Overblowing the PM’s investments in Cayman
As someone who has spent the better part of three years of my life in the Cayman Islands and the better part of ten years in places like Switzerland & London where there are very favourable tax treatments for non nationals who reside in these locals, I must say I have seen extraordinary changes and evolution on how the international taxation community has successfully tackled tax evasion for individuals. However, the challenge today is not as much catching individuals who try to evade taxes, but to find solutions on how to get large multinational organisations to pay their fair share in taxes and invest more in the countries they operate.
The debate on international taxation in Australia has switched into overdrive on the back of the attention raised from Australian Prime Minister Malcolm Turnbull investments made into businesses registered in the Cayman Islands.
And from the looks of it, has made a lot of Australian’s question the ethics of the Prime Minister. In defence, Malcom Turnbull made it very clear that he pays tax on all his income earned from his investments in the Cayman Islands is taxed in full. To those gritting their teeth right now, if the Prime Minister is a man of his word, he is not committing anything illegal. And I would say that Mr Turnbull does pay his taxes in full on any income derived from the Cayman Islands.
The unfortunate reality is that heads of multinational corporations alongside the hedge funds around the world are just as focused on their tax structures as they are about their return on investment. And quite often, we find in the international landscape– corporations so focused on reducing their tax burdens that they end up spending more on legal and accounting services than they would in paying taxes in their home country. And any Australian with money in a superannuation fund has (without knowing) most likely seen a small piece of their savings end up flowing through the Caymans.
Now here is the problem for Australia– It’s a global world and there are only so many industries to invest here. Believe me, since moving back to Australia, there are very limited choices (almost all of which require significant leverage). But hopefully we could create a new culture where we invest in local startups and innovation. I will save that argument for another post.
So let me break things down on the pros and cons of Australia’s Ultra-high net worth individuals (UHNWI’s) in Australia worth over say US$50million investing in business in tax havens.
- Firstly, a dollar of capital invested overseas is a dollar less in capital that could be invested in Australia. Australia is a net importer of debt and this nation needs more capital.. because there is not enough of it.
- Secondly, Less capital invested in Australia means less jobs created.
- Thirdly, It makes you look sneaky.
- When an Australian invests in an overseas jurisdiction that has no tax treaty with Australia, Australian residents are taxed on the entire dividends received as they cannot use franking credits etc..
- Leading on from point 1, companies in tax havens have no incentives to make significant write-downs or drive up costs to reduce profit. Remember these corporations are in a tax free jurisdiction. Hence corporations using offshore tax structures don’t need to make their corporations looking like they earn less in profit than they actually earn. This again puts more money in the pocket of the Aussie investor that will be taxed.
So here is the conundrum for Australia and a lot of other countries that are trying to level the playing field between corporations that pay less tax than others through the use of offshore tax havens. Corporations are not human so skilled accountants and international taxation lawyers use this to the advantage of the multinational corporation they represent. But if corporations were treated like humans, it would be very hard for corporations to escape paying taxes. On the other hand, the international monetary system has all but 100% clamped down on tax evasion for individuals. Hence even considering scrapping corporation tax altogether and putting the tax burden on individuals who receive the dividends at the end of the day could be a plausible option in a truly complex international environment. So regardless of where one invests, they will pay their taxes in their place of residency (minus any tax treaty commitments).
Both options offer incentives for corporations to repatriate their cash to their motherland which should hypothetically stimulate investments, economic activity and make tax havens a thing of the past. I know it sounds crazy, but for every action there is a reaction. And sometimes we need to figure out what could create a positive reaction in such a negative economic environment. And governments would start to see revenue flowing back into their coffers at a significant rate.