Wednesday, July 30, 2014

Australia's Economic Vulnerabilities

Interesting comments from Australian OECD economist Adrian Blundell-Wignall.

He argues that the export-led model of many developing economies is not sustainable, especially over time as developing economies account for a greater share of global GDP (see here for analysis).

Not all countries can be exporters at any point in time exports must match imports so unless we start trading with another planet, not every country can have a trade surplus.

He then goes on to skewer the banks:
"If you go back to 1980 the earnings of the financial sector of the S&P 500 companies was less than 10 per cent."
He says the proportion of Wall Street earnings by finance stocks is now more than 30 per cent, having risen above its share when the GFC hit.
"The financial sector is supposed to be the sector that intermediates between real savers and real investors. That's what greases the wheels of capitalism," he said.
"Where do we get off thinking that the financial sector can just rip one third of the earnings for themselves?
"People want to understand why investment is a problem ... there's no inflation and the recovery is very problematic everywhere.
"Monetary policy can only do so much and you need an investment cycle to follow. And the investment cycle really isn't following."
He also warns of the danger of a slowing China for Australia and the potential for problems if the US dollar rises and has an impact on commodity prices.

New Defence Issues Paper

The New Paper outlines the following areas of concern for the future:

  • What are the main threats to, and opportunities for, Australia’s security?
  • Are Defence’s policy settings current and accurate?
  • What defence capabilities do we need now, and in the future?
  • How can we enhance international engagement on defence and security issues?
  • What should the relationship be between Defence and defence industry to support Defence’s mission?
  • How should Defence invest in its people, and how should it continue to enhance its culture?
It'll be interesting to see what the government does with the new White Paper given the extensive ambition of the last 2 WPs under Labor and their significant underfunding. 

One of the biggest issues remains whether Australia should build military hardware itself or buy it 'off the shelf' from other countries. 

If we are going to build things ourselves we still need to provide competitive pressures to avoid cost overruns, delays and incompetence. 

On the first point it will be interesting how the WP deals with the issue of China. 

Monday, July 28, 2014

The 2014 Human Development Index

The World Bank has released its 2014 Human Development Index. Australia ranks second behind Norway. Just imagine if we increased the level of taxation on our 80 foreign owned resource sector and redistributed some of the profits, how well we might do.

The HDI attempts to provide a broader measure of progress than GDP by including life expectancy, literacy, education and GDP per capita.  For a range of ways to measure economies see How Big, How Rich and How Developed? The State of Play in the World Economy

Monday, July 14, 2014

The Double Irish Dutch Sandwich

The tax arrangements of Google explained. Facebook, Apple and other corporate tax dodgers do similar things. 

Treasury official Rob Heferen in a speech entitled Implications of Digitisation for the Australian Tax System argues that such arrangements might undermine the willingness of all of us to pay tax because we might increasingly see tax systems as fundamentally unfair.

I think this is true for a lot of issues wider than tax, including globalisation in general. If economic integration is associated with increasing inequality it is likely that it will be blamed. The benefits of openness need to be spread by appropriate government policies and effective taxation is integral to this. This is of course one reason why we needed to develop an effective mining tax earlier in the boom.

So how does the Double Irish Dutch sandwich work.  Heferen explains:
The notion of Base Erosion and Profit shifting or “BEPS”, has recently entered the public policy lexicon around the world. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. It is squarely on the G20’s agenda and the OECD is well into a two-year work program in this area. 
In recent years, intangibles have been the source of some very high profile and sophisticated tax planning techniques. These have significantly elevated concerns about BEPS. I’m sure many of you would have heard of one such technique that has come to worldwide attention called – the Double Irish Dutch Sandwich. A structure reportedly approved by the IRS. 
The basic set up goes something like this. We have a US parent company whose employees developed, over many years, some intellectual property. Let’s say it’s the IP used to deliver internet advertising services. The Parent sells the rights to exploit the IP outside the United States, to its subsidiary company Ireland Holdings. Ireland Holdings is managed and controlled from another jurisdiction – say, Bermuda 
Ireland Holdings licences all the rights in the IP to a subsidiary company in the Netherlands – for a royalty fee. The Dutch company sub-licences the IP to Ireland Operations, who is the retailer of internet advertising. 
Customers wishing to place ads enter into contracts with Ireland Operations on its website. This could be an Australian business wanting to advertise to its local customers.
As a result of this complex arrangement, we ask, where is the tax paid? 
The cost of advertising for the customer is reported as income in Ireland Operations. Its taxable income is substantially reduced by the tax deduction it receives on the royalty payment to Dutch Holdings. Under EU law, withholding tax can’t be applied to the royalty payment from Ireland to the Netherlands. 
Similarly, the Dutch subsidiary pays a small amount of corporate tax on the difference between royalties received and paid, with no withholding tax on the payment of royalties.
You would think that the royalty payment received by Ireland Holdings would be taxed in that country, but it is not. This is because of the interaction between Ireland’s residency rules, Bermuda’s tax haven status and the US’ check-the-box rules. 
But let’s focus on Australia now. Under this arrangement, the profit on sale of advertising into Australia is not taxable in Australia. But should it be? 
Some of questions that run through my head include, is the sale of the advertising, in substance, really a service provided by Ireland to Australia. Does it really look like an import? The complex nature of this structure gives the impression that it is artificial; and more generally it doesn’t pass the sniff test.  
Are genuine activities and value-add services conducted in Australia? If so, then conceptually some of the profit should be taxed in Australia and current law says it should. 
Given Australia's reliance on corporate taxation at a much higher rate than the rest of the OECD making these corporations pay tax on Australian operations probably matters a lot.

