Large businesses paid the Australian government a record A$100 billion in taxes last year, an increase of 17% from the previous year. But, over the same period, there were still 31% of large companies operating here but paying no taxes.

The Australian Taxation Office annual report corporate tax transparency report released last week includes data on almost 4,000 of Australia’s largest companies.

In its tenth year, the report is welcomed by the government and ATO as a means of increasing corporate accountability and reducing tax avoidance. But there are no details on the tax practices of multinational entities, including how they interact with their offices around the world.

In particular, there is little information on how 1,200 companies paid no taxes.

What the report tells us

The transparency report provides data on companies with revenues of $100 million or more and companies paying that amount. tax on oil resource rent (PRRT). This includes Australian public and foreign tax entities, as well as Australian resident private companies.

The report details total income, taxable income, tax payable and PRRT payable for all entities that meet the reporting threshold. Taxable income is simply taxable income minus deductions. The tax liability as a percentage of taxable income can then be used to calculate an effective tax rate. The legal corporate tax rate is 30%.

A variation between a effective tax rate and the legal tax rate does not constitute proof of tax evasion. However, it is worth questioning how profitable companies reduce their tax liability to zero.

Zero liability can be achieved by deducting offsets and credits. For example, companies that conduct significant research and development receive tax breaks that reduce the amount of tax they owe.

When a company suffers accounting or tax losses because it has incurred more expenses than income, the tax will be zero. These are legitimate reasons for not paying tax.

But the limited information provided simply tells us how profitable a business is, the amount of tax deductions claimed from that profit and the tax payable.

What the report doesn’t tell us

The transparency report reveals little about the tax practices of multinational entities.

The question remains what deductions are claimed by corporations and tax entities. The ATO has this information but can only publish what the law allows, which is limited.

For multinationals, deductions will include transactions with foreign parts of the global entity, such as subsidiaries or the parent entity. These transactions create legitimate tax deductions.

Current transactions include payments to foreign subsidiaries for servicesroyalty payments for intellectual property and interest on foreign borrowing.

In the case of an oil company Chevronthe money was borrowed from the United States at approximately 1.2% and loaned to a related Australian entity at 9%.

After a lengthy court battle, approximately 5% of the interest was allowed as a deduction, an amount significantly higher than the original interest rate. This gave Chevron in Australia a significant tax deduction.

It is through these types of transactions that profits earned in Australia are transferred overseas. Current tax law allows this but requires that the transaction, known as transfer pricebe at at arm’s length – that is, the price is agreed between independent parties participating in the same transaction.

What are transfer pricing?

Multinational corporations are global by nature and therefore logically maximize global profits. Tax systems do not work the same way.

Tax is a matter of domestic law, meaning that transactions between parties of a global entity are recognized for tax purposes.

If goods or services are sold by one part of the entity to another, an internal transaction occurs. For tax purposes, the transaction is counted as a deduction in one place and as income in another. An Australian entity would pay a foreign party for things like marketing and get a deduction for those expenses.

In recent years, the ATO has ruler marketing disputes with major multinationals including Google, BHP, Apple, Rio Tinto, ResMed and Microsoft.

When a deduction is allowed in a high-tax jurisdiction, such as Australia, and the income is included in profits in a low-tax jurisdiction, such as Singapore, the result is greater overall global profits.

The tax system recognizes the incentive for multinational entities to shift profits in this way and requires that transactions take place at a commercial or negotiated price. However, pricing can be difficult and has led to numerous court cases and tax disputes.

The tax transparency report does not reveal anything about this type of transactions.

Taxing multinationals in Australia

Over the past decade, steps have been taken to tax income where economic activity takes place. THE OECD has attempted to end corporate profit shifting, which erodes the tax base of high-tax jurisdictions, through its tax reform program.

The issue of transfer pricing is further complicated by the question of whether there is actual activity in the countries where different parts of a multinational are located.

Singapore is known for what are called service centers. These are places where various services such as business negotiations are conducted and marketing takes place. Singapore also has a corporate tax rate of 17%. This figure is often reduced to a single figure after agreements are reached between taxpayers and the Singapore Tax Authority.

Intellectual property poses similar problems.

These are increasingly valuable assets for multinational entities, as they give them a unique advantage in the market. Just think of Apple, Microsoft and Google to understand how valuable names, logos and designs are.

By its very nature, intellectual property has no physical location and can be owned anywhere in the world. Often, intellectual property is held in countries with low or no taxes.

The transparency report does not contain any details on the amount transferred to these sites. This is where Australia propose Public country-by-country reports can be useful.

Is the ATO’s Corporation Tax Transparency Report worth it?

Australia should continue to strive to be a leader in corporate tax transparency.

A two-step approach is needed to eliminate corporate tax avoidance. Information is valuable and public transparency measures are an important first step.

A second step, however, is to reform tax laws so as to tax profits where they are actually generated.