Wednesday, November 08, 2017

Tax Avoidance exposed by the Paradise Papers

By Stephen Long

The late media mogul Kerry Packer once famously said anyone who wasn't trying to minimise their tax needed to have their head read.
In a similar vein, the revelations in the Paradise Papers about the huge transfer of income to tax havens by the rich and powerful will doubtless prompt some to question: "What's wrong with that?"

Even if it does not cross the threshold into illegal tax evasion, there are many reasons why the shifting of trillions of dollars of income to tax havens by global companies and wealthy individuals is not a good thing.

What are the Paradise Papers?

The Paradise Papers are the largest leak in history with more than 13.4 million files revealing the workings of the tax haven industry. The first and most obvious reason is the impact on public services.

The draining of tax revenue means there is less money to spend, among other things, on needed infrastructure, health services, mental health services and public education.

In the United States — the richest country in the world — the cities and suburbs are dotted with crumbling physical infrastructure, dilapidated roads and bridges and decaying telegraph poles held up with star pickets.

In Australia, public schools — which once provided a means of social advancement — have increasingly become a repository for the disadvantaged.

"If the current trends continue, if we allow our corporate tax revenues to drain to nothing … we'll be increasingly unable to provide these things," Matt Gardner, a senior fellow at the Washington-based Institute on Taxation and Economic Policy, told the ABC's Four Corners program.

"An indirect but far more corrosive effect is on the public's view of our institutions."
If the middle class and the working class are bearing a disproportionate share of the tax burden, trust in democracy is undermined.

"When it's documented as well as it has been that companies like Apple and Google and Microsoft — these incredibly profitable companies — are just able to use the tax system like a piƱata, that just reinforces the belief that no-one cares about the plight of middle-income families," Mr Gardner said.

The tax avoidance also imposes a higher tax burden on others; companies that don't engage in the offshore tax avoidance game as well as individuals.

"Right now there's a phenomenal level of public distrust of our government, of our institutions, of our neighbours, and the more it's obvious that our tax system is being hijacked by well-heeled lobbyists, by corporations in particular, the more reason there will be for the public to distrust their institutions," Mr Gardner said.

The Paradise Papers leak reveals a deal hatched in an offshore tax haven to cash in on the myth, the aura and music of rock star Michael Hutchence. This applies equally to Australia, where a third of the largest companies are not paying tax.

When smart accountants, investment banks and law firms help powerful corporations and "high wealth" individuals shift income from higher tax jurisdictions to low tax jurisdictions characterised by secrecy, the less-well-off suffer.

Warren Buffet, the famously successful US billionaire investor, has argued it's wrong to have a system where his secretary pays a higher proportion of income in tax than he does.

While there are global initiatives to crack down on tax havens, the revenue drain has also prompted a "race to the bottom", with major economies cutting corporate tax rates with the aim of attracting more investment and discouraging tax avoidance.

Cuts to public services can also result from the corporate tax "race to the bottom" and this can fuel inequality as the well-off, who can afford to, buy their way out of inadequate public provision.

It's difficult to determine just how much income is being siphoned off to tax havens by companies and rich individuals, but there is no doubt the sums are huge.

According to the most recent statistics from the Commissioner of Taxation, at least $148 billion in international related party dealings flowed through tax havens.

Australian companies paid out about $75 billion to import "business services" from abroad, including payments for intellectual property and royalty payments, according to ABS balance of payments data.

Buying inter-company services from a subsidiary in a tax haven is a convenient way for multinationals to shift income offshore — the transfer of income from Google Australia to Google Ireland is an example.

At the very least, billions — and perhaps tens of billions — in potential tax would be lost to Australia each year through such transactions.

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