Good Reading : September 2016
GOOD READING SEPTEMBER 2016 49 the consumer market by their subsidiaries. The multinationals’ light-bulb moment was to recognise that subsidiaries did not need to make a profit in every national market. In fact, foreign governments would want to collect taxes on any such profits. The multinationals’ solution was to impose charges on their subsidiaries for royalties, manufacturing knowhow, and technical-service fees. There were no taxes on charges for intangible services. These parent-company imposts ensured that the subsidiaries never made a profit and so never paid company tax. In some cases, the subsidiaries incurred losses for decades. The almost meaningless expression ‘transfer pricing’ is used to describe the pricing mechanisms that multinationals employ to charge their subsidiaries in overseas markets for the subsidiaries’ purchases of goods and services, intellectual property, interest on loans, and much else. These charges, usually excessive, are imposed where the parties to the transaction are related by common ownership: that is, where it is a parent–subsidiary relationship. The subsidiaries have no choice in the transactions. Those prices would not be acceptable (they would, indeed, be ruinous) to an arm’s-length purchaser, as they do not enable the purchaser to on-sell the goods, intellectual property, or services at a profit. Years (or even decades) of continual losses by a multinational marketing affiliate, for instance, indicate that the parent company is not charging an arm’s-length price for goods, services, and intellectual property. Some subsidiaries of multinationals have not made a profit in over 20 years of operation in Australia. No business operating on its own behalf continues in business if it makes a loss year after year, unless it is contributing to an international profit across borders. Banks do not lend to independent companies that make such losses. Generally, the purchaser is wholly owned by the parent, though it may simply be controlled by a much lower level of external ownership. This level of ‘controlling’ ownership varies from market to market. And although the ATO accepts that start-ups will often make losses for two or three years, losses over any longer period are a clear indication that a multinational affiliate is not acting at arms’ length. Governments need tax. The decline in income tax, company tax and, in Australia’s case, a stubborn bipartisan political refusal to increase the GST to the levels that are common in Europe, will ultimately mean that national governments will not be able to meet the social and infrastructure-development obligations that they were elected to deliver. The problem is the mismatch between the demand for government services and the supply of tax revenue. Demands upon the public purses of all government author ities are increasing, while tax collections are falling relative to the increasing size of national populations. We don’t often think much about tax. It is one of those subjects that you know has an impact on your life but you are not really interested in. Maybe you don’t want to know. Tax usually gets taken out of your wages or salary, and you get what is left. Alternatively, you may own a small business and have to pay a number of different taxes, including company tax.You either struggle with the end-of-year return to the Australian Tax Office, or get an accountant to help you. Either way, it costs you time and money. Multinational cor porations have avoided trillions of dollars of tax over the past 25 years. That number is not an exaggeration. They don’t ‘evade’ tax; they ‘avoid’ it.Tax ‘avoidance’ is legal, but tax author ities will try to collect the additional tax and impose a charge for the per iod of time they are out of their money.Tax ‘evasion’ is illegal and, if the case is ser ious, the tax office may try to send the offenders to jail. Extract from The Great Multinational Tax Rort: How we’re all being robbed by Martin Feil, published by Scribe, rrp $32.99. BOOK BITE 3 THE GREAT MULTINATIONAL TAX RORT Multinational corporations have avoided trillions of dollars of tax over the past 25 years.