In its 2016 “Taxes Paid” report, Rio Tinto warned that if Australia sticks with its 30% corporate tax rate, other nations will “leave Australia behind”. Similarly, it said that the US should push forward with its tax reform plans because “a significant lowering of the corporate tax rate and simplification of the tax code would make the US a more attractive investment location”.
Australia’s government is keen to push ahead with plans to cut its corporate tax rate, but the US is stuck at an impasse as the Trump administration struggle to agree on proposals, prolonging the prospect of promised changes.
Australia’s government ready to join ‘race to the bottom’
To ensure that Australia’s business market maintains its global competitive edge, Turnbull has confirmed that the government will commit to delivering its company tax package in full, which includes a cut to the corporate tax rate from 30% to 25% over the decade. The reduction will reach 25% in the 2026-27 income year.
The cuts are estimated to cost the budget around A$50 billion ($37 billion) over the next decade. However, Turnbull argues that this is money well ‘spent’ because it will boost investment into the country.
Moreover, the government believes it could plug the resulting revenue gap with investigations being undertaken by the Australian Taxation Office (ATO) against large businesses. The ATO is investigating the tax arrangements of a large number of companies, including 59 multinational corporations operating in Australia and has issued tax assessments to seven MNEs, including mining giant Rio Tinto. It has also introduced the Multinational Anti-Avoidance Law and the diverted profits tax (DPT) to target corporate tax avoidance. The DPT aims to strengthen Australia’s anti-avoidance rules and focuses on MNEs that enter into agreements with offshore-related parties that lack economic substance.
Turnbull said this corporate tax cut is vital to maintaining Australia’s competitive businesses environment. “An uncompetitive business environment can be the difference between firms investing in Australia or choosing to invest elsewhere,” Turnbull said during a keynote address at the Sydney Institute’s 2017 annual dinner. “That’s why reducing the tax burden on business is so critical to our competitiveness – no other single tax reform by the Commonwealth can do more to grow the economy.”
The prime minister noted that the country needs to compete with changes elsewhere, such as the UK’s corporate tax rate of 19%, which will fall further to 17% by 2020, and the US’s proposals to reduce its rate from 30% to between 10%-20%. Were Australia’s rate to be lowered to 25% it would be level with China’s and lower than New Zealand’s tax rate. However, the rate would still remain higher than that of Singapore – the jurisdiction most used by corporations to shift profits out of Australia and reduce tax liabilities.
“We cannot pretend that Australia will be able to compete successfully for capital, business investment and jobs if the cost of doing business here is so much higher than in comparable countries.” Turnbull said.
Business lobbying for cuts
Coincidently, Rio Tinto’s latest tax report also warned that the corporation may cut investment and jobs if taxes were not reduced. “We support the Australian government’s policy to reduce the corporate tax rate,” the document said.
In February Philip Lowe, the governor of the Reserve Bank of Australia, also pushed for a rate reduction, saying rates need to be internationally competitive. “[W]e need to make sure that our tax system is internationally competitive,” he said in a speech at the A50 Australian Economic Forum Dinner. “One example of this complication is in the area of corporate tax, where there is a form of international tax competition going on in an effort to attract foreign investment. Like other countries, we face the challenge of responding to this, while achieving a balance between recurrent spending and fiscal revenue.”
The Business Council of Australia (BCA) is also backing the government’s plans. “Large businesses accounted for more than two-thirds of the increase in private-sector employment over the five years to June 2015, are responsible for most of Australia’s investment and are the most vulnerable to global competition,” chief executive Jennifer Westacott said in a press statement. “When larger employers don’t invest, that has serious flow-on effects to smaller businesses and to job creation and higher incomes.”
Progressively reducing the corporate tax rate to 25% for all companies over the decade is projected to increase the size of the economy by more than 1%. Coupled with the ATO’s crackdown on tax avoidance and evasion as well as stricter tax policies, the Australian government’s plan is about driving investment, economic growth and employment, as well as bringing the budget back into balance.
Turnbull’s government will, however, have to secure the support of cross-bench lawmakers for the reduction to be passed by legislation.
Plans face opposition
However, the Senate and Australian opposition parties are showing little support for cutting the corporate tax rate.
Leader of the Opposition in the Parliament of Australia, Bill Shorten, says that big companies should not be allowed to pay less tax. He also argues that individuals will bear the burden of a corporate tax rate reduction while businesses pocket the profits.
Nevertheless, the Senate passed the Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 on March 31 to gradually implement changes to the company tax system over three years, which would see the corporate tax rate be reduced from 30% to 27.5% for businesses with turnovers up to A$50 million, with the unincorporated tax discount increased to 8%. The reductions were the cornerstone of last May’s federal budget announcement.
Looking ahead, the BCA’s Westacott said it is “now imperative that parliament continue negotiating the full passage of the Enterprise Tax Plan, which should remain in the budget as the only policy on the table to revive the economy with better jobs and higher incomes. There is no Plan B to get the economy moving again”.
US corporate tax reform hits hurdle
The Rio Tinto report also makes reference to the US tax reform, saying that change must happen.
“We are aware of discussions regarding fundamental tax reform in the United States. The US is the largest market for many of our businesses and host to some of our long-standing assets,” the company’s report said. “While it is too early in the process to comment about potential impacts for Rio Tinto, a significant lowering of the corporate tax rate and simplification of the tax code would make the US a more attractive investment location.”
This view is shared by many companies that operate in the US.
In addition, President Donald Trump, his administration and Republican Party members in Congress (GOP) are united in their desire for tax reform, but an agreement on what those changes should be and how they should be written into law will not be easy to come by.
In his 100-day action plan, Trump pledged to reform the corporate tax system by slashing the corporate tax rate from 35% to 15%, offering a low tax rate of 10% for repatriating offshore income, and establishing a tax for companies that relocate abroad and try to sell their products back to the US tax-free in a bid to stop corporate inversions. April 30 will mark Trump’s 100th day in office since his inauguration.
The House Republicans have also been pushing for tax reform and released a blueprint of their proposals in 2016. Although the long-awaited US tax reform may move forward during his four-year tenure, it is unlikely to happen quickly.
The government was intending to prepare a tax reform bill after the spring budget had been passed, but this now seems unlikely because the House of Representatives, Senate and White House officials are still working on a plan. However, Trump’s administration is still hoping for change this year.
Until the US unveils its agreed tax reform proposals, Rio Tinto – and other big businesses operating globally – will have to look to other jurisdictions that have cut corporate tax rates and become more attractive investment destinations.
