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Corporate tax needs global approach

By Jennifer Westacott | February 20th, 2015

The Senate Inquiry into Corporate Tax Avoidance and Minimisation is a welcome opportunity for considered and informed discussion about the performance of our corporate tax system.

It is crucial that commentary is evidence-based. It would be disappointing if the inquiry conflates issues and undermines the community’s confidence in the integrity of the system and the Australian business community more generally.

The Business Council’s submission is built on four core principles:

  • Businesses must accept their obligations to pay tax and be transparent in their tax arrangements. Where companies do not adhere to the law, authorities should act.
  • Where companies act beyond accepted community norms, governments need to respond, but changes must be carefully considered to avoid unduly deterring investment, reducing our competitiveness or creating unnecessarily complex tax arrangements.
  • Australia’s company tax arrangements must support investment, growth and jobs in an increasingly competitive and dynamic global environment.
  • Global tax issues require global solutions.

There are two broad issues to be considered. The first is how multinational corporations are taxed around the world. The second related but distinct issue is the robustness of Australia’s company tax laws.

There are legitimate questions about how well long-standing international tax conventions are performing in the face of increasing globalisation and digitisation. Company taxes traditionally are paid where profits are sourced. But disaggregated global supply chains and the growth of ‘intangibles’ in production, particularly intellectual property, have made it much harder to measure profits and determine where they come from.

This is why the G20 has commissioned the OECD to act as the prime multilateral forum for progressing tax integrity reforms through the Base Erosion and Profit Shifting Action Plan (BEPS). The plan focuses on a range of issues including transfer pricing, the digital economy, treaty abuse and the definition of permanent establishment.

Success of the BEPS process is of great importance. A multilateral solution will be vital to avoid countries going it alone with ‘beggar thy neighbour’ responses that could result in double taxation, much higher compliance costs and the undermining of legitimate commercial arrangements. Such outcomes would be to the detriment of global investment, trade, jobs and growth, and especially harmful for Australia as a medium-sized open economy heavily dependent on trade and foreign investment.

On the issue of domestic tax compliance and our corporate tax rates, Australia has some of the toughest tax integrity measures in the world, which together with high levels of compliance and enforcement, contribute to large corporate tax revenues. Company tax receipts are expected to be around $70 billion this year. Within the OECD, Australia’s corporate tax revenues as a share of GDP are second only to Norway. The priority for governments is to maintain the integrity and transparency of the system while supporting Australia’s economic competitiveness.

Successive governments, with bipartisan support, have sought to maintain this integrity by continually adjusting transfer pricing rules, the foreign source income anti-tax-deferral regime, general anti-avoidance rules and thin capitalisation rules. Recent changes to the transfer pricing and thin capitalisation laws make these regimes arguably the most robust in the world.

The government’s upcoming tax white paper process provides an opportunity to ensure our tax system retains its integrity while supporting investment, growth and jobs.

The mobility of capital, and competition for it, has increased. Countries have responded with more competitive tax regimes to attract investment. The United Kingdom, Japan and Spain will all lower their corporate tax rates this year to boost investment and growth. There is now hard-won bipartisan support for lowering Australia’s company tax rate, which is among the highest in the OECD.

The Business Council is acutely aware that the community must have confidence in the integrity of the corporate tax system if it is to support broader tax reform.

This is why a careful and well-informed debate is now a national imperative.

Jennifer Westacott is chief executive of the Business Council of Australia.

This article was originally published at the AFR.

Tags: Taxation
Sectors: Government

Is Australia spending over $100 million a day more than collected in revenue?

By Professor Miranda Stewart | February 16th, 2015

“At the moment, we are spending over $100 million a day more than we’re collecting in revenue. Now that’s unsustainable, particularly given we’re spending nearly $40 million a day on the interest on the debt that we have.” – Treasurer Joe Hockey, interview with Alison Carabine on RN Breakfast, February 3, 2015.

