Shane Wright: Companies dodging tax on an industrial scale

The tax official leant across the table in a sign he was revealing a secret. As a person who had been both a corporate tax payer and a corporate tax chaser, he was keen to explain the problem.

"A few years ago, the aim was to cut your tax by 20 or 30 per cent," he said.

"If you cut it by 30 per cent, that was seen as pretty good and everyone, from the board down, was happy.

"But now, you've got the same businesses saying they want to cut their tax bill by 80 or 90 per cent or just not pay anything at all."

And there is the problem.

At the G20 summit in Brisbane, there was again much debate about how to deal with the efforts of multinational firms to shift their cash around the globe to avoid tax.

As the release of highly confidential documents out of Luxembourg showed recently, the breadth of companies which are trying to wipe away their tax bill is staggering.

The lengths they are going to are astounding. Tax havens are a new industrial pursuit by some countries.

More than 15 per cent of total American foreign direct investment goes into The Netherlands (with an economy half the size of Australia's), with 80 per cent of that $700 billion going into various holding companies.

Luxembourg, a principality not much bigger than Canberra, attracted $US2.4 trillion in foreign direct investment, more than Germany and France combined. Luxembourg really only has one industry, however, and that's tax minimisation.

Much has been made about the efforts gone to by firms such as Apple and Google - such as the phalanxes of accountants employed and the strong-arming at the government level by chief executives - but not much has been discussed about the why.

As the senior tax official pointed out, there's been a change in just how much tax some firms want to shed.

Instead of paying something, they want to pay nothing. He offered one interesting reason for this. The companies we are talking about are largely multinational and in the IT or services sector.

Many did not exist 15 or 20 years ago. And many were created by highly driven, highly intelligent people who worked largely by themselves or with a few friends to help create their visions.

"These people just don't seem to understand the whole social contract side of things. They see they've made huge profits and don't understand why they should pay tax on it at all," the official opined.

"Nerds Against Tax" might make a great headline but the official was getting at the cultural change that seems to be part of the problem.

Evading tax as a pursuit is as old as the imposition of income and company tax, but there was an understanding by firms they should pay some tax.

Tax helps pay for an educated workforce, for roads and railways that transport goods. It even paid for the creation of the internet that is now being used by many firms to avoid tax.

And those multinationals with the financial wherewithal to minimise their tax leave small business and individuals holding the ball for a country's financial requirements.

This could be tolerated when governments had money. Now that they don't, they have come to the realisation that this state of affairs cannot continue. Tackling the issue includes an overhaul of tax treaties, new treaties and improved information transfer between nations that are known tax havens and those that are going poor. However, there are clear signs that those corporates with most to lose are coming up with ways to avoid this increased transparency.

Firms are relocating their corporate headquarters and looking at new ways to keep ahead of the game.

And, perhaps not surprisingly, corporates are looking at the developing world (corrupt ones and those that simply can't afford to bring their tax systems into the 21st century) for new tax arrangements.

There is also the little issue of what countries will now do to either keep or attract firms to their shores (such as The Netherlands or Ireland or Luxembourg). If all the new measures work, and more tax revenues are collected, then there will quickly develop an imperative for countries to compete on tax rates.

We saw this in the run-up to the global financial crisis, with some countries, such as Ireland, offering ridiculously low company tax rates.

If all nations act in concert, the erosion of tax avoidance should lead to firms shopping about for the best legal tax rate. That could put pressure on Australia where the company rate at 30 per cent is above the OECD average.

The Abbott Government is cutting this to 28.5 per cent but for the biggest firms, who are also the biggest taxpayers, they will have to pay the 1.5 per cent levy needed to cover the cost of Abbott's gold-plated paid parental leave policy. So if governments do get smarter than accountants they will run into the situation of having to fight each other with ever-lower tax rates.

That's at the same time as voters are demanding improved services, and the demographic changes confronting the world mean governments will have to sharply lift their investments in the health and ageing areas. Unless there is a change in the attitude of business operators, in their culture, the fight about corporate tax dodging is not going to be resolved any time soon.