Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

I rise to speak on the government's Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. Transfer pricing in general terms occurs when two parties related or unrelated supply goods or services to each other and transfer profits from one to the other. The parties to the transaction may be domestic entities, or the transaction may occur between resident and non-resident entities. The transaction can also be between related parties or non-related parties. Of course, for taxation purposes, the main issue occurs when the transaction is between related parties and one of those parties is a nonresident.

For Australian taxation purposes, where only one party is a nonresident, Australian tax can be minimised through applying deductions to the Australian entity through the purchase of goods by the resident entity at an inflated price or through allocating income from the Australian resident through the sale of goods from the resident entity to the non-resident entities at a discounted price. Specifically, division 13 of part 3 of the Income Tax Assessment Act is designed to ensure that transactions between Australian residents and nonresidents are done at arm's length for taxation purposes. This counters such activities as the shifting of deductions to the Australian resident from the nonresident or income shifting from the Australian resident to the nonresident. This is done so that appropriate taxation can be captured within Australia.

Not only is division 13 of the Income Tax Assessment Act relevant but so too are our international tax treaties, which are incorporated into our domestic law through the International Tax Agreements Act 1953. These treaties are commonly referred to as double taxation agreements. Where there is conflict between division 13 and a treaty, the treaty takes priority. Of particular importance within these treaties are the provisions relating to associated enterprises. These are usually contained within article 9 and deal with profit-shifting. As I mentioned earlier, they mandate an arm's-length principle for international dealings between associated enterprises. The Australian Taxation Commissioner applies the provisions within division 13 of the 1936 tax act along with the associated enterprises article within the international tax treaty when making transfer-pricing adjustments. The outcome of these adjustments should be consistent. Division 13 and associated enterprises articles within tax treaties are both based on the arms-length principle. However, consideration must be given as to the precise wording of the treaty. If the operation of division 13 and the relevant section of the tax treaty are inconsistent, the international tax treaty provisions will apply unless the treaty itself gives precedence to domestic law.

In 2011 the full Federal Court cast doubt on this premise for transfer-pricing adjustments in the Commissioner of Taxation v SNF (Australia) Pty Ltd. Transfer-pricing rules exist to ensure that appropriate taxation is collected on the contribution of profits from Australian operations and also to ensure that profits are not shifted between related parties and across borders. For the benefit of context I will briefly go over the key points of this case. The taxpayer was in that case a wholly owned French subsidiary who was a distributor of chemicals acquired from a non-resident related party and who sold these goods in Australia. SNF used what is known as the comparable uncontrolled prices—CUP—basis for its transfer-pricing methodology. SNF provided evidence of sale transactions from comparable entities to the Commissioner of Taxation which showed that SNF paid less for its acquired stock than prices paid by comparable independent entities.

SNF also used OECD guidelines in explaining its comparability factors. The commissioner disagreed with SNF's transfer-pricing methodology and calculation, arguing that Australian transfer-pricing rules meant that SNF could only compare an arms-length transaction with transactions of other taxpayers who had the same characteristics as SNF, apart from its association with offshore related parties. Some examples of similar characteristics that the commissioner argued would provide a basis for comparison include the size of SNF within its market, the market strategy that SNF was employing, and SNF's loss position. The full Federal Court rejected the commissioner's approach and upheld SNF's position. The court also highlighted that the approach taken by the commissioner imposed unreasonably high benchmarks for comparison when using the transfer-pricing methodology. This was, in part, acknowledged by the commissioner in the commissioner's decision impact statement on this particular case.

The commissioner's impact statement notes that the court found that the OECD's transfer-pricing guidelines were not a legitimate aid to the construction of either division 13 or the associated enterprises articles of Australia's double tax treaties as domestically enacted. This case was argued only on the basis of division 13. The government now believes division 13 does not adequately reflect the contributions or profits from Australian operations to multinational groups. As such, the government claims there will be instances where treaty transfer-pricing rules may produce an unintended taxation outcome relative to the application of division 13.

In November last year the government announced a review of division 13 of the 1936 tax act and announced that it would legislate to clarify the transfer-pricing rules and tax treaties are valid transfer-pricing adjustments independent of the ITAA 1936. The bill currently before the House deals with these changes to legislation. The government's bill seeks to ensure that transfer-pricing articles contained in Australia's tax treaties are able to be applied and provide assessment authority independent of division 13. They are seeking to do this by creating express provisions within the Income Tax Assessment Act 1997. The government's bill also seeks to ensure that transfer-pricing rules are interpreted as consistently as possible with the relevant OECD guidelines. Finally, this bill seeks to clarify the interaction between transfer pricing and thin capitalisation rules, which have previously only been dealt with through administrative arrangements.

Of great significance to us on this side of the House is that the government is again, through this bill, raising the spectre of sovereign risk. This bill seeks to retrospectively amend transfer-pricing legislation following the outcome of the full Federal Court decision in the SNF (Australia) case. This change is proposed to apply retrospectively to 1 July 2004. The explanatory memorandum suggests a basis for starting on 1 July 2004 on this confusing argument:

The 2004 income year commenced immediately after the parliament's most recent amendment to the tax laws in 2003, which again evidenced the parliament's understanding that tax treaties could be used as a separate basis for making transfer-pricing arrangements.

In his second reading speech to the House, the minister stated:

A decision to change the law from a date before announcement is not taken lightly. It is generally only done, as in this case, where there is significant risk to revenue that is inconsistent with the parliament's intention.

