Are the corporates paying their tax dues? Our average Joe and
Josephines are forking out for nearly 50 per cent of the ATO’s total
tax haul. What do the business giants put back into government coffers
and are they taking social responsibility seriously? I investigated the tax system for In The Black a couple of years ago. With the current chat on tax reform again it’s worth revisiting.
As individuals it is easy to feel hard done by the tax system. We pay a top marginal rate of 48.5 per cent, 10 per cent GST and pay the bulk of tax raised each year. Tax raised from individuals, excluding GST, accounted for 56 per cent of the total in the year 2002-03 – about $91 billion.
Companies in contrast have a top marginal rate of 30 per cent and accounted for 20.5 per cent – $33B of the $163B raised – and have many more options to minimise their taxes.
The amount of tax paid by companies is a sensitive issue for most, especially transnationals which may want to export maximum profits to overseas head offices despite the payment of taxes being part of their corporate and social responsibility (CSR).
According to a report from the general accounting office in the US, companies not paying taxes is a widespread problem. Between 1996 and 2000 over 60 per cent of all US companies paid no federal taxes. In 2000 nearly 95 per cent of US companies paid less than five per cent in tax despite the corporate tax rate being 35 per cent. Similar figures for the corporate market in Australia are difficult to come by because of the blanket of secrecy covering the reporting of privately owned companies.
According to Dr Valerie Braithwaite, director of the Centre for Tax System Integrity, one of the problems in Australia is that there is little debate about how much tax should be paid and what should be provided. She says research indicates that people are prepared to pay more tax if better services, such as education, can be provided. But she says you can’t have a situation where the better off are paying little tax and the worse off are supporting the social infrastructure by paying their full chunk.
Writing in the UK magazine Accountancy, BDO Stoy Harward senior partner Chris Swinson says there is an expectation gap in corporate and social responsibility and tax. He says at a recent debate on CSR one participant was surprised that tax policies were not taken into account in any of the published CSR indices. The delegate said this was surprising as, surely, paying tax is a social responsibility.
Swinson says his impression was that finance directors are interested in maximising their businesses’ bottom line profits and aim to reduce anything that impacts on profit. ‘To them tax is a cost and not a social responsibility,’ he says.
Associate professor Janna Thompson, deputy director of the Centre for Applied Philosophy and Public Ethics at University of Melbourne, says that a lot of people, including herself, have the impression that corporations don’t pay as much tax as they should and that governments, because they want to encourage invest-ment, have allowed corporations to get away with paying lower taxes. She says: ‘For one thing I think this is rather short sighted because corporations depend on a certain infrastructure that does have to be paid for by taxation, for example, education.
‘Any company that relies on a skilled workforce relies on there being an education system that is producing skilled people and if governments don’t have the money to pay for that sort of thing they have to run down their educational infrastructure, which in the end will harm corporations as far as being able to get the kind of skilled people they need.’
She says that US-based philosopher John Rawls has had a great influence on how people think about social justice and tax. He has argued that society is a cooperative venture in which people cooperate for the sake of everybody’s good.
Thompson says: ‘Corporations, of course, are part of that on both a national and international level. Some [people] benefit from this cooperation and some people, from no fault of their own, don’t benefit – like workers who are put out of jobs because of structural changes to the system.’
Rawls proposes a system where those who benefit should support those who don’t, which is the idea behind progressive taxation – the wealthy should have some of their earnings redistributed to those who haven’t done so well in the system, regardless of how little they have or have not used the infrastructure.
In Australia, even those companies rated highly for their corporate and social responsibility in the Reputex index didn’t want to talk about the issue of tax and corporate and social responsibility. Westpac, which was rated first in the Reputex index didn’t return calls while IBM, rated second, didn’t want to comment on the issue.
Only two companies contacted would talk about the issue: Kerry Packer’s Publishing and Broadcasting Limited (PBL) and Coca-Cola Amatil (CCA). Both have had run-ins with the ATO on grey areas in tax legislation. CCA says that ethically companies should pay a fair tax because they benefit from the infrastructure it provides. A CCA spokesman says: ‘It’s both a cost and a social responsibility.’
None of the Big Four accounting firms contacted talked on the conflicting issue of minimising tax to maximise shareholder profits versus paying a fair whack to pay for the social infrastructure from which companies benefit. While the Big Four follow best practice in corporate and social responsibility, they also advise companies and individuals on aggressive tax strategies.
PBL is unusual as in the ‘PBL and the community’ section of its 2003 annual report it has a 70-word section dedicated to taxes. The section highlights that the company pays a lot more than the $85M that comes off its bottom line. The report says that the company paid over $307M in taxes during the financial year. This includes $200m paid by Crown to the Victorian government in gaming taxes and levies. The Nine Network paid $55.7M in television licence fees. And it points out that in 10 years since formation PBL has paid $2.98 billion in taxes, levies and fees.
Clearly someone very high up in the company is very sensitive to any public perception that he doesn’t pay his fair share.
