Slow reform taxing Australia's competitiveness

11 April 2011

Australia has 53 Federal and State taxes – business that operate nationally can be taxed at up to 160 points
32 State, Territory and Local Government taxes raise nine per cent of business tax revenue – the remaining 91 per cent is raised by 21 Federal taxes
For every $1 of tax paid respondents collect an additional $1.78 on behalf of government
63 per cent of business tax revenue is raised by income tax, comparing unfavourably with a global average of 38 per cent

AUSTRALIA

Two years after the GFC Australian businesses remain burdened by a complex and uncompetitive taxation system, according to PwC's fourth Total Tax Contribution report, released today.

The study reveals structural problems with Australia's tax system and the burden it imposes on Australian business in terms of both compliance and administration costs.

PwC partner Tim Cox says, "The Australian tax system remains out of step with those of our international competitors. Australia is not as competitive as it could be due to overreliance on income tax and the complexity of our Federal system."

"With the Federal Government's Tax Forum scheduled for October, comprehensive tax reform is firmly on the national agenda. By consolidating and simplifying the taxes Australian businesses pay, governments can improve the nation's competitiveness at a time when many Australian businesses are struggling to emerge from the global economic downturn."

The study of major Australian public and private companies and Australian-based foreign enterprises provides clear insight into the impact of Australia's complex tax system on business.

These companies, employing almost 450,000 Australians paid nearly $16 billion in business taxes.

Tax burden

The 2010 Total Tax Contribution study shows that Australia's largest businesses contribute extensively to the nation's state and federal revenue streams:

Australia has 53 different Federal and State taxes and businesses that operate across the country can be taxed at up to 160 different points.
Survey respondents face a total of 32 State, Territory and Local Government taxes, which raised only about nine per cent of business tax revenue. The remaining 91 per cent of revenue was raised by 21 Federal taxes.
The 45 survey participants incurred $15.8 billion in Taxes Borne. $9.9 billion, or 63 per cent of this, was corporate income tax. This compares unfavourably with a global average corporate income tax take of 38 per cent.
Corporate income tax, payroll tax and irrecoverable GST accounting for $12.7 billion of business taxes borne by survey participants; the remaining 45 business Taxes Borne raised $3.1 billion.
Of all Taxes Borne, Federal taxes comprised 82 per cent, while State, Territory and municipal taxes accounted for the remaining 18 per cent.

Although the tax reform debate focuses on the amount of tax paid and the complexity of the tax system scant attention is paid to the role business plays in providing the administration of Federal and State taxes:

The largest corporate taxpayers are generally the largest tax collectors for Federal and State governments.
The 45 survey participants collected $28.2 billion in taxes from employees and customers.
Respondents revealed that for every $1 of tax paid, they collected an additional $1.78 on behalf of government.

"These results demonstrate the government's deep dependence on business for the collection and administration of its tax revenues," says Mr Cox.

The 2010 TTC study also highlights the different impact the taxation system has on different industries. For example, the Total Tax Rate for food, beverage and tobacco industries is 20 per cent higher than any other sector. The study showed that the retail, food, beverage and tobacco, and banking industries face the largest number of taxes compared to other industries.

"Any discussion of tax reform must carefully consider the impact the taxation system has on different industries. Any reform package needs to recognise how the burden can vary widely between and across industries," Mr Cox says.

Compliance costs

The 2010 TTC study reveals that businesses in Australia spent more on tax compliance, relative to the amount of revenue raised, than businesses in other countries, including the United States.

On average, participants estimated they incurred total compliance costs of approximately $2.1 million.
The cost of complying with these taxes is a significant additional cost for business, equivalent to an average 1.6 per cent surtax on the actual taxes paid by business.
There is an inverse correlation between the size of business and the relative cost of compliance. The study makes it clear that the complexity of the tax system is particularly onerous for smaller businesses, with some smaller participants experiencing compliance costs of over 10 per cent of their taxes paid.

International competitiveness

PwC has undertaken TTC studies in ten countries around the world. A comparison between the results of Australian companies and those from other countries confirms the complexity of Australia's taxation system, and Australia's relative competitive position.

Australia has the fourth highest number of taxes (53) of the countries where TTC studies have been undertaken. Like the United States the majority of taxes are applied at the State level, adding to the number of business taxes applied and the complexity of the system. In comparison the UK (which does not have State-based taxation) has only 22 business taxes.

This is particularly striking when you consider the relatively small size of Australia's economy.

"Australia's taxation system must ensure that we are seen as an attractive destination for foreign investment," says Mr Cox.

Australia's corporate income tax rate remains high by international standards. The study has found Australia continues to rely more heavily on income tax to raise revenue from business than most other countries.

"Without the long-promised substantial reform Australia's international competitiveness will continue to slip backwards," says Mr Cox. "The community has the opportunity in the October Tax Forum to properly consider reform of our tax system."

"One of the first things we must address is the rationalisation of taxes to simplify the system and reduce the compliance and administration burden on Australian business to maximise international competitiveness and restore our attractiveness as an investment destination."

About the 'Total Tax Contribution Survey'

This is the fourth year that PwC has surveyed Australian corporations on the number of taxes they face, the amount they pay and collect on behalf of the government and the costs they incur to comply.

The 45 participating companies this year represent a wide range of industries and a mix of the largest Australian listed, large foreign owned and some privately owned Australian entities.

The PwC total tax contribution framework focuses on three areas that represent a company's overall taxation contribution:

Business Taxes Borne by the business
Business Taxes Collected from customers and employees that are then remitted to Government
Tax compliance costs: costs incurred in assessing and remitting Taxes Borne and Taxes Collected.

PwC designed the TTC framework to enable companies to collect and report tax information in a consistent manner to meet the needs of stakeholders and improve transparency.

About PwC

PwC provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

'PwC' refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.