Dwyer Partners

Terence M. Dwyer						        Deborah R. Dwyer
B.A. (Hons), B.Ec. (Hons) (Sydney)				        B.A. (cum laude), M.A. (Smith)
M.A., Ph. D. (Harvard)			        LL.B. (ANU)

30 October 1999

The Secretary
Senate Finance and Public Administration References Committee
SG 60
Parliament House 
CANBERRA ACT 2600

Dear Sir

SUBMISSION RE BUSINESS TAXATION REFORM

I refer to the Committee’s request for public submissions and trust the small delay in forwarding this submission does not cause any inconvenience.

Having regard to the Committee’s terms of reference seeking submissions on the economic theories and assumptions underpinning business tax reform, I submit the acid test of business tax reform is whether more Australian and overseas investors will wish to invest in, or keep their capital in, Australia.  Whether one likes it or not, capital is mobile and, without capital, labour productivity and wages must stagnate in this country.  

Whether capital stays in Australia depends on the net returns to investment in Australia.  Yet prima facie the after-tax return to capital seems set to fall because the overall impact of the ANTS tax reform, as modified by the Ralph process, is an increased tax take from business and investment income.  In the article Company Taxation - Getting it Right published by the Business Council of Australia in the Business Council Bulletin of December 1995  Mr J T Larkin and I made several serious criticisms of Australian company taxation and offered proposals to correct economic distortions.  While two (cash refunds of imputation credits and deductibility of black hole expenditure) are now proposed for adoption, others (such as conduit treatment and treatment of overseas income) have not and, indeed, the system is being made worse as compared to the tax-neutral partnership model.  Rather than making a detailed submission to the Committee on these deficiencies, I consider the Committee’s terms of reference could be most concisely addressed by suggesting that the Committee ask the following questions of the Treasury.  

1.		Why will foreign direct investors in Australia not convert their subsidiaries to branches to avoid the entity tax system?  Will multinational companies be discouraged from locating regional headquarters in Australia?
1.	

2.		Bearing in mind the several articles by Mr Alf Capito, International Tax Partner at Arthur Andersen which have appeared in the LBC’s Weekly Tax Bulletin, why will Australian multinationals not either emigrate, float off overseas operations or be taken over by foreign multinationals whose cost of capital is cheaper under their home tax regimes?
1.	

3.		Bearing in mind that trusts under the entity regime will no longer be tax-neutral 
vehicles for holding assets for asset protection or any other purposes, why will the capital held by trusts stay in Australia?  If the legal ownership of that capital has to incur stamp duty and capital gains taxes in restructuring why will it not be restructured via countries such as the USA which have more tax-neutral treatment?

4.		Why will Australian investors invest in collective investment vehicles here when they can now invest in more neutrally taxed US mutual funds or limited partnerships?
1.	

The reason for asking these questions is that, for all the talk of international competitiveness, the entity tax system and the “all receipts less ‘adjusted’ losses” taxation scheme are internationally sui generis and smack of a closed economy mindset insofar as they seem harsher in many respects than taxation systems elsewhere .  To an economist, they seem liable to induce an export of capital from Australia as a natural consequence.  Of course economists are aware that markets do not adjust instantaneously but history tends to show (as with exchange controls) that tax incentives do eventually operate, whatever the legal impediments.  Surely tax out-competitiveness is a major reason why Singapore and Hong Kong have overtaken Australia in per capita GDP and, if so, how will Australia’s new business taxation system stack up beside them?

To put it plainly, it is an accepted principle that a person is presumed to intend the natural consequences of his actions.  Does Treasury want Parliament to legislate, as an apparently intended consequence of business tax reform, for tax inducements to the export of capital from Australia?  To an economist this must be the central question of tax reform and it is one  Treasury should be asked to face squarely with eyes wide open.  

Yours sincerely

							
(Dr) Terry Dwyer
Visiting Fellow
National Centre for Development Studies
Australian National University