Opening statement to House Standing Committee on Tax and Revenue Inquiry into Taxpayer Engagement with the Taxation System

With Sinclair Davidson

We have been asked to make some points about the effect blockchain and similar technologies will have on taxpayer engagement with the taxation system.

The RMIT Blockchain Innovation Hub was established earlier this year as the world’s first social science research centre into the blockchain economy. The Blockchain Innovation Hub will measure and understand the economic, political, social and legal implications of blockchain, and advise governments, firms and communities on how best to take advantage of this exciting new technology.

We’d like to make a few points that we hope might stimulate further discussion and consideration. We are going to be speculative by necessity.

First, this new technology is an opportunity for Australia. We can attract high value knowledge workers by having a competitive tax and regulatory system. Governments should focus on making it easy to host cryptoeconomy services in Australia.

Second, blockchain services are going to change some of the fundamental structures of market capitalism. The twentieth century was dominated by large public companies. In the future, firms will look more like shifting networks managed by blockchains rather than the hierarchies we are used to.

This will have a number of consequences. Australia is heavily reliant on corporate tax revenue. These new firm-like structures are going to be harder to tax than the monolithic firms of the 20th century. We’ve published sceptically about the parliament’s efforts to prevent profit shifting by multinational firms. However, the born-global nature of blockchains will supercharge these trends. We do not believe there will be any easy regulatory solution to this, and parliament will need to rethink not just how it taxes, but what it taxes.

Another consequence of the networked firm is that more people will earn their living as contractors rather than employees. This will have wide-ranging consequences for superannuation, payroll tax, and so on. The tax and industrial relations system has traditionally struggled to integrate contractors into its frameworks, and this is likely to be a bigger issue in the future.

Blockchain applications make possible real-time reporting and payment of tax obligations. A large public company could place its accounts on a publicly verifiable blockchain. This would eliminate the need for auditing.

We are not proposing real time blockchain reporting as a regulatory requirement, but would urge shareholders in public companies to consider demanding this of management.

We can also see some attraction for small and medium sized firms of real time blockchain reporting, which would make automate tax compliance and make business activity statements redundant.

The ATO should develop guidelines for real-time taxpayer blockchain reporting that it would consider compliant. The ATO should also rethink its internal systems to facilitate voluntary real-time reporting.

Real-time tax reporting raises different issues for individual taxpayers. Privacy is an overriding problem here. There are new technologies that have been developed with the blockchain – such as zero-knowledge proofs – that provide opportunities for privacy-protecting public services in the future. This is a something we plan to work on in the future.

Blockchains are likely to bring about enormous changes to the way we work. For now, and to conclude, we will leave it that any use of new digital technology for government revenue raising has to place fundamental values such as privacy and the rule of law at the centre.

Submission to the Productivity Commission Inquiry into Collection Models for GST on Low Value Imported Goods

With Sinclair Davidson

Introduction: The Productivity Commission (PC) Discussion Paper, Collection Models of a GST on Low Value Imported Goods, suggests that the inquiry that the PC has been directed to pursue is somewhat of a fait accompli. The legislation enacting this policy change (Treasury Laws Amendment (GST Low Value Goods) Bill 2017) has already passed the parliament with broad parliamentary support.

However, the parliament’s decision to delay the implementation of this policy by one year (the original legislation introduced to parliament was scheduled to begin in July 2017) provides an opportunity for the PC to make clear the practical and philosophical problems with the legislated scheme. A clear statement that this scheme is not in the interest of consumers, is unlikely to be effective, threatens Australia’s participation in the global internet commerce economy, and casts Australia as a bad global actor in international taxation, would, in our view, have a concrete public policy impact. The parliament is capable of amending the legislation in response to this investigation, and the government has significant discretionary power to adjust or mollify its implementation.

Available in PDF here

The South Australian Major Bank Levy: Arbitrary, unjustified, and harmful for South Australia and the rest of the country

With Sinclair Davidson

Introduction: In the South Australian state budget 2017-18, South Australian Treasurer Tom Koutsantonis announced that the state government intended to introduce a South Australian Major Bank Levy, one of two revenue measures “to help us meet the cost of our significant support for driving economic growth and creating more jobs”. Treasurer Koutsantonis made clear that this levy was explicitly modelled on the Commonwealth government’s Major Bank Levy, which was announced in the May 2017-18 Commonwealth budget and passed the Commonwealth parliament in June.

