Apple, Ireland and Australia
The European Commission’s decision that Apple should pay €13 billion to the Irish Government has created a fascinating company tax argument in Australia.
Far more captivating than the European Commission (EC) demanding that Apple pay €13 billion (or up to €19 billion after interest is added) of back tax to Ireland was the Irish government’s response. Rather than chase the windfall, the immediate reaction was to appeal against the EC’s decision, although this has since been questioned by some in the country’s governing coalition.
The interesting point for Australian tax commentators, and in particular The Centre for Independent Studies (a policy institute and think tank) was the level of our own corporate tax rates as compared to Ireland, and to many of the world’s major business environments.
This shows the importance Ireland puts on having a competitive tax system. Australia would benefit from having a similar attitude.
Few businesses could ever dream of paying a corporate tax rate of 0.005%, the amount Apple is claimed to have paid in 2014 in Ireland. But at the same time, relatively few international businesses pay as much as 30% - Australia’s company’s tax rate. That fact does not bode well for the Australian business environment, experts say.
"There is a lesson for Australia in this approach to tax competitiveness," says Michael Potter, economist and Research Fellow in the Economics Program at the Centre of Independent Studies. "Ireland disagrees with the European Union ruling that tax arrangements provided an 'undue benefit' to Apple, with the EU demanding Apple pay more than AUD$19 billion (€13 billion) in extra Irish tax.”
"Ireland is reportedly planning to dispute this EU ruling. This is an extraordinary move - they are considering opposing windfall taxes revenue worth all of Ireland's health budget. This shows the importance Ireland puts on having a competitive tax system. Australia would benefit from having a similar attitude.”
It is that final point - that Australia would benefit from a similar attitude - that the new argument is based around. While the Turnbull government has openly spruiked its plans to cut the corporate tax rate from 30% to 25% by 2026/27, the move is seen as too little, too late by some, and as politically unlikely by others.
Legislation to reduce company taxes right now, Michael says, is essential and requires agreement from all sides of politics.
"Australia is crying out for this reform,” he says. “Wages growth is weak, national income has been falling for several years and productivity growth needs a substantial boost.”
"Even more troubling is our investment levels which are at near-record lows. The only other time we have seen non-mining investment this low is in the depths of the 1990 recession. And mining investment is declining sharply.”
Our comparatively high company tax rate, Michael says, dissuades those looking to invest in Australia. The result is that wages stagnate, exports and GDP remain flat and national income and employment hit a ceiling.
"Australia needs substantial policy reforms to address these weaknesses,” he says. “We cannot sustain growth in household incomes or wages if we don't boost productivity and investment.
Wages growth is weak, national income has been falling for several years and productivity growth needs a substantial boost.
Michael’s research, as outlined in his paper ‘Fix it or fail: Why we must cut company tax now’, a submission to the Senate Inquiry into the Treasury Laws Amendment Bill 2016, indicates that the nation would be far better off with company tax reform.
"With dismal investment levels, this is exactly the wrong time to be hitting investment with such a large tax increase,” he says. "Instead, the tax on investment needs to go down. There are massive global funds looking to invest, but the funds are not going to Australian business investment.”
Current modelling, he says, underestimates the benefits of a cut to company tax. “"It assumes the tax cut won't increase Australian-financed investment,” he says, “an assumption at odds with market valuations and company behaviour.”