Global tech and consulting giants routinely engaged by government departments have been shown to be paying only a fraction of tax on multi-billion dollar local income in the latest tax transparency report released on Thursday.
While the tax office report showed large corporates paid a record $68 billion in income tax in 2021, tax transparency experts are concerned by apparent differences in reported profit margins in Australia and globally.
Centre for International Corporate Tax Accountability and Research (CICTAR) analyst Jason Ward said there are promising signs of greater compliance in the latest report but more transparency is needed, particularly for government tenderers.
“There are clearly major government contractors who continue to seem to pay very, very small amounts of tax,” he told InnovationAus.com.
Microsoft had income of more than $5 billion in 2021 but only $337 million was taxable, with $95 million as tax payable. Google’s Australian arm generated $1.4 billion in income, reporting $300 million of it as taxable and paying $78 million.
Amazon Web Services added nearly $200 million more in income in 2021 for a total of $744 million. $131 million of this was taxable with $39 million paid.
IBM paid $26 million income tax on income of $2.7 billion after reporting $137 million as taxable.
Government favourite tech consultancy Accenture’s income climbed to $2.3 billion in 2022, with $111 million of it taxable for a $33 million tax bill.
Another Canberra favourite, the Boston Consulting Group, had income of $279 million, with $17 million of this taxable and a final payment of $5 million.
PricewaterhouseCoopers, which is paid the equivalent of nearly $1 million every day by the Australian government, had 2021 income of $685 million, but only $5 million was reported as taxable, with just $1.6 million payable.
“The concern is very much how taxable income is reduced from the total income,” Mr Ward said.
“There’s all kinds of legitimate reasons why it’s reduced… but the question is, for many of these [companies], are they squeezing artificial costs in there to artificially reduce taxable income through transfer pricing?”
CICTAR last month accused Microsoft of doing just that after analysing its tax records. It found the tech giant is using a vast network of subsidiaries and tax havens in a potential attempt to minimise the tax it pays in Australia.
The ATO report for the 2021 financial year covers 2,468 corporate entities.
The data showed Microsoft’s annual income jumped $800 million in one year to $5 billion. The difference between the total income and the taxable income of $337 million suggests a profit margin of less than seven per cent, Mr Ward said.
“We know that, globally, [Microsoft’s] profit margin was over 40 per cent, and in Australia in this data the number looks like 6.7 per cent. So what happens in there? We have some ideas based on the analysis that we’ve done before.”
CICTAR holds similar concerns about the other technology and consulting firms being paid billions every year by the Australian government. But there are some bright spots like McKinsey paying nearly 20-times more tax in 2021 after reporting a much larger share of its $471 million to be taxable.
“I’m encouraged by McKinsey numbers. Perhaps there has been a change of behaviour. McKinsey in Australia and elsewhere has faced quite a bit of scrutiny for tax performance, including fraud charges in France. So that is encouraging,” he said.
“But we see the same [worrying signs] for other consultancies and other tech firms.”
The new Labor government campaigned on making multi nationals pay a “fairer share” of tax, and in its first budget allocated the Australian Taxation Office more resources to support new transparency and compliance schemes starting next year.
This includes a country-by-country tax public disclosure scheme for the largest companies – described by Mr Ward as a genuine “world first” – and a new requirement for tenderers for Australian Government contracts worth more than $200,000 to disclose their country of tax domicile.
Assistant Treasury minister Andrew Leigh on Thursday talked up the policies alongside the release of the ATO’s latest transparency report.
“The last thing we want is an economy in which firms are competing based on who’s got the best tax loophole,” he said. “That doesn’t provide a stronger economy. That’s not the foundation for the productivity growth that we know is vital.”
Mr Ward said the new policies are likely to drive change.
“It’s very likely to begin to shift corporate behaviour if people can see what you’re doing, and why you’re doing it and the tax consequences,” Mr Ward said.
“Sunlight is the best disinfectant.”
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The larger consultants apply premium rates, see greater margins between what they’re charging their government clients and what their local workforce is paid, AND pay proportionately less taxes.
Meanwhile they seek to reduce any local contractor footprints as part of their business development activities.
The government clients and the Tax Office need to wise up and take steps to address the problem since it’s clear the major consultancies will keep doing what they do unless they’re forced to change.
The narrative and analysis here is incredibly misleading. Certainly, most of the consulting firms are partnerships where the partners own the business (they are like the shareholders). Accordingly, the profits flow straight through to the partners in one step rather than flowing through to shareholders in two steps – the outcome is the same. Instead of the partnership paying 30% company tax and distributing the profit to the partners, who will then pay an additional 15% tax (subject to their individual marginal tax rate), the partners receive the profit direct and pay 45% tax straight up (again, subject to their individual marginal tax rate). Either way, the ultimate amount of tax paid will be the same. Accordingly, you are comparing apples and oranges when you look at the tax the consulting firms pay versus traditional companies. To make the correct comparison you need to look at the total tax paid – but that is difficult and would ruin the outrageous story that the consulting firms don’t pay tax!!
This behaviour is even more egregious when considering that this cohort of multinationals is supporting deflective authentication that they profit from and are proffering on an unsuspecting public via incompetent Government procurement practices and lack of Government support for independent developers.