Nearly 800 large companies paid no corporate tax in Australia in the 2020-21 financial year, according to new data published by the Australian Tax Office (ATO).
In total, about a third of all companies paid no tax. There are many legal reasons why this might be the case, and the ATO routinely checks companies are paying appropriately.
There is no suggestion that any company acted illegally. But how is it legal that companies can pay no tax?
About company tax
Companies are taxed not on their total earnings, but on their profits (earnings minus expenses).
If a company operates at loss in a financial year, they don’t have to pay any tax. This is quite common, and not just for failing companies: for example, companies spending money to expand will often record losses.
Australia also lets companies “carry forward” losses into future years. That means a big loss in one year could be spread out to reduce tax to zero over several years.
Just like people, companies can also claim a range of ‘deductions’ which reduce their tax bill. For example, tax breaks are available for companies investing in research and development.
In the last few years, as a support measure during COVID, the Government also allowed businesses to “carry back” losses. That meant businesses with large losses during COVID could effectively get a refund on the tax paid in previous years.
Without any additional information, we don’t know the specific circumstances of the companies paying no tax each year. The ATO monitors for illegal underpaying, but these figures don’t include the results of that monitoring.
Some of the results match public information about profitability. For example, many mining companies paid a lot of tax in 2020-21 at the same time as iron ore prices increased. Many airlines paid no tax in a year where the airline industry was significantly disrupted by the pandemic.
However, there is significant international debate about whether corporate tax laws make it too easy for companies to (legally) structure their businesses to pay very little tax.
There is some evidence in Australia. ATO data is available back to 2013-14, and it shows a large number of companies who have paid no tax despite consistently large earnings.
A particular focus of this debate is the tax paid by multinational corporations. Leading economic institutions including the World Bank and the International Monetary Fund have highlighted that many of the largest companies in the world take advantage of different tax rules around the world to avoid tax – for example, by structuring their accounts so that sales made in a high-tax country are recorded as profits in a low-tax country.
There are international efforts to crack down on this issue, and the Australian Government announced new measures in last month’s Budget.
How do other countries tax companies?
Like Australia, countries tax profits rather than earnings. Most comparable countries to Australia also allow losses to be carried forward into future years, although some have time limits in place.
The International Monetary Fund recommends a ‘minimum tax’ on earnings, where companies must pay a small amount of tax on total earnings even if they make no profit.
What about tax rates?
Australia’s corporate tax rate is 30% (30c for every dollar). This rate is one of the highest in the world. A handful of areas including the Cayman Islands, the Bahamas, and the United Arab Emirates, have 0% corporate tax rates.
Some other examples: Brazil 34%, Japan 30.6%, New Zealand 28%, China 25%, U.S. 21%, UK 19%, Singapore 17% and Ireland 12.5%.