Why transparency won’t fix Australia’s tax system
Transparency has a role to play in corporate tax governance, but without complementary ‘hard’ regulation, it won’t move the needle, academic says.
Australia’s tax regulators are increasingly looking towards transparency measures to enforce good corporate tax behaviour. Of the push for greater transparency, Dr Mattia Anesa, lecturer at the University of Sydney said “I don’t see much impact.”
“If you look at other jurisdictions, I think Australia has been leading in using it as a soft tool to nudge the business world towards more responsible tax conduct,” said Dr Anesa. The practice is expected to deepen with country-by-country reporting legislation coming into effect in July.
“I’m not saying [transparency measures] are bad, but I think we should be a bit more critical and it should be complemented with harder regulation,” he said.”
Based on research conducted by Dr Anesa and Dr Alessandro Bressan, senior lecturer at the University of Notre Dame, there are three reasons why the push for greater transparency is unlikely to move the needle on corporate tax responsibility.
Public perceptions
In research published in 2017, Dr Anesa along with professor Paolo Antonetti explored public perceptions around tax strategies of large businesses. What it found was that media coverage of avoidant corporate tax strategies generated “negative reputational effects" for those businesses.
On the other hand, however, media coverage on responsible tax conduct “does not produce significant positive effects.” In other words, the public appears to care a lot more about corporate tax minimisation than they do about more responsible tax conduct.
Given that businesses will likely not be rewarded for good tax conduct, “I cannot see how transparency would give any advantage to companies,” he said.
“As long as they are not disclosing ‘tax avoidance’ behaviour (and I cannot see why they would be that silly), I don’t see much impact.”
Small businesses will hardly be affected
For a few reasons, Dr Anesa expects the proposed transparency measures will have “much less purchase” with smaller businesses.
The first reason is that SME’s, by nature of their scale and impact, “don’t really avail themselves of anything that could spark so much outrage.”
SMEs tend to operate within one regulatory environment, meaning many of the worst tax minimisation strategies engaged in by larger companies are not available to them.
Smaller companies also generally have fewer resources to devote to advisory services and therefore, “they can’t really be that creative.”
Beyond this, Dr Anesa said smaller businesses are generally regarded more sympathetically by the public.
“If they’re doing something that gives them a tiny bit of an advantage, and maybe it’s not that kosher, we think ‘well, they’re already struggling, so of course they’re going to look for ways to minimise their costs,” he explained.
In January, Dr Anesa published research which found that small business owners have an “ingrained view” that the “the best way to fulfil their responsibilities is to minimise tax expenses.” While the research relied on data gathered in Italy, Dr Anesa said the principles could be broadly applied to the Australian context.
Put differently, small business owners tend to see responsibility for public services as resting solely with the government and are therefore less likely to be motivated by greater transparency.
“In fact, most of our participants openly admitted to engaging in some level of avoidance and evasion…based on our fieldwork, we would be surprised if research found that SMEs suffered reputational backlashes for their tax conduct,” they said.
Where governments have tried to blame SMEs for tax avoidance, their efforts have been “met with fierce opposition” for targeting small businesses over the “‘real’ problem” of tax avoidance by multinationals.
“A David versus Goliath narrative was embraced by our interviewees, which legimitised their practices to reduce taxes,” he said.
Tax is not transparency-optimised
Transparency can be very effective in enforcing certain parts of corporate social responsibility. When it comes to behaviours such as human rights abuses and or environmental bad practice, “it’s pretty clear cut,” said Dr Anesa.
On the other hand, tax poses a bigger challenge as the data is “not so straightforward…It is not as simple as saying ‘we are good because we pay more taxes’ or ‘we are bad because we pay less,’” he said.
For instance, there is genuine public interest in getting companies to offset their tax bills by investing in tailored schemes such as those geared towards increasing research and development or sustainability.
“The ATO and policy makers are doing a great job, but I think we should be a bit more critical about the potential effectiveness of transparency measures in tax,” Dr Anesa concluded.