Banking is a key sector in a modern economy. Banks and the financial markets they serve work to allocate capital across the economy to its most efficient purpose. The health of the banking sector is closely related to the health of the economy in general; likewise, an unstable and inefficient banking sector often causes, or is at least a leading indicator of, turmoil in the general economy. The centrality of banking and financial markets to economic prosperity and recession throughout history is reason to subject public policy proposals that affect banking markets to particular scrutiny.

This paper is an examination of the South Australian Major Bank Levy. The South Australian Major Bank Levy is intended to exactly replicate the Commonwealth Government’s Major Bank Levy but at the state level. Accordingly, it applies an additional 0.015% tax on South Australia’s share of the total value of bank liabilities that are subject to the Commonwealth Major Bank Levy Act 2017. That levy consists of a tax introduced on a range of liabilities held by the five of Australia’s largest banks – the Commonwealth Bank, the ANZ, the National Australia Bank, Westpac and Macquarie Bank. While these banks are not explicitly named in legislation, they are subject to the levy because they each have total liabilities greater than $100 billion – raising the prospect of new banks being added or of existing banks dropping off the list.

Both levies apply to the total liabilities held by each bank with the exception of that bank’s additional Tier 1 capital, its deposits protected by the Financial Claims Scheme (that is, its government guaranteed deposits), an amount equal to the lesser of the derivative asserts and derivative liabilities of each bank, and its exchange settlement account held with the Reserve Bank of Australia.

This paper finds that the South Australian Major Bank Levy:

  • will be economically harmful to a state that has seen a rise in unemployment and a decline in business investment,
  • lacks serious justification in either taxation or banking policy,
  • represents a rollback of the GST compact of 2000 which required South Australia to remove state taxes on banking and financial services,
  • harms the stability of banking in South Australia and Australia more generally,
  • increases ‘regime uncertainty’ for investors, and
  • there are reasons to believe it has already done harm to the South Australian economy.

Not only should the bank levy be rejected by the South Australian parliament, but parliament needs to work to ensure that markets and investors have certainty that such an arbitrary and harmful intervention could not occur in South Australia in the future.

Available in PDF here.

State Government bank levy makes South Australia riskiest place for investment in Australia

Imagine being an international investor looking at Treasurer Tom Koutsantonis’s Budget. You wouldn’t be interested in his infrastructure spend and “future jobs fund”.

You’d immediately hone in on the fact that the South Australian government has doubled down on the Federal Coalition’s bank levy by introducing its own state bank levy.

And you’d immediately understand that this makes SA the riskiest state to invest in, in a country that is looking like an increasingly risky place to invest.

South Australia has the highest unemployment rate in the nation. It needs firms to put their money into the state and create productive private sector jobs. No government spending can substitute for an attractive economic investment climate.

In this, the state’s bank levy is almost comically bad. The federal bank levy is arbitrary, punitive and unjustifiable. Treasurer Scott Morrison groped around for a rationale for taxing the big banks, finally landing on: people “don’t like you”.

Koutsantonis’s tax is even more arbitrary and its rationale even more slight. In his Budget speech, he said that the “banking sector is very profitable” and that given, in his view, the GST should be applied to financial services, SA should expropriate some of the big banks’ money.

But this is nothing more than a rhetorical shell game. The SA bank levy looks nothing like the GST, developed and refined over nearly two decades to be as efficient as possible. The GST is a consumption tax specifically designed to be paid by consumers.

Koutsantonis says he will ban the banks from passing his tax onto consumers. (This is astonishing by itself – the SA government is going to start regulating banks? We ended state-based financial services regulation 20 years ago.)

Finally, the GST was specifically devised in order to get rid of state-based taxes on financial products. These taxes – the bank account debits (BAD) tax and financial institutions duty (FID) – were uniformly agreed to be inefficient, to disproportionately harm the poor, and to harm Australia’s international competitiveness.