This is curious rationalisation from a government that have only served to heighten sovereign risk perceptions. They have cast doubt on investor confidence on the Australian economy, having implemented a raft of decisions in taxation law with retrospective effect since coming into office only 4½ years ago. As recently as last year the government legislated a retrospective change dating back to 1990. They sought to clarify the taxing point and the way it is determined for the purposes of the petroleum resource rent tax. This was to pre-empt the outcome of a taxpayer appeal to the full Federal Court.

This government has a bad habit of bringing retrospective legislation to the House. This bad habit is damaging Australia's sovereign risk profile and damaging international investor confidence. The coalition has serious concerns regarding the government's justification for the retrospective application of this bill. The explanatory memorandum to this bill fails to quantify the impact on government revenue on the basis that this bill is a 'revenue protection measure'. The government has not provided any detail on the size of the retrospective tax impost. The government is asking for this parliament to pass legislation that will have a retrospective commencement date going back eight years. For the government to do so, I suggest, requires the government to make a compelling case for the need for the amendment. Indeed the unlimited power to make amendments provides another reason why it is incumbent on the government to make public any evidence it has that makes it so important for this House to pass a bill containing such a significant retrospective measure.

We are not convinced. During recent Senate estimates, responding to a question from the coalition about cases in dispute and the amount of revenue at stake that was being addressed by this egregiously retrospective bill, the Commissioner of Taxation said:

They involve substantial sums, but not greatly substantial in the context of the broader picture.

What the hell does that mean? Again I call on the government: can you justify publicly why you need to go back to 2004 to fix an issue that is 'not greatly substantial in the context of the broader picture' as the Commissioner for Taxation says? We will pursue this matter vigorously through the Senate Economics Legislation Committee inquiry into this bill. In the meantime the coalition will not accept the government's case. It has not been a strong case and certainly publicly it has not been made satisfactorily to justify such significant legislation as this, which is retrospective. The government's justification for such change within the explanatory memorandum to this bill was that:

Australia incorporates its tax treaties into municipal law through the International Tax Agreements Act 1953 (ITAA 1953). The Commissioner of Taxation (the Commissioner) has long held and publicly expressed a view that the treaty transfer pricing rules, as enacted, provide an alternate basis to Division 13 for transfer pricing adjustments.

Many stakeholders and professional groups do not agree with this statement in the explanatory memorandum. The Law Council and the Corporate Tax Association, among others, take issue with this statement. I wonder if the ministers know the true impact of the legislation that they are trying to steer through this place. This creates real sovereign risk—and the Commissioner of Taxation is of no help whatsoever in this process. The Taxation Committee of the Business Law Section of the Law Council of Australia stated in its submission on the exposure draft of this bill that 'the justification for retrospective operation of the amendment from 1 July 2004 was on a spurious basis'. They said:

The Committee rejects the suggestion that there has been any clear expression of Parliamentary intention that the associated enterprises articles of Australia’s double taxation agreements (DTAs) were to operate as an independent taxing power. Nor has Parliament previously indicated an intention to fundamentally alter the principles to be applied in interpreting the provisions of the DTAs conferring the taxing power.

They went on to say:

The Committee is concerned that paragraph 1.10 of the Draft EM seeks to justify the retrospective operation of the amendment from 1 July 2004 on a spurious basis.

The purported basis for electing this particular date is that Parliament spoke to this issue in 2003, and that the current amendment is a ‘clarification’ of prior intention. The Draft EM cites the International Tax Agreements Amendment Act 2003 (Cth) and its explanatory materials as Parliament’s most recent demonstration of its intention that DTAs provide alternative and independent transfer pricing liability provisions to those contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936).

The Committee strongly disagrees that the 2003 amendment or its explanatory materials gave any signal—explicitly or implicitly—that the transfer pricing rules would operate as suggested. Furthermore, no further attempt at ‘clarification’ has been made by Parliament in the eight years since this time despite the issue being questioned by the courts on a number of occasions.

That is a hugely important point. The parliament never sought to repair, change or clarify this piece of disputed bill in all that time, even though the matter had gone to the courts on a number of occasions. They went on to say:

For these reasons it is plainly inappropriate to select this date and, if the provisions remain retrospective, the Draft EM (particularly paragraphs 1.8 to 1.10) should be modified to make it clear to Parliament that this is the case.

This evidence seems to contradict the government's justification for the retrospective application of the bill: that it was the parliament's understanding that tax treaties could be used as a separate basis for making transfer pricing adjustments.

The coalition is opposed to retrospective tax changes as a matter of principle. People are entitled to proceed with the law as it stands. There have been exceptions. But under this situation the law has been clear since 2003, operating in an unfettered fashion even though invited by the courts. If it was done wrongly the previous coalition government is as guilty as the current government. I am not pretending otherwise. But it is going to create enhanced sovereign risk when sovereign risk is the most disputed and contentious issue in global financial markets at the moment.

The coalition understands that it can change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law as at the time the agreement was entered into. Retrospectivity can expose taxpayers to penalties in circumstances where taxpayers could not possibly have taken steps at the earlier time to mitigate the potential for penalties to be imposed. People believed they were complying with the law. It may change a taxpayer's tax profile, which in turn can materially impact the financial viability of investment decisions and the pricing of those decisions. Most importantly, the retrospective application of the change will heighten Australia's level of perceived sovereign risk.

