30/06/2024
ROYALTIES & FOREIGN COMPANY TAXES
PART 1: LABOR’S 2022 POLICY (Read time – a few minutes)
We previously republished our 2023 piece on Norway versus Australian royalties and taxes.
With the recent release of Labor’s Future Gas Strategy, we felt that the subject of returns on our fossil fuels was poorly addressed and lacking transparency. With winter upon us and gas shortages already occurring, this subject becomes even more critical to our country. As we recently said, Angus Taylor’s much-vaunted ‘gas-led recovery’ is bloody difficult when we keep running out of gas – well at least on the east coast.
Firstly, a definition of ‘Royalties’: Fossil fuel resources are owned by the community and a royalty is a purchase price for the resource. The community expects a fair return for the loss of its non-renewable fossil resources.
Over coming weeks, we will endeavour to improve transparency where we can try to inform the public of as much relevant information as we can.
This article repeats Labor’s 2022 election policy on royalties and taxes in fossil fuel industries as published on their web site at the time.
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Labor's Plan to Ensure Multinationals Pay Their Fair Share of Tax
An Albanese Labor Government will join the growing global efforts of more than 130 countries with responsible measures to ensure multinational companies pay a fairer share of tax.
Australians are paying much more tax now under this Liberal Government than when they came to office, at the same time as too many multinationals are avoiding their tax obligations.
Australians shouldering $1 trillion in public debt racked up by the Morrison Government have been losing out on funds that should be available for vital services like Medicare, aged care and child care because multinational companies have been using tax havens and tax avoidance schemes to avoid paying tax in Australia.
That’s why Labor will adopt global developments on multinational tax through a responsible and measured multinational tax integrity package that will close tax loopholes exploited by multinational companies and improve transparency.
Labor’s plan will benefit the Australian community by helping fund vital services, helping to repair the Budget and leveling the playing field for Australian businesses.
The problem
Multinational companies operating across borders are too often able to shift profits to low or no tax jurisdictions to avoid paying tax in countries like Australia.
These practices have become more sophisticated as companies use intangible assets such as intellectual property that they hold in low tax jurisdictions. The rapid growth of the digital economy has exacerbated this issue.
Some multinationals also continue to artificially inflate the amount and cost of debt they hold in Australia to claim higher deductions and reduce the amount of tax they pay in Australia.
Global multinationals can pay armies of lawyers and accountants millions to reduce their tax bill by billions, and Australian workers, families and businesses are the losers.
Part of the global movement to ensure multinationals pay a fair share of tax where they operate
The OECD has been leading a global movement of more than 130 countries to tackle tax avoidance and ensure multinationals pay a fairer share of tax.
Labor will take responsible and measured steps to implement the OECD’s proposals and targeted anti-avoidance measures – strengthening our own system and ensuring the global tax system is more robust.
Labor will also responsibly improve transparency.
These modest and responsible measures are expected to raise $1.89 billion over the forward estimates, which will help fund essential services and support a Budget that has been weakened by a decade of Liberal rorts and wasteful spending.
These measures will not start before 2023, ensuring there is the right amount of time to consult with industry on the implementation of these rules, which carefully target activities deliberately designed to minimise tax - without creating an extra burden on legitimate business activity.
What are we doing?
Labor will tackle multinational tax avoidance in four ways.
1. Supporting the OECD's Two-Pillar Solution for a global 15 per cent minimum tax, and ensuring some of the profits of the largest multinationals - particularly digital firms - are taxed where the products or services are sold.
2. Limiting debt-related deductions by multinationals at 30 per cent of profits, consistent with the OECD's recommended approach, while maintaining the arm's length test and the worldwide gearing ratio.
3. Limiting the ability for multinationals to abuse Australia's tax treaties when holding intellectual property in tax havens.
4. Introducing transparency measures including reporting requirements on tax information, beneficial ownership, tax haven exposure and in relation to government tenders.
Supporting a global 15 per cent minimum tax and ensuring some of the profits of the largest multinationals are taxed where the products or services are sold
We will implement the OECD’s global Two Pillar plan, which was designed to address challenges created by the digitisation of our economies. The Two Pillar solution includes:
• a Global Minimum Tax proposal to ensure multinationals pay an effective tax rate of at least 15 per cent on the profits they make around the world; and
• a fairer distribution of profits by multinationals, in particular digital firms.
