CANBERRA: Australian customs has said that our just 10 taxes raised 90% of all tax revenue. The Australian company tax is a successful tax, it generates substantial revenue. It is the second largest source of revenue to the Commonwealth. The Henry tax review identified 125 taxes within Australia levied by all levels of government.
Yet the public debate seems to suggest that the integrity of the Australian company tax system is compromised. Late last year the Tax Justice Network Australia released a report that suggested widespread tax avoidance, if not outright tax evasion. In particular, it claimed: The average effective tax rate of the ASX 200 was 23%, and If the ASX 200 were paying tax at the statutory rate an additional A$8.4 billion could be raised in company tax revenue.
While these claims were well received in parts of the Fairfax press and the Australian Broadcasting Corporation, Australian Treasury officials testifying at Senate Estimates were nonplussed. Referring to the 23% average effective tax rate, Rob Heferen, executive director of the Treasury Revenue Group, told the Senate, “I must confess I was surprised it was so high”. That comment in turn suggests two things; first deviations between average effective tax rates and the statutory rate are not unusual and, more importantly, it is very unlikely that $8.4 billion could be raised by increased compliance activity. In short, there is no fiscal free lunch. If government wants to raise more revenue in taxation, it is going to have raise taxes.
When thinking about Australian company tax, the first thing to understand is that financial accounting is very different from tax accounting. The former communicates information to shareholders while the latter communicates information to taxation authorities. There is far more leeway in how firms communicate to shareholders than there is to the tax authorities. As such we expect to see differences between effective tax rates calculated from information contained in annual financial statements and the statutory company tax rate. That difference can be calculated from the ATO Tax Statistics. In the academic literature that difference is referred to as “the book-tax income gap” and has been extensively studied by academics. Alfred Tran summarises the book–tax income gap (emphasis added):
The major causes of the book-tax income gap are attributable to deliberate government policies and different objectives of the tax and the financial reporting systems. Tax incentives, dividend rebates, concessional treatment of capital gains, and non-deductibles are all the results of government policy decisions. There are good economic, political, and administrative reasons for these policies. In short – not only does the ATO know about the book – tax income gap, it is a direct result of deliberate government action.
So the mere existence of a book–tax income gap doesn’t necessarily mean there is widespread tax avoidance. On the other hand just because we can explain the gap doesn’t mean that some firms aren’t avoiding company tax either.
After controlling for country, industry, and firm effects, they report that multinationals and domestic-only firms face similar effective tax rates. In the case of Australia, they report, everything else being equal, domestic-only effective company tax rates and multinational corporation effective company tax rates vary by 1% and that difference is not statistically significantly different from zero.
All up, the integrity of the Australian company tax system is sound. That isn’t to say that there aren’t some companies that cut corners and evade tax when they should be paying tax, but there is precious little evidence of systematic rorting of the company tax system. That reflects well on the efforts of the ATO who police the system – but it does make life difficult for politicians hoping for quick and easy fixes to the budget deficit.