In submissions in the consultation period for these proposed changes, various peak taxation and accounting bodies all expressed concern over the retrospective application of this proposed legislation. The Institute of Chartered Accountants of Australia in its submission to Treasury stated: 'The retrospective amendment to the law being proposed in the exposure draft legislation cannot be justified on either a policy or revenue integrity basis.' The Tax Institute's submission states that it 'has grave concerns as to the appropriateness of retrospective legislation to effect this announced change.' CPA Australia stated:

We reiterate our earlier view that no clear business case has been advanced to justify the retrospective application …

This is an inequitable outcome for taxpayers who may be potentially subject to audit for up to 7 years on matters which they may reasonably regard as having been finalised. The enactment of these retrospective changes may also damage the international reputation of Australia as a jurisdiction in which key foreign investors can invest and trade with certainty and confidence.

And these guys opposite wonder why there is a lack of business confidence in Australia and why there is a lack of consumer confidence in Australia! Here it is, before the House—retrospective legislation. People who believed, in good faith, that they were complying with the law as it stood now find that they are going to have back audits for seven years and back penalties, potentially, for seven years, and whatever transactions they entered into in good faith must now be unwound with potential back losses to the organisation.

Those opposite cannot understand why there is a negative sentiment out there in the commercial world, a negative sentiment that involved some five different versions of a mining tax and four different positions on a carbon tax—let alone what they are doing on the interest withholding tax. And there are a range of other measures from employee share buyback schemes—which they promised they would not touch and they completely muddled—right through to an overinvestment in an NBN with no business case. How is it that those opposite cannot understand how confused the Australian business community would be about their incompetence?

Now before this House we have retrospective tax legislation going back seven years, and we have a Commissioner of Taxation who, when asked about what the revenue implications are, just dismissed them as insubstantial. If they are not that substantial, why are we putting our reputation on the line for increased sovereign risk for international investors? Why would you do that? Since 1788 we have needed to import money into this country. The risk that is being posed by retrospective tax legislation is an even greater reason that people should be concerned about investing in Australia.

This mob opposite keep referring to a 'pipeline of investment'. Well I can tell you that a pipeline of investment can soon dry up in the wake of a government that creates uncertainty. It was Ivan Glasenberg who wrote the speech he made in London where he said that he could get greater sovereign certainty out of the Congo than he can get out of Australia—and he is one of the largest investors in Australia. The coalition did not write that speech. The coalition did not write the speech of Jac Nasser, the Chairman of BHP, or that of Marius Kloppers, the Chief Executive of BHP, when they flagged their intention to hold back on investment in Australia, citing the cost of doing business in Australia as one of the great challenges.

We did not write the press releases and press statements for Gerry Harvey, the head of Harvey Norman, or John Singleton or John Symond or the conga line of businesspeople out there who have been putting their reputations on the line to come out and warn about sovereign risk in Australia and the dangers of an incompetent government. We did not write those words; they are writing those words. If you want evidence of the very actions that cause these people to warn of the risks of doing business in Australia, look at what is before the parliament now—retrospective tax legislation, going back seven years.

A fundamental question is: how can taxpayers be expected to have complied with laws they did not know existed at the time but which they were supposedly expected to comply with? They were expected to comply with laws that did not exist. How is that fair? How is that stable? How is that inviting a confident and reliable stream of investment? This bill is the very evidence of why business and investors are so nervous about dealing with this government.

The changes contained within this bill will confirm that the transfer pricing rules contained in Australia’s tax treaties provide a power, through express incorporation into Australia’s domestic law, to make transfer pricing adjustments independently of division 13. The coalition further questions whether the government has consulted with any tax treaty partner countries. If so—and no-one has given us an answer—did those countries raise any concerns as to the perceived impacts that this will have on the negotiated tax agreement as well as any flow-on consequences to trade and investment? In the context of investment with the United States, in its submission on this bill, the American Chamber of Commerce said:

It is clear, therefore, that the US interprets the treaty as limiting its right to increase US taxation on an Australian-owned entity. It is our understanding that the US would expect Australia to interpret the Double Tax Agreement similarly. Based upon this, it is ill-founded for the Assistant Treasurer to allege that the amendments proposed are consistent with Australia's Double Tax Treaties, without including an exception for the United States.

Another anomaly arising from this bill is that it applies to countries that Australia has a tax treaty with, ignoring entities who are transacting with parties in tax havens such as the Cayman Islands. So this applies to the guys we have treaties with, but for anyone operating out of the Cayman Islands it is, 'You're fair game—go for it, guys.' Such taxpayers will be subject to transfer pricing under division 13 only, whereas taxpayers conducting business with an associated enterprise—say, in Japan, a treaty country—will be subject to potential adjustments under this bill and its wider powers. Does the government seriously believe this is good policy? The member for Chifley is about to stand up. Does he seriously believe this is good government where, if you operate out of a tax treaty country that in good faith negotiated a tax treaty with Australia, you are subjected to the pain associated with this but, if you are operating out of a tax haven, you do not have that same application and you are subject only to division 13? It is an unusual policy outcome, isn't it? We call on the government to explain this anomaly.

Then there is the issue raised by PricewaterhouseCoopers that would see taxpayers being tied up in complex discussions under the mutual agreements procedure in most treaties, which would be aimed at mitigating potential double taxation outcomes from the bill. As PwC said:

We acknowledge that the risk of double taxation is present under the existing provisions and that the ATO may contend that the MAP process has traditionally worked effectively … However, in our experience, the process can take years and there is no compulsion under Australia’s treaties for the competent authorities to reach agreement.

