Analysis_

# Avoiding and evading: talking multinational tax

29 August 2016

In this episode, Dr Shumi Akhtar, a senior lecturer at the University of Sydney Business School, joins our host Dr Chris Neff to share new perspectives on how we can think about and judge multinational tax avoidance.

Worldwide approximately $100 to$250 billion is lost annually in tax avoidance by multinationals.

Host: Dr Chris Neff

Guest: Dr Shumi Akhtar

Producers: Verity Leatherdale and Victoria Hollick

Editor: Caitlin Gibson

Dr Shumi Akhtar
Dr Akhtar is a senior lecturer in the University of Sydney Business School's Discipline of Finance. She explores the contribution of multinationals to society and her research efforts to discover how much tax they are paying and should pay.
25.1MB

Transcript

[music plays]

Chris Neff: Welcome to Open for Discussion, a University of Sydney podcast, looking at research through a personal and critical lens. I am your host, Chris Neff.

Today in my office I’m chatting to Dr Shumi Akhtar, a senior lecturer and researcher at The University of Sydney; with a focus on corporate finance, multinationals and international finance.

Wait, stop, I know what you’re thinking … this is a podcast about tax. But I want you to stay and I want you to listen, because Dr Shumi Akhtar is one of the most fascinating people you will ever hear. Stay tuned and listen to this!

Alright, so we’re here on Open for Discussion, a University of Sydney podcast with Dr Shumi Akhtar. First of all, did I pronounce your name right?

Dr Shumi Akhtar: Yes.

Chris Neff: Okay good. Can you tell me a little bit about how much of the global financial dollar, or yen or pound, is going through tax shelters or tax havens, or tax avoidance schemes?

Dr Shumi Akhtar: To be quite frank, that is right in the core of my research at this stage. And it is very complex to calculate, however I can share one or two statistics that have been around…

Chris Neff: Don’t give it away; don’t give it away for free …

Dr Shumi Akhtar: [laughs] no, this is … I’m sure this is public already. Um, 100 – 250 billion dollars, that has been lost due to tax avoidance; that’s for all around the world. Now, how much of that belongs to Australia or per country – we don’t know; they are making some guestimates based on their GDP or some population. But, you know things are far more complex so therefore I’m staying away and giving you an amount right at this stage …

Chris Neff: You should write a book…

Dr Shumi Akhtar: [laughs] I should.

Chris Neff: You should, and when it comes out we will have it in the podcast.

Dr Shumi Akhtar: I will do that.

Chris Neff: So, can you tell me a little about what brought you to doing your research?

Dr Shumi Akhtar: Sure, so doing research in this area; in terms of tax avoidance and multinationals. First of all, there hasn’t been much done over the last whole decade, but slowly it is changing because of the activation that has been taken on by the Australian government and also some of the other governments around the world. Especially when there’s a critical need for us to raise revenues, so that’s one thing.

Secondly, I’m a firm believer in research that we do – if it has got some practical implication and helps society, I think that’s good research. So, therefore I hope that some of the research that I am doing, it will be able to have some impact in the policy debate or policy reforms, and just to make a better financial system and better tax system.

Chris Neff: And can I push you on that a little bit … because picking tax avoidance and safe havens, is quite a specific area of study. What brought you to tax havens?

Dr Shumi Akhtar: Sure, there’s not much clarity about what it actually means. When you hear about tax avoidance, it is often mistaken for …  as if it is a criminal act; in fact it is not. Tax evasion is a criminal act. For example if a company is committing tax avoidance, they may be doing it because it’s just there. It’s a matter of knowing it and taking advantage of it, they are not doing anything illegal per se. Tax avoidance, technically speaking, is not really (so far and from some of the evidence I have seen) … they haven’t done anything wrong, they are still abiding by the rules, and if the rules allow them to do so they are just clever in how they are doing it. Um so, therefore we need to really understand the full extent of this avoidance and evasion.

Chris Neff: So we are sitting in an office, my office, and we are surrounded by books, [Shumi laughs] and I just want to note for the record that I am probably going to declare all my books. There are probably $2000 worth of books and I will be using them as a tax deduction because I use them for my work [Shumi voices her understanding]. So, what is the threshold between me doing it, you know me playing by the rules and the spirit of the rules, and you know a company that goes beyond it and is paying 1 percent in taxes. Dr Shumi Akhtar: That’s the thing; there is no threshold at the moment. That therein lays the problem; there is no maximum or minimum how much you can claim as a tax deduction. So, it’s all … for example for you, you know$2000 worth of books is probably enough for your work. On the other hand, I am also an academic let’s say I also need to rely on books but my books are far more expensive; let’s say I’m spending $10,000. So, from the tax authority there is no minimum or maximum per se. So therefore you can see this variation across multinationals. Chris Neff: Are there certain sectors of multinationals that are more prone to using more loopholes, or tax deductions or tax avoidance schemes than another? Dr Shumi Akhtar: Yes, definitely. It is sector based, and most often you see it in the high-tech industries and also in the mining industries. Because technology moves so fast, so therefore they need to grow much bigger and to grow much bigger they need to, you know, rely on expansions, and therefore to do that they need to rely on borrowings and so on and so forth. So, yes, their expenses are very different than a traditional company. Chris Neff: And we’ve … you know, or at least I have, you know beat up on tax avoidance generally … is there good bits about companies that avoid taxes? Dr Shumi Akhtar: Look, the way I see it is this; let’s say a company avoids paying$10 tax. Now, that $10 tax could either be contributed to the economy as a … government claim it as a tax revenue … or a multinational or a company can keep it to themselves. Now, the way I see it is, who is actually going to contribute more by using that$10? To me, that is more important, rather than seeing if it comes to the government’s pocket or it stays in the company’s pocket. That’s how I see it. Now, of course it is not very easy to be able to understand that unless you really know the cost benefit, like…

