Multinationals’ brazen tax avoidance
American Express has paid no net tax in Australia for nine years, according to its latest financial statements. That is zero tax on $10 billion in revenue.
Well might this story end there. Enough has already been said. But Amex is by no means alone. Multinational reporting season is under way once again and the handful of reports that we have analysed so far evince the same patterns as in years gone by: offensive tax structuring, feeble disclosure, and audits ticked off by tax advisory giants EY, PwC, Deloitte and KPMG.
Those who can afford to pay the most, the biggest companies in the world, pay proportionately the least tax. Their social licence to operate in this country surely hangs by a thread. We will get to Google, eBay, Facebook and Shell shortly. In the meantime, how does Amex get away with it?
Over the past nine years, the financial services juggernaut has racked up revenues from its credit-card services of $9.93 billion and shown a tax gain, rather than a loss, of $900,000.
American Express Australia Limited used to pay tax in this country, but thanks to a “restructure” in 2004 billions in profits have since been siphoned out to an associate in the tax haven of Jersey.
The notes to the 2005 financial statements show that, in September 2004, the company entered into an agreement to transfer billed card-member receivables to American Express Capital Australia (AECA).
AECA is in turn a general partnership established by American Express International Inc and CredCo, an entity domiciled in the Channel Islands tax shelter.
Despite its billions in revenues from merchant fees and income on credit cards, the most tax recorded by Amex in any of the past nine years was just $2.2 million.
The 2008 annual report for the Australian arm of American Express notes: “Included within borrowing costs in the income statement is the discount charged on the transfer of receivables to AECA of $370 million.”
Through this arrangement, Amex in Australia has transferred almost $5 billion in credit-card receivables to a related entity in just one year, and at a large discount. These receivables are money due to be paid by customers on their credit cards.
Bear in mind the typical interest rate on these receivables is above 20 per cent, while the Reserve Bank cash rate plods at just 1.5 per cent. It is not unusual for there to be a discount when “factoring” financial assets such as credit-card receivables. It is the discount and the default rate that are key to how much profit is ripped out of Australia. The discount in 2014 was $153 million on a loan balance of $3.3 billion. How much profit was left in Jersey after defaults? That’s unknown.
American Express is the archetypal multinational tax avoider. It conducts “related party transactions” with other Amex entities in a tax haven. Via these transactions, profits are siphoned offshore before tax can be paid.
It produces very low profits, or losses, in Australia. This is typical of multinationals – the less they make in profit here, the less they pay in tax.
The standard corporate tax rate in Jersey is zero and the rate for financial services companies is 10 per cent, a far more desirable destination for profits. The corporate rate in Australia is 30 per cent.
If a positive thing can be said about Amex, it is that at least it files “General Purpose” financial statements, instead of the bush-league “Special Purpose” variety that conceal information on related party transactions.
The same cannot be said of the American digital giants, most of the global players in Big Pharma, Adidas, Unilever, BUPA and Rupert Murdoch’s News Australia Holdings.
Looking at some of the other multinationals that have reported their December 2016 year accounts, there are two bright spots: Google and Facebook have reluctantly brought a third of their revenue onshore.
Until now, these two, as well as eBay and others, have pretended the revenue they make providing services to people in Australia constitutes foreign business. So Google has booked its estimated $2.5 billion to $3 billion in sales directly to Singapore and eBay theirs to Switzerland.
Thanks to the multinational anti-avoidance law (MAAL), however, and under pressure from an invigorated Australian Tax Office, Google Australia disclosed $882 million in revenue for last year and its tax jumped from $16 million to $41 million. Facebook Australia – which had once, bizarrely, won an exemption from reporting from the corporate regulator as it claimed it was “not part of a larger company” – paid $3.3 million on $327 million in revenue.
Presumably, its real revenue figure is well above $1 billion. Nonetheless, progress has been made, progress which would not have occurred but for public pressure and awareness arising from the senate inquiry into corporate tax avoidance that kicked off in 2015.