And so on. So the coalition will actively pursue the matters that I have raised in respect of this bill today through the Senate Economics Legislation Committee inquiry into the bill. In the meantime, the coalition believes the government has failed to make a strong enough public justification for retrospectivity in this bill. Therefore, I am foreshadowing that the coalition will seek to move an amendment to give only prospective effect to this bill. If our amendment is unsuccessful, the coalition will not support the passage of this retrospective legislation. Enough is enough. You cannot continue trashing Australia's safe haven sovereign risk reputation. Enough is enough.

Ed Husic (Chifley, Australian Labor Party) Share this | Link to this | Hansard source

There were a number of things in that contribution, but it basically boiled down to this: in the course of over 20 minutes, the greatest weight was placed on the issue of retrospectivity, and the other issue was—you would almost believe that this has been an alien concept—tackling business profit shifting or transfer pricing. The reality is that it is something that, in 1982, then Treasurer and later Prime Minister John Howard was trying to deal with. Governments have been dealing with the concept itself. On the international level, guidelines established by the OECD to deal with this issue have been present for many years. On top of that, there is the issue of retrospectivity. If those opposite were on this side of the House and there were a threat or an issue potentially affecting taxation revenue, they would be here basically lecturing us and saying that protecting government revenue is the most important thing and that every effort should be made to deal with it. What we have had is basically a railing against retrospectivity but not necessarily against the concept per se, because transfer pricing has been dealt with in one way, shape or form for decades.

I want to remark on something else. The shadow Treasurer referred to the American Chamber of Commerce in Australia. In fact, transfer pricing has attracted the attention of the Obama administration in the US as well, as far back as 2009. In particular, in my contribution on this issue I want to touch on a sector that I have a particular interest in, the tech sector, looking at transfer pricing amongst multinational technology companies. I refer to an article written by Julian Lee in the Sydney Morning Herald back in 2009, when the issue of the profits of, for example, companies such as Google and Yahoo was in the frame. For example, Google was billing out of Ireland; eBay was billing out of Switzerland; Yahoo's search marketing was billing out of Ireland, as was Facebook; and Microsoft was using an Irish subsidiary. The way in which they transfer price was attracting the attention of the US administration. In fact, US President Barack Obama was calling back in May of 2009 for an end to transfer pricing and had set a target as to when that would be dealt with. That was the US administration. The American Chamber of Commerce in Australia was quoted here today, but the US administration is taking this issue seriously.

The Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 is an important bill. Many would not appreciate that from reading the title of the bill, but it deals with an emerging reality potentially affecting revenues raised by governments here and the world over. It is not a new concept, as I have said, but acknowledging it and dealing with it becomes more important, particularly as the reach of the internet spreads, opening up business opportunity and acknowledging what almost seems to be the dissolution of borders as businesses are able to reach and operate across all corners of the globe. As the Assistant Treasurer indicated in his second reading speech, transfer pricing rules are critical to the integrity of the taxation system.

This bill will help ensure that the Australian operations of a multinational group pay their fair share of taxation, because trade within multinational groups is a big deal. In fact, in 2009 cross-border trade within multinational groups was valued as $270 billion. To put that into perspective, that is about half of Australia's total trade flows. Our transfer pricing rules govern the prices at which related entities—companies within large multinational groups, for example, in different countries—buy and sell the goods and services to each other. These rules aim to clamp down on profit shifting where, for example, artificially excessive fees are levied for services rendered between entities, ultimately aiding in the transfer of money from one company to another within a group but with the ambition to reduce tax liability within Australia. Last November, as has already been referenced, the government launched a review of our transfer pricing rules, indicating that we would move to end the uncertainty around whether or not transfer pricing rules contained in our tax treaties could apply independently of unilateral rules in division 13 of the Income Tax Assessment Act 1936. That is what this bill in part deals with. As the Assistant Treasurer told the House, the OECD work that covers this area reflects the best international thinking on transfer pricing and shaped pricing regimes across the world. Guidelines used across regimes and observed by multinational enterprises themselves also ensure there is a clear legal pathway to the use of the OECD guidance. While the issue of transfer pricing has been around for a while it has become more complex, particularly when you consider how it operates in the case of tech companies.

When you step back and look at the overall issue, you will see the online economy itself is 'the biggest regulatory challenge in a generation'. That was not my observation but the words of ACCC Chairman Rod Sims, made following the decision of the ACCC to investigate arrangements by local retailers to deter overseas counterparts or wholesalers selling the same goods online at cheaper prices. While I can certainly appreciate the motivation of local retailers engaging in this, the corrosive nature of this practice is designed to weaken competition and work against consumer interests. It also betrays a double standard insofar as retailers are preventing the consumer from doing what they do themselves—that is, search for a preferred supplier at a cost commercially attractive to the retailer. If local consumers feel they are being disadvantaged or being denied an advantage accessed by companies then that is going to draw ire and understandably so. It is this sentiment which propelled a case for an investigation into price discrimination as it affects the IT sector.

I wholeheartedly welcome Minister Conroy's decision to establish the pricing discrimination inquiry to be held by the House of Representatives Standing Committee on Infrastructure and Communications. I mention the committee's work because of its relevance to the legislation currently being considered by the House. In particular, the inquiry will look at pricing differentials as they exist and will also look at the pricing frameworks employed by major tech companies. I imagine through the inquiry it will be determined what impact transfer pricing has on the way these companies do business here in Australia. It is obvious that transfer pricing will be easier to identify in the pricing of physical product—in this case, hardware. But, with the transformative impact of technology, physical product morphs into something that is digital—in this case, software. Regulators and governments know that this intangible presents a massive challenge to global taxation regimes.