Some other relevant sources

Digital Economy Chokes on Online Giants’ Low-Tax Sandwiches

Twitter Follows Apple, Google And Facebook To Irish Holy Grail

To reduce its tax burden, Google expands use of the “Double Irish”  

Monday, June 2, 2014

The White Australia Policy

During the nineteenth century, Australians defined themselves as a British outpost in an alien region. In the first half of the nineteenth century, labour shortages were a major problem for Australian economic development. Some believed that Chinese ‘coolie labour’ could turn “wilderness into gardens”.[1] Pastoralists also lobbied hard for cheap labour. However, the arrival of significant numbers of Chinese, as indentured labourers after 1848 and as prospectors on the goldfields after 1851, caused increasing friction with Anglo-Celtic miners.[2]

Anti-Chinese sentiment flared again in the 1870s with new gold discoveries in Queensland. At this time, one in seven settlers in Queensland was Chinese.[3] Determined to put a halt to the influx of Chinese immigrants, by the late 1880s all Australian colonies had banned Chinese immigration. Concerns about Japanese immigration also rose as Japan opened up to the world in the late nineteenth century.[4] White Australia’s increasingly hostile attitude to Asia and Asian immigration in the latter part of the nineteenth century restricted the growth of trade with East Asia, as did the preference for British imports and exports.

The Immigration Restriction Act 1901 – the White Australia Policy’s (WAP) official title – was the first major piece of legislation passed by the newly federated Australian Parliament.[5] Hostility to Asia and Asian immigration pervaded all levels of Australian society.[6] The British, however, were concerned about the WAP’s direct banning of non-white immigration and Japanese sensitivities to such overtly racist exclusion policies. These concerns led the Australian Government to introduce a dictation test for new immigrants, which after 1905 could be conducted in any European language, just in case the potential immigrant was proficient in English.[7]

It is important to remember that from 1902 until 1921, Japan was a British ally. Britain saw a formal alliance as one way to solve its strategic problems in the Pacific as its global reach declined. It provided a temporary solution to Britain’s anxiety about Russian expansionism and allowed them “to do without a fleet in the Pacific”.[8] Australia, however, did not share Britain’s faith. As one commentator remarked at the time, “Japan has ulterior motives. Her policy can be summed up in one word – expansion ... Japan has no love to the white man, not even of her British ally”.[9]

Events at the 1919 Paris Peace Conference at the end of World War I further antagonised Australian-Japanese relations. Japan wanted a racial equality clause inserted into the new League of Nations Covenant but Australian Prime Minister Billy Hughes saw the clause as a threat to White Australia and fought to have it rejected. Hughes won the day, despite the fact that the British made considerable effort to placate the Japanese. Hughes also resisted US President Wilson’s plans to allow the League of Nations to be responsible for German New Guinea because he did not want Japanese immigration to an island just off the coast of Australia. After the war Hughes became increasingly concerned about Japan’s intentions and dismissed British reassurances:
It is a long way from Tokio to Whitehall, but we are with a stone throw. I desire again to emphasise that our fleet is practically without fuel, and in any case quite unequal to meet Japanese with any hope of success; that there are no British squadrons in eastern waters fit to do so; that we profoundly distrust Japan; that the experience of Port Arthur shows she strikes first and declares war afterwards; present belligerent mode evident in attitude to Shantung; and as you doubtless know, her strong animosity has been roused by our opposition to her desire for an equal treatment of their [nationals] and their entry to Australia.[10]
While Hughes was eventually shown to be correct about Japanese intentions, his fears did not translate into greater effort to build up Australian defence.