Transparency and disclosure in the Facebook and Google accounts remains poor, especially in light of the fact these two digital players have wrested well over half the advertising income away from the mainstream media.
eBay remains a renegade. Although the online auction house is believed to make more than $1 billion in revenue in Australia, it declared just $51.5 million, all of which came from related parties, probably offshore and probably relating to “service arrangements”. Tax paid here was just $1.9 million. eBay deems its Australian revenue belongs to an entity in Bern and so it invoices from Switzerland and pays zero income tax and GST. It has not even begun to comply with the MAAL and its accounts are utterly meaningless as they are not consolidated. It also appears to bulk up its costs: average pay last year for its 109 staff was $312,553 per worker.
This week it was revealed that global oil and gas giants – Chevron, Shell, Exxon and others – may not pay any petroleum resource rent tax or royalties on five gigantic gas projects – Gorgon, Wheatstone, Ichthys, Pluto and Prelude – that are expected to deliver them revenue of $33 billion a year.
Before the senate inquiry in Perth two weeks ago into corporate tax avoidance, the companies themselves conceded no rent tax would be paid until at least 2029, even though Gorgon is now shipping gas and Wheatstone is expected to begin production later this year.
Although Chevron executives claimed the company would pay between $60 billion and $140 billion in petroleum resource rent tax over the life of the Gorgon and Wheatstone projects, their oil price assumptions were not made available to the inquiry.
On the expert report by Wood Mackenzie, commissioned by government, the gas giants would pay $7 billion in rent tax over the life of all five projects. That estimate is struck on an oil price assumption of $US60 a barrel, however, whereas the price is below $US50.Moreover, the tax office submitted that the industry had amassed $238 billion in credits and, under the structure of the rent tax, exploration losses were transferable and could be offset against income on other projects. Then there are the $34 billion in tax losses carried forward to offset income tax.
It is quite plausible no tax or royalties will be paid on projects that, when running at full capacity, will bring in $33 billion a year. The petroleum resource rent tax needs reform. Although the companies cry government interference only deters investment, the investments have been made, the resources are finite, and it is a matter of national interest that foreign multinationals not extract Australian resources free.
The oil majors have not showered themselves in glory when it comes to paying tax on existing projects, either. Chevron recently had its appeal against the ATO dismissed by the full bench of the Federal Court in an historic case that established transfer pricing of money. It had borrowed $US2.5 billion in America at less than 2 per cent then on-lent it to its subsidiary in Australia at 9 per cent.
Another $41 billion in loans is yet to be assessed, loans that suck hundreds of millions of dollars a year in interest payments offshore before tax. Much is at stake and Chevron has foreshadowed an appeal to the High Court.
Meanwhile, as domestic gas prices were tripling, ExxonMobil, which operates the offshore gas fields in Bass Strait with BHP, failed to pay tax at all for 2014 and 2015. Its 2016 accounts are still not available from ASIC.
Chevron has an exemption from the corporate regulator from filing on time but Shell’s 2016 accounts have dropped. Shell’s upstream business, Shell Energy Holdings Australia Limited, paid $11.7 million in tax last year on $1.1 billion in disclosed revenue. It is not in Chevron’s league of chicanery but it does reduce its tax in Australia via loans from associates overseas. Shell also sells a large portion of the oil and gas it extracts from Australia’s soils and seabeds to associates in tax havens. The petroleum resource rent tax for these sovereign commodities – North West Shelf, and so on – plunged in 2016 from $US257 million to $US127 million while finance charges jumped from $US174 million to $US485 million. As elsewhere, this drained profits to offshore Shell companies before tax.
Like the feckless tourist just off the cruise ship for a stopover in Acapulco, preyed on by crafty hucksters, the government, indeed successive Australian governments, are being swindled. Analysis of the first tranche of financial statements for 2016 shows the same aggressive patterns of tax avoidance by multinational companies persisted last year. Poor reporting standards also prevailed once again. Profits are principally siphoned offshore by related party transactions and it will not be until government and regulators demand greater transparency that further progress can be made.
The bright spot is that the multinational anti-avoidance law is beginning to work and already, as laid out in the treasurer’s budget speech this week, some $2.9 billion has flowed to government coffers. The trick now is to keep the reform process ticking along and demand more disclosure and transparency – something the business lobby and the Big Four audit firms will fight against – that is essential to the future of this country.
This article was first published in the print edition of The Saturday Paper on May 13, 2017 as "Getting down to farce tax". Subscribe here.