November 19th 2016


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Articles from this issue:

COVER STORY QUT discrimination case exposes Human Rights Commission failings

CANBERRA OBSERVED Triggs in the gun: loaded section 18C to get overhaul

EDITORIAL First Brexit, now Trump - it's the economy, stupid!

ANALYSIS What is possible to a Trump Whitehouse

MANUFACTURING Foreign ownership no sole reason for breakdown

ENVIRONMENT Billionaires bankroll U.S. anti-coal campaign

LIFE ISSUES Abortion trauma link to male suicides

NATIONAL AFFAIRS Commission's "Get Pell" campaign fails on facts

GENDER AND POLITICS Pronouns, ordinary folk, and the war over reality

NAVAL MILITARY HISTORY A WWII encounter that deserves remembrance

INTERNATIONAL AFFAIRS China builds Great Wall in the South China Sea

MUSIC Dylan's Nobel prize causes song and dance

CINEMA Humanity within inhumanity: Hacksaw Ridge

BOOK REVIEW Bill is $500 billion and counting

BOOK REVIEW Arguments and facts: the man who remade Russia

POETRY Sunset at the Perth War Cemetery

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BOOK REVIEW
Bill is $500 billion and counting




News Weekly, November 19, 2016


THE GREAT MULTINATIONAL TAX RORT: How We’re All Being Robbed

by Martin Feil

Scribe, Melbourne
Paperback: 256 pages
Price: AUD$32.99

 

Reviewed by Colin Teese

 

Don’t be put off by the book’s somewhat wordy and provocative title.

Martin Feil has written an important and necessary book. If published 25 years ago it would, perhaps, have had special reference for Australia. Back then, maybe we were the first Western country to be plagued with the problem of “transfer pricing”.

Feil knows what he is talking about when it comes to these matters. An accountant by training, he has consulted to business on matters relating to tax, customs and import tariffs.  Before that he worked in the Department of Customs and Excise and the Industries Assistance Commission.

He begins by telling us what his book is not about. It’s not about the “Panama Papers”. That document, of some 11 million pages, was concerned with tax havens and tax evasion by the very wealthy individuals and their tax advisors. “Panama” did not deal with a no less significant problem – tax evasion by multinational corporations and their tax advisers.

As to the Panama problem, Feil tells that according to economist Gabriel Zucman some 8 per cent of the financial wealth of households – $US7.6 trillion – is held in tax havens. Zucman calculates that this generates a loss to global taxation of about $US200 billion a year, including $US35 billion in the United States and $US78 billion in Europe.

Until the Panama papers governments had long turned a blind eye to these practices; now they are concerned about how to deal with the problem.

Neither is the book about tax, accountancy and economics. Feil characterises these as “the academic disciplines and the sources of the tools and strategies involved in what is emerging as the greatest human and financial disaster that the world has ever known”.

Feil is concerning himself with what appears to be only one aspect of his “disaster” scenario; the behaviour of those in charge of multinational companies effectively refusing to pay their fair share of tax. Technically, this is called “transfer pricing”.

Feil believes that multinationals had what he calls their “light-bulb moment” when they took a close look at the way the world tax arrangements were structured. They quickly discovered that, to maximise their tax advantages it was against their interest for subsidiaries or branches to make a profit in every market.

Better still, it became clear that by paying the right tax advisers it was even possible not to make a profit in any taxable market. The way to do this was to artificially inflate prices charged to their subsidiaries for royalties, manufacturing knowhow and technical service fees to the level needed to take up any locally generated profit. Of course, no profit, no tax. The technical name for this newly devised strategy became ‘transfer pricing’.

So far as manufacturing industry was concerned, the opportunity for this practice in Australia was opened up when, in the early 1980s, we gave up the idea of charging a tax on imports (a tariff) based on the cost of the imported goods or service.

Before the 1980s, overcharging subsidiaries for services provided by the principal would simply increase the duty paid on the import by the subsidiary. However, once import duties no longer applied the door was opened for multinationals corporations with subsidiaries in Australia to legally avoid paying tax on earned income.

The consequences were severe. First we lost the revenue stream from taxes on imports. Second, Australian consumers lost the benefit of removing duties on imports into Australia, because we did not compel importers to pass on the price benefits of lower priced imports to consumers. Instead, these became extra profits for multinational corporations. Third, we lost the income tax previously collected from the subsidiaries.

At the same time multinational corporations, in a globalising world, and with the help of their tax advisers, found ways to park their profits in one of the multitude of tax havens around the world. In this way corporations can manage their affairs so as to avoid paying tax anywhere.

The intentions of the multinationals are unashamedly mischievous, but their affairs are so carefully arranged that they break no tax laws. It is no wonder that one commentator on Mr Feil’s book has called these practices a kind of theft.

Martin Feil explains that all this is possible with the help of what he calls the “big four”. Lest we jump to conclusions, he is not talking about the four large Australian banks, though they, in a minor way, play a part in transfer pricing.

The author’s big four are in fact the world’s four biggest accounting and audit firms – PriceWaterhouseCoopers, Ernst & Young, KPMG and Deloitte. In the past 25 years they have been paid $US500 billion to prepare annual accounts and manage the tax affairs of multinational companies.

They have earned their fees, providing one overlooks the negative financial and economic impact transfer pricing has had on the governments and peoples in the countries concerned.

For obvious reasons, no figures have been collected about taxation lost to governments by tax dodging. Oxfam has, however, estimated that it cost the US government $US111 billion each year. Others have calculated similar or even larger amounts.

Remember that all these strategies became possible when countries around the world agreed to get rid of tariffs and embrace the idea of “free trade”. Those promoting the material benefits to consumers of lowering tariff barriers in the name of cheap imports overlooked the unintended consequence of diminished tax revenue. Either they had not done their homework, or they were so besotted with ‘free trade ideology that they were indifferent to wider consequences.

Deeper into the book Feil discusses these wider implications. For those interested in detail he also clearly sets out the various forms of transfer payments systems and how they work.

When it comes to what might be done about it, Feil is less clear. On the positive side major economies in Europe and North America are now sufficiently concerned to want the problem dealt with. It is not clear to what extent our government here in Australia has the same degree of commitment.

This not withstanding its concern about what it calls ‘budget repair’. Quite obviously, solving  the problem of transfer prices would release a healthy revenue stream into the government’s hands for urgently needed domestic needs.

Feil leaves us in doubt that the problem is very difficult. First the multinationals and their accountants have carefully structured arrangements so that no laws have been broken.  Further, action is taken against the multinationals, it has been long, costly and has yielded meagre returns.

Tax legislation around the world, perhaps in concert, will have to be redrafted in more draconian forms to get around this problem.

At least in the Northern Hemisphere there is a willingness to move. The Organisation for Economic Cooperation and Development (OECD), of which most major trading nations are part, wants to deal with the problem but recognises the difficulties, some of which lie in its own charter. All of which Feil clearly explains.

However, given all the problems, it would be unwise to expect much progress in the short term.

All in all, Feil has produced a fine book. He has, not without a certain passion, described a major problem which presents a serious threat to the international economy and to the governments who make it up.


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