I was surprised when I witnessed a few weeks ago the emergence of an unlikely taxation advocate who argued that tech companies should be paying their way more. I am talking of course about the member for Wentworth—and I note his presence here today—who, in late May, demonstrated that not only is technology accelerating business processes but it is also helping speed up the pace of backflips. On Monday, 21 May he argued in the Financial Review that tech companies should be paying more tax. By Wednesday he was arguing that he was not arguing that. He said:

I am not proposing any specific change to the existing tax laws or flagging a shift in coalition policy.

By the time we advised that this bill on transfer pricing would be around to help, in part, buttress taxation revenues from the impact of pricing intangibles he had sniffed that that was not good enough, without spelling out what he would actually do, which I am surprised about because he has, in the past, been able to devise a range of alternative taxation measures. It got me thinking: what made the member for Wentworth rip open his shirt to reveal his inner taxation avenger? It is worth bearing in mind that his comments were in response to the claim that Google had paid $74,176 in tax on search engine and directory revenue, equating to around $1 billion. Google said it had paid $781,000 and their accounts, ending 31 December, suggested they had made a $3.9 million loss on revenue of $201 million. Again, on 21 May the member for Wentworth remarked:

Over time, the erosion of the tax base will become material. You’ve got X billion dollars of revenue . . . being earned by Google paying very little tax in Australia.

So Google was placed right in the frame by the member for Wentworth. For a company to be singled out like that, to be put in the public space like that, attracting the ire of the member for Wentworth would have raised eyebrows. But it certainly did not with me because I recall some pretty sharp comments he directed towards Google back in September last year where he said:

Let me tell you who the conspirators are. They are the vendors, who want to sell lots of kit for the NBN. They’ll tell you privately they think it’s bonkers, but they want to sell the kit. There are the over-the-top people like Google and Yahoo and media companies …

He went on to say:

Google has got a massive interest in building these networks and that’s why they’re a supporter of the NBN … If I was to build a 10-lane freeway all around my country and only allowed the trucking companies to use it. Then all the trucking operators would say to me, Malcolm, you are a visionary.

What was their crime to make the member so animated? Google had the temerity to commission firms to establish the value of the internet to the Australian economy and community. They pointed out the bleeding obvious that investment in the NBN would ramp up the value of the net to the economy—outrageous. For the record and from my own perspective I have found Google's commissioned research, conducted by Deloitte Access Economics and Boston Consulting, to be valuable. They are doing the right thing advancing the interests of their sector—one that is vital to our future economic prospects. It is worth pointing out to decision-makers and the general public the relative worth of other sectors drawing attention to themselves, such as mining. By the way, while the member did not acknowledge the ICT sector's value, he was effusive about the mining sector. In May 2010, he said:

I could recite a longer list of statistics on the importance of the industry, but suffice it to say the resources sector is of absolutely vital importance to our economic security. And any major changes to the way in which it is taxed need to be examined and considered with that in mind.

So two years ago we needed to exercise due care when taxing a valuable sector of the economy but now that has gone out the window. After reading the spirited defence of the mining sector, I had the gall to suggest that maybe we could stand up for a sector that is doing a great deal for Australia and not undermine the work of the sector in rightly promoting its own benefit because we are seeing terrific investment by that sector in Australia.

I had the pleasure last week of attending the opening of the HP Aurora data centre at Eastern Creek, a $200 million investment in the region and in our nation's ICT future, an investment that will facilitate the growth of cloud computing. That builds on investments by another firm, Macquarie Telecom, a local trailblazer which invested in its own data centre in Sydney and is a passionate advocate of cloud computing which is set within months to open another centre. These developments will help the construction and strengthening of our digital economy. It is the government's aim that by 2020 our country will be among the world's leading digital economies. Speaking favourably about the sector's value in Australia does not mean I am not interested in exploring ways of ensuring that the tech sector pays its fair share of tax and that is what this legislation is aiming to do. I would actually argue that it is in their own interests too. For example, I do not think it is right that you operate a firm within the sector, be concerned about, for instance, skills shortages, expect government to play a part in addressing these shortages and then argue against moves to ensure the sector is paying its fair share of taxation. It is fair to point out that you cannot champion the phenomenally important investment in renewing this nation's broadband infrastructure and then rail against moves to protect our revenue base that will, among other things, help fund this investment.

Government action that will in part address issues adversely affecting business operations and provide a beneficial operating environment obviously need to be funded. General revenue is absolutely critical, which is why this legislation of itself is critical. As much as transfer pricing will deal in part with some of these issues that emerge as a result of the internet opening up trade across borders, the other thing that will obviously need to occur in time is for the OECD to take a greater role in necessarily advancing or reviewing and further examining this area. As I indicated earlier in this contribution, there is interest within the US to deal with the issue of transfer pricing but particularly the way in which multinational companies are operating such that they would be perceived to not necessarily be paying their fair share in taxation.

As much as it has been around for many years, the area itself is exceptionally complex, but that does not necessarily mean it is something we can give up on. As the ACCC said, as much as this presents the biggest regulatory challenge of a generation, it is still something that will gain increasing interest as the years progress.

