The rich man gets the money

And the poor man gets the blame

Every time Apple Australia sells a $600 ipad here, about $550 goes straight to an Apple subsidiary in Ireland. Some of that money will be used to pay suppliers (none located in Ireland), and some of the income such suppliers receive will be taxed. But of the $550 received in Ireland, about $220 will never be taxed anywhere in the world. Ireland has made an artform of being the tax haven of choice for this rort and effective fraud upon the citizens of the rest of the world.

The last clause is my own, though the facts are as presented by Professor Antony Ting, from the University of Sydney, in a submission to this week's senate committee on corporate tax avoidance. He was not suggesting that there was anything illegal or even clandestine about what Apple, and other multi-nationals, including Microsoft, were doing to avoid tax, either where they make profits or anywhere else at all.

"These tax avoidance structures are perfectly legal under the current tax system," he said. "Though tax administrations, including the Australian Tax Office, are now well aware of these structures, the multinational enterprises are still able to continue shifting profits from Australia.

"This is not because the ATO is not willing to address these issues, but because the current tax law does not provide a legal basis to challenge the structure."

"The current international tax regime is primarily premised on the separate entity doctrine which dictates that each company is treated as a separate taxpayer, even if the company is a wholly owned subsidiary of a corporate group. This doctrine provides ample opportunities for MNEs to create paper companies in tax havens or low-tax jurisdictions.

"... Tax administrations are bound by the tax law and therefore in general have to respect intra-company transactions even if they do not have economic substance. Taking Apple's international tax avoidance as an example, it has successfully shifted US$44 billion to its Irish subsidiary from 2009 to 2012. The Irish subsidiary was a shell company with no employees before 2012...

"This result defies common sense on at least two fronts. First, it is inappropriate for a MNE to create profits that are not subject to tax anywhere in the world. This is unfair to people who pay their fair share of tax.

"Second the structure relies on the intra-group sales between Apple subsidiaries in Australia and Ireland; both are wholly owned subsidiaries of Apple Inc in the US. This begs [sic] the question, why does the tax law respect these intra-group transactions which are created artificially for the prime purpose of tax avoidance?"

Indeed. But there are whole industries, including, sometimes the modern tax office itself, devoted to explaining why. Or why, in any event, nothing much should be or can or ought to be done about it.

The tendency for the "professionals" to agree on the subject is much increased by a modern system of much more interchange between the tax collecting and the tax dodging industries, by increasingly strange concepts of public interest, and by the arcane use of language to exclude the public and turn sense upon its head.

It all puts me in mind of the politics of two great tax controversies of about 35 years ago. They ultimately played a significant part in bringing down the Fraser government. The present tax argument — in its popular if not arcane form — has a similar capacity to drag down Tony Abbott, Joe Hockey and Mathias Cormann.

The feeling that big and ubiquitous operations do not pay tax and that politicians with avowedly strong relationships with the big end of town will do nothing much about it is a potent force, never to be ignored.

The first argument going on in the late 1970s was in the High Court. Many of its judges, including the Chief Justice, Sir Garfield Barwick, had made professional careers at the bar advising rich individuals and corporations on how to minimise tax. They had a certain anarchistic delight in threading a way through a thicket of anti-avoidance and evasion rules. It was often in counterpoint to authoritarian tendencies on civil liberties and pro-government attitudes on laws that affected the common hordes.

A high water mark came with the 1980 Westraders case, by which a feat of legerdemain allowed companies with large undistributed profits to be acquired and sold, stripped of dividends, to partnerships which would go on to claim wholly fictional losses.

Garfield Barwick, thought the scheme "ingenious", and with a majority of other judges allowed the claimed losses. But sensitive to increasing criticism of the court as a tax dodgers' paradise, he thought it right to deliver a public lecture on the right of every citizen to arrange his affairs so as to pay as little tax as possible.

This freedom "to choose the form of transaction into which he shall enter is basic to the maintenance of a free society".

He was confronted head-on by Lionel Murphy, who issued a warning that resonates still, and which could well apply to the current debate.

"It has been suggested, in the present case, that insistence on a strictly literal interpretation is basic to the maintenance of a free society.

"In tax cases, the prevailing trend in Australia is now so absolutely literalistic that it has become a disquieting phenomenon. Because of it, scorn for tax decisions is being expressed constantly, not only by legislators who consider that their Acts are being mocked, but even by those who benefit.

"In my opinion, strictly literal interpretation of a tax Act is an open invitation to artificial and contrived tax avoidance.

"Progress towards a free society will not be advanced by attributing to Parliament meanings which no one believes it intended so that income tax becomes optional for the rich while remaining compulsory for most income earners.