Getting rid of the FID and BAD tax was a key part of the GST deal. Is SA going back on that deal? Is it dipping out of the GST compact? How do Koutsantonis and Premier Jay Weatherill think the other states and Commonwealth, should respond?

With the imminent closure of Holden, SA needs to be looking to grow its economy and attract investors. But if there’s one thing investors hate, it is policy uncertainty.

Policy uncertainty is exactly what Koutsantonis has delivered.

Opening statement to Senate Standing Committee on Economics Inquiry into the Treasury Laws Amendment (GST Low Value Goods) Bill 2017

With Sinclair Davidson

We recommend that the Treasury Laws Amendment (GST Low Value Goods) Bill be rejected by the parliament. It is our view that this is not an integrity measure, that this is not the government closing a loophole in the GST legislation as they claim, but rather that this is a new tax. This new tax does not promote fairness for Australian retailers or consumers. It deviates quite substantially from the current GST design and is only superficially similar to the GST in that it has a 10 per cent rate. The GST itself is a tax which purports to tax Australian consumption, but it is actually a sales tax, and the legal incidence of this tax is on the seller of the goods, and the economic incidence is the assumption that the tax is then passed on to final consumers.

This particular tax, however, does not vest legal incidence in the seller of the goods; it vests legal incidence in the electronic distribution platform and/or the people offering transportation services. It is those companies and entities which facilitate a transaction between foreigners and Australians who will bear the tax, not the seller and not the consumer. This is not a tax on Australian consumption at all, but rather it is a tax on trading with Australians.

As an aside, I noticed before that you were concerned about double taxation. If this tax is collected by the foreign seller or the electronic distribution platform, they may have a problem convincing their own tax authorities that this is not revenue to them, and they may in fact then be taxed on that in their home country. So they need to be able to tell a story that remitting money to the Australian government is actually a legitimate business expense, and I suspect we will find that it is not. So double taxation will come in, in that these foreigners in fact will be taxed in their home countries on a 10 per cent increase in revenue. I was also astonished to discover that the authorities—certainly the tax office—seem to be recklessly indifferent to consumer fraud. That is certainly a massive problem.

The unintended consequences of this tax are such that I think the government has not much thought about these consequences at all. It is very likely to reduce competition in the domestic market as foreign sellers withdraw their services and stop selling. It is likely to expose Australians to darker elements of the internet, reducing antifraud protections and consumer protections that they currently enjoy. It draws foreign entities into the Australian tax net, which currently are exempt from the Australian tax net. No thought has been given at all to the consequences of Australian businesses then being drawn into foreign governments’ tax nets. So not only will there be a greater compliance on foreigners imposed by the Australian government; foreign governments will in turn put a compliance burden on Australian businesses hoping to trade with their citizens. That has not been discussed at all. So the net compliance effect of this is unknown, certainly much more than the budgeted amount of $13 million, which I think is just the salaries of the people who will be working on this. The increased compliance cost on small business is likely to create a barrier to growth. Obviously, large Australian businesses are in a position to wear those fixed costs of foreign compliance. This will create a barrier to small business growth in Australia and again will be a barrier to entry.

This fails as a protection mechanism. Australian consumers pay well above 10 per cent price differentials when buying from domestic retailers than with foreign goods anyway. It fails to produce substantial revenue for the Australian government. We estimate it is less than 0.2 per cent of additional revenue on the existing GST. It is not clear to us that these inherent flaws can ever be repaired. If the government were to simply abolish the $1,000 threshold at the moment, they would find themselves in the position of having to borrow money to collect revenue at a loss, which of course is a completely nonsensical position.

We think the government should leave well enough alone, not introduce a new tax, not expose Australians to the dangers of the dark internet and substandard or unsafe goods, and not encourage Australians to move away from reputable online sellers. So this has no redeeming features whatsoever and it should not be legislated into existence. Thank you.

GST change is a plain and simple tariff, Scott Morrison

With Sinclair Davidson

The Turnbull government’s proposal to eliminate the $1000 threshold before the GST is levied on imported goods is not a tax integrity measure. It is a tariff, and one that will have serious repercussions that the government does not seem to have considered seriously.

