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Submission No. 184 Back to full list of submissions
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16 April 1999

 

The Secretary
Review of Business Taxation
Department of the Treasury
Parkes Place
Canberra ACT 2600

Dear Sir

Attached is James Hardie Industries Limited’s submission to the Review of Business Taxation Committee.

Our comments are focussed on the issues faced by Australian based multinational companies which have significant foreign earnings and a large Australian resident shareholder base.

We are concerned that some of the recommendations of the RBT will further disadvantage our Company and other Australian based multinationals in the international arena. Of major concern is the introduction of a deferred company tax and its impact on reported profits and dividends.

If we are to see the successful growth of Australian companies into offshore markets, then the introduction of a deferred company tax system would have a significant and adverse impact on those companies and their ability to grow.

As set out in our submission, a tax system which is simple, easy to comply with and is internationally competitive would enable companies like us to remain domiciled in Australia and yet compete successfully in offshore markets.

 

Yours sincerely

James Hardie Industries Limited

 

Phillip G Morley

Chief Financial Officer

JAMES HARDIE INDUSTRIES LIMITED

SUBMISSION ON A PLATFORM FOR
CONSULTATION ISSUED BY
REVIEW OF BUSINESS TAXATION COMMITTEE

Introduction

James Hardie Industries Limited ("James Hardie") welcomes the opportunity afforded to it to respond to the Review of Business Taxation’s ("RBT") second discussion paper, A Platform for Consultation.

We believe that we are in a unique position to make this submission, in light of the mission statement of the RBT, which is as follows:

"To consult on and recommend a sound, competitive and efficient business income tax system for Australia".

In analysing this mission statement, the RBT itself has acknowledged that "the goal of an effective business taxation system is to improve the international competitiveness of the economy in order to attract capital for investment and maximise the opportunities for job creation".

Why is James Hardie in a unique position to make this submission - because the current business taxation system has placed us at an international disadvantage. We are therefore deeply concerned with some of the recommendations of the RBT as we believe they may further disadvantage us and other Australian multinationals in the international arena. Of primary concern is the recommendation of a deferred company tax ("DCT"). We believe that there is little doubt that the introduction of such a regime would further erode James Hardie’s international competitiveness rather than enhancing it.

Accordingly, we have set out below some brief comments in relation to the proposal for the introduction of a DCT regime (as well as other matters) and trust that our comments will be taken into account by the RBT in finalising its report to the Government. We have attempted to concentrate only on the critical issues, as we are aware that the RBT is receiving numerous other submissions on this matter.

Deferred Company Tax

James Hardie is strongly opposed to the introduction of a DCT regime to achieve the reform of the imputation system. We believe that the commercial consequences of such a regime would be significant and adverse for the company and ultimately its shareholders.

 

Reduction in Reported Profits and Share Prices

The most critical impact of the DCT on James Hardie, will be that it will lead to a reduction in the reported profits of the company. This is acknowledged by the RBT, however, we are concerned that the actual effect will in fact be larger than that anticipated by the RBT. This is because the RBT has not fully comprehended the impact of DCT on the tax effected profits of the company.

This additional reduction in reported profits, will arise due to the existence of timing differences. This is because timing differences do not affect the calculation of the income tax expense recorded in the accounts in accordance with the Accounting Standards. We are therefore concerned that whilst the RBT acknowledges that there will be a reduction in the recorded profits, they have not comprehended the full extent of that reduction.

In our opinion, the reduction in our reported profits can only have one effect, that is a reduction in the level of dividends paid by the company. This reduction largely arises due to the incidence of tax on the company under a DCT rather than on the ultimate shareholder. We also can not escape from the conclusion that the reduction in our dividends will necessarily give rise to a reduction in our share price, at least relative to other domestic based companies.

We note that the RBT believes that the Australian market will likely appreciate this change and its effect on reported profits and that therefore, this should not have a significant impact. With respect, we agree that the market will appreciate the change, though the result will be a discount in the share price of those companies currently paying unfranked dividends.

