Governments around the world are estimated to lose between US$240 to 650 billion per annum through corporate tax avoidance. It therefore seems logical that this policy challenge is a major political and social issue.
The loopholes that allow multinational corporations to minimise profits in ‘high tax jurisdictions’ have been in use since the 1970s, but it was not until the Global Financial Crisis that activist groups were able to get the topic of tax justice on the political agenda. Tax justice activists leveraged the fact that many cash-strapped governments after the financial crisis had implemented austerity programs, cutting back services to citizens as a way of repaying the debts they had incurred bailing out and stimulating their financial systems. These activists were able to harness growing resentment of the results by campaigning on questions about fairness and the distribution of the tax burden.
In Australia, while there was no budgetary crisis or austerity measures (despite the Federal Government’s rhetoric and due to the failure of the 2014 federal budget), questions about corporate tax avoidance still resonated with the public and governments. Who were these corporations? What complex tax practices were they employing? And, what could the government do about it?
These questions prompted the 2015 and 2017 Australian Senate inquiries into tax avoidance and the tax practices of multinationals. The Senate Economic References Committee on Corporate Tax Avoidance (to give it its full name) invited representatives of Australia’s largest multinationals to speak to the Committee about the tax practices of their firms, and justify the positions taken on how much of their profit is actually booked in Australia.
In April 2019, we published a study examining the responses of multinational representatives in the Australian Journal of Political Science. We asked the following research questions. How did firms justify their approach to corporate tax? Did this vary between industries? And, did it change over time? The last question was prompted by not only the tax justice campaign’s growing traction, but legislative changes introduced in Australia during the period of the inquiry, including the Diverted Profits Tax Bill and Multinational Anti Avoidance Law.
The study employed a content analysis of the Senate inquiry testimonies, which was coded using QSR NVivo 10. Three main rationales were observed, and codes applied in respect of them:
- Business ‘DNA’: A corporation should be expected to aggressively minimise tax to deliver shareholder value.
- Respect for regulation: A corporation should pay what is stipulated under the law, no more and no less.
- Moral duty: A corporation should not aggressively minimise tax payments, and should be responsive to community concerns and social attitudes.
The following findings were derived from this coding.
Mining giants most likely to stress moral duty
Our findings show that there were differences across industries. In particular, there was something unique about the responses of some of Australia’s largest mining firms.
Both Rio Tinto and BHP were questioned about their similar corporate tax structure in the 2015 inquiry. This structure saw iron ore that was mined in Australia, sold out of a marketing hub in Singapore. Rio Tinto had negotiated corporate tax rates with the Singaporean government of 5%, while BHP secured a 0% tax rate, both significantly lower than the 30% corporate tax rate in Australia. Yet, there was no physical movement of these commodities. They were mined in Australia and remained here during the sale process, after which they were shipped to their final destination. The Senate inquiry highlighted these practices, and soon after the Australian Tax Office (ATO) issued large, amended tax assessments for several previous tax years, with a higher tax bill, to both firms. BHP has recently negotiated a settlement with the ATO, while the dispute with Rio Tinto remains unresolved.
In analysing the responses of multinational representatives at the Senate inquiries, we found their comments fell into the three categories as mentioned above. Firstly, some technology firms were proud of their ‘harmful tax practices’, that is, they argued that it was their corporate duty to minimise taxes and to not do so would be detrimental to their shareholders’ value. But secondly, most representatives stressed their company’s adherence to the law and decision not to aggressively pursue tax minimisation strategies. Most also noted that if the Australian government wished to collect more tax revenue, it should address loopholes in the international tax system.
The third category of responses was far more generous, in fact, we labelled these ‘moral duty’. These representatives stressed their firms’ adherence to the letter of the law, but also its spirit. What was interesting is that excepting the pharmaceutical company GSK, BHP and Rio Tinto had the greatest proportion of codes applied for moral duty not just out of all the mining multinational corporations, but of all multinational corporations whose representatives appeared before the Senate Inquiry.
One example of this type of response can be found in the testimony of Rio Tinto’s Managing Director, Phil Edmands: “Our overall philosophy regarding tax is that policy makers need to make the laws, but we will apply them in conformity with our global code of business conduct in the way we work. So our policy is to comply with both the letter and the spirit of the law.”
Yet, in the earlier anti-mining tax campaign…
In our article, we provide a brief overview of the earlier campaign led by the Minerals Council of Australia, but overwhelmingly funded by Rio Tinto and BHP, against the proposed resource super profits tax (the mineral resource rent tax, or MRRT).
This campaign against the MRRT was highly successful. It had far-ranging political impacts including the overthrow of two Prime Ministers, the Labor Government and the ultimate abandonment of the tax by the subsequent Abbott Liberal/National Government, after collecting almost no tax revenue. Most seriously, it set a precedent for large, powerful and ‘noisy’ industries wishing to make a political point. For very little outlay (AUD$22.2 million), these firms were able to control the political agenda, demonstrated by Rio Tinto’s CEO at the time, Tom Albanese, warning that “policymakers around the world should learn a lesson when considering a new tax to plug a revenue gap, or play to local politics”.
Our findings draw a thread between the anti-mining tax campaign, the power of mining MNCs, and their unique responses at the tax avoidance inquiries. We suggest that by stressing their importance to Australia’s economy, and wielding their political power so overtly during the first campaign, the mining sector (and Rio Tinto and BHP in particular) made themselves big political targets. They did so to the extent that when the inquiry about harmful corporate tax practices emerged, the spotlight emphasised the dubious tax practices employed by both firms in particular. In a change of strategy from prior interactions with the Australian Government, both firms were forced to respond by stressing their moral commitment to corporate taxation.
Political overreach
Thus, we conclude that the mining sector should have pursued its interests less noisily in the preceding years. The industry was vocal in highlighting its contribution to the Australian economy, all while attempting to pay lower corporate tax. Once the aggressive tax strategies employed by these firms, claiming that the economic benefits from the extraction of Australian iron ore should accrue to Singapore, emerged through the Senate inquiry, it was clear that they had overreached.
In a way, they effectively helped to kill the goose that laid their golden eggs – in other words, government inaction on corporate tax loopholes, and public acceptance or ignorance of them.
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