The end of the low-value threshold was first flagged by the government in December 2014. It formed part of last year’s budget. Now there is actual separate legislation before parliament, and a Senate committee inquiry that will give its verdict on the legislation the same day Scott Morrison releases his 2017 budget.

By July, if everything goes to the government’s plan, the commonwealth will be receiving a stream of GST revenue from every global internet retailer that supplies Australian customers with a total of more than $75,000 worth of goods.

That’s the plan, anyway. This proposal is no more convincing now than it was two years ago when it was first announced.

In 2011 the Productivity Commission concluded that inspecting low-value imports at the border to assess their GST liability would cost more money than it would raise. So rather than getting Customs to collect the GST, the government wants to convince foreign online retailers to do it for them.

Let’s imagine this ploy works. Some of the consequences are easily predictable. First, many Australians will substitute away from well-known online sellers — such as eBay and Amazon — that have built excellent reputations for facilitating and protecting trade, to those less well-known sellers that are likely not to charge the GST.

Doing so will expose more Australians to online fraud and lead to them purchasing less reliable products from unreliable suppliers that may not meet our high quality and safety standards. It also will expose more Australians to the more unsavoury sellers on the internet, possibly leading to an increase in unlawful imports into the country.

At the very least, a 10 per cent increase in the cost of digital goods will make intellectual property ­piracy just that little bit more ­attractive. This is a real cost of the policy that must be fully accounted for.

Second, the way the government proposes to implement this measure constitutes an exercise in extraterritorial power. The commonwealth Treasury does not have jurisdiction over eBay (headquartered in San Jose, California) or Amazon (headquartered in Seattle). Attempting to rope them into our tax system will place the Australian government in conflict with our major trading partners. At the very least this should generate trade disputes at the World Trade Organisation.

Doubly so if our trading partners read the Treasurer’s second reading speech introducing the legislation, which makes it clear that this is a protectionist measure to benefit the Australian small businesses that have been “unfairly disadvantaged” by the fact they pay taxes that firms in other countries do not.

This is the nub of the issue. Transactions that occur in foreign countries should not be liable to the Australian GST.

The GST is usually described as being a “consumption tax” but in fact, for practical reasons, it is a tax on sales.

When Australian consumers purchase goods online from, say, a company based in Britain, the sale does not occur in Australia — it occurs in Britain.

The money is exchanged in Britain, the order is produced in Britain, the sale is processed in the Britain and the dispatch order is made from Britain.

The fact the goods are subsequently imported into Australia does not mean those goods should be liable to an Australian sales tax. A tax levied on imports is a tariff. This legislation is an embarrassing reversal of Australia’s longstanding free trade agenda.

Morrison pointed out in his second reading speech that his legislation is a “significant world first”. That is not something of which he should be proud.

In the realm of tax administration, at least, Australia is showing itself to be a bad international player.

Rather than introducing a new tariff to protect Australian business from international competi­tion, the government should focus its efforts on those features of the Australian business environment that impose such high prices on local consumers.

Working to lower company tax, high wage structures and reducing red tape would benefit Australians far more than protectionist measures for their small-business constituency.

Submission to the Senate Standing Committee on Economics Inquiry into the Treasury Laws Amendment (GST Low Value Goods) Bill 2017

With Sinclair Davidson

Executive Summary: The elimination of the low-value threshold for the Goods and Services Tax constitutes a new tax on inbound internet trade – that is, it will function as a tariff imposed on Australian consumers.

  • The tax will raise very little revenue and will be expensive and complex to administer.
  • The tax deviates substantially from the existing GST design.
  • The tax is less a tax on consumption but on the reputation of foreign internet businesses.
  • The tax is inconsistent with the government’s commitment to deregulation, the promotion of international trade, and its innovation agenda.
  • The tax rejects principles that the Howard government established in terms of deregulation and the promotion of international trade.
  • The tax will do nothing to address the issue of high retail prices in Australia.
  • While masqueraded as a tax integrity measure, this tax is clearly intended to operate as a form of protectionism.
  • The tax will reduce competitive pressure within the domestic Australian economy, and (as a consequence) expose Australian consumers to government sanctioned higher retail prices.
  • The tax will lead to Australian consumers substituting away from large reputable electronic distribution platforms to more disreputable platforms leading to higher rates of internet fraud and possibility criminality. Product safety and consumer protection rights are likely to be compromised.
  • The tax has few safeguards to ensure compliance and remittance of revenue to the Australian government.
  • The tax contributes to increased levels of regime uncertainty within the Australian policy environment.

