Multinational tax integrity and tax avoidance by the fossil fuel industry: Part 2

Dec 12, 2022
Tax concept, Withholding taxes binders files on document report in business office. Retention taxes is income tax to be paid to government by payer of income rather than by recipient of the income.

This is the second instalment of a two-part series based on our recent submission to the Australian Government regarding tax transparency and the fossil fuel industry. The first part examined how transnational fossil fuel corporations are routinely engaged in accounting practices which enable them to avoid paying the Australian Government hundreds of billions of dollars in income tax. This second part provides recommendations for minimising these tax avoidance practices and recouping some of the wealth these corporations have extracted from Australia.

According to a report published in 2020 by the Global Alliance for Tax Justice, corporate ‘profit shifting’, a.k.a. ‘tax avoidance’, cost countries $620 billion in lost tax revenue in that year alone. Nowhere is this kind of behaviour more evident than in the operations of the global fossil fuel industry.

In the first part of this story, we drew attention to data from the recently published Corporate Tax Transparency Report (CTTR) for the 2020-2021 financial year and historical data from the Australian Tax Office (ATO) which recorded extraordinarily high levels of tax avoidance by major fossil fuel companies operating in Australia.

ATO tax data over the eight years from 2013 to 2021 clearly demonstrates that nine of the companies concerned, including ExxonMobil Australia, Chevron, Santos, Peabody Coal, Yancoal Australia and QGC Upstream (a subsidiary of Shell) paid zero income tax over that period. Those nine companies, together with sixteen other energy and resource companies with significant financial and political interests in fossil fuels, disclosed revenue of about $1,425 billion and paid an average of less than 1 per cent income tax on that revenue.

We concluded in Part 1 that these activities constitute abuses of the Australian tax system which are enabled by a host of offshore tax havens. We also pointed out that, contrary to popular opinion, four wealthy countries i.e. the United States, Netherlands, Luxembourg and the United Kingdom and its ‘independent’ territory of the Cayman Islands, are responsible for 47 percent of countries’ global tax losses.

In this second part, we outline seven recommendations that would limit, and possibly even eliminate, transnational corporations’ tax avoidance practices. Each recommendation begins by providing the rationale for reform, followed by specific regulatory changes that could be implemented to achieve reform.

Recommendation 1

The indefinite grandfathering of tax losses to offset profits until such time as those losses have been ‘used up’ is an anomalous concession that needs to be addressed as a matter of urgency. It has empowered fossil fuel transnationals to avoid paying billions of dollars in income tax on revenue and super profits and is the most generous rule on this issue of any OECD country.

Time limits on all losses incurred by corporate entities should be imposed, informed by overseas best practice. The amount of time allowed can be varied by industry, depending on the capital expenditure required to establish relevant operations and normal expectations of returns based on historical evidence or comparable industries. Limits on tax exemptions and the proportions of expenditure claimed should also be imposed on environmentally and socially unsustainable business and industrial practices to discourage investment in them.

Such reforms would have the positive outcome of discouraging high-risk, highly capitalised enterprises, which now characterise most fossil fuel developments, while ensuring that enterprises with high revenues soon after establishment pay income tax commensurate with their earnings and super profits.

Recommendation 2

The two Federal Government bodies with the most expertise in addressing tax avoidance are The Treasury and the ATO. We suggest they should have additional resources allocated to them so they can properly investigate those practices which have enabled transnational corporations to shift income earned in Australia to tax havens and/or lower taxed jurisdictions. A joint taskforce operating on an ongoing basis would examine relevant policies and regulations in Australia and overseas and seek to implement appropriate reforms. A focus for the taskforce would be to examine the practice of corporate entities in foreign jurisdictions lending money or providing goods and services at a higher interest rate or price to subsidiary entities operating in Australia, i.e. ‘transfer pricing’.

Recommendation 3

The recently published paper, ‘The Treasury Multinational Tax Integrity and Tax Transparency’, discusses enhancing tax transparency rather than focusing on why these companies pay no corporate income tax in Australia. The Treasury canvassed several strategies to improve tax transparency in its paper, including:

  • public reporting of tax information on a country-by-country basis,
  • mandatory reporting of material tax risks to shareholders, and
  • requiring companies bidding on tenders for Australian government contracts to disclose their country of domicile.

