Management

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Public speakers are often reminded to adapt their message to their audience. Companies are little different.

More than 42 percent of Australian corporates with revenue above A$100 million ($71 million) reported taxable income at less than 2 percent of total income in the year ended June 2014, according to figures released by the country's tax office. You'd expect a similar proportion to report the equivalent thing -- a pretax profit margin of less than 2 percent -- to their shareholders. In fact, the figure is less than 36 percent, according to data compiled by Bloomberg:

Tails You Lose
The proportion of Australian companies reporting low margins is higher when the tax office is watching
Source: Australian Taxation Office, Bloomberg data
Note: Taxable income figures are for taxable income in year to June 2014 as % of total income, for companies with more than A$100 million in total income. Accounting income figures are for pretax income margin in fiscal year before last, for companies with revenue above A$100 million domiciled in Australia.

There are legitimate reasons for small differences between the two sets of numbers , but the direction and scale of the disconnect is striking: When companies want to impress their shareholders, they seem to be reporting better margins than when they're pleading poverty to the taxman. Death may still be certain, but taxes aren't.

Such behavior isn't unique to Australia. Governments lose between $100 billion and $240 billion a year from multinational companies arranging their international operations to minimize tax, according to the OECD -- equivalent to about 4 percent to 10 percent of worldwide corporate income-tax revenues. 

The profit that's left over once companies have paid operating expenses and interest will probably always be fought over by tax collectors and shareholders. But governments that have seen their budgets chipped away after the 2008 financial crisis are growing less tolerant of companies' strategies to reduce their payments.

Limits to Growth
Australia's corporate tax collection has stalled
Source: Australian Treasury, Bloomberg data
Note: 2006 levels=100; years are for 12 months to June 30

The U.S. Treasury has tightened its rules twice in the past 15 months to prevent inversions -- deals where local companies use takeovers to move their legal headquarters to lower-taxed jurisdictions such as Ireland. Pfizer, the drugmaker with a market value of $200 billion, is technically being taken over by Allergan (value $122 billion) in a pending merger that will move its tax domicile to Dublin. The U.K. has introduced a 25 percent diverted profits tax to discourage companies from coming up with "contrived arrangements" to shift their income overseas. In Australia, a similar policy was signed into law last week.

Actions are going through the courts, too. BHP Billiton is in dispute with the government of Australia's Queensland state over A$288 million of royalties and interest relating to its coal mines. The mining company paid the royalties as a percentage of the price at which it sold rock to BHP Billiton Marketing AG, a Singapore-based trading division. The government wants the royalties calculated based on the higher prices at which the marketing unit then sold coal to external customers.

Whether governments or shareholders end up winning this battle ultimately depends on how well legislators, lawyers, and accountants play their hand. There's a substantial industry, and numerous revenue-hungry jurisdictions, dedicated to keeping corporate tax bills lower than politicians would like. But if the Australian corporate sector is really performing the way it's telling the taxman, it's in a considerably worse state than it looks.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Companies report their total income and taxable income to the Australian Taxation Office, numbers that are similar to accounting revenue and pretax income but not identical. The tax data relates to the 12 months to June 2014. We've used numbers from companies' last-but-one fiscal years, which will reflect a similar but not identical time period. The tax office also has data for a wider array of 1,539 companies, which includes closely held businesses and subsidiaries of other groups. Bloomberg has only included the 377 companies whose shares are traded on public exchanges and have data for the relevant period.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net