In 2003 Westpac, the company with the best reputation in Australia, paid $728M in tax. It follows best practice in its reporting on corporate and social responsibility, highlighting its high scores on the Dow Jones Sustainability indicies, its sentiment on tax can’t be faulted.
A Westpac statement says: ‘Take the focus off bottom line results and you kill the goose that is laying the golden egg and the ability of business to support government, non-government organisations and civil society in creating and sustaining a sound enabling environment and healthy society. Indeed governments of all persuasions invest heavily to attract business because healthy businesses mean jobs and spending and taxes to fund social initiatives and infrastructure. Producing safe and cost effective goods and services, thereby generating profits, creating jobs and building wealth remains the core responsibility of business to society.’
The growing role of paying a fair whack of tax as part of corporate responsibility is starting to become noticed. The difficulty is in integrating it into indices because of the subjective answer to the questions: ‘What is enough tax?’ The Reputex index is currently revising its criteria and, as Australian CPA went to press, says it may be addressing the issue of tax in a reformulation.
Alex Barkawi managing director of SAM (sustainability asset management) Indices at Dow Jones, based in Switzerland, says that the organisation is not looking at tax in its current indices but is looking at it as part of its methodology development in the future. He says: ‘We are seeing that this is getting more and more important. The way we have started integrating it with certain transparency issues with which we see related to the whole tax issue.’
In particular, Dow Jones is currently looking at initiatives in the mining and extractive industries such as the ‘publish what you pay’ campaign and the ‘extractive industry transparency’ initiative in which companies disclose what they pay to governments in royalties and taxes.
He says: ‘It would be very tough for us to come up with a figure and say ‘well companies should pay at least X per cent of their net income in taxes’.
‘We don’t really see that as the issue but more a transparency thing. Do companies disclose what they pay? [If they did] there could be a debate about whether people believe it’s high enough or not.’
Dow Jones has an industry specific approach in compiling its sustainability indexes. Barkawi says: ‘Once you start asking yourself about what the right level of taxes is you move away from being industry specific to country specific because tax jurisdictions are country specific. So it’s a whole difficult ballgame.’
High profile and controversial tax disputes are taken into account in the existing methodology within the media and stakeholder analysis. Barkawi says: ‘Obviously that would be a reputational issue and we would look at the severity of the issue and how the company is handling it, whether it is reporting transparently about it, whether it is proactive in finding solutions and so forth.
‘What we are seeing in some companies – it is just starting now – is that they are disclosing the percentage of what they pay to government.’
He uses the example of the latest annual report from German chemical giant BASF which discloses the distribution of ‘value added’ to stakeholders.
According to BASF, the ‘value added statement’ shows the company’s business performance minus advance payments such as material cost and depreciation. It is not from a shareholders perspective, but explains the company’s contribution to private and public income. In 2003, 68 per cent of value added went to employees, 16 per cent to the state, 9 per cent in dividends, 4 per cent to creditors, 2 per cent to the company and 1 per cent to minority interests.
Barkawi says this is an interesting development in terms of transparency. In a further step forward, this year Dow Jones is asking mining companies whether or not they publicly endorse the industry’s transparency initiative and if they are already reporting on taxes, royalties and fees paid to government.
Janna Thompson says that many companies realise that they have some sort of social responsibility but they may not think taxation comes into the matter. She says: ‘Most people think of taxes as just something you pay because you have to and you only pay as much as you have to.’ No company is going to intentionally pay substantially more tax than its competitors.
Thompson says: ‘I think there is a problem, partly psychological, partly political, that companies that are transnational don’t feel particularly loyal to any particular country. They don’t feel like they are part of a system of cooperation where they have responsibilities and because there’s no global world society in the same way that there are national societies they don’t feel particularly responsible to it.’
The fact is, however, companies do have responsibilities all over the world because they rely on the infrastructure of a global economy as well as the infrastructure of individual countries.
The internet economy has fractured the tax system, providing a means to sidestep sales taxes, especially for anything that is downloaded from the web.
Some countries are evolving by creating tax systems that encourage sustainable behaviour. In London, a congestion charge created to cut traffic to central London has become so successful that the tax revenue has not hit budget. In Japan companies are incentivised to pay for employees use of public transport, creating a workforce which is highly mobile without using polluting cars.
In Europe, and in particular in the resources sector, companies are trading carbon credits with the aim of cutting greenhouse emissions.
One new idea put forward by philosopher Thomas Pogge is that companies are taxed globally for the amount of resources, including energy that they use. The proceeds would be distributed by an international body to the countries most in need. This would help overcome the fact that some companies invest in countries where the tax rates are lowest and divest where tax rates are high.
Thompson says that companies should be discussing these possibilities and not, in a knee-jerk way, resisting them. She says: ‘I think many companies resist taxation because they think if they don’t their competitors will get an edge on them. Successful regulation is where everybody is regulated so nobody has an unfair advantage over their competitors.
‘I think that some companies can afford to take leadership positions and do slightly better. Their profitability wouldn’t really be undermined if they took a more responsible attitude towards paying taxes. They might even, because of the enhancement of their reputation, get some benefits out of it.’