Labor’s Cayman Islands adventure ignites the base, but business is worried – Sydney Morning Herald

In the letter, Bowen questioned whether Frydenberg had properly scrutinised the takeover, and asked whether he had instructed the Foreign Investment Review Board (FIRB) to take into account Brookfield’s links to the Cayman Islands.

On Friday, Frydenberg responded, saying “we welcome foreign investment in Australia, provided it is not contrary to the national interest. This includes considering the tax implications of any proposal.”

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However, Bowen has reignited the debate about the already opaque nature of FIRB approvals for offshore corporate takeovers, and stoked concerns in the business community that a tough approach to deals under a Labor government may stifle foreign investment and hurt the economy.

“We need transparency about what the ground rules are,” says veteran investment banker Simon Mordant.

“There has been concern by foreign investors that the process has been opaque and uncertain.”

Political theatre

Bowen’s stance nonetheless gave Labor two bites at the cherry by tarring the Coalition with the sins of being a handmaiden to the corporate sector, and also not caring about healthcare.

Healthscope owns Sydney’s Northern Beaches Hospital and Prince of Wales Private Hospital and Victoria’s Knox Private and Melbourne Private hospitals.

Simply mentioning the Cayman Islands has become fertile territory for Labor during this election campaign.

The Coalition was hurt last month by renewed scrutiny over the Federal government’s purchase of 28.7 gigalitres of water from two Queensland-based properties owned by Eastern Australian Agriculture in 2017 at a record cost of $78.9 million.

Australia has always relied on foreign capital to fund its growth

Fund manager Geoff Wilson

Eastern Australia Agriculture’s parent company is based in the Cayman Islands.

The company was co-founded by Energy Minister Angus Taylor, who says he has had nothing to do with it since entering parliament and received no benefit from the sale.

“Whether it is hospital buyouts or water buybacks, Labor believes that deals involving tax havens warrant extra scrutiny.”

Labor upped the ante on Tuesday with the public announcement of a tax haven blacklist.

“Under Labor, companies that operate out of the most notorious tax havens will be prevented from engaging in tax avoidance activities in Australia,” said a press release from Bowen’s office.

Illustration: Joe BenkeCredit:

Foreign investment has already been put through the ringer in recent years over fears of China’s appetite for agriculture and infrastructure assets. Now, the corporate sector is concerned Labor is adding another a layer of complexity that could make things worse.

Fund manager Geoff Wilson, who has already become acquainted with Bowen via his bruising battle over Labor’s franking credits policy, was unimpressed with the latest policy. “Australia has always relied on foreign capital to fund its growth,” he says.

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“It appears illogical that the Labor Party, on one hand, are looking at restricting foreign investment in Australia, and on the other hand, changing the rules on franking that will encourage Australian companies and investors to invest their money overseas.”

The new rhetoric on tax is markedly different from Labor’s last period in power. As the Herald reported this week, in 2010 the then Labor government approved an earlier takeover of Healthscope by two private equity firms with links to the Cayman Islands.

Experts not convinced

Tax experts were lukewarm on the new stance. “Based on the limited information Labor has put out, it is unclear what risks to the Australian revenue Labor is trying to address that would not already be addressed by the multitude of measures targeting offshore investment,” Tim Neilson, who heads the professional body for tax professionals The Tax Institute, said.

“We were scratching our head with the recent announcement as to really what is it actually trying to do which is not already covered by current laws,” added Paul Suppree from the Corporate Tax Association (CTA) the professional body representing Australia’s biggest companies on tax issues.

“We were really struggling to see what mischief are they seeing which we’re not.”

Neilson was one of many who pointed out that Labor appears to be ignoring the fact that these tax havens are used by many legitimate companies, and can serve a legitimate purpose.

This was a point made by none other than Labor luminary Lindsay Tanner in a 2009 speech as finance minister saying it was “common practice and often difficult to avoid.”

The entity he was defending over its use of tax havens was none other than the Future Fund.

Neilson says a lot of the investment by offshore consortia comes to Australia via tax havens to avoid double and sometimes triple taxation by the governments with juridstiction over entities involved in cross border deals.

“The consortium’s collective investment vehicle has to be located somewhere. Normally there would be tax in the investment destination country and each investor’s home country,” he says. “If there was also tax in the country where the investment vehicle is located, there could be three lots of tax on the one investment.”