Mr Hockey has made similar statements in multiple interviews to support the government’s position that cuts to spending are needed to reduce the deficit.

To get $100 million of “overspending” a day, the Treasurer has relied on the Commonwealth Government fiscal balance recorded in the Mid Year Economic and Fiscal Outlook statement (MYEFO). The MYEFO, released in December mid-way through our financial year, updates the figures from the May Budget – including the deficit.

MYEFO states that the 2014-15 estimated deficit is $40.362 billion. It’s listed in MYEFO as the underlying cash balance.

The estimated deficit is a net fiscal balance for the entire year, so it does not really make sense to think about it on a daily basis. But ignoring that quibble for now, the numbers in Mr Hockey’s statement more or less check out.

In fact, dividing $40.362 billion by 365 and rounding produces a figure of $111 million – even more than the $100 million a day that the Treasurer stated.

That’s up from the estimate of the annual fiscal deficit of $29.8 billion – $80 million a day in the Treasurer’s language – that was in the May Budget.

MYEFO also tells us that the expected 2014/15 deficit, or underlying cash balance, is 2.5% of GDP.

The interest of $40 million a day also comes from MYEFO. It’s a figure for the interest on Commonwealth government-issued debt, listed in table D7 of that document as $14.2 billion. Divide that by 365 and you get $39 million: Mr Hockey’s “nearly $40 million a day”.

Let’s put it in context: with a population of 23,742,527 as I write, each Australian is “overspending” by $4.66 per day, or just over $1,700 per year. And we’re each paying $1.64 in interest a day on our debt.

What do the numbers mean?

Internationally, we are doing OK. In 2012, the latest year with full comparable figures, all OECD members except for Norway and Germany had an operating fiscal deficit and most of them had a larger deficit than Australia.

What about government debt? This is difficult because there are different measures, including net or gross debt, central or general government debt, or the value of Commonwealth-issued securities.

In 2012, Australia’s gross general government debt (at all levels) was 57% of GDP as recorded by the OECD here. But at the Commonwealth level, the May budget indicated that government debt on issue would have a face value of 23.3% of GDP, while Commonwealth net debt is estimated as 15.2% of GDP in Table 3.4 in MYEFO.

Most other governments had higher gross debt than Australia. Some governments, like Germany, had a fiscal surplus but high debt (89% of GDP in 2012). The UK had debt of 101% of GDP and a deficit of 6% in 2012.

The Commonwealth government is AAA rated. It does not have any problem borrowing.

As the deficit and debt trend up, the credit rating agencies have started to mutter. The agencies, like Moody’s, rely on the value of issued government securities – on this basis, Moody’s states that “consolidated gross general government debt, which includes state and local government debt, is about 32% of GDP, whereas the median for AAA-rated countries is around 45% of GDP”.

On any comparative measure of government debt, we are still ahead of the curve.

How can we fix it?

We don’t need to worry too much, not right now. Partly because, as others have recently explained, the government budget is not like your household budget.

However, both the Parliamentary Budget Office and the Grattan Institute argue that our fiscal deficit and government debt are structural and need fixing in the medium to long term.

To do that, the government can either cut spending or raise taxes.

Commonwealth government taxes this year are estimated to be $353.6 billion (total revenue is $385.9 billion) but government expenses are over $400 billion. More or less, that is what causes our “overspend”.

Today, our federal taxes are falling. They were estimated at $360 billion in the May budget for 2014-15, or 22.1% of GDP.

This is lower than a decade ago: under the Howard government, federal receipts reached 24% of GDP. And tax revenues are predicted to decline further in MYEFO, by several billions, because of lower commodity prices and because your wages are not growing as fast as before. The GST raises only a small percentage of GDP in revenue and revenue growth is slowing.

In the May 2014-15 budget, the government proposed to cut expenditures including unemployment benefits and the age pension, and raise fees for doctors and universities. The government claims that $10.6 billion in budget savings have not been enacted because of the Senate’s refusal to pass these unpopular budget measures.

