AS CLUMSY and debilitating as Facebook’s news feed ban has been – for thousands of businesses and community organisations – commentary so far is mostly missing the point. It's about The Money – specifically the amount of money being transfer-priced out of the Australian advertising economy by the Big Tech platforms.

The point should not be about Facebook, Google and other platforms’ reluctance to agree to pay for news content (especially as they can certainly afford it). The point is that the digital advertising market in Australia is not a fair and level playing field – for Australian companies.

The sticking point is that these multi-national tech giants are ‘transfer pricing’ billions each year out of the Australia economy – never to be seen again. While they pay a substantial amount of tax, at the same rates as Australian companies, it is not assessed on the genuine profits made out of the Australian market. Nope, only on what is deemed to be taxable in Australia.

The vast majority of earnings are ‘transfer-priced’ to another jurisdiction where the Big Techs access far lower tax regimes. This is money sucked out of the Australian advertising arena, forever. In fact, out of Australia, forever.

That is the real problem for Australia – and not simply for the Australian media landscape.

It is not just the tech giants doing this, although they are having the most obvious negative impacts on the publishing sector – and it’s debilitating their own digital media community here, whether they like to admit it or not.

Here’s how it works

Let’s use Google as an example, as they are close to three times the economic size of Facebook in Australia.

Google last year reportedly had an income of about $4.8 billion in Australia, mostly drawn from advertising. Its Australian operation, however, only recorded $1.24 billion in earnings – basically a sales agency fee of about 25 percent.

The rest ($3.56 billion) went offshore. The advertising is probably billed out of Singapore and tax on that income is paid there, where Google and certain other tech giants have a ‘cuzzy’ low tax deal with the government. 

That $3.56 billion, earned out of the Australian advertising economy, is gone forever to the Australian people.

If Australian media companies had earned that advertising revenue, it would be taxed by the Australian Government at 30 percent of profits. That money would also circulate and then recirculate through the Australian economy as a normal part of the publishing production cycle.

If profit was only 10 percent of that $4.8 billion, in Australia (and surely it’s more than that, given the very nature of these platforms; after all, the cost of sales is taken care of in Australia), it would be $480 million to be taxed. That’s about $144 million in profits tax. (But in such a case, the other 90 percent would have been spent in Australia anyway, get the picture?)

Yes, Google paid over $108 million in tax last year, but that included a $50.6 million agreed amount with the ATO  to cover ‘under-taxation’ from previous years.

According to a Sydney Morning Herald report last year, this was the result of the Federal Government’s Multinational Anti-Avoidance Legislation (MAAL), which came into effect on January 1, 2016, and the Diverted Profits Tax (DPT), which came into effect on July 1, 2017. From the introduction of these two pieces of legislation, tax bills have risen steadily for the multi-national digital platforms. 

So, on those numbers, and with profit only estimated at (say) 10 percent of income, right now Google is paying less than a third of what an Australian media organisation would be expected to pay.

Not a bad Visitor’s advantage.

Facebook earned nearly $674 million from local advertisers in the last financial year. It paid about $16.8 million in tax.

Facebook also uses a reselling and transfer-pricing structure – as do other multi-national entities such as Netflix, Spotify, Apple, Airbnb, Uber and even American Express – so that Facebook’s Australian revenue was booked at about $166 million, meaning the organisation could declare a local profit of $22.7 million … after that $16.8 million donation to the people of Australia.

The other $508 million has left the Australian economy … forever. 

Transfer pricing ‘imbalance’

These examples demonstrate why the Australian Government loves the Big Four Australian banks.

In recent years Australia has come to expect around $10 billion a year in profits taxes from the Big Four banks. On the banks’ numbers – bringing in a combined and ‘disappointing’ $17.4 billion in FY2020 profits across a difficult year (usually it is well into the mid-$20 billions) – four Googles would have earned about the same amount of revenue and paid just $230 million (or $400 million if you include the one-off $50.6 million back-tax agreement with the ATO as well).

