Australia s company & shareholder tax system: Options for fiscally sustainable reform. Joint work by David Ingles, Chris Murphy, Miranda Stewart

Transcription

1 Australia s company & shareholder tax system: Options for fiscally sustainable reform Joint work by David Ingles, Chris Murphy, Miranda Stewart Professor Miranda Stewart, Director, Tax and Transfer Policy Institute Crawford School of Public Policy, Australian National University miranda.stewart@anu.edu.au 13 July 2017

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4 4 Large and very large companies pay most company tax in Australia ( ) Size Companies Net tax $m % Loss 1, % Nil 125, % Micro 706,860 8,184 12% Small 61,173 7,329 11% Medium 16,497 9,180 13% Large 1,345 3,418 5% Very large 1,130 40,251 59% Total 914,508 68, %

5 taxpolicy.crawford.anu.edu.au 5 Source-based corporate income tax is important for Australia Net capital importer Resource-rich exporter; these sectors earn rents Mineral resources Agriculture, etc Education, financial services Relatively small population for consumption (although rich) Current system is source-based Consistent with international tax norms

6 Corporate-Shareholder Imputation System Since 1987 (company tax rate then was the same as top individual tax rate) Dividends paid to shareholder Include in shareholder assessable income ( gross up ) Tax applies at individual marginal tax rate Imputation tax credit to shareholder, dividend franked Out of tax-paid franking account kept by company (carry forward unused credits indefinitely) Distribute franking credit, reduce shareholder tax on dividend by amount of credit 6

7 7 Policy of imputation system One level of tax on corporate profits Assumes company tax is economically borne by shareholders Financing neutrality: Equalise debt and equity finance But cross-border is a classical system No imputation for foreign shareholders 30% company tax on dividends paid offshore Interest paid offshore is deductible at 30% rate (subject to thin capitalisation) and may have zero or low (10%) interest withholding tax Foreign debt financing tax-favoured over equity financing Base erosion

8 Imputation for Australian resident individual shareholder $ $100 Tax = $45, less tax credit of $30 Tax owed = $15 Jo Ausco Personal tax at 45% rate; franking credit of $30 Franked dividend $70 $100 (30) $70 Australian source profits Company tax paid at 30% rate

9 Imputation credit refund for low-rate resident shareholders $ $100 Tax = $19, less tax credit of $30 Tax refund = $11 Fred Ausco Personal tax at 19% rate; franking offset Franked dividend $70 $100 (30) $70 Australian source profits Company tax paid at 30% rate Refundable credits were introduced in 2001 (partly for retirement funds to be able to use them: taxed at 15% rate) 9

10 Australian company tax operates as a final 30% tax on nonresident investors Foreign tax may apply at F tax rate; likely no tax by participation exemption, or foreign tax credit Parent Co Ausco No franking credit Franked dividend $70 No dividend withholding tax $100 (30) $70 Australian source profits Company tax $30 paid at 30% rate Total tax paid = $30 10

11 Debt capital is cheaper after-tax than equity for Australian companies with foreign investors Foreign tax may apply at F tax rate; but likely in a tax haven so low tax $100 profits (70) interest deduction $30 net profit ($9) Tax 30% Parent Co Ausco Australian source profits Total tax paid = $15 $63 Or Ausco will gross up to $70 for interest WHT Interest of $70 WHT ($7) Interest withholding tax likely 10% or 0% Company tax of $9 paid at 30% rate 11

12 Chevron (2016) related party debt taxpolicy.crawford.anu.edu.au 12

13 4-Dec Dividend imputation in international context Debate about effects of imputation Closed economy view Dividend imputation ensures one level of tax on shareholders/investors Company tax is just a withholding tax on shareholders Relevant tax for individual investors is the personal income tax Equalises return on debt and equity investment Removes bias to retained earnings; increases dividend payouts Theory suggests imputation credit is fully priced into shares

14 taxpolicy.crawford.anu.edu.au 14 Australia dividend payout ratio Source: Ainsworth et al (2015)

15 4-Dec Dividend imputation in international context Small open economy view Cost of capital is set by the marginal foreign investor Who is indifferent to dividend imputation credit and responds only to company tax rate/debt deduction Company tax discourages investment, requiring higher rate of return Suggests incidence of company tax is on domestic factors (labour/wages ) On this view: dividend imputation credit is a subsidy free kick to domestic investors (Treasury; Gruen; CGE modelling by Murphy et al 2017)

16 4-Dec Options for corporate tax base and rate reform Remove dividend imputation ACE or ACC (allowance for corporate capital/equity) Substantial fiscal cost unless constrained in some way Comprehensive business income tax (CBIT) A CBIT of 25% (with taxation of financial institutions) would be revenue-neutral. Hybrid systems of various kinds

17 Key features of different corporate tax bases (by deductions, x-border) Deductions CBIT standard ACE/ACC Cash flow GST/VAT (compare) Wages X X X X Investment X X Depreciation X X X Debt X X Equity Source/ destination X Source Source Source Either Destination

18 18 4-Dec-17 Comprehensive business income tax (CBIT) Removes debt vs equity distortion by making neither deductible Aims to remove ability to shift profits out by shifting debt in broadens base: can fund rate cut Pragmatic compromise could be combined CBIT/rent tax system: aims to removes debt vs equity distortion reduce taxation of capital investment, while increasing taxation of rents

19 19 4-Dec-17 Some complications Cash flow, ACC and CBIT face issues in taxing financial services (because interest flows are not in the base). Some options are: use ACE use cash flow extended to include all interest-bearing assets and liabilities (R+F base) use cash flow or CBIT extended to include loans and deposits only What should the rate of return for ACC be? ACE and ACC neutrality depends on choosing correct returns for equity (ACE) and equity-debt combined (ACC) A common suggestion is to use the corporate bond rate because the allowed returns represent interest liabilities of a credit-worthy government

20 20 4-Dec-17 Budget cost and funding the tax cut Budget estimates direct cost of tax cut before behavioural responses Static (long-term) CGE modelling of consumer welfare and budget cost/gain Effect of behavioural responses? (boost to economy and reduced profit shifting) estimate that provide self-funding of about half the fiscal cost - such responses included under dynamic scoring (e.g. US CBO) Funding options: (standard modelling assumption: lump sum tax) bracket creep company tax reform (base broadening) GST increase spending cuts other?

21 taxpolicy.crawford.anu.edu.au 21 Thanks! Questions