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A timely leak of documents may finally force the G20’s hand on corporate tax dodging. By Mike Seccombe.

Luxembourg tax deals hard for G20 meeting to ignore

Clearly the little group of anti-poverty campaigners who set up their protest last Friday in Brisbane, in anticipation of this week’s G20 meeting, were a bit behind the news cycle.

In an effort to portray concerns over the use of tax havens by multinational corporations, they brought deckchairs and beach umbrellas and sat on a pretend beach while wearing shorts, drinking mocktails and listening to the Beach Boys. “Tax heaven,” said their banner.

It would have been more topical had they dressed warmly, sipped pilsner or moselle, scoffed a bit of sauerkraut and listened to an oompah band, given the previous day’s revelation of massive tax dodging by multinational corporations. For the leaked documents emanated not from some tropical island paradise, but from chilly, landlocked Luxembourg, a tiny duchy wedged between Germany, France and Belgium.

No matter. The dump of the Luxembourg documents served the protesters’ cause far better than any bit of street theatre could. The G20 has been largely ignoring civil society protests for 15 years now, as it focused on freer trade and economic growth.

The Luxembourg leak though, of about 28,000 pages of material exposing in detail how 343 multinational companies went about avoiding taxes, is pretty hard to ignore. All the more so given that it comes on top of a series of highly publicised revelations over the past couple of years of egregious avoidance practices by some of the world’s biggest and best-known corporations.

Just last year, in a major report, the Organisation for Economic Co-operation and Development concluded the growth in corporate tax dodging was now a “serious threat to tax revenues, tax sovereignty and tax fairness” to rich and poor countries alike. It has proposed an action plan, the first tranche of which will be considered by the G20 in Brisbane this weekend.

The release of the Luxembourg documents by the International Consortium of Investigative Journalists (ICIJ) was perfectly timed to add pressure to the leaders of the world’s biggest economies to actually do something about corporate tax dodging this time, after studiously ignoring it for decades.

As Tim Costello, chair of the C20, the coalition of civil society groups that parallels the G20, tartly observes: “For so long as they just thought it was about ripping money out of the developing world, nothing really happened. As soon as they began ripping off first world countries, it got some attention.”

The Luxembourg material shows it is everyone’s problem now, although it is still a bigger problem for poorer nations.

The data came out of a leak from PricewaterhouseCoopers (PwC), one of the world’s largest accounting firms and facilitators of corporate tax dodging, relating to secret tax rulings negotiated with Luxembourg authorities.

The list of the implicated is a who’s who of corporate heavyweights: Apple, Amazon, Coca-Cola, General Electric, Heinz, IKEA, British American Tobacco, AXA, FedEx, Procter & Gamble, ABN AMRO, Accenture, GlaxoSmithKline, Guardian Media Group. All of them are using complex structures to move profits through Luxembourg and so greatly and secretly reducing their taxes in other countries where they do most of their business.

IKEA, to cite just one example, reported $103 million in Australian profits between 2002 and 2013. The Luxembourg documents suggest real profits were some 10 times larger.

Other companies on the list, such as AMP Capital, Macquarie Group, Babcock & Brown, Hutchison Telecommunications and Goodman Group, are Australian. Perhaps most remarkable of all, the Australian government itself is on the list.

We learn the government’s $100 billion Future Fund, set up in 2006 to help meet the cost of public sector superannuation liabilities, was sending money via another infamous tax haven, the Cayman Islands, to Luxembourg, then back through the Caymans to Australia.

In total, according to the ICIJ’s analysis, hundreds of billions flowed through the various schemes set up by PwC, and billions in corporate tax was avoided as a result.

Bear in mind this relates to just one data leak, from one tax-planning outfit, in one tax haven. Dozens of secrecy jurisdictions around the world offer greater or lesser degrees of opacity, to facilitate tax dodging.

Little Luxembourg is big in the tax-avoidance world. About the size of the Australian Capital Territory, with a population of about 550,000, its outsized financial services sector has about $US3.7 trillion in assets under management, second only to the United States.

Last year, the International Monetary Fund rated its citizens the richest in the world, with per capita annual income of more than $US112,000, twice that of fifth-placed Australia.

Australia is actually one of the less affected nations. But even so, we lose huge amounts of revenue each year. The tax office reckons the figure is probably a couple of billion, although other estimates run far higher. 