We fully support such reforms, but they do not go to the nub of the problem.

A new law should be introduced that requires the world’s largest transnational corporations to publicly disclose their tax information on a country-by-country basis. The companies involved would be required to report to the ATO their annual income in, and taxes paid to, each country in which they operate — even if they are headquartered in foreign jurisdictions. This requirement would strongly affect those corporations that shift profits and avoid taxes around the globe, including a number of large American energy and finance companies with a strong presence in Australia, but also Australian companies such as Energy Australia that have moved their headquarters offshore. This measure would clamp down on companies that shift their accrual profits to tax havens with the goal of avoiding their tax obligations in the countries where they operate and earn revenue.

Recommendation 4

We recommend that all corporations be required to adhere to the new Global Reporting Initiative (GRI) tax transparency standard (GRI 207: Tax) in their annual reports. The GRI Tax Standard is the first global reporting standard to support ‘public disclosure of a company’s business activities and tax payments on a country-by-country basis’. According to GRI’s website, the new standard was launched in 2019, and has been supported by global investors, civil society groups, labour organisations and a range of other stakeholders because it will help address growing demands for tax transparency.

Recommendation 5

The current state of external auditing practices and the dominant role in the auditing of major corporations played by the Big Four accounting/consultancy partnerships is a global issue of concern, not just a national problem. Conflicts of interest are rife in this space and have been consistently downplayed or ignored by successive state and federal governments.

As Michael West has repeatedly argued, and his fellow investigative journalists have more recently confirmed, it is the Big Four accountancy/consultancy firms that routinely advise not only those transnational corporations engaged in tax avoidance, but many government departments, including the treasury, finance and auditing bodies that are supposed to regulate and monitor them.

Fossil fuel companies and other transnational corporations would be unable to pursue the accounting and legal practices associated with tax avoidance without the services of the Big Four.

As a matter of priority, the Parliament of Australia should investigate conflicts of interest and dubious ethical practices by the ‘Big Four’ and those legal firms that provide taxation advice. These entities enable companies to refashion themselves as ‘transnational’ and thereby avoid paying taxes on the revenue they earn in national jurisdictions. Such an enquiry would review the social licence and the social contract of the individuals and entities that provide taxation advice. It would then act to withdraw such licences and contracts from those individuals and entities who were engaged in unethical and/or illegal tax avoidance practices.

Recommendation 6

The Corporate Tax Transparency Report (CTTR) contains the total income, taxable income, and tax payable of 2,370 corporate tax entities for the 2019-20 financial year. At present, private equity firms and companies held in trust in offshore locations are not included in the entities definitions for the CTTR and therefore remain invisible to public scrutiny. We therefore recommend that the CTTR should include in its entity definitions private equity firms and other entities held in trust in offshore locations to ensure greater visibility and accountability for these business entities.

Recommendation 7

Finally, the incoming Federal Labor Government has a historic opportunity to engage in a significant reform of the corporate tax system. To minimise opportunities for corporate profit shifting and other tax avoidance practices of dubious ethical or legal merit, a simple 15% of cash income earned in Australia should be the corporate tax on sales or revenues of transnationals and local enterprises.

Not only would this greatly simplify the current corporate tax system by freeing up for more productive uses hundreds of millions of dollars in fees that are currently paid annually to those firms and lawyers specialising in tax shifting and avoidance, it would generate billions of dollars in revenue for government expenditure on education, health, and other vital portfolios. This would be a cash accounting rather than a historically derived (creative) tax accounting or an accrual accounting number.

We have no illusions that transnational corporations will voluntarily agree to any of these recommendations. Big Business has deep pockets and hundreds of lobbyists and corporate lawyers at their beck and call. Nevertheless, if Australians want to see some measure of equity in the tax system, and reasonable levels of tax paid by corporations earning eye-watering revenues from their operations in our country, we all need to pay far more attention to these issues and give our support and encouragement to those who advocate for reform.

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