Bit of a difference. On similar revenue, the Big Four banks paid $7.4 billion in tax while four Googles would have paid just the $0.4 billion.

Consider how much of a comparative advantage this structure gives the Big Tech platforms over local media, who cannot transfer-price, and you begin to understand the market cancer these magic wand transfer pricing arrangements present.  It’s not really fair to pick on Google and Facebook alone over this as there are plenty of other multi-national companies doing it – especially in the resources and financial services sectors.

That’s why the Australian Government did not like BHP trying to emulate the multi-national techs by setting up a ‘marketing office’ in Singapore several years ago, in order to buy resources from offshore, pay reduced tax on that in Singapore, and then sell it on to places like Japan. BHP felt the pressure and ‘did the right thing’ pretty smartly. Well, after losing the High Court case.

Tip over the rotten apple cart?

But the Big Techs have a profit generating global apple cart that they are very reluctant to see tipped over.

Google has done the sums and within its model it can afford to cut some multi-million dollar deals with Australian media companies, keep its reputation intact and still make a motza.

It will assist the Australian situation and keep its reputational presence intact in this market. Yes, even though it earlier threatened to pull certain services out of Australia too.

Facebook earns much less than half what Google does in Australia, so perhaps it has less wriggle room.

But the reaction to ‘turning off the news’ is now likely to see Facebook squirm. Recent moves to strike deals with Australian media companies seems to verify that.

This misstep probably won’t have much of an effect on them financially overall, even if the Australian market retreats from Facebook.

But accounting for reputational damage is never a precise ledger.

Sometimes, to save face, book profit doesn’t count. Especially when the books are kept in separate countries.

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BUSINESS ACUMEN’s special report on leadership, in edition 93, could not be more timely. Or more poignant. Or better described.

That is because this report comes from someone who has proven that great leadership can make lives better, overcome seemingly impossible situations – and save lives.

To look at leadership through such a prism, sadly, makes a stark and depressing contrast to leadership failures in other areas of Australian life at the moment – such as politics and at the top of our financial sector. 

After all, we have just recently lost another national leader, Malcolm Turnbull, in a bitter example of political infighting that the general public simply does not understand the need for, right now. That is because most Australians feel that leadership should be all about community interest, not-at-all about self interest.

The outcome of the back-stabbing and brawling that has seen the Prime Minister honour board read more like an MMA fight card – Rudd, Gillard, Rudd, Abbott, Turnbull, Morrison – for no appreciable gain for Australians in general, has sadly diminished public trust in the way the country’s political leaders conduct themselves. It is apparent that self interest (being elected to government, rather than governing) trumps public interest.

It is a malaise that certain sectors of business in Australia cannot feel self-righteous about either, given the revelations of the Royal Commission into banking and insurance. So many formerly feted and stratospherically-paid business leaders – many of them also having held esteemed advisory roles with government – have opted out of their once ‘stellar’ careers rather than face the ‘cruel pull’ of gravity that is the Royal Commission.

Even many of those who have avoided the ‘hot seat’ of the Royal Commission have seen their reputations as effective leaders crash and burn through the testimony of others – former customers and corporate whistleblowers – and with the critical evidence presented.

GREED IS NOT GOOD

As is quoted in Acumen’s 93rd edition’s Special Report on Leadership: “Success sometimes breeds cancerous ego and greed. Even good leaders can eventually fall prey to believing their own bulldust. If you look at successful businesses led by very good chief executives, who clearly are great leaders, ego, hubris and conceit nearly always creep in before a fall. They increasingly forget to credit the teams that enabled their success. This is when the rot creeps in. A cook is only as good as his last meal. Generally, when the ego takes over that’s when they drop the ball and fall.”

An accurate assessment, and one made by a still-today-highly-regarded Australian business leader who was making those comments based on decades of observation of his peers – and well before the Hayne Royal Commission came to town.

