Why The Government is Right to Punish Companies Dodging Taxes


Companies found avoiding taxes on profits made in Australia will face large fines. That’s the official word from Treasurer Joe Hockey ahead of tonight’s budget reveal.

Finally the government is doing something that every taxpayer can get behind.

Hockey said the ATO will have the power to fine companies 100% of their unpaid tax (plus interest). That’s in addition to recovering all unpaid taxes. In other words companies avoiding taxes will face paying more than double the original claim.

It may not shore up the AU$40 billion hole in the budget, but it’s a start.

The Daily Reckoning Editor Greg Canavan dismisses the budget as a sales pitch. He may be right that the budget will turn out to be a damp squib. And he may be correct that the government’s proposals will fail to prevent a recession this year.

But even he may agree that chasing unpaid company taxes is one idea the government have gotten right. I believe most taxpayers are supportive of ideas that ensure all companies pay what they’re required to.

For one it preserves the integrity of Australia’s tax system. If you and I have to pay full taxes on our income, why shouldn’t the largest corporations? Because they have investors to protect?

Don’t take this as an attack on investors. Companies paying higher taxes will have smaller dividends to share with investors — that’s true. But this goes beyond the interests of investors. We shouldn’t have a system which favours multinational companies over individual Australian taxpayers. It’s not something that strikes me as ‘fair’.

How Multinational Companies Avoid Taxes

The ATO is investigating up to 30 multinationals over unpaid taxes. Of these, about 10 companies are Australian. It includes Aussie giants like BHP Billiton [ASX:BHP].

Last month the ATO accused BHP of failing to pay billions in taxes on profits from their Singapore operations. In Singapore the corporate tax rate is 17%, compared to 30% in Australia. The ATO believes this is costing the government AU$750 million in taxes every year.

By funnelling profits through offshore operations, companies can reduce the amount of tax they pay on profits. BHP argues its offshore operation maintains closer links to their customers. That may be true, but it doesn’t give them the right to dodge taxes as a result.  It’s believed the multinationals involved transferred AU$31.4 billion offshore in 2011–12 to avoid taxes.

That could force multinationals to pay several hundred million dollars in unpaid taxes. And that’s before the 100% fine on top of that kicks in. You can see why investors share concerns for what this would do to profit margins.  Anything that affects dividends and share prices (and a hefty fine would) will cause investors to worry.

The multinationals involved will be within their right to challenge any final ruling. And it’s unclear how far the government will chase these companies. Who’s to say we don’t end up with years of lengthy legal battles? That wouldn’t be good for the government or investors. More earnings would be set aside to cover legal costs. That’d mean less money for investor returns and dividends. And the government would be nowhere closer to claiming these tax payments.

But there could be an another unintended downside to all this. The Aussie consumer might be a casualty of the government’s tax plans for companies. Let me explain.

Why Australian consumers could face higher prices for international products

If you’ve ever purchased something online, you’ll be aware that Australian consumers face price gouging. We pay higher prices than our American counterparts for many products.

Take Microsoft [NASDAQ:MSFT] for example. Buying digital software from Microsoft is expensive for Aussies. A product that costs US$100 can set us back AU$140. So why do we pay more for digital products than others?

Buying somethingover the internet should reduce the amount we pay in Australia. There are no shipment fees involved like with physical goods.

The excuse over the dollar exchange doesn’t add up either. We still paid more for products when the Australian dollar was at parity with the USD. It’s as if US companies decided that it’s acceptable to charge Australians more.

These companies will now face higher taxes on earnings from Australian consumers.

There is a caveat to that however. Companies will now have even less incentive to offer cheaper goods. Prices for some products could actually rise as a result. Multinationals like Microsoft can just pass on their taxes to Aussie consumers.

But this is something I believe taxpayers should find acceptable. The principle behind the government’s decision is the right one. The company tax fines are about making every Australian taxpayer responsible for their lot. At worst, it’s a step in the right direction.

Mat Spasic,

Contributor, The Daily Reckoning


PS: Greg doesn’t think anything the government does will be enough to prevent the economy sliding into recession. In a free report, ‘Australian Recession 2015: Unavoidable’ Greg reveals how government debt is at a crushing AU$300 billion — and why this means a recession is inevitable. Download your copy today and he’ll show you how you can protect your wealth from the imminent fallout. To find out how to download his free report right now, click here.

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The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.

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