After declaring a ‘budget emergency’ during the recent federal election, one of Treasurer Joe Hockey’s first announcements was to increase the debt ceiling to $500 billion.
He then announced the scrapping of $2.4 billion worth of revenue-increasing measures.
Regardless of whether or not these measures make sense individually, they can hardly be explained in the context of a ‘budget emergency’.
One of revenue measures that has not received much media attention is the watering-down of changes designed to stop profit shifting by multinational companies.
Profit shifting is a major problem globally.
Former Assistant Treasurer David Bradbury estimated that this costs Australians around $1 billion per year in lost tax revenue.
I undestand how profit shifting works in practice.
Not that long ago, I worked in Dubai for one of the world’s largest multinationals and did exactly that.
The company’s regional head office was just south of Dubai at the Jebel Ali Free Zone Authority (JAFZA). This is a special economic zone where multinational companies operate without the need for a local partner and, most importantly, without paying any company tax.
Multinationals, like the one I worked for, enjoy working in this free zone because they save tens or hundreds of millions of dollars in tax. This is great for the company, but effectively deprives the poorer neighbouring countries of much-needed tax revenue.
In my case, it was countries like Egypt, Libya, Jordan, Lebanon, Syria, Palestine, Oman, Yemen and Iraq that suffered the most. These are not wealthy oil states – they are struggling economies with a legitimate claim to taxes on profits earned from products sold to their people.
Although this is legal, it hardly ethical.
The way it works is remarkably simple: local companies import or manufacture products for sale at a profit. Notionally, these companies in Australia would pay tax on profits of around 30%.
Multinationals can deliberately overstate the cost of goods in one country to minimise the profit made in another. In a high-tax country such as Australia the local company will purchase goods from a low-tax country at a hugley inflated price. This is designed to leave the local company to making only a small profit; our target was less than 5%.
The ‘excess profit’ is then made in a country which pays little or no income tax. It might be in a Dubai Free Zone or a range of other ‘friendly’ jurisdictions. This profit could be as high as 40% of sales.
Although the media criticises the big-name multinationals, it is worth remembering that these companies are operating to the letter of the law. Governments design these structures, and multinationals are happy to participate.
Consider the example of Apple.
According to BRW, Apple’s revenue in Australia is around $6 billion but only makes a profit of around $58 million. That’s a very tidy 1% net profit – slightly more aggressive than the 5% that I targeted in the Middle East.
Seriously, could it really be true that Apple, the world’s most valuable brand, struggles to make a profit in Australia?
It seems highly unlikely Apple would only make 1% net profit in Australia. If goods were purchased at true cost price, my estimate is that net profit would probably be around 15% ($900-million). This would mean a notional tax of around $270 million – much more than the $40 million in tax that Apple actually paid.
Even if you know nothing about how multinationals operate regarding transfer pricing, compare this result with local Australian retailer Harvey Norman. Apple is four times larger than Harvey Norman in Australia, but Apple paid less tax than Harvey Norman.
These numbers just don’t make sense.
Whatever mechanism Apple uses to minimise its profit in Australia is unquestionably legal. However, in my opinion, it is also unquestionably immoral.
Instead of wielding the axe to hack away at government services, Hockey should go looking for money at the big end of town.
It is simply obscene that world’s largest companies can pay almost no tax in Australia while Hockey cuts the superannuation co-contribution for low-income workers.
If this is what the Coaltion mean mean by their slogan ‘open for business‘, then heaven help us all.