Opinion piece: race to top on innovation, not race to bottom on tax compliance

Australian Treasury

Pharmaceutical company AbbVie make the world’s best-selling arthritis medication. They also specialise in causing pain for tax administrators. In 2020, the Chicago-headquartered company made 75 per cent of its sales in the United States, yet only 1 per cent of their income was reported in the United States for tax purposes.

How did AbbVie magically make their tax bill disappear? According to a recent Senate Finance Committee investigation, the pharmaceutical multinational has been holding a valuable array of patents, trademarks and other intellectual property rights in the zero-tax jurisdiction of Bermuda, where it has zero employees. AbbVie’s tax arrangements helped it dodge billions of dollars in taxes and pay an effective tax rate that was a fraction of that paid by the average working family.

Intellectual property is an important way of protecting new innovations. Australians’ ingenuity helped bring the world the Cochlear implant, Google Maps and Wi-Fi, helping to create a more connected and inclusive world. Great ideas and innovation propel our society forwards and their creators should be appropriately recognised.

But for tax authorities, the problem has come when intellectual property is used by multinationals to shift profits to low‑tax or no-tax jurisdictions. The details are complicated, but the trick is a simple one. First, get the lawyers to move the intellectual property to a country that doesn’t have a company tax rate. Second, have the subsidiary in that country charge a fee for using the intellectual property. Third, deduct that fee from the corporate tax bill. Voilà: what was once a taxable profit has now disappeared. Now you see it, now you don’t.

Using intellectual property to shift profits is especially attractive because patents, trademarks, logos and brands are weightless. Moving them to a tax haven doesn’t require booking a cargo ship or calling the removalists. All it takes is some clever contracts and the intellectual property is sunning itself on the beaches of the tax-free Bahamas. And as you’ll recall from the case of AbbVie, intellectual property doesn’t even need a babysitter. The multinational had precisely zero employees in the Bahamas.

Such examples of bad faith business practices are why the Australian Government is taking action to stop large multinational corporations from hiding behind false structures to unfairly reduce their tax bill.

Our Government will introduce a new rule to limit the ability for large multinationals to claim tax deductions for payments relating to intangibles and royalties paid to low or no tax jurisdictions. This will ensure that such behaviour is not allowing these companies to minimise or avoid paying tax in Australia. The reform doesn’t just affect pharmaceutical companies. Intellectual property is a part of every big brand product you buy or online services you consume. From sneakers to store layouts, intellectual property is big business for multinationals.

Good ideas should be rewarded and foster an environment for further innovation, not stifle the economy by draining tax dollars offshore. This reform is part of a package of measures to strengthen the integrity of Australia’s tax system and force major companies operating in Australia to be more transparent about their profits and tax arrangements. These changes will level the playing field, giving Australian entrepreneurs a chance to be successful and compete with their innovative ideas, rather than against global giants exploiting tax loopholes.

By closing tax loopholes, we’ll create a more productive economy. An excessive focus on tax minimisation can be a distraction from businesses. When AbbVie’s executives tried to earn their multi-million dollar bonuses by shifting profits and overcharging consumers, they didn’t do much for the productivity of the American economy.

Likewise, Australian rules that tempt multinationals to use contrived structures to shift profits offshore will sap the attention of management from productivity boosting to tax minimisation. We need more Australian companies that devote attention to creating true intellectual property – not hiding intellectual property in jurisdictions where no or low tax is paid. Under Labor, the Australian Government is committed to encouraging a race to the top in business productivity, not a race to the bottom in tax compliance. If we want to produce the kind of high-skill, high-wage jobs that Australians deserve, that’s the only path that will get us there.

Ensuring multinationals pay their fair share of tax will also help fund services for Australians. Public investment in quality early childhood education, talented teachers and accessible universities are fundamental to helping the next generation to discover their great ideas. By preventing multinationals from hiding their intellectual property, we can invest in helping young Australians create more intellectual breakthroughs.

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