The defeat of Japan in World War II provided an end to Japan’s hegemonic ambitions and an end to one source of Australian anxiety, although many Australians saw Japan’s rise to power as a warning for the future. The victory of the communists in China in 1949 combined an old fear with a new one - communism. Labor Immigration Minister Arthur Calwell utilised an earlier slogan, “populate or perish” and proclaimed that Australia had “twenty-five years at most to populate this country before the yellow races are down on us”.[11]

Despite the perceived desperate need for a larger population, Australia’s Anglo-Celtic policy-makers continued to discriminate against non-white immigrants. Post-war immigration continued to take place under the rubric of White Australia, officially defined by the phrase: “In pursuance of the established policy, the general practice is not to permit Asiatics or other coloured persons to enter Australia for the purpose of settling permanently.”[12]

The WAP was a major impediment to Australian-Asian relations. After replacing Menzies as Prime Minister, Harold Holt removed discriminatory elements of Australian immigration law and between 1966 and 1971 non-European migration increased from 746 a year to 2696. Although the Whitlam Government reduced overall immigration as a response to the economic downturn, it legislated to enable all migrants to become citizens after three years and instructed all overseas immigration posts to disregard race as a criterion for settlement. The Fraser Government removed all vestiges of the policy from the statute books and allowed the entry of a large number of Vietnamese refugees.[13] This influx of Vietnamese was the first significant migration of Asians to Australia since the nineteenth century.

The early years of the Howard government also saw the rise of Pauline Hanson and a reinvigoration of a virulent strain of anti-Asian sentiment. Hanson argued that “Australia was in danger of being swamped by Asians”. The failure of Howard to criticise these anti-Asian views attracted widespread condemnation in the region and reinforced the perception of his government’s downgrading of Asian engagement.[14] Hanson garnered support among some disillusioned white Australians, especially those in regional areas, because she offered a return to the past on Asian immigration, attitudes to aborigines, industry protection, and welfare policy.

While racism obviously remains rife throughout the Australian community (as it does throughout the world), the rise of Hanson shows just how far mainstream politics has shifted away from White Australia. It is no longer acceptable to be overtly racist or to argue that discriminatory immigration policies are acceptable. Nevertheless, attitudes to and policies towards asylum-seekers show that fears continue to exist about immigration and about border control.

Today, Australia is a truly multicultural country. According to the ABS:
One-third of Western Australia’s population were born overseas, the highest proportion of any state or territory according to new figures released today by the Australian Bureau of Statistics (ABS) … People born in the United Kingdom (256,100), New Zealand (81,000) and South Africa (39,800) were the largest groups of migrants, accounting for almost half (48 per cent) of Western Australia’s overseas born population in 2011 … Victoria had the second highest proportion of migrants at 29 per cent born overseas. The largest migrant groups were those born in the United Kingdom (228,400), India (126,800) and China (112,800) …

In June 2013, Australia’s population included 6.4 million migrants (28 per cent of the population). Over the past decade the number of people born overseas who are now living in Australia has increased by 1.7 million people …

People born in the United Kingdom remained the largest group of migrants with over 1.2 million calling Australia home, followed by those from New Zealand (608,800), China (427,600) and India (369,700).

[1] S. H. Roberts (1935) “History of the Contacts between the Orient and Australia” in I. Clunies Ross (ed.) Australia and the Far East: Diplomatic and Trade Relations, Sydney, Angus and Robertson and the Australian Institute of International Affairs, pp. 3-4.
[2] By the late 1850s, there were 42,000 Chinese in Victoria alone. Ibid., p. 6.
[3] Ibid., p. 7.
[4] Ibid., pp. 22-3.
[5] For a copy of the Act see It is important to note that the term “White Australia Policy” was never officially used.
[6] Edmund Barton (1901) Commonwealth Parliamentary Debates, 26 September, p.5233, cited in ABC Television (2001) “Episode 2 Transcript Rise and Fall of White Australia”, 100 Years: The Australian Story. <>
[7] Cited in ABC Television, “Episode 2”.
[8] Frederic Eggleston (1914) “Naval Policy and the Pacific Question”, Round Table, 9, in W. Macmahon Ball (1969) Australia and Japan: Documents and Readings in Australian History, Melbourne, Thomas Nelson, p. 14.
[9] Louis Esson (1908) “Japanese Imperialism”, The Lone Hand, Oct 1st, p.617ff, cited in ABC Television (2001) “Episode 5 Farewell Great and Powerful Friends”, 100 Years: The Australian Story. <>
[10] Cited in Kim Beazley (2010) “Nervous about Nippon”, Australian Literary Review, 3 February. <>.
[11] Alison Broinowski, (1992) The Yellow Lady: Australian Impressions of Asia, Melbourne, Oxford University Press, p. 11. Calwell maintained that he was not a racist and that his statement that “Two Wongs don’t make a White” had been misconstrued.
[12] Dyster and Meredith, Australia in the Global Economy, p. 210.
[13] Department of Immigration and Citizenship, “Abolition of the ‘White Australia’ Policy”, Immigration Fact Sheet No. 8. <>
[14] Paul Kelly (1997) “The Asian Imperative”, The Australian, 10 May.

Video Resources

White Australia Policy 1960s News

Immigration Nation: The White Australia Policy

100 Years the Australian Story: Rise and Fall of White Australia (this is a link to the first part - follow links for the rest of the documentary)

Dept of Immigration and Border Protection: Fact Sheet 8 – Abolition of the 'White Australia' Policy

End of the White Australia Policy

Australian Immigration Timeline 

Immigration Restriction Act 1901