a demonstrable increase in tax revenue from these sources.
And if tax havens, and tax minimisation, are perfectly legal, why should we be concerned at all? Well, the government has told us we have serious revenue and budget problems, and they are looking at budget cuts and tax increases to address the issue.
In the meantime, according to a July 2012 report by the Tax Justice Network (TJN), an advocacy group of researchers and activists with a shared concern about tax avoidance and tax havens, ‘a significant fraction of global private financial wealth’ estimated around $21 to $32 trillion ‘has been invested virtually tax free through the world’s still expanding black hole of more than 80 offshore secrecy jurisdictions’.
A more recent, December 2015 report co-authored by the TJN states that ‘[i]n 2012, US multinationals alone shifted $500–700bn, or roughly 25 percent of their annual profits, mostly to countries where these profits are not taxed, or taxed at very low rates. In other words, $1 out of every $4 of profits generated by these multinationals is not aligned with real economic activity.’
The report goes on to highlight why this is a problem:
“As governments are losing tax revenues, ordinary people end up paying the price: schools and hospitals lose funding and vital public services are cut. Fair taxation of profitable businesses and rich people is central to addressing poverty and inequality through the redistribution of income. Instead, the current global system of tax avoidance redistributes wealth upwards to the richest in society.
That is why civil society organizations, united in the C20 group, together with trade unions, are calling for the actions announced by the OECD to be regarded only as the beginning of a longer and more inclusive process to re-write global tax rules and to ensure that multinationals pay their fair share, in the interest of developed and developing countries around the world.”
In Australia the lost tax revenue through legal corporate tax minimisation schemes alone is estimated to be up to $11 billion per year. To put that figure in perspective, it represents just over a third of the amount a 5% increase in the GST would raise in additional government revenue.
The Senate Economics References Committee conducted an inquiry into corporate tax avoidance last year, with its final report due by 22 April 2016. In its first report the Committee makes 17 recommendations designed to combat tax avoidance and aggressive minimisation, and to protect Australia’s revenue base. In the process the Committee made a number of interesting observations:
2.20 Corporate income tax is an important part of Australia’s tax base and is the second largest contributor to tax revenue after personal income tax.
2.51 Aggressive tax minimisation and avoidance can have a number of direct and indirect consequences for the broader economy and social fabric. Some submissions reflected growing concerns that tax avoidance causes serious harm, often to the most vulnerable groups in society, as unrealised corporate tax revenue denies governments revenue for essential public services, such as healthcare, education, effective law enforcement, aged care and roads. In essence, failure to address base erosion and tax leakage means that the tax burden eventually falls more heavily on other taxpayers and/or government does not provide the same level of services it would otherwise be able to provide.
2.52 Also, if left unaddressed, tax avoidance reduces the efficiency, fairness and sustainability of the tax system. This leads to unfair competitive disadvantages for businesses that do the right thing and, ultimately, distorts investment decisions.
2.53 Further, tax avoidance can undermine the integrity of the tax system and skew social and economic interactions by favouring those who can best afford to develop and implement the most effective tax strategy, usually large corporations and wealthy individuals. This has the potential to create widespread distrust and a reluctance to comply when others are not …
3.35 In the case of Apple, the committee questioned whether it was plausible that the Australian subsidiary could have a taxable income of only $247 million from revenue of $6,073 million in 2013–14, effectively representing an operating margin before tax of just over 4 per cent. As a result, Apple paid only $80 million in tax for this period which appears to the committee to be low given the company is very profitable globally.
3.60 Google Australia reported a profit of just over $46 million on revenues of $358 million in 2012–13. It paid only $7.1 million in corporate tax, however, as it was able to claim a research and development tax credit to the value of $4.5 million.
5.14 During the course of the inquiry, the committee was surprised to learn how little is known publicly about the potential size and scope of the aggressive tax minimisation measures and tax avoidance schemes used by large Australian corporations and multinationals operating in Australia. It was also taken aback by the reluctance of some companies to disclose information to the committee, or, of greater concern, where some companies seemed not to be in possession of what seemed important information about their company’s operations in other countries.”