Director of National Tax at BDO, Lance Cunningham, today said the ACCC’s Chairman, Rod Sims, recent comments relating to companies buying domestic competitors rather than chasing "dynamic" growth in new markets, are to be commended.
“However, one of the important reasons why Australian companies are discouraged from expanding offshore is the huge overall tax cost associated with making foreign profits. The Australian Imputation system is a great way of ensuring there is no double tax for Australians investing in Australian companies, however as the imputation system does not give any franking credit for the tax paid by companies on foreign profits, the imputation system does not stop double taxation of foreign profits. This can result in the overall tax rate on profits from foreign profits being up to 70% or more,” Mr Cunningham said.
“It is little wonder that many Australian companies are opting for Australian takeovers rather than expanding offshore when they are faced with the alternatives of investing offshore at an overall tax rate of 70%, or investing onshore with an overall tax rate of between 0 and 49% (depending on the tax profile of the shareholders receiving the Australian profits as franked dividends).”
“For example, an Australian corporate group decides to set up and wholly owned subsidiary in the USA. The USA Subsidiary makes $1,000,000 profit (in Australian dollars to simplify the calculation). The combined USA Federal and State tax rate is, say, 40% (34% Federal 6% State) i.e. $400,000 tax. The USA subsidiary pays the after tax profits of $600,000 to its Australian parent company, which pays no Australian tax on the dividend (because such cross boarder intercorporate dividends are generally not taxable in Australia). At this stage the 40% tax rate is high but not terrible but when the Australian company wants to pay the $600,000 USA dividend on to its Australian shareholders it generally has to pay it as an unfranked dividend as there is no Australian tax paid by the company on the foreign profits.”
“Therefore the Australian shareholders will pay tax on the unfranked dividend at their marginal tax rate. If the shareholders are individuals on the highest marginal tax rate of 49% (including Medicare levy and budget repair levy), the Australian shareholders will pay tax of $294,000 on the $600,000 unfranked dividend. This means that the total USA and Australian tax paid on the $1,000,000 USA profit is $694,000 i.e. a tax rate of almost 70%.”
“If the Australian Government wants to encourage Australian companies to invest offshore instead of taking over competitors in Australia, one of the things that needs to be looked is this huge tax disincentive for foreign investments by companies. One option could be to allow foreign tax paid by Australian companies or their subsidiaries to be available for franking credits so the offshore profits can be paid out as franked dividends to Australian shareholders.”
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