Australia should consider a tax plan being pushed by Donald Trump’s Republican Party which could stop multinational corporations avoiding tax, prominent economist Ross Garnaut says.
Professor Garnaut said that while it was difficult to know what President Trump intended to with corporate tax rates, despite campaign promises of a cut to 15 per cent, there was merit to the Republican Party leadership’s proposal to fund rates cut of between 15 and 25 per cent by scrapping deductions.
“Our existing tax base for the corporate income tax is in deep trouble,” Professor Garnaut told the Melbourne Economic Forum on Tuesday.
“It’s subject to egregious avoidance or evasions, with two of the main instruments of avoidance being arbitrary use of interest on debt to reduce taxable income and, more importantly, arbitrary use of payment for import of services as deductions.
“You have a lot of what must be fundamentally some of the most profitable enterprises in Australia paying no corporate income tax.
“Google and Microsoft and Uber, they manage to generate very large sales in Australia … but somehow make no profit from it because of payment for intellectual property, payments for services.”
Professor Garnaut said opportunities for international tax avoidance had prompted a “race to the bottom” on tax rates between nations, which had compounded the issue and led to greater erosion of tax bases in all jurisdictions.
“So I wouldn’t be frightened by the possibility that Trump will take up the Republican proposals,” he said. “In fact I think we should look very carefully at whether we should be looking at it for ourselves.”
Miranda Stewart, director of the Tax and Transfer Policy Institute at Australian National University, said the extent to which the corporate tax base had been eroded had been understated.
She said Australia was not competing with havens like the Bahamas, and it had to be assumed multinationals were already structuring their businesses so as much as possible was in low-tax jurisdictions.
“Us reducing the rate will have an effect on base erosion because it reduces the value of the expenditure deductions,” Professor Stewart said.
She said there was a “win-win” scenario where the base was broadened while rates were cut by reducing deductions.
“We estimate you could fund a cut to 25 per cent by denying interest deductibility. Potentially if you go a bit further you could fund an investment allowance.”
The Turnbull government last month secured a cut to the corporate tax rate from 30 per cent to 25 per cent for businesses with turnover under $50 million a year, at a cost of $24 billion over the medium term. The government has not been able to pass similar cuts for businesses of all sizes.