The Impact of Foreign Operations and Foreign Ownership on Corporate Tax Avoidance in the Australian Dividend Imputation System

Abstract

This thesis investigates the impact of foreign operations and foreign ownership on corporate tax avoidance of listed Australian companies and large Australian companies owned by foreign multinational enterprises (MNEs) in the Australian dividend imputation system. With dividend imputation, listed Australian companies can ‘pass’ their corporate income tax to shareholders as a tax credit (franking credit) to offset shareholders’ personal tax liabilities. Therefore, listed Australian companies may not have strong incentives to engage in costly tax avoidance arrangements. However, only domestic income tax payments can be attached to dividends as franking credits, and only domestic shareholders can claim the franking credits received as tax offset. Thus, the corporate tax avoidance-reducing effect of dividend imputation may be undermined by foreign operations (which are subject to foreign taxes) and foreign ownership. Three empirical studies are carried out to investigate the corporate tax avoidance-reducing effect of the dividend imputation system in a comprehensive manner. The first study provides an overview of the impact of franked dividend distributions, foreign operations, and foreign ownership on corporate tax avoidance of listed Australian companies. It is found that companies distributing more franked dividends or having a lower proportion of foreign ownership engage in less corporate tax avoidance. No significant relationship between foreign operations and corporate tax avoidance is found, possibly due to listed Australian companies shifting foreign profits to Australia (inward profit shifting) in order to pay Australian income tax to frank their dividends. The second study focuses on the relationship between foreign operations and corporate tax avoidance. It examines if listed Australian companies with mainly domestic ownership but with foreign subsidiaries take advantage of the tax rate differentials across countries to reduce their worldwide tax liabilities. The results show that companies with subsidiaries in low-tax countries, or high-tax countries, or both, have similar worldwide tax liabilities compared to their counterparts without such subsidiaries. The findings provide further indirect evidence to support the ‘inward profit shifting’ conjecture. The third study focuses on the relationship between foreign ownership and corporate tax avoidance. It examines whether large foreign-owned Australian companies (FOACs) which are subsidiaries of foreign MNEs engage in intra-group transfer pricing and thin capitalisation to avoid Australian tax in comparison with domestic-owned listed Australian companies (DOLACs) which have little incentives to do so. The results show that FOACs use intra-group transfer pricing and pay high interest rates on intra-group debts to shift profits out of Australia to reduce their Australian tax liabilities, which are manifested in their lower gross profit margins and operating profit margins, higher interest expenses but not higher leverage ratios, as well as lower pre-tax profits and income tax expenses in comparison with DOLACs. The thesis contributes to the literature by documenting how foreign operations and foreign ownership shapes the tax avoidance behaviours of large companies in the Australian dividend imputation system. It also has significant policy implications for countries and organisations considering integrating corporate and shareholder taxes and formulating rules and regulations to tackle corporate tax avoidance.