Malcolm Turnbull (Wentworth, Liberal Party, Shadow Minister for Communications and Broadband) Share this | Link to this | Hansard source

As the House knows, the opposition opposes this bill, the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, on the basis that it is retrospective. I could not improve on nor add to the powerful arguments advanced by the shadow Treasurer on that score, although I endorse and adopt all of them. I want to turn to some matters that the member for Chifley touched on, including the question of transfer pricing in the digital age. Regrettably, this bill, whatever its merits, even having regard to its prospective merits, really does nothing about the critical problems faced in Australia and in many other countries as a consequence of globalisation of commerce and the way in which so many transactions nowadays are occurring in the cloud, the internet, in a way that, perfectly legitimately and without a hint of evasion or skulduggery or anything of that kind, is beyond the reach of the laws, including this law, for transfer-pricing arrangements that we have.

A few years ago the OECD said in its report on transfer pricing—it is an apposite point:

Not long ago, transfer pricing was a subject for tax administrators and one or two other specialists. But recently, politicians, economists and businesspeople, as well as NGOs, have been waking up to the importance of who pays tax on what in international business transactions—

with more than 60 per cent of world trade taking place within multinational enterprises. The transfer-pricing regimes, globally and certainly within Australia, depend really on two possible circumstances. One is the multinational company having a subsidiary in Australia or having what is called a permanent establishment. The vice of transfer pricing that legislation has sought to address is the circumstance where the multinational, no doubt from a tax haven, is selling its products to its local subsidiary in Australia at a very high price so that there is very little profit made in Australia, perhaps just enough to pay the overheads here, and such profit is racked up in the tax haven.

Of course, a similar arrangement can take place. You do not need to have a subsidiary corporation here; you could have a permanent establishment and, if that permanent establishment has under the tax treaties an effective connection with the transactions in Australia, similar principles can be brought to bear. The principle, of course, which is easy to state but very hard to define and assess is the arms-length principle. What is the arms-length price? There are plenty of simple examples one can imagine. If a subsidiary in Hong Kong is selling aluminium ingots to its associate in Australia at a price that is above the LME price, then obviously the ATO will say it is over the odds and look to apply the transfer-pricing rules. But none of this is really relevant to the transfer-pricing issue, or the issue that we are dealing with at the moment, which is not, strictly speaking, a transfer-pricing issue at all.

The honourable member for Chifley mentioned Google and he suggested that I had been unfair to Google. Far be it from me to take on such a leviathan, but the fact remains that Google, a great multinational company and a very innovative one indeed which the government often quotes in its support for the NBN, pays virtually no tax in Australia. The Australian division of Google recently released accounts showing that in 2011 it paid $74,000 in tax. It is widely estimated to be generating somewhere between $1½ billion and $2 billion of revenue out of this market. And, if you look at its global accounts, it is a very, very high-margin business. There are literally hundreds and hundreds of millions of dollars of profit being accrued by Google on those sales in Australia, but there is no tax being paid in this country. There are some cynical souls, such as me, who just make the observation that it is all very well for Google, paying $74,000 of tax in Australia, to be encouraging the Australian taxpayer to spend $50 billion on an NBN, of which Google will be an enormous beneficiary, but it is not contributing anything to the tax base here to enable that investment to be made. Google would be more credible if it actually put its money where its mouth was.

I am not suggesting that Google is breaking the law—far from it. But the fact is that what Google is able to do, and this applies to many other companies in the digital realm, is to sell advertising to Australians online from an entity—until very recently it was an entity located in Ireland which, I might say, was generating well over €11 billion of revenue out of Ireland, just in that entity alone; obviously, that plainly was not coming out of the Irish market. And it can transact directly with customers in Australia, from Ireland, over the web. It arranges its affairs so that its business in Australia, its permanent establishment in Australia, has no effective connection with that transaction and, therefore, there is no basis for the transfer-pricing rules to apply. Of course the same thing can be said about Amazon. You go onto the web, you order some books or whatever you want from Amazon or another online vendor, and again there is no local connection.

What we are seeing is a very substantial diminution in and erosion of the Australian tax base. You can say, 'Taxes are bad; nobody should pay tax; we are all in favour of no taxes.' But, at the end of the day, somebody has to pay for the schools and the hospitals and the Army—the defence minister was here a moment ago—and the more that commerce is taken out of Australia and into the internet cloud, the less revenue is available in this country and the heavier the burden that has to be carried by those entities that cannot avoid paying tax in Australia.

This is a very big challenge. I have raised this not in the sense of having an instant solution to it, because there is no instant solution. This is a problem that the United States faces. There are large multinational technology companies which have literally tens of billions of dollars of retained earnings stashed up in tax havens, or low-tax jurisdictions, around the world, which they do not want to repatriate to the United States because they would have to pay tax in the US, and they have had the chutzpah to go to the US Congress and say, 'If you give us a tax break we will bring the money back into the country.' So you can imagine how affronted the US legislators are.

This is a very big issue. Senator Conroy, when I raised this, gave his usual flip, instant response and said that this legislation would deal with it. This legislation has got nothing to do with it. I wish it did. It does not. It is not pertinent. The transfer-pricing arrangements that we have, and other developed countries, other OECD countries, have, are really inadequate to deal with the globalisation of commerce. I just raise that as a very important matter for the House.