But no one really knows, as was evident when tax commissioner Chris Jordan talked about the Luxembourg documents to the ABC this week. “It’s rare for us to get access to information of this nature, so we’ll be very happy to have a look at it,” he said.

Jordan’s comment, says Professor Miranda Stewart, director of the Tax and Transfer Policy Institute at the ANU Crawford School, sums up in a sentence why progress on tax reform must come out of the G20 meeting. “He didn’t know. Well, that’s information the tax office should have.”

But she remains hopeful that the G20 will make progress on the ambitious reform agenda set out by the OECD.

“I’m pretty confident automatic information exchange is going to happen,” says Stewart.

“What’s even more important is that various country revenue agencies are going to start working together in a more integrated way than ever before, in the longer term perhaps actually collecting and remitting tax to each other.”

Significant progress on this transparency agenda has already been made. About 40 countries, including big ones such as Britain, Germany and France, will begin the automatic exchange of information in 2016. Australia has committed to it by 2017.

The Labor opposition has accused the government of dragging the chain, but it looks more like lack of resources than lack of will.

Among its various cost-cutting moves, the Abbott government has hacked into the tax office and treasury. Nearly $200 million has been cut from the tax office budget.

“There is a real issue about how prepared the tax office is, given that it’s suffered substantial cuts, as has the treasury, where staffing has been cut 30 per cent,” says Stewart.

In fairness, she points out: “That happened under the previous government as well.”

The other measure for which there are high hopes is country-by-country reporting, requiring multinationals to reveal such information as where they sell, where they employ people and where they record their profits.

Says Tim Costello: “The basic issue, as we’ve seen again [in the Luxembourg leaks], is that economic activity and legal structure, permanent residence, where you get taxed, are profoundly disconnected.”

Some broad agreement may be expected but, says Antony Ting, an expert in international tax avoidance from Sydney University’s business school, “the devil may be in the detail”.

“The initial draft proposal put up for consultation required a lot of information, about 17 items. The proposal which will be endorsed this weekend is reduced down to about seven,” he said. 

“The original proposal was also to disclose not just country by country, but company by company. So each company in a group would have to disclose separately.”

This watering down, he suggests, increases the scope of corporations to continue to frustrate tax authorities by moving money between their various arms.

The US, says Ting, is “the main culprit” behind this change. He notes that the immediate past and current chief negotiators for the US came out of accounting and law firms specialising in multinational tax planning.

“It’s an inside job,” he says.

Then there is the problem that whatever is agreed at the meeting must be reflected in domestic laws, says Mike Callaghan, director of the G20 Studies Centre at the Lowy Institute.

“Among US Republicans, who now control both the house and senate, the common view is that the current situation benefits a lot of major US corporations, and they’re not willing to change their laws so other countries can increase their tax take.”

Costello notes hopefully, however, that the OECD has done work to determine which countries are winners and losers from tax avoidance, “and the US is still a net loser”.

In short, the process of reform is going to be long and fraught. 

“But,” says Miranda Stewart, “at least the project is still moving forward. We had a harmful tax practices project in the 1990s which collapsed partly because of the US politics.”

The fundamental question, though, is who benefits from that progress.

An analysis released by Oxfam ahead of the G20 showed that, in the past year, global inequality continued to grow. The richest 1 per cent of the world’s people reaped 36 per cent of economic growth.

The real test of the G20 reforms, says Costello, is whether they address this rising inequality. He notes that the Abbott government is stressing measures to increase global growth by 2 per cent. “We in the C20 say the action plans to get that growth must show distributional effects.”

And he points to the Abbott government’s action plan, which includes profoundly regressive measures such as cuts to unemployment benefits. “We say, the test should be 2 per cent above trend growth for the poorest 20 per cent of households.”

Now Pope Francis has written to the deeply Catholic Abbott, urging that the G20 focus on inequality as well as growth.

Costello is disturbed by reports the Abbott government does not want any mention of “inclusive growth” in the G20 communiqué.

It will be interesting to see this weekend how the G20 leaders balance concepts of growth against fairness. And whether equity is one of those issues, like global climate change, that our government would rather not talk about.

This article was first published in the print edition of The Saturday Paper on Nov 15, 2014 as "Little slice of haven". Subscribe here.

Mike Seccombe
is The Saturday Paper's national correspondent.