Without significant company tax reform, Australia will be left out in the cold on new investment and job opportunities as companies shift their operations to the United States.
In a new report for the Minerals Council of Australia, international tax expert Dr Jack Mintz* has warned that Australia is ill-prepared to deal with the global implications of the US administration’s tax reforms.
US tax reform will have an enormous impact on worldwide company decisions and individual country tax reforms. This will have implications for Australia’s ability to compete for investment and the positive flow-on effects of investment: technology, jobs and tax revenues.
For decades, companies with US operations have sought to keep profits out of and costs in the US to reduce worldwide taxes. But following the US reforms which came into effect on 1January 2018, companies with US operations are re-evaluating supply chains, investment plans and financing with the aim to shift investment and profits to the US and expenses to affiliates in other countries.
This means that if Australia’s politicians don’t support company tax reductions, we will lose investment and jobs to more tax-attractive jurisdictions such as the US.
Australia’s company tax rate of 30 per cent has been unchanged for almost 20 years and is now 9th highest of 43 countries surveyed in Dr Mintz’s report and 4th highest of 34 OECD countries, tied with Mexico.
Australia’s company tax rate is 3.3 points higher than the US (including state-based income taxes in addition to the company tax rate of 21 per cent) and is higher than weighted average company tax rates for G7, G20 and OECD countries by wide margins. With planned tax reforms in France and Belgium, Australia will move to having the second-highest company income tax rate by 2020.
The report shows that Australia’s marginal effective tax rate (METR) – the effective tax burden on new investments – is 28.4 per cent, higher than the average METR across the G7, G20 and OECD economies and almost 10 points higher than in the US.
Companies evaluate investment decisions according to whether they earn sufficient after- tax profits to cover their cost of capital. They also compare investment prospects across countries depending on after-tax profitability. A company will choose to invest in those jurisdictions that provide the best after-tax returns.
Taxes will play an important role, especially when jurisdictions are comparable in other factors such as political risk, infrastructure, labour costs and growth prospects. Australia has been especially weak in attracting manufacturing and service investment, making Dr Mintz’s estimated tax burdens on capital particularly relevant.
The report also makes the point that lower company taxes allow higher compensation to be paid to workers and lower prices for consumer goods, both of which directly contribute to a higher living standard. Reducing the tax cost to business will help increase Australia’s well-being in the long run.
It’s time for federal Parliament to back company tax cuts so Australia can attract the investment needed to grow our economy and support jobs, especially in regional Australia.
*Jack Mintz is the President’s Fellow at the University of Calgary’s School of Public Policy focusing on tax, urban and financial market regulatory policy programs. Dr Mintz was appointed the Palmer Chair and founding Director of the School of Public Policy from 1 January 2008 to 30 June 2015. He was recently awarded the Order of Canada for his fiscal advice to governments internationally and at home. This includes leading a study of corporate tax reform in Canada as Chair of the Federal Government’s Technical Committee on Business Taxation in 1996 and 1997.