Parliament should reject the Treasury Laws Amendment (GST Low Value Goods) Bill 2017.

Available in PDF here.

Diverted Profits Tax Will Go Nowhere

With Sinclair Davidson

The Turnbull government’s diverted profit tax has passed the Parliament. Introduced in response to the moral panic that, somewhere, somehow multinational corporations don’t pay a fair share of taxation, this new tax is at odds with the government’s professed belief in lowering the corporate tax burdens, is at odds with our international competitors, and (as we learnt just this month), is even at odds with the Australian Taxation Office’s tax enforcement priorities.

The 40 per cent tax on diverted profits is expected to raise $100 million. That implies that the federal government estimates a mere $250 million of diverted profits. To put that figure into perspective, the federal government recently announced a tightening of the rules on the grandparent child care benefit. That policy change would result in welfare savings of $250 million.

Grandparents allegedly rorting the welfare system are a much bigger budget problem than multinational corporations allegedly rorting the tax system.

Indeed, Tax Commissioner Chris Jordan gave the game away on March 16 when he told a Tax Institute conference that the gap between what large corporates and multinationals pay and what they should pay in tax was “relatively modest” and that “the biggest gap we’ve got in the system is us” – that is, individual taxpayers.

After five years of hyperventilating about corporate tax avoidance, this is a striking confession. The previous treasurer Joe Hockey made much of the fact that the ATO had identified 30 multinational corporations likely to offend and had embedded agents in those firms and would carefully investigating their practices.

True, Scott Morrison did say that this diverted profits tax is a tax integrity measure. Ensuring the integrity of the tax base is a legitimate policy goal. But a diverted profits tax is a counterproductive and illiberal way to go about it.

It allows the ATO to impose upfront liability and collect tax on allegedly diverted profits. It reverses the onus of proof and removes the right to silence – thus multinational corporations the right to natural justice under the Australian legal system. That is not a reasonable integrity measure but rather a punitive regime that targets foreign investors and successful Australian companies.

This is a policy that substantially increases the powers of the ATO without any governance measures to ensure that abuses do not occur. No doubt these powers will be exercised by the ATO to collect revenue beyond the amount intended by Parliament. That is simply the nature of regulatory bureaucracies and it will be small comfort for those multinationals who successfully challenge the ATO that their money is eventually returned to them.

Even more fundamentally, the diverted profits tax doesn’t sit well with current policy settings, nor with economic reality. There is currently a lot of effort and anti-business rhetoric to collect $100 million. Is it a coincidence that business investment is low? Or is that government is passing tax laws that violate societal norms of fairness and are creating an uncertain and arbitrary tax environment?

Business doesn’t know what tax rate they will face in Australia in years to come. It could be 30 per cent. It could go down to 25 per cent over 10 years if the Turnbull government’s corporate tax cut goes through. Or it could be as high as 40 per cent if some Canberra bureaucrat, empowered by the diverted profits tax, gets a bee in their bonnet about multinational structures they do not understand.

There’s been a lot of talk about policy uncertainty in the Australian energy market. With a lot less fanfare the corporate tax confusion is doing the same to the entire corporate sector. This is not how to ensure jobs and growth

In the meantime, Australia is facing an international environment where the British Prime Minister is openly discussing turning the UKinto a tax haven, and the Trump administration wants to reduce America’s corporate tax rate to between 15 and 20 per cent. The Turnbull government has chosen the wrong time to put multinational engagement with Australia at risk.

“Stop This Greed”: The Tax-Avoidance Political Campaign in the OECD and Australia

With Sinclair Davidson. Published in Econ Journal Watch (2017) vol. 14, no. 1, pp. 77-102.

