Is it a problem that some big companies pay little tax?
There is a big debate on that ongoing in Australia at the moment and it has been causing heartburn in Britain too. The British have attempted to plug the hole by a bureaucratic monstrosity that will have a main effect of increasing accountancy costs. But the most just system would undoubtedly be to abolish company tax altogether. Companies disburse their revenues to suppliers, workers and shareholders. And those people are already taxed on those receipts. Company tax is double taxation. Australia has a unique "franking" system that reduces the burden on shareholders but the simplest system would be to abolish the tax altogether.
Politicians rarely abolish or reduce taxes, however. You almost have to be another Ronald Reagan to do that. John Howard did but even he replaced the "lost" tax by a new tax (the GST). Given that reality, the challenge is to find a better system of taxation than the present one.
The simplest and most efficient change would be to impose a turnover tax as an alternative to a company tax. A turnover tax of (say) 2% on all companies would yield similar revenue to what company taxes yield and would not be avoidable by profit shifting. Multinationals would have no avenue of escape. The turnover of a company (total revenue before disbursements earned in the country concerned) is readily ascertainable from existing company records so would also require minimal bureaucracy to enforce.
It would also erode the temptation to divert profits into "fringe benefits" for company officers and employees. Such diversion would have no effect on the tax bill. Even the temptation to retain profits in the hope of changed circumstance in the future would be minimized. The revenue would be taxed whether it was retained or not. It would also require no international consensus or co-operation.
Why it never seems to be canvassed rather mystifies me. Perhaps the bureaucrats don't like it because it would shrink their empires. An excerpt from the current debate below
Taxation experts have warned against unilateral action on corporate tax avoidance, telling a Senate Economics Committee Australia should be proactive and show leadership in the OECD and G20 tax processes already underway.
The inquiry, initiated by Greens leader Christine Milne, is exploring tax avoidance and aggressive minimisation by corporations registered in Australia and multinational corporations operating in Australia.
Treasurer Joe Hockey has hinted that a diverted profits or “Google tax”, similar to that introduced in the UK is being considered by the Australian government.
However Richard Vann, Challis Professor of Law at Sydney University told the committee he was somewhat cynical about such a tax, suggesting it would collect very little revenue in the UK.
“They don’t even know how they’re going to try to calculate the revenue that they’re going to collect from Google,” Professor Vann said.
Professor Vann said the government was sending a “mixed message” to the multinationals that presented the biggest tax avoidance problem to Australia, by suggesting in the tax discussion paper that we needed to cut our corporate tax rate, and at the same time highlighting the problem of tax avoidance by multinationals.
“There are no simple single-country solutions, it does require coordinated action, he said.
“I’m not saying the diverted profits tax or something like it is a bad idea, but if everyone introduced one that would be a problem. They would all be different, they wouldn’t be harmonised and then we would have breakout.”
QUT taxation Professor Kerrie Sadiq agreed, and said Australia must collaborate internationally and not act “hastily or unilaterally”.
“Personally, I believe we should strive to fix the current system, particularly the transfer pricing regime.”
Transfer pricing sees multinationals make intra-company transactions, such as billing a subsidiary company, for the purposes of avoiding tax in higher taxing jurisdictions.