New world of finance
When Tim Edgar's not listening to his daughter's piano practice at home in Western Ontario, he's making a study of how tax systems come to terms with the new world of finance.

He says there is no question cross-border companies not only use the new tricks of the finance markets to spread their eggs among many baskets, but they also use them to lower the tax bill in the country where they make their money.

Edgar says companies can play the markets to shift revenue seamlessly between all the places they do business, especially when he says there's "a silly international convention" that treats different arms of one company as though they're independent.

"We have this silly convention internationally that multinational corporations operate as separate units within different countries, and then transact among themselves, and the whole question is how do you allocate the income among those units, in governments, is just way behind in dealing with that problem," he says.

"Financial instruments are just one particular way that I can manipulate my income recognition, expense recognition in different countries. And the simple proposition is of course to stuff all the income in the low-rate countries and keep all the expenses in the high-tax-rate countries.

"Financial instruments are just a nice easy way to engage in that same game."

Tim Edgar says multinationals can stage-manage transactions to legitimise them, and at the same time, minimise tax.

"There's no question," Edgar says.

"I mean financial instruments are sort of the leading edge in capital income tax generally of both domestic tax avoidance problems and the cross-border tax avoidance problem, because it's the old song and dance about capital being so mobile and it's very easy to repackage cash flows in different categories."

Australia lags on tracking multinational cash
There are ways of dealing with this. In the United States and New Zealand, legislation exists to help authorities track the movement of cash around the financial markets.

But Australia is lagging behind.

Despite two sophisticated reports that represent eight years of work by Treasury and the Tax Office, we haven't acted on their proposals.

Tim Edgar says the proposals, both in December '93 and December '96, would allow Australia to catch up in the tax race if they were acted upon.

"I think without qualification that they are the most sophisticated and well thought out government proposals to deal with the tax treatment of financial instruments that I've ever seen," he says.

"Why they haven't been implemented or acted on, I just don't know."

Tim Edgar's frustration is all the sharper because he thinks the changes should be an easy sell for policy makers. He says everybody knows you can use market innovations to save on tax.

"It's not even contentious that tax avoidance is certainly problematic in this area, and in fact Merton Miller, from the University of Chicago, a Nobel Prize winning economist, has written extensively in this area, says that tax avoidance is in fact one of the driving forces underlying financial innovation," Edgar said.

"There are other good reasons non-tax-driven, but certainly tax avoidance is critical. So I never thought it would be a difficult sell. The politics of it mystify me."

So here's a new world of finance. Some theorists say it exists because of the desire to avoid tax. There are ways to keep tabs on it, but we're choosing not to, and all this in the full flush of a tax debate.

Experts question tax reform agenda
Tax advisor Tony Rumble is just one person asking why it's not on the agenda.

"If we have got wide-ranging reform proposals that have been worked on for many years, and which will bring us up to international speed, why isn't that part of that tax reform debate?" he says.

Rick Krever says the big tax issues such as the GST are pushing other reforms off the agenda.

He says the big issues have more chance of making the news and politicians find them easier to manipulate to serve their purposes.

The Howard Government is pushing for re-election with the sale of what remains of Telstra, a stop en route creating what the Prime Minister calls the greatest shareholding democracy in the world.

Tony Rumble says new tax measures on those financial instruments should not be beyond the comprehension of a nation of would-be shareholders. He says the argument that financial standards are too esoteric for public debate doesn't hold up.

"I think the classic example of a new product is in fact the product that was used by the government to sell Telstra," Rumble says.

"What you got when you bought Telstra was not the ordinary share, but you bought an instalment receipt. An instalment receipt is like a lay-by: you pay half now, collect all the dividends, and then pay the other half at maturity, at some period of time down the track.

...the over-emphasis on the GST is both misguided and not what the electorate should accept...

"Now if that instrument was tremendously successful for Telstra, you know, we had $10 billion of these securities on issue, then I think you can see that these products may be exotic in the way they're engineered, but can be presented in very simple fashions."

No-one suggests such reform is easy. It would cost business dearly, both in administration costs, and the tax bill itself.

But Tony Rumble's frustration stems not from the potential costs, but from the narrowness of the current debate where there is not even room for these reforms to be discussed.

"I would have thought that the over-emphasis on the GST virtually at the expense of any other possible tax reform, is both misguided and really not what the Australian electorate should accept," he said.

And another missing ingredient from this tax debate: how is the Tax Office feeling about the way the debate is heading?

Rumble says the ATO is frustrated, annoyed and concerned about the narrowness of the debate.

"The Tax Office sit there as the people who need to administer the laws once they're passed, and they throw their hands up and say 'This is not going to give any improvement to the tax laws," Rumble says.

"And I think that's one of the great missing ingredients in this tax debate."

Background Briefing's Co-ordinating Producer is Linda McGinness; Research by Vanessa Muir; with Technical Production by Greg Richardson and Judy Rapley. The Executive Producer is Kirsten Garrett.
If you would like to print this story a transcript of the whole program is available.

• Rick Krever's staff page at Deakin University