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May 17 — Australia’s proposal to cut the corporate tax rate will benefit the U.S. government the most because of existing double taxation agreements that would boost U.S. tax revenues, according to a study by the Australia Institute.
The briefing paper, issued by the Canberra-based think tank May 16, said the U.S. is the largest foreign investor in Australia, accounting for 27 percent of all foreign investment.
Tax arrangements for U.S. companies that invest in Australia are governed by the double tax treaty between the two nations, which allow companies to claim a tax credit on their U.S. tax liability for any tax paid in Australia, the institute said.
A provision in Australia's 2016-17 budget released May 3 would cut the current 30 percent corporate tax rate to 25 percent for all businesses by 2026-27 .
The study found the change will constitute little more than a “gift” from Australian taxpayers to the U.S. government—as it would result in more tax paid in the U.S. rather than in Australia as the companies lose the credits from reduced Australian taxes.
It explained that a bilateral tax agreement between Australia and the U.S. means that a “reduction in Australian company tax does not necessarily result in a reduction in company tax paid by foreign companies and can simply result in an increase in the tax paid by foreign companies to foreign governments.”
According to the study, the tax paid by a company in one jurisdiction can be used as an offset against tax payable in the home country. “Hence US companies receive a tax credit for tax paid in Australia which they can apply against their US tax. That can mean the foreign investors themselves most likely obtain no benefit from any reduction in Australian company tax; it just increases the US tax,” the paper said.
The Australian tax rate changes would be phased in gradually and wouldn’t apply to very large companies until 2026-27.
The study calculated that in the 2026-27 financial year the cuts would mean that Australian taxpayers “will make a free gift of US$732 million to the US government,” and that over the course of the subsequent decade the total value would be about $8 billion. The institute attempted to quantify the likely value of the increased revenue going to the U.S. in 2026-27 by extrapolating from U.S. data on the amount of credit claimed by American companies for taxes paid in Australia.
A scenario in the briefing paper presented an example of where the tax liabilities lie under the proposed corporate tax rate cut. To illustrate, it supposed a U.S. company earned $100 in Australia and paid company tax of $30. When filing its U.S. tax return, it declares income of $100 and claims an offset for the $30 paid in Australia.
If the U.S. corporate tax rate is 35 percent, as it is now, the U.S. company would be taxed $35 in the U.S. and receive a $30 credit. But if the Australian company tax were to fall to 25 percent, then the Australian tax would be $25, the U.S. tax $35 with a credit for the $25 per cent leaving $10 payable to the U.S.
“Hence in this case, any tax cut going to the US company increases its US tax liability and the US company is no better off. The beneficiary is of course the US Internal Revenue Service,” the paper said.
In addition, the paper said if the Australian government is successful in tackling multinational tax avoidance and profit shifting via tax havens, then the U.S. would gain even more revenue.
“By tackling multinational tax avoidance via third country transactions more taxable income would be assessed in Australia; but if the company tax rate is reduced then much of the benefit of identifying assessable income would be lost with lower tax rates,” it said. “However, the benefit of the lower Australian tax credits would be captured by the US IRS as it levies tax on multinationals but gives a smaller credit for tax paid in Australia.”
The paper's author, Australia Institute senior research fellow David Richardson, told Bloomberg BNA May 17 that an Australian Treasury analysis of the effects of the tax cut had failed to consider the ramifications of double taxation treaties.
The Treasury modelling “assumes that any cut in the company tax rate in Australia is a benefit to any foreign investor,” and therefore would attract business, he said. “That is not the case.”
Richardson added that it was important for any country contemplating corporate tax cuts to consider whether they would deliver any substantive benefits, given the impact of double tax treaties.
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