Double Taxation of Foreign Sourced Profits at Corporate Level

The proposed DCT regime will also result in the double taxation of the foreign sourced profits of James Hardie at the corporate level. We find it difficult to believe that such double taxation can ever give rise to a significant improvement in the international competitiveness of the economy. In fact, all such proposals can do is further endanger our international competitiveness. Whilst we acknowledge that double taxation currently arises in the hands of the ultimate shareholders (on which we have commented further below), the critical point is that DCT will cause this double taxation to occur at the corporate level. This can only give rise to a further reduction in our reported profits and hence a reduction in our share price.

Cancellation of Tax Concessions Provided in the Legislation

We are also concerned that the DCT will apply to unfranked profits which arise due to income which has previously been subject to a specifically designated tax concession. In our case, a critical tax concession that will be impacted upon is the Research and Development ("R&D") tax concession. We do not believe that it is appropriate for a DCT to apply to such tax concessional income on the basis that such a tax can only discourage further investment in R&D. Therefore, if it is the intention of the Government to remove the R&D concession, then this is what should be done rather than introducing a DCT to achieve the same effect.

Impact on Non-resident Shareholders

Our other main concern in respect of the DCT, is the impact of the DCT on our non-resident shareholders. The reduction in our reported profits, is unlikely to be appreciated by our non-resident shareholders, who are even more likely to be led by our earnings per share than the Australian markets. In particular, we are concerned that the DCT places us at a disadvantage compared to other companies that have predominately domestic shareholders. This is because any DCT that arises is wholly creditable against a resident shareholder’s future tax liability whereas a non-resident is likely not to receive a foreign tax credit for any DCT paid. Whilst we acknowledge that the non-resident investor tax credit regime may go some ways towards addressing this concern, we note that it is only a partial solution and that a real significant cost will still arise for our non-resident shareholders.

Summary

In conclusion therefore, we believe that it would be most appropriate to maintain the current franking system with some modifications. These modifications may go so far as to include a resident dividend withholding tax ("RDWT"). We acknowledge that a RDWT will achieve the majority of the Government’s objectives, without giving rise to the significant adverse consequences of a DCT.

Status of Australia’s Current Double Tax Agreements ("DTA")

Whilst we acknowledge that it is outside the scope of the RBT to renegotiate the current DTA’s held by Australia, we believe that it is appropriate for the RBT to make recommendations as to the necessary changes required for the current DTA’s to ensure our international competitiveness.

This is particularly important given that Australia’s current DTA’s with our most significant trading partners are out of date. One major concern for James Hardie is the current DTA with the US, as a large portion of our activities are carried out in the US. Under that DTA, dividend withholding tax rates between the US and Australia are set at 15%. This is in addition to any state and federal taxes paid in the US. Accordingly, James Hardie is currently exposed to approximately a 49% tax rate on all profits earned in the US. This should be contrasted to most of our other major trading partners whose DTA’s with the US restrict dividend withholding rates to either nil or 5%. We recommend that the RBT consider this issue further.

Double Taxation of Offshore Income

Another major concern that we have previously raised is the effective double taxation of offshore income in the hands of Australian shareholders. This is of particular concern to James Hardie, as we derive a significant proportion of our profits offshore. As noted above, profits derived in the US are subject to 49% tax in the US. When these profits are repatriated to Australia, although they are exempt at the corporate level, they are exposed to 48.5% tax at the individual level. As noted above, the introduction of a DCT will bring forward 36% of this tax, which will be payable by the company.

We would submit that it is difficult to see how such a business taxation system can be seen to be sound, competitive and efficient. It is also difficult to see how such a system can allow James Hardie to be competitive in the international arena. Accordingly, we believe that it is critical that the RBT address this issue in further detail and consider ways to improve and not harm the international competitiveness of Australian businesses.

Summary

We trust that our comments are of assistance to the RBT in its mission of recommending a sound, competitive and efficient business income tax system for Australia. This can not be achieved unless the RBT considers the real-life situation of companies such as James Hardie who are operating in the global economy. All recommendations made by the RBT must be capable of being proved to further enhance such companies international competitiveness rather than further damaging it.