Chris Neff: I want the \$10.

Dr Shumi Akhtar: [laughs] We all do, right, we all do. We all think that we should keep it. Now, we have to see it more in a bigger perspective; the net benefit, what is going to contribute more to the society? And that’s what we should go by.

Chris Neff: And wasn’t I reading in your research, that multinationals that utilise tax avoidance schemes are also among the highest that actually pay taxes.

Dr Shumi Akhtar: That’s right; yes so interestingly enough, as much as we have been hearing on the news and a lot of media headlines that ‘multinationals, they are not paying their fair share of tax’. In fact, on average, multinationals are the ones who are paying more tax than the domestic corporations.

So, obviously multinationals are paying, but I guess the question is ‘are they paying enough?’ So that’s where the problem is.

[music plays]

Chris Neff: You are listening to Open for Discussion, a University of Sydney podcast and with me today is Dr Shumi Akhtar from The University of Sydney’s Business School. And today we are talking about a topic you can’t avoid – tax avoidance. To find out more about the University of Sydney’s research visit sydney.edu.au/news.

Can I ask within your research … because this sounds really fascinating; we don’t talk about the difference between tax avoidance and tax evasion; we don’t think of ourselves as tax avoiders even though everyone who takes a deduction is; um, we don’t think about the fact that … it’s something around 50 percent of all the financial income in the world goes through tax havens… so is there an effort in Australia to do… like, in terms of your research and what you’re doing, is there an effort to get a handle on this? Because you know we are throwing around numbers of 200 billion dollars and it would be nice to have some hard, like you say, numbers and some real data.

Dr Shumi Akhtar: Sure, so one thing I can tell you now is … the top 500 multinationals around the world and only 10 of those are Australian based … in any case, on average, what I found is that the multinationals they have got nine times more long-term debt… the companies that avoided tax, right, paying tax; they have nine times more long-term debt than the companies [multinational companies] that didn’t avoid tax. So what is the difference? Or why we should be worried, let’s say, about that nine times more debt that they have?

Now, debt can be seen as a mechanism by the multinationals to take advantage of tax deduction. For example, they may raise their debt or they may borrow from a country where interest expense is very low. Meaning, you know, if you borrow money what happens … when you borrow money from the bank you have to pay the bank some form of interest. So, those multinationals what they do is they borrow money from a country where they can get the best deal, meaning borrowing costs are very low to almost 0 percent, it doesn’t cost them anything. But, then what they do, they do an inter-company loan … because through their subsidiaries, because they are networked… I mean they have got other subsidiaries around the world.

So they find a country where their tax system allows interest tax deduction and they will be claiming the maximum they can, meaning… they will be saying ‘okay, well our borrowings cost was let’s say six or seven percent’ whereas they are paying actually nothing, as a cost of raising the debt.

Now, that is more like a double dipping a) it never actually cost them and b) and now they are claiming actually more, getting more from the tax man in their pocket…

Chris Neff: That’s totally double dipping.

Dr Shumi Akhtar: It is double dipping. Now, so these are the things that the Australian government [A1] has taken a number of initiatives in. How successful they will be is a matter of time. Because, we only … as of the beginning of this year, we implemented this country by country reporting system, so we get to see in each of those countries where the multinational has subsidiaries; how much they are raising, how much they are earning, so on and so forth.

Chris Neff: So, can I ask, how much of a role do you think accounting firms and banks, you know, people looking for the loopholes, play in this? I mean, is it the companies or is it the firms that are advising the companies that we should be a little more critical of?

Dr Shumi Akhtar: Look, obviously lawyers, they know all the rules and how the jurisdiction works. When it comes to accountants, they know more on tax. Again, I would hope that the accountants, that they do follow their due diligence and follow the rules and therefore if someone is eligible then sure, they can do the tax deductions. But it was quite disturbing to find, especially in the Panama Papers, revelations that most of the money that has been loaned around or shipped around the country; it was by the help of, you know, accountants or legal firms which was really quite disturbing because they should be the ones who have high respect for all the rules or policies we set out. And that’s why we, as a government, should step in and try and be a bit tighter in a sense that they should be liable, or held responsible for that.