This is, in fact, is one of several perspicacious quotes drawn from the book Fly! Life Lessons from the Cockpit of QF32, written by Richard De Crespigny, the captain at the helm – or, more accurately, in the hot seat – when Qantas flight 32 suffered a catastrophic engine explosion over Singapore in November, 2010. The blast sprayed out shrapnel, oil and fuel that damaged the wing and fuselage, crippling the Airbus A380.

It was a ‘Black Swan’ incident that could, in all probability according to accident investigators, have ended the lives of all 469 people on board.  There was no walking away from being in that ‘hot seat’ in that moment for Richard De Crespigny. But as he recounts in his book, it was his many years of studying effective leaders and how they behaved in high-stress situations – rallying their teams to perform at their very best – that allowed those 469 people to all walk away.  

While Mr De Crespigny has already written a book about the incident (and near fatal accident) itself, named QF32, in this latest book he relates the many years of research he had conducted on leadership and human behaviour under stress that underpinned the result QF32’s crew achieved that day.

He has mapped out the neuroscience behind behaviour and leadership under extreme stress. He has interviewed and quotes a selection of his most admired and genuine leaders, including first-man-on-the-moon Neil Armstrong, NASA’s Apollo program flight director Gene Kranz, and the airline captain who performed ‘the Miracle on the Hudson’, Chesley ‘Sully’ Sullenberger who landed his stricken aircraft on the Hudson River, New York.

And, yes, he also draws life lessons from leadership methods of political and business ‘greats’ who have proven themselves time and again under duress as compassionate and empathetic – but strong – leaders.

If ever there was an Australian book that should be mandatory reading for Australian business and political leaders, Richard De Crespigny’s Fly! would be hard to beat. 

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THE ROYAL COMMISSION on banking and financial services ‘misconduct’ has thrown up many situations that – as the oft-used expression goes – took many people by surprise. Apparently even the bank and insurance company CEOS …

But nothing that has come forward in the Royal Commission has taken the average small or medium business owner faintly by surprise. Why? Because they have seen, heard or experienced it all – and worse. 

The surprise for Business Acumen – which has been hearing and charting stories of financial services misconduct for 15 years – is that some of the worst cases in which the banks have liquidated companies and ruined the asset bases for generations of families, have not rated a mention.

The fact is that those cases have rarely been charted beyond the direct circle of those involved – and most certainly have not been a common source of knowledge within the financial institution perpetrating such action.

Sure, financial advice being charged out to deceased clients is a headline, and tens of thousands of dollars may be at stake.

But certain other examples did not make the cut at the Royal Commission, even though they took people down for millions of dollars.

BUYING THE FARM

One example Business Acumen knows about involved a major bank forcing the sale, at the start of the GFC, of an innovative multi-product family farm which melded dairy cows with small crops and with aquaculture.

The farm was suddenly valued down by the bank-in-crisis from more than $5-6 million to about $3 million, triggering a cash panic and eventual liquidation sale. The sale barely covered the loans and the family was left farmless and virtually penniless – especially after legal fees generated by the family’s efforts to stop the liquidation and fight the bank’s high fees and penalty interest.

This farmer had been developing energy self-sufficiency through solar and bio-generation and also applying new robotic milking techniques to the dairy. The farmer was also well advanced in developing the property as an educational attraction for school children, already catering for regional primary and secondary schools.

The case was put up for consideration by the Royal Commission but was not accepted. The former farmer, who has struggled to make a living ever since and is now in his mid-70s, was told it did not fall within the current ‘scope’ of the commission.

Perhaps the most ironic thing about this case was that the farmer had previously enjoyed a successful career as a rural bank manager.  Even so, he could not anticipate the actions of the modern banking system – and the spurious delegation of management responsibility to decision makers far, far away.

WHAT WENT WRONG?

Someone who does understand the modern financial services system is securities investment firm Motely Fool Australia general manager Scott Phillips. In a recent lament on the way banking has gone in Australia, he wrote:

“There was once a time when your local bank manager was a pillar of the community. He – and it was always a ‘he’ – knew everyone, every business and every risk. He’d use that knowledge when it came to working out who to dole loans out to. And was almost always right.