"If strict literalism continues to prevail, the legislature may have no practical alternative but to vest tax officials with more and more discretion. This may well lead to tax laws capable, if unchecked, of great oppression."

Soon after, parliament changed the law to require a purposive approach. But even before it passed, the storm of public criticism of the court had began to influence some of its judges, who changed their approach to tax cases. Never let it be said that judges are impervious to political or public criticism.

By then tax avoidance and evasion industry was becoming more and more blatant, with involvement by more and more captains of industry, (some, particularly in Western Australia, with important Liberal Party connections). It reached a peak with what became known as "bottom of the harbour" schemes, by which companies were stripped of assets then sold, with tax liabilities unable to be collected, either to fictitious people or prominent criminals. The paperwork would often disappear — the joke was into Sydney Harbour.

The Tax Commissioner of the day, Bill O"Reilly and most of his staff were not ones to sup with leading "stakeholders": tax lawyers, accounting firms and rich taxpayers, let alone give regular demonstrations of touching concern for corporate confidentiality.

The extent of the rorts came out more by accident rather than design. A royal commission was established in routine political bastardry by Malcolm Fraser to detect embarrassing links between a blatantly criminal union and Labor. That purpose was casually achieved, but, as so often with such inquiries, the real victims ended up being the government itself, when the inquiry discovered that big business tax avoiders were using union men to front tax-stripped companies.

Labor, in parliament, alleged the government had been slow in dealing with the problem because so many of its mates were involved. So as to defend itself against such charges, Howard tabled hundreds of exchanges between himself and O'Reilly over four and a half years.

This fascinating exchange did show Howard moving deliberately, if with great slowness, to address the problem. But it also showed a tax commissioner continually pressing him for stronger, and quicker action, continually anticipating the myriad sources of delay the tax industry was using to defer any showdown.

O'Reilly waged a lonely war through a bureaucratic, political and business thicket to keep the item high on the agenda, fighting off cold feet from everyone involved, and occasionally using very heavy artillery indeed. Howard came only reluctantly to his ultimate view — the one put by O'Reilly from the start — that drastic criminal legislation was necessary'.

PM&C, Treasury and Attorney-Generals had little appetite for strong action, ever preferring delay, more consultation, further committees, deeper inquiries. Sometimes, like their political and ministerial masters, some listened too much to lobbies from people not disclosing they were speaking on behalf of people up to their neck in the schemes.

Even then, the high price that Howard paid was for action, not inaction. Some Liberals, particularly from the west, never forgave his retrospective laws on the subject. It might be a good thing to flirt with in relation to Apple, Microsoft and others, if only to hear all of the usual suspects bleat so satisfyingly but unconvincingly about "sovereign risk".

As it happens, Joe Hockey proclaimed that doing something about multinational tax avoidance was a priority at the G20 meeting in Brisbane. His department has never manifested any enthusiasm for the scheme, and the recent tax paper issued by the government does not suggest that Treasury regards it as a priority matter, or one for unilateral Australian action or achievement. Indeed, it is far from clear that Treasury even believes that corporations should be taxed at all.

The current senate inquiry, launched by the Greens but enthusiastically embraced by Labor's Senator Sam Dastyari, is a political stunt, but, likely an effective one, if only for wedging government on tax.

The tax (avoidance) industry and their front groups, some with names suggesting them to be very neutral or detached, including much of the legal, accounting and marketing frameworks, counsel strongly against Australia going it alone on international avoidance. Even the OECD has been tickled — Treasury is usually OECD tummy-tickler-in-chief, and often exchanges drafts of "independent" OECD views on such matters — to submit that we should do anything only after everyone agrees, which is to say never or not for a long time.

Meanwhile, politicians such as Tony Abbott have been long mining popular resentment about paying taxes, and the view that hard-working Australians pay too much, and "others" too little. Most Australians believe that multinationals are getting away with murder — they are. Polls show most voters would prefer that big companies at least pay more tax, rather than the less tax about to be announced in the next month's Budget. And that rich Australians — defined, roughly as "anyone earning more than me" — also ought to pay more.

Tony Abbott came to office promising to "axe the tax". He was referring to carbon and mining super-profits taxes but quickly scrubbed a host of anti-avoidance measures. And he did other things giving rise to an innuendo of being susceptible to special pleading from the big end of town, not least over financial advice laws. Such matters invariably colour opinions of fairness, as Hockey already knows.

In all of these senses, Apple, and co, might well be reasoning that "now is not the time" for their tax avoidance — legal or illegal — to be stirring the pot.