Former Labor finance minister Lindsay Tanner said it is difficult to avoid the use of tax havens. Credit:Glen McCurtayne

“International collective investment would be severely hampered if it were not for tax-free regimes for income to flow through the collective investment vehicle’s home jurisdiction.”

But other groups, like the Tax Justice Network, say usage of these structures cost governments billions of dollars – money that could be used to fund schools, hospitals and aged care.

The TJN estimates that around $US6 billion was lost to Australian tax coffers in 2013 alone through corporate tax avoidance. But that is not its only issue with havens such as the Cayman Islands.

“The problem for me is even if people are not doing anything wrong [in using tax havens] it’s rewarding these jurisdictions for poor oversight and transparency,” says TJN’s Mark Zirnsak who backs Labor’s plan on the grounds that more transparency is needed.

“The problem is that at the same time people are using it for [legitimate reasons], the regime is also used for money, laundering, fraud, tax evasion, terrorism,” he says.

A TJN submission to the recent senate inquiry into corporate tax avoidance also provided examples of how tax havens can be used for precisely this purpose.

The example it cited was energy giant Exxon which had generated billions in revenues but not a cent in tax for the previous 2 years. Exxon’s Australian subsidiary was owned by a shell company in another well known tax haven, the Netherlands, which was in turn owned by another subsidiary in the Bahamas.

“This appears to be a Caribbean variation of the aggressive tax-minimisation scheme commonly known as the “Double Irish with a Dutch Sandwich,” said the TJN.

For its part Brookfield can allay concerns about its tax paying record in Australia with the financial accounts of its first major deal, the $4.2 billion acquisition of Multiplex Group in 2007.

Financial accounts filed with ASIC for Multiplex Pty Ltd report that the construction group paid income tax totalling $26 million for the year ending December 31, 2018 on a profit before tax of $72 million. The prior year it paid taxes totalling $11.5 million on a profit of $26.3 million.

FIRB not a toothless tiger

When it comes to when it comes to scrutinising the tax intentions of foreign suitors, FIRB is hardly a toothless tiger.

In 2014, the then Treasurer Joe Hockey introduced measures that ensured the Australian Tax Office (ATO) provided FIRB with what is effectively a tax risk assessment of any suitor seeking investment approval.

The legislation also included restrictions preventing foreign investors from overloading acquired companies with debt as a mechanism for transferring profits offshore via vastly inflated interest payments.

Australian Investment Council chief executive Yasser El-Ansary says the FIRB process is rigorous. Credit:Glen McCurtayne

“Any suggestion that the tax office in any way has its hands tied or is not across the specific detail (of a proposed investment) is simply not right,” says Yasser El-Ansary, a tax expert and now head of private equity’s peak body in Australia, the Australian Investment Council.

The tax office seems to support this view as well.

In a submission to senate inquiry into corporate tax avoidance, which was completed last year, the ATO described the tax compliance of Australia’s large companies as “global best practice”.

In its three submissions the ATO mentions tax havens once.

The real problem

The real problem, though, is hiding in plain sight.

The Sydney Morning Herald and The Age reported last month that Facebook and Google generated sales in Australia of around $5 billion last year, but their combined tax bill barely hit the $60 million mark.

This is actually an improvement on previous years thanks to new laws introduced in 2016, the Multinational Anti Avoidance Law (MAAL) designed to plug corporate tax holes for both traditional multinationals and the new wave of digital giants.

Tax experts say the digital frontier remains the real battlefront for tax avoidance. Governments are still struggling to address the challenges created by online businesses, which have upended centuries of understanding on how a company’s tax jurisdiction is determined.

“To this day, there are still considerable difficulties in identifying how you determine the tax incidence in an environment where … the physical presence of businesses today are not as readily identifiable as it once used to be,” says El-Ansary.

He says this issue represents “a very different conversation, and is a very different set of policy and regulatory challenges, to the issues relating to the aggregation of capital in (tax havens) to then be deployed in an economy like Australia.”

Tax repatriation laws introduced by US President Donald Trump, which reward US multinationals like Apple for sending back profits parked offshore to their home market are a further complication on this front.

The CTA’s Suppree says it changed the conversation from tax not being paid on these earnings at all, to who gets the tax spoils.

“A dollar of tax paid in Australia means a dollar of tax less paid in the US, so this is about sharing the totality of the tax pie that your Google’s, or your Uber’s make,” he says.