“Then, of course, the real bean counters took over. With computers and algorithms ready to replace the nous of the locals. It was cheaper. Easier. More consistent.

“But, of course, with great power came great responsibility. Mistakes, when they were made, were larger and most costly – for the banks and their customers. Incentives, introduced to help the banks grow, induced some – many – to prioritise their own wallets at the expense of their customers’ pocketbooks.

“It's so much easier to design a system that hurts a lot of people than to have to do it, one customer at a time, from across the desk.”

He is right, of course, the banks were seeking efficiencies through technology and implementing new management systems already deployed in the US and Europe – efficiencies that should have made the big banks and their customers more money. But decision making was removed from the point of impact and fell into the realm of the ‘theoretical’.

So why, now, expect artificial intelligence (AI) to restore the bank-business-customer situation when banks are not even apparently using human intelligence?

“No, I don’t think most of it was intentional. But it was real,” Mr Phillips said. “And it was painful for those customers. The desk-jockey at headquarters could change a few words in the terms and conditions of an insurance policy … could influence the list of ‘approved investments’ for the bank’s financial planners, which had the effect of improving the bank’s bottom line at the customers’ expense. Or … could introduce monthly fees – it’s only a few bucks, after all – that most customers paid, rather than changing banks.

“But because there wasn’t a customer in sight, these changes didn’t feel so bad. And they boosted the bank’s profit and earned her a bonus. No-one really got hurt, right?”

Add to the fact that the banks were in abject panic at the start of the GFC and it got worse, not better, by 2012 when many more businesses’ cash reserves had been soaked up through meeting the demands of the banks for a re-balance of loan valuation ratios (LVRs)  and other urgent orders (not requests) to pay down loans.

GETTING REAL

The Royal Commission is a result of the banks pushing too many people too hard until it had a political impact. Few business leaders (even leadership teams at the big four banks) would not now agree that the Royal Commission was a necessity to help re-set the entire trust system.

But most business leaders outside the banks – especially those who have been on the receiving end one way or another – worry that the Royal Commission has had a more sensational consumer case bent than a more balanced look at the serious ramifications on SMEs and farmers.

Or, to put it another way, how bank profit extremism has decimated the family-led businesses and SMEs, across all industries, that underpin Australia’s economy.

They are the ones who lose private property when their businesses fall foul of the banks. They have never been able to get business loans from a bank without putting their family homes on the line.

They are the ones who generate new jobs more rapidly, yet hold on the longest before letting staff go. (What’s the biggest structural problem in our economy right now? Something to do with long-term  jobs?)

So while small business and farmers have seen some light at the end of the tunnel – mainly through the lobbying and publicity work of the Australian Small Business and Family Enterprise Ombudsman (and banks trying to head off looming financial consequences) – not much has happened so far regarding compensation for actions that have destroyed businesses and livelihoods in the past.

Changing the rules so that poor behaviour does not continue into the future is one thing. A much harder ‘thing’ is what to do about the damage already done and those who have been financially destroyed – and others who have died waiting for justice.

The fact that these things happened during the big banks’ succession of most profitable years on record must provide a starting point. Just because the banks have got that money does not mean it should remain theirs.

That’s right, some of that money simply has to go back to where it rightly and fairly belongs. And let’s not see this done through some complicated legal-led process that shells more out to ‘the legal industry’ than the very people affected.

Here’s one uncomfortably practical idea: Banks can start by paying back all the fees and penalty interest they charged on mortgage-backed business loans that fell behind schedule (we have witnessed cases of mortgage-secured loans in arrears being ratcheted up to 19 percent). Banks may argue that most of those businesses no longer exist – true – but the families who owned those homes certainly do.

Many small business people who lost homes in that frenetic GFC period today cannot even scrape together a deposit. Such recompense would change that whole dynamic – and SMEs would truly know the banks are serious about making good.

If banking decisions were, today, still made personally by local managers, they would do it. They would look you in the eye as they did so. And you could look them in the eye as you thanked them for setting things right.

How humanely intelligent.

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