Countries around the world are committing to implementing these measures, which will only affect the largest companies in the world. Australia should also take action domestically to ensure we do not lose out when other jurisdictions are implementing these arrangements.
Labor would join other OECD members in implementing the arrangements in line with global action. The OECD is expecting these arrangements to begin in 2023.
Limiting debt related deductions by multinationals
Labor will adopt the OECD’s recommended approach for limiting the deductions multinational firms can claim for interest payments.
Creating artificial debts and repayment arrangements within related entities is one of the main strategies multinational groups use to minimise their profits in higher tax countries while maximising income in low tax countries.
We will adapt Australia’s rules on deducting interest to fit with the OECD’s recommended approach to limit net interest expenses to 30 per cent of profits (EBITDA – earnings before interest, taxes, depreciation, and amortisation) from 1 July 2023.
We will ensure we are targeting tax minimisation and firms may be able to make further deductions if they can substantiate those under the arm’s length test or worldwide gearing ratio test.
Many countries around the world have adopted similar approaches including the US, UK, Germany, Japan, Sweden, Norway, Spain and many other European countries.
Tax havens integrity
Some multinationals “treaty shop” to funnel payments into tax havens with low tax rates.
We will limit the ability of large multinationals to abuse Australia’s tax treaties while holding intellectual property in tax havens from 1 July 2023.
A tax deduction would be denied for payments for the use of intellectual property when they are paid to a jurisdiction where they don’t pay sufficient tax.
This measure would only apply to large global multinationals and is related to measures put in place in the UK, US and Netherlands.
Public reporting of tax information on a country-by-country basis
Labor will require public release of high-level data on how much tax large multinational firms pay in the jurisdictions they operate in, alongside the number of employees working there.
Some firms (such as BHP and Rio Tinto) already provide this kind of information on a voluntary basis.
This will be good for investors and the market as businesses are more transparent on their arrangements.
Labor would consult on the specific details that firms operating in Australia would have to provide as part of consultations on the legislation.
Public registry of ultimate beneficial ownership
To ensure transparency over who actually owns a company, reducing our vulnerability to money laundering and tax evasion, Labor will implement a public registry of beneficial ownership.
The registry will show who ultimately owns, controls or receives profits from a company or legal vehicle, even when the company is registered as legally belonging to another person, such as an accountant or a shell company. This will stop individuals hiding behind complex corporate structures that avoid accountability and obscure their tax liabilities.
The Liberals’ failure to implement a beneficial ownership register means it’s more likely that people using tax havens are re-investing their profits in the Australian share market.
Mandatory reporting of tax haven exposure to shareholders
Shareholders have a right to fully understand the risks their investments are taking in relation to their tax structuring.
Companies would be required to disclose to shareholders as a “Material Tax Risk” if the company is doing business in a jurisdiction with a tax rate below the global minimum (15 per cent).
Requiring government tenderers to disclose their country of tax domicile
Labor will level the playing field by bringing in a Fair Go Procurement Framework requiring those that gain government contracts to pay their fair share of tax. All firms tendering for Australian Government contracts worth more than $200,000 should also state their country of domicile for tax purposes.
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In our view, this should be seen as purely a starting point because as we showed in our Norway comparison ‘modest and responsible measures’ raising $1.89 billion over the forward estimates just doesn’t cut it! That is a puny amount each year.
To put this amount into perspective, Budget paper no. 1 2022–23 (p. 349) shows that the interest cost of servicing AGS on issue during 2021–22 is about $17.5 billion and is estimated to rise to $26.3 billion by 2025–26 in nominal terms. The Australian Government can service the interest paid on AGS by issuing new AGS. (Hell of a way to pay your debts! Thanks ScoMo!)
What we haven’t seen yet is the promised transparency!
Now we have to go digging for any hint of this policy being implemented. We’ll start by looking for the proposed public register on beneficial ownership. Now, where would Labor hide that info? Which ministry? The ATO would be a logical starting point.
We’ll get back to you…
Late info: Turns out the Treasury Department commenced a Consultation process on beneficial ownership which ended in December 2022. Submissions can be viewed on their web site. Timing on the next phases do not seem to exist yet - at least not on Treasury's site.
GB / AB