We could collect more taxes, if we choose, to fund public goods, redistribution and services.

Verdict

It is true we are spending over $100 million a day more than we’re collecting in revenue and nearly $40 million a day on the interest on the debt. However, we compare favourably to other countries on deficit and debt.

You don’t need to worry too much right now about your $4.66 a day in “overspend”. But you do need to join a debate about tax reform that asks what you want government to do, how we can reform taxes to ensure prosperity, and how we can fund public goods fairly and sustainably for the future.

This article was originally published at The Conversation.

Photo Credit: Ryan Rayburn/IMF

Sectors: Government

Seven secrets to nailing your pitch: Shark Tank judge Naomi Simson

By Naomi Simson | February 13th, 2015

Let me paint a picture for you…

You’ve been practising your business pitch for days – to family, friends and even your dog. You’re confident everyone will love your idea as you’ve been told you’re onto a winner. As you wait for the signal, you rehearse your pitch over and over again. This is the moment you have been waiting for.

The music starts as you begin the long walk through the Shark Tank. The doors swing open and you find yourself in front of five people who could change your life forever .?.?. if you nail your pitch.

We saw more than 100 business pitches during the filming of TEN’s new program Shark Tank, and during that time I became really clear on what makes a successful pitch and what will see you crash and burn. Don’t be fooled into thinking these lessons just apply to business pitches – unfortunately, these are some of the most common mistakes happening in boardrooms and business meetings across the country.

These are the seven things I wish everyone had considered before pitching to us on Shark Tank.

1. Research who you’re pitching to

Each of the five sharks has a different reason for potentially investing. What do they believe in? What is their background? What is their area of expertise? Do the work and find out as much as you can about the people behind the “investor” label. People do business with people, and investors invest in people.

2. Understand your customers

An idea is only an idea until someone is prepared to pay money for it, and then it could potentially end up as a commercial product. Asking your friends and family if they like your business idea is not research – they are only going to tell you what you want to hear. In the tech world, we have what is called minimum viable product – we ship “beta” product to get customer feedback.

3. Discover everything possible about the industry

It is unlikely the investor will know as much as you about the industry and market you’re in (putting a Facebook page together to “test” the industry is not what I mean here). How big is the industry? How many competitors are there? Is it a new market or existing? There is plenty of industry data available to start this inquiry. Know your market and know its potential.

4. Deeply understand your numbers and cash flow

You should know every critical number in the business and please don’t fudge them! If you are not a numbers person, practise and work out how you can remember them. Key numbers to know are the cost of acquisition of a customer, the cost to serve a customer (this is more than your cost of goods sold), the number of unique customers, conversion rates, and of course the obvious ones – cash burn and time to profit at current run rates pre and post investment.

5. Deal with the details

If necessary, get trademarks, patents, registrations, licences and approvals. Ensure you comply with regulations and have paid your taxes – no investor will be interested in taking on a business that has any potential litigation, so tie up every loose end before your pitch. You want to build trust with the investor, and one way to do this is to make sure you have taken care of the detail.

6. Understand different valuation models

Some people just want to get the money back that they have already invested in their idea, but this really doesn’t make sense for an investor. If you are pitching an equity deal based on future potential sales, then you need to be clear on why this is so and have a demonstrable track record (eg. recurring income). If you’re valuing your business based on current top-line revenue, know and show similar valuations in your industry. Too many times we saw people pitch with a valuation that was all about “hope” – investors don’t buy hope as a sustainable strategy.

7. Tell the story

Share your vision and entice us with the dream of how you are making the world a better place. A great pitch is an emotional journey for both the person seeking investment and the investor. I’ve been known to say, “It’s just business” but what I’m really saying is, “It’s not just my money: it is my time, my reputation and commitment that you are asking for.”

Make sure your pitch takes the investors on a journey filled with facts and numbers. More than anything, you should be someone they can believe in.

This article was originally published at BRW.

Photo Credit: Channel Ten

Sectors: Business