There is one way, of course, that it can be addressed, to some extent, and that is through levying a VAT or, in Australia, a goods and services tax—a GST. There is no restriction on the jurisdiction whereby the Australian government could levy GST on these internet transactions if they result in a sale to an Australian customer, and the international online businesses have the perfect capacity to do that. In fact, if you go onto an online retailing site and order some goods and you nominate an address in Australia, you will see a price for the goods and a price for the freight and the total. If you then were to nominate an address in a state of the United States—take New York—you would then have a price for the goods, a price for freight, and some New York taxes. So it is perfectly feasible for them to collect GST for Australia.

This matter has been raised in the past by Australian retailers on the basis that the fact that these transactions are not paying GST exposes them to a competitive disadvantage. I suppose it does, though I think it is literally a rounding error in terms of the disadvantage that they face. But it is a very significant factor in terms of the erosion of our tax base.

The point I want to make to the House tonight and to honourable members is that we have to take this issue seriously because there is a tendency to ignore these issues until it is too late, and to be a little bit like the frog in the kettle that does not realise he is in trouble until the water is boiling and he is dead. This issue is growing on us and we have to address the challenges of the erosion of the tax base.

It is a huge issue within the United States, because they do not have a national goods and services tax; the various states and cities have different sales taxes and, of course, companies like Amazon are able to locate themselves in a way that effectively forum-shops and can, in a very material way, pull retail activity, retail sales, out of one jurisdiction into another and deprive not only the local retailers of that business but the community of the tax revenues that they need to pay for all of their services.

So, with respect to the member for Chifley: like him, I admire Google; nonetheless, I think that everybody should pay their tax. There is a real issue. This is not—

Mr Husic interjecting—

The honourable member mentions the miners. I am really glad he did that. I will tell you, in the few minutes left to me, about the counsel of despair. This is what the weak-minded and the gutless will do: put the taxation of international transactions into the too-hard basket and simply focus taxation on immovable property such as resources and real estate. Before too long you will have a Labor government wanting to have a national land tax so residential householders would have to pay tax.

The honourable member opposite me here, the member for Oxley, shakes his head. He is very wise to shake his head. But I say to my honourable friend across the table that that is where you end up if you are not prepared to recognise that the nature of commerce is changing and that taxation and regulation has to change in line with it. Otherwise you end up with a situation where your tax base narrows to only those assets and activities that cannot move. They are real estate, resources and PAYE taxpayers. That is too narrow a tax base. This is a big challenge for this government. It has not addressed it. Instead of pretending that this law deals with the matter, they should come up with some responsible answers that deal with this very significant erosion of Australia's tax base.

Bernie Ripoll (Oxley, Australian Labor Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

We are almost in fierce agreement across the chamber—almost. Certainly on a lot of matters there is a fair bit of agreement, such as wanting things like a fair taxation system; international companies and transfer pricing to interact in a proper way with the integrity of our tax system; a tax system that works effectively when people are paying tax; a wider taxation base; and ways to deal with the challenges that this and other countries face in terms of how international multinational organisations—such as Google and those that interact over the web—actually pay a fair share of their tax in Australia. So I would say that on all those matters there is a fair bit of agreement.

It was great listening to the member for Wentworth. He raises some really good issues. It was certainly more interesting than listening to the member for North Sydney. But, unfortunately, the issues that the member for Wentworth raised had very little or nothing to do with the bill that is before us, the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. If the opposition were genuine about the matters raised in their contribution, they would accept that this bill actually takes us in that right direction. It actually does make clear the intent of this parliament for many a decade and ensures the integrity of our taxation system.

A number of other issues were raised. The member for Wentworth said that there was no instant solution. I would probably agree with him. He is right. There is no instant solution. There ought to be a broader debate in this place about what we do to make sure that we have proper transfer pricing arrangements for organisations such as Google and others and that they pay a fair share of tax. But this is no reason to oppose, as the opposition is doing, the cross-border transfer pricing bill that we have before us. If in fact the only reason, as they say, for not supporting this bill is that it is retrospective, it is a fairly weak and shallow argument. It does not go to the core of what this bill will do when passed by the parliament.

Transfer pricing rules are an integral part of our tax system. This bill will make sure that is the case. When we look at what transfer pricing represents in terms of the Australian taxation system—as we have heard, it is valued at around $270 billion, around half of Australia's total trade flows—we see that it is important that we get this right. The government in November of last year announced that it would reform Australia's transfer pricing rules and that it would move to end the uncertainty that existed around whether or not the transfer pricing rules contained in our tax treaties could actually apply independently of the rules in division 13 of the Income Tax Assessment Act. That is exactly what this bill does. That on its own is worthy of support from the opposition. I find it strange and odd that clarifying a very important part of the integrity of our taxation system cannot possibly find support from the opposition. I find that very odd and very strange indeed.

These changes are extremely important and have been necessary for some time. They go back a long way. As we have heard from other speakers, there is a clear legislative intent by this parliament of how the law should be operating in this particular manner. This bill makes that clear. From time to time that necessity arises. When it does, this parliament—I believe as a whole—should be supporting that.

This bill will ensure that the integrity of our tax system is not compromised by leaving some doubt as to how the system actually operates. What we are doing is absolutely consistent. It is consistent with what are internationally accepted as transfer pricing rules. In the absence of any other further contribution from the opposition, if they want to make a contribution in this area, they should support what we are doing. Again, the government is clarifying the operation of the law.

