The schemes used by big foreign pharmaceuticals to pay the lowest tax in Australia

Villagers prepare a 1 km sandwich as they try to set a new Guiness book world record in Pastoano, Italy. Salvatore Laporta/Getty Images

Major multinational pharmaceutical companies operating in Australia pay on average an effective tax rate of just 5.7%, according to analysis by University of Technology Sydney researchers.

The rate was the lowest in a study of 76 big multinationals. Technology companies pay 7.5% on average and energy groups 20%.

Overall, the companies paid an average effective tax rate of 16.2%, almost half the corporate tax rate of 30%.

The difference between what the 76 companies paid and the statutory tax rate is $5.37 billion a year. Pharmaceuticals represented 13 of those companies.

The study, Closing the Caribbean Connection: Solving Aggressive Tax Avoidance by Top Foreign Multinationals Operating in Australia, was commissioned by advocacy group GetUp! and conducted by associate professor Roman Lanis, and researchers Brett Govendir and Ross McClure.

The study comes as the Senate inquiry into corporate tax avoidance releases its second report into its investigation, saying: “It is clear to the committee that the public is understandably sceptical when the Australian subsidiaries of some prominent multinationals pay such small amounts of corporate income tax, and in some cases no tax at all, on revenue from activities in Australia.”

No-one is suggesting that what the multinationals do to keep their tax low is unlawful.

The Senate report: “At issue is not the legality of the activities of multinationals … The central concern is to what extent multinationals arrange their corporate structure and engage in practices deliberately intended to deny Australia its proper share of tax and whether they are held accountable for engaging in such practices.”

The UTS study also looked at the methods the foreign companies use to structure their tax affairs.

“The main methods used for aggressive tax minimisation are debt loading –- most commonly employed by big companies in energy and resources – and profit alienation, which is used by pharmaceutical and technology businesses,” says associate professor Lanis.

Debt loading is a when a foreign company lends to its Australian operation at a high interest rate. Local revenue then becomes a book loss when interest payments are made on the loan.

Profit alienation is when companies hold intellectual property rights in low or zero tax jurisdictions. Revenue from Australia is then used to pay the parent company for the use of its intellectual property.

This is sometimes called the Double Irish with Dutch Sandwich because profits are moved from both the country where the intellectual property rights are created as well as from the country where the revenues are realised.

For example, when Apple’s Australian subsidiary sells an iPad for $600 in Australia about $550 of that ends up in Ireland where the corporate tax rate is 12.5%, according to evidence presented to the Senate inquiry. The intellectual heart of Apple is in the US.

“With the rise of digital, more and more corporations make money from intangible assets, allowing them to make use of profit alienation to avoid paying tax,” Lanis says.

The UTS report recommends the federal government limit or even eliminate interest deductions and other financial payments on loans from foreign subsidiaries in low or no tax jurisdictions.

“Hong Kong protects its tax revenue in this way, by prohibiting companies from claiming tax deductions for any interest paid to related entities based overseas,” the researchers say.

The report suggests the federal government follow the UK with a diverted profits tax, also known as the Google Tax. The UK imposes a minimum tax rate of 25% of profits sent overseas for corporations deemed to have arranged their business structure to avoid tax.

“This ensures company profits are taxed as they move offshore -– so there’s no tax advantage in shifting profits overseas,” Lanis says.