The landmark Tax Justice Network report released on Monday suggests Australia could be missing out on the best part of a billion dollars a year in annual taxes from the big four banks alone. It would be a galling figure for those who have argued the heavily protected banking cartel should be subjected to a super-profit tax, but a close analysis show the big headline estimate of lost revenue can easily slip through your fingers.
The TJN report, Who pays for our common wealth?, analysed the reported taxes paid by the ASX200 over the 10 years of 2004-2013 and found that, on average, companies are paying an effective tax rate of 23%, and the Tax Office is missing out on $8.4 billion each year.
All big four banks appear on a table of the top 23 tax-aggressive companies (or companies that aggressively minimise their tax) by annual estimated average tax foregone (see page 32). Combined, these top 23 companies account for three-quarters of that $8.4 billion lost revenue each year. NAB ranks sixth, CBA ranks seventh, ANZ 10th and Westpac 19th, and together the big four banks account for $674 million in lost revenue each year. If you add in QBE, Suncorp and AMP, the total estimated annual tax revenue foregone from the finance sector rises to $1.1 billion.
Source: Tax Justice Network, Morningstar, Datanalysis
Australia’s corporate income tax rate is 30% — below both the GDP-weighted average for the OECD nations of 32.5% and the 35% tax rate in the United States — but the report showed that, on average, our big four banks paid just 27%. That is higher than the ASX200 average and slightly above the 26% effective tax rate paid by 11,180 medium to very large businesses in 2011-12, according to the Australian Taxation Office.
While the 27% effective tax rate paid by the big four banks appears unobjectionable, the sheer size of the banks means any lost tax revenue is significant. And at first glance it is difficult to explain because the big four banks do not seem to make extensive use of the three main tax-evasion strategies canvassed in the report: thin capitalisation, transfer mispricing and tax havens.
“Thin capitalisation” is when a company has much greater levels of debt than equity (anything over 75%, under Australian tax laws). Typically the strategy is used by multinationals that load up subsidiaries in high-tax jurisdictions with debt, and interest payments are deducted from profits to lower margins and therefore taxes paid. None of the big four banks appear among the 10 companies reporting the biggest loss of profit-to-finance costs, topped by Challenger, Beadell Resources, and Transurban. Swiss mining giant Glencore is a prime example, as was revealed in this June piece by Fairfax Media’s Michael West, who has written a series of brilliant articles for The Sydney Morning Herald on tax evasion by multinationals from Google to IKEA.
Transfer pricing involves transactions between arms of a multinational, and “mispricing” can be used to evade tax by artificially inflating the price paid in a high-tax jurisdiction in order to transfer revenue offshore. Again, Glencore is an example. The Tax Justice report notes that a staggering 60% of world trade now takes place within, rather than between, multinational corporations. But apart from New Zealand, the offshore operations of Australia’s banks are relatively small — NAB’s Clydesdale and Yorkshire banks in the UK, for example, or ANZ’s expansion into Asia — and the banks are not big offenders.
The Tax Justice report lists 52 tax havens or “secrecy jurisdictions” according to their level of financial secrecy — judged by willingness to require companies to be transparent, share information with other tax authorities, and combat money-laundering — and share of the global market for offshore financial services. Any score over 65 out of 100 is deemed problematic. Samoa, Vanuatu and the Seychelles top the list, with scores above 85.
Australian companies make heavy use of tax havens, with $47 billion flowing to them in 2012-13, and $60 billion coming back. Among the ASX200, Singapore Hong Kong and Malaysia are the top three destinations for subsidiaries. The Tax Justice report lists 18 companies with more than 15 subsidiaries in such jurisdictions. None of the big four banks are particularly heavy users, although we would be interested to know what happens at CBA’s Bermuda branch.
CBA told Crikey the bank was Australia’s third-largest taxpayer in 2013-14, paying $3.3 billion. The two largest contributors that reduced CBA’s effective tax rate were lower offshore tax rates (in New Zealand the rate is 28%, and in the UK, where the bank has an institutional arm, the rate is 21%), and the impact of tax overprovided in previous years. In 2013-14, CBA’s key Australian divisions paid an effective tax rate of between 29.9% and 30.1%.
Similarly NAB’s spokesperson told Crikey the bank’s overall effective tax rate was influenced by different corporate tax rates applying in the overseas countries where NAB operates.
The Tax Justice Network report is groundbreaking work, highlighting the scandalously low effective tax rates paid by the likes of James Hardie (zero) and 21st Century Fox (1%), and among the listed property trusts as a whole (5%). Ireland-domiciled James Hardie is a one-off, however — has any company done more to lower the reputation of business in Australia? — and Fox, which genuinely gets the bulk of its earnings overseas, has demerged its Australian operations and delisted from the ASX since the period of the report, effectively exporting any tax evasion problem to America. The taxes paid by Australia’s trusts and stapled securities in property, infrastructure and utilities are another story altogether — canvassed by West here — but unless fundamental changes are sought to trust law, which allows profits to be passed through to unit holders and taxed in their hands, the taxman will have to zoom in on a case-by-case basis to look, for example, at the kind of related-party transactions that are illegal overseas but allowed here.
There are some tantalising stories to fall out of the report: why does Telstra have 46 subsidiaries in secrecy jurisdictions such as the British Virgin Islands, Bermuda, Jersey and the Caymans? Why does Origin Energy pay an effective tax rate of 16% while Santos pays 29%?
But the big four banks are a surprise inclusion on a list of tax-aggressive companies. Over a decade, they have run assets exceeding $2.1 trillion and on average make $26 billion in pre-tax profits a year. The taxpayer should not be missing out on a single dollar of revenue.