Chris Neff: And how is Australia, with respect to regulation of firms or banks or tax loopholes?

Dr Shumi Akhtar: Okay, so, so far, again in the Top 500 Financial Times big multinationals, Australia’s four big banks names are there, right.

Chris Neff: How high up the list?

Dr Shumi Akhtar: Pretty high …

Chris Neff: Pretty high, Okay.

Dr Shumi Akhtar: Okay. Now that was quite interesting. And um in terms of whether Australia should be really concerned, again, we need some data driven evidence to be able to say it for sure. At this stage, it does, look like yes their names are there but to me, being an empiricist, I don’t really conclude anything based on hearsay stories. And so far, any of the evidence that I have … or the statistics that I have heard so far, either there is no real source of data, what data are they actually using to come up with those statistics? We don’t know that. And even the OECD’s (the statistics I gave you earlier) … when I did a bit of a dig around earlier, it is an aggregate measure. So, we really don’t know how much of it actually belongs to the multinationals, or it is just the corporations on average, or it is all the tax evaders, I mean even individuals can be tax evaders, we don’t know that.

I mean, the Australian government, they spend eight million dollars, only to recover two million dollars in total tax revenue by catching whoever it was evading. And I go ‘all I needed was like one million, an eighth of the money and I could have given you a better outcome’. And you’d be amazed … I got a phone call, I received a phone call from the ATO you know the Australian Taxation Office basically saying, asking me, ‘where did you get your data? Um, like your results… can you give me your database or …?’ and I was just shocked, I was like you guys should be the ones who should have this information in the first place! ... (Sorry).

[music plays]

Chris Neff: You are listening to Open for Discussion, a University of Sydney podcast and again joining me is Dr Shumi Akhtar from The University’s School of Business.

Can I ask one more question?

Dr Shumi Akhtar: Sure.

Chris Neff: So we’ve talked about tax avoidance and we’ve talked about how people get out of paying tax. What’s good about paying tax?

Dr Shumi Akhtar: First of all, it is a form of income from the government’s perspective, which they tend to use it for improving the infrastructure or education sector or the healthcare system, right? So that’s a good thing about tax. But one has to be careful of … by the name of raising tax, but if you are actually harming on the other hand. Like for example, multinationals bring a lot of good things into any country, for example the innovation they bring in and the number of employment and the people they employ as well as some of the new products or services that they bring in … there is another research I am currently doing is that multinationals happen to be the one who is taking a lead in keeping the balance between the gender employment, whereas that’s not the case in many other companies. It is often claimed that females, it takes them longer to go up the ladder or at the hierarchy there’s less females, but that’s not the case when it comes to multinational corporations.

Chris Neff: I have to ask you a shark questions, because I study sharks. And it sounds like there are lots of sharks in the tax avoidance waters, what have you. What would you say is the sharkiest behavior you’ve seen? Is it by the banks or by the firms or is it by the companies or it might be the lawyers or the accountants? What’s the … who’s got the sharpest teeth?

Dr Shumi Akhtar: Well, on the surface it looks like companies have the sharpest teeth, but for them to have the sharpest teeth, I think the dentists are the lawyers and the accountants.

Chris Neff: Oh okay.

Dr Shumi Akhtar: If that makes any sense.

Chris Neff: So the lawyers are essentially sharpening the teeth…

Dr Shumi Akhtar: The lawyers and the accountants, yep…

Chris Neff: Aaah, interesting. Well thank you for playing along with my metaphor [Shumi laughs]. Um, so what do we do? Um, we’ve got tax avoidance but there’s no threshold, so people could be getting away with murder but it’s not illegal and then we’ve got companies that are improving gender parody and… um what do we make of it?

Dr Shumi Akhtar: Sure, so, what I’m trying to do through my research is that I would like to determine, doing the cost benefit analysis (from the government’s perspective and society’s perspective) and come up with an optimal level of tax. That way we are all better off; societies better off, the multinationals are better off and so is the government. And that is what I’m working, trying to work on…

Chris Neff: Optimal …

Dr Shumi Akhtar: Finding an optimal level of tax …

Chris Neff: I love that, the optimal level of tax. And I feel like I’m paying above the optimal level of tax.

Dr Shumi Akhtar: It’s a level where everyone is better off.

Chris Neff: Which is, and I think well …

Dr Shumi Akhtar: That’s exactly what it should be.

Chris Neff: I think that’s fantastic and I think that is really important research. I’m glad the Senate is listening to your research. I’d like to thank you again for being here with us, Dr Shumi Akhtar from the University of Sydney School of Business.

Dr Shumi Akhtar: Thank you Chris, it was a pleasure.

Chris Neff: Thanks for listening to Open For Discussion, a University of Sydney podcast. You can subscribe to this podcast on iTunes or on Soundcloud; you can find me on Twitter @christopherneff.