Abstract: Corporate tax avoidance has come to be a major political and popular issue. This paper considers the evolution of the corporate tax debate; it scrutinizes the empirical claims and the calls for crackdowns on corporate tax avoidance. It focuses on two jurisdictions, the OECD and Australia, to show how international claims were reproduced in domestic political rhetoric. The paper then considers the economic function of tax competition, and examines the evidence underlying the OECD’s claim that the corporate tax base is being “eroded” by “profit shifting” to lower tax jurisdictions.

Available at Econ Journal Watch

The case for a company tax cut is rock solid – and Labor knows it

To read most election comment you’d be forgiven for believing that what was until very recently a bipartisan consensus – that there was a strong case for Australia’s company tax rate to be cut – was in fact a mass delusion.

In 2010 Wayne Swan as treasurer declared that, “Reducing company tax will create new jobs and grow the economy right around the country” and was open to a reduction in the rate from the current 30 per cent to 25 per cent. Chris Bowen was arguing for a 25 per cent rate as recently as September last year.

But now that the Turnbull Government has announced a reduction to 25 per cent to be phased in over the next decade, Swan says there’s “no case for a company tax rate” because multinational companies are avoiding their tax and to suggest otherwise has something to do with Margaret Thatcher and Ronald Reagan and “trickle-down economics”.

For their part, Bowen and Bill Shorten now describe the 25 per cent rate as a $50 billion giveaway to big companies.

This is a rather damning indictment of the current Labor leadership, which has abandoned a long-held position simply to paint the Coalition as pro-big business during an election campaign.

Still, why blame a politician for acting like a politician? The populist argument against company tax cuts is just too easy to make. What’s remarkable is not that Labor has reversed its view but that successive governments actually managed to reduce the company tax rate from 49 per cent in the late 1980s to 30 per cent today.

The case for a corporate tax cut is rock solid. It’s about ensuring that the Australian economy is internationally competitive. A competitive economy attracts foreign investment – and with that investment comes growth and jobs. By contrast, an uncompetitive economy is a declining economy.

As the Rudd government’s Henry Tax Review pointed out, in 2001 the OECD average corporate tax rate was 32.5 per cent. At that time Australia’s 30 per cent rate was a good effort. But now the OECD average is about 25 per cent, and Australia’s rate hasn’t changed.

A word has to be said here about our system of dividend imputation. Under dividend imputation, investors receiving a dividend are credited for tax already paid on company profits. This avoids profits being taxed twice – first as company tax and then as personal income tax when dividends are returned to shareholders.

You often hear that dividend imputation makes the 30 per cent headline rate meaningless, as a reduction in company tax would be automatically made up by a corresponding increase in income tax collection. But that only holds true for domestic shareholders. Foreign companies have foreign shareholders who do not benefit from dividend imputation. And it is foreign companies we want to attract – along with their money and jobs and economic activity.

Indeed, the fact that we need a dividend imputation system at all partly demonstrates why the company tax is a bad tax. In truth no “company” pays tax. Companies are made of people and people pay tax – whether those people are company’s customers, shareholders, workers or management.

Who ultimately pays what proportion of the company tax is a matter of great controversy.

Last year Chris Bowen accepted that the bulk of the company tax was paid by workers. If, alternatively, investors pay the bulk, then it’s worth remembering that through compulsory superannuation we’re all investors. If management pay the bulk – and you sometimes see arguments that the company tax is a de facto tax on wealthy managers – then it is a wildly indirect way of taxing the rich.

This confusion and complication is why every serious investigation into tax points out that the company tax is one of the most inefficient – that is, wasteful – taxes available to government. (See Chart 1.5 of the Henry Review.)

Yet Australia relies on this inefficient tax for its revenue (18 per cent of the total tax take as of 2013) more than any other OECD country (with the exception of Norway, where company tax provided about 22 per cent of the total tax take).

In that light, Wayne Swan is exactly wrong to argue that multinational tax avoidance means we shouldn’t reduce the company tax rate. I’ve argued in the past that avoidance is for the most part a non-problem. But to the extent that company tax is being avoided, it is because other jurisdictions – like Singapore – offer much more welcoming tax environments than Australia does.

Our extreme reliance on company tax makes us particularly vulnerable to corporate tax avoidance and demonstrates how uncompetitive Australia has become for investment.

Labor used to understand this. Given how close they are to winning government, it’s a real worry they no longer do.