Big businesses and the federal Treasury are setting up “straw man” arguments against a tougher crackdown on multinational tax avoidance, the Tax Justice Network says, advocating Labor’s policy as “just the beginning” of sweeping changes that would force companies to pay fair rates of tax in Australia.

In submissions to a parliamentary economics committee examining whether tightening personal and company tax deductions could help fund a cut in tax rates, the Treasury and peak business organisations argue that removing the ability of companies to deduct interest payments from their taxable income would be bad for the economy and force investment offshore. All the business submissions to the committee say they would rather keep the deductions than trade them off for a company tax cut.

But Mark Zirnsak of the Tax Justice Network says this is a straw man argument because no one is arguing for interest to be removed completely as a tax deduction, but rather for tougher rules that would prevent multinationals gaming international tax laws so they paid little or no tax.

“Companies who artificially load their Australian operations with debt to avoid paying tax here know that’s worth far more to them than a small company tax cut, so it’s little wonder they aren’t interested in trading off or losing the deductions for a lower tax rate,” he said.

The arrangements – where a company takes out a low interest loan overseas and then lends money to its Australian entity at a much higher rate so that repayments reduce its Australian taxable profit – resulted in the finding by the Australian Tax Office last year that Chevron had used a series of related-party payments to slash its tax bill by up to $258m.



But Zirnsak said that finding just proved Chevron had “been too greedy”.

Chevron Finance Corporation was paying 2% interest on a loan taken out in the US and charging 9% on average to its local operation, reducing its tax bill in Australia, but Zirnsak said the ATO’s assessment of what the company legally owed showed it was willing to let it get away with a more modest amount of “tax avoidance”.

“It would appear that had Chevron only charged itself a 5% interest rate (rather than 9%), then, in our opinion, it would have been free to tax avoid over $100m through interest deductions to its US subsidiary,” the submission says.

The Tax Justice Network is proposing significant legal changes to the committee, which appears to be fast-tracking its considerations so findings can be fed into the tax policy process – proposing a single “roundtable” to consider the evidence it has received instead of the normal series of protracted hearings.

The Tax Justice Network says as a “starting point” Australia should adopt Labor’s policy for interest deductions to be assessed on the debt-to-equity ratio of a company’s global operations. Labor says it could save more than $1.6bn in four years from amending “thin capitalisation” rules so multinational companies would no longer be able to claim up to a 60% debt-to-equity ratio for their Australian operations, but instead have their deductions assessed on the actual overall debt-to-equity ratio of their global operations.

The network also advocates that the Australian government should follow the lead of countries such as Argentina, Brazil, Germany, India and Italy by banning deductions from transactions with a tax secrecy jurisdiction, and legislate so the ATO can crack down on companies that “game” differences in the tax laws of different countries.

Before Christmas the government passed the Tax Laws Amendment (Combating Multinational Tax Avoidance) bill, which targeted contrived business arrangements for the purpose of tax avoidance, but Zirnsak said it did not go far enough.

In its submission, the Business Council of Australia argue for a lower company tax rate but said it should not be funded by tightening of tax deductions.

“There is very strong evidence from Treasury analysis, and elsewhere, that a lower company tax rate would be beneficial for the Australian economy. However, further changes to the operation of the company tax system should be assessed on their merits, rather than with the narrow view of funding a reduction in the company tax rate,” it said.

The Minerals Council of Australia said it “strongly opposes any proposal to alter long-standing tax arrangements on the deductibility of interest expenses. Successive reviews of Australia’s taxation system have rejected such a radical approach. Removing or tightening existing arrangements for the deductibility of interest would be contrary to Australia’s economic interests and out of line with international best practice”.

A separate Senate inquiry into corporate tax avoidance spent most of last year investigating how tech, mining and pharmaceutical companies radically reduce tax by using intra-company loans, marketing hubs and different tax rules and employing highly paid lawyers and accountants to push the tax laws to the limit.