Thursday, June 06, 2013

Tax competition?  Bring.  It.  On.

In his latest contribution to The Drum, former journalist at The Australian newspaper, Mike Steketee, admonished the use of tax havens by multinational corporations and argued for tighter regulations to deter such practices.

Steketee lampooned Barbados, Bermuda and the British Virgin Islands as 'powerhouses of the world economy,' describing their disproportionate global shares of foreign direct investment as being attributable to their status as 'tax havens'.

Although there is no agreed definition, tax havens are generally characterised as jurisdictions imposing low, or no, income taxes, and which usually, but not uniformly, maintain confidentiality provisions preventing the public disclosure of cash or asset holdings of investors in those jurisdictions.

The explanation for why certain jurisdictions around the globe select to impose low or no taxes on corporate income is reasonably straightforward.

In a world dominated by economically large, but high-taxing, advanced countries, an effective way for small countries and territories to grow their local economies is to impose lower taxes, in the hope of attracting more internationally mobile capital.

An empirical study by economist James Hines shows that tax havens have, indeed, enjoyed significant economic growth as a consequence of their tax competition strategies.

With tax havens otherwise typically lacking natural and human resource advantages to compete for investment, it would seem that tax haven opponents would rather prefer havens become poverty-stricken outposts that, at best, merely provide holiday opportunities for Western visitors.

However, in the eyes of some, tax havens are not confined to certain Caribbean islands but extend to even some major economies with below-average corporate tax rates, such as Ireland with its 12.5 per cent tax rate regime.

This Irish policy measure has created an obsession by politicians and tax authorities in countries imposing high corporate taxes, including Australia with its 30 per cent rate, about the economic and financial activities of multinational firms with a presence in the Emerald Isle.

Steketee noted in his piece that a US Senate subcommittee recently heard claims that about $22 billion, or 64 per cent, of Apple's pre-tax income were recorded in Ireland in 2011, saving the company $7.7 billion in US taxes.

However, Apple CEO Tim Cook noted in his testimony to the subcommittee that the company made corporate income tax payments to the US Treasury of $6 billion in 2012, and $2.5 billion in US state and local tax payments.

While it may, or may not, be the case that Apple could have provided additional taxes to the US federal government of the magnitude revealed in the subcommittee hearings, Cook nonetheless noted that 'revenues from international operations are taxed in accordance with the laws of the countries where they are earned.'

It is no coincidence that recent political harassment of successful multinational corporations specialising in information technology and communications products and services, such as Apple, Google and Amazon, for more revenue is closely aligned with the significant fiscal troubles faced by advanced economies.

Most Western countries are hampered by massive budget deficits and public debts brought about by years of over-spending, especially on welfare, however recent efforts to impose new taxes, and increase existing ones, have consistently failed to deliver expected revenue gains into public treasury coffers.

It is thankfully nigh on impossible for countries to effectively unite by imposing higher taxes upon all, since any global tax cartel would be undercut by a jurisdiction imposing significantly lower taxes in efforts to obtain a greater share of global investment.

In the absence of an international agreement on tax harmonisation, major countries and international bureaucracies, such as the OECD, have adopted an alternative strategy of attempting to eradicate tax competition from the global economic scene.

They are doing this by threatening crippling financial sanctions on tax havens and other low-taxing countries that refuse to end their financial confidentiality provisions, and using moral suasion and other tactics to pressure multinationals to disclose their tax payments and to disengage from tax haven activity.

The recent announcement by the Commonwealth Government to publicly disclose the tax payments of major companies, generating annual incomes of $100 million or more in Australia, is designed to foster public pressure upon companies to yield more taxes than they are legally obliged to.

The implementation of such measures, expediently dressed up as 'tax transparency,' would flout the rule of law, since one set of rules will apply to one class of taxpayers and not to others.

How would Joe Blow like it if his tax payments were published on a website for all and sundry to inspect?

On balance tax havens have contributed to our global economic prosperity by encouraging tax competition, enabling footloose capital and labour to move to economically hospitable environments and thereby limiting the worst fiscal excesses in high-taxing countries.

From the mid-1980s to the late 2000s Australia lowered its economically inhibitive high corporate and personal income tax rates, encouraging tax competition and allowing domestic workers and firms to keep more of their own earnings in their pockets.

The best way for Australia to now deal with the tax haven challenge is to join them by returning to the global tax competition contest.

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