Tax Competition and the Future Fund

Australia’s sovereign wealth fund, the Future Fund, does not pay tax, which would be pointless, but it is not too keen on paying foreign taxes either.  The Fund’s 2008-09 Annual Report shows five Cayman Islands subsidiaries.  As the report notes ‘the Fund seeks to maximise after tax returns and, where it is legitimate to use a structure which protects the claim to sovereign immunity, this path has been taken.’  The Australian government has been an enthusiastic participant in international efforts to crack-down on so-called ‘harmful’ tax competition, but is not averse to having its own proprietary trading operation take advantage of these opportunities.  To be clear, this is meant as a criticism of the government’s participation in such efforts and not the Future Fund.

The Fund saw a real rate of return of -5.7% (ex-Telstra), which is pretty poor compensation for the tax cuts forgone as a result of the Fund’s creation.  The Fund remains 41.1% invested in cash (ex-Telstra), down from 62.1% at the end of the previous financial year.  The government could have achieved a better return with less risk and at lower cost simply leaving the funds on deposit with the Reserve Bank.

posted on 30 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy

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