The government has not come to this view on its own. This is not something that we have done without being mindful of a range of different views. It is certainly something that we have taken as an important step in formulating this amendment bill. In fact, Australia's current unilateral transfer pricing rules were first introduced in 1982 in the form of division 13, so they date back a long way. In fact, the explanatory memorandum circulated by the former Prime Minister and then Treasurer John Howard explained even back then that specific amendments would operate that way. That is consistent with what is being done today to clarify. The government has been absolutely clear in its intent. It is contained in the explanatory memorandum, which sets out multiple examples of parliaments where this is the case. The tax office has been abundantly clear on how this should work and on its intent. Even major accounting firms have supported this as well.

This has been a matter, across different parliaments of different political persuasions, which has always had clear bipartisan support. It is interesting that something has changed now, which means that there is no longer support from the opposition. It begs the question: what has changed? I certainly do not believe that the change is to the integrity of systems of taxation in this county; perhaps the change is to the integrity of the opposition. Perhaps it is that the political imperative now has a higher priority than the national interest. I find that curious and strange in this particular case, as well.

Certainly this amendment is entirely consistent with the commissioner's long-held and publicly expressed view of the current law. We need to be absolutely clear that these amendments constitute a mere confirmation of what the rules are, to the extent that there is any uncertainty. I think this is something that the opposition should support. If their only basis for not supporting this is some view about retrospectivity in terms of how the law applies then I think they should have a closer look at what the intent is—the clarification—and what this means in terms of Australia's taxation system.

This is a good, sound amendment. It is an amendment that, if the parliament were constructed in a different manner, would perhaps have the support of the opposition. Perhaps in this case there is a different political imperative for the opposition. It is not a case of whether it is good policy or bad policy but whether it suits their agenda. I commend the bill to the House. I commend the minister for bringing these amendments forward. The House should support this bill as presented.

Scott Buchholz (Wright, Liberal Party) Share this | Link to this | Hansard source

I rise to associate myself with the comments of the shadow Treasurer and the member for Wentworth on their support for the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. As with all tax law amendment bills that this government has tabled, this bill is one which the coalition will scrutinise for its intentions and for its consequences for businesses here in Australia.

This bill will seek to provide consequential amendments to the Income Tax Assessment Act 1936 and the Income Tax (Transitional Provisions) Act 1997. The government seeks to legislate to clarify the transfer pricing rules after a decision in the Federal Court in 2011. The Commissioner of Taxation's understanding and application of treaty rules for transfer pricing adjustments was challenged in this case.

Even though this piece of legislation seeks to clarify the transfer pricing rules in tax treaties, there is always a sting in the tail with this government when it comes to taxing business in Australia. Although it has been stated by the government that no impact will result to the budget with the passing of this bill, it is hard to believe that a taxing windfall for the government has not already been apportioned to the recently tabled budget.

So let me revisit that. Here we have a comment from the so-called experts in Treasury. The Prime Minister in this House on many occasions has referred to the expert advice that we get from Treasury. We do not have to look too far back to find expert advice from Treasury in terms of its forecasts of this year's enormous deficit. In protecting the $1.5 billion surplus as we move forward, we see that this will have no impact on our budget! But why is it that the retrospectivity of this bill is so important that we have to go back to 2004 or 2006 and start taxing these bodies? It will be a liability that will be brought about by this bill.

As an opposition we fundamentally oppose retrospectivity. It is the right of any business in this nation to do business, pay their tax bills in good faith and know that when they start trading in the next financial period they start with a clean slate. This bills refers to liability. It is a contingent liability and maybe those businesses have been applying for it. The Treasury is saying that this will have no impact on budget revenue but that can only mean one thing: that the tax office has already accumulated the contingent liability and brought it into their forward estimates to be expended and received in this financial year to help save a wafer-thin surplus.

I refer to the retrospectivity of this bill, which goes back to 1 July 2004. The coalition opposes retrospective taxation in principle, and opposes the retrospectivity of this bill. The coalition will seek to amend this bill to give prospective effect to the bill, because that is fundamentally what we believe in. We reckon that if you pay your tax when it is due then that should be that—it is imperative to the security and sovereign risk of our nation. The government should not be able to go back and have another crack.

If the opposition amendment is unsuccessful we will oppose the bill. You would have contemplated the fact, Deputy Speaker Adams, that over the last eight years business taxpayers have operated on the existing tax laws of the day. In the current global economic uncertainty, business should not have to forecast or mitigate the financial imposts that expose them to penalties and retrospective charges from 1 July 2004. We are in a pretty difficult time from a manufacturing perspective, a tourism perspective and a construction perspective. Yet, with our two-speed economy, our mining sector is going gang busters and we do have a lot of things as a nation that we could celebrate. But, with the current global financial crisis and the lack of market confidence that exists, not only in this nation but also across a lot of our European partners who are suffering at the moment, you do not have to go too far—pick up any of the local papers—to know that jobs are at risk. Fairfax is putting off 1,900 staff, Macquarie Bank put off a heap the other day and Qantas are making announcements to that effect. The top end of town is doing it tough. Not all, but some, of those companies may be picked up in these retrospective clauses.

Perhaps it is a position that this government, in its attempt to deliver a surplus next year, does not understand. Perhaps they do not understand what this new measure will do to foreign investment prospects for this nation—that changing a taxpayer's tax profile and obligations retrospectively may impact and result in financial and investment decisions being compromised or, worse, abandoned in Australia.

At the end of the day we thrive, we rely, as a nation on foreign investment. That is how we have managed to maintain the quality of life that we have. It is fundamentally underpinned by foreign investment. This government, as we all probably well know, the other day—with no announcement or lead-in time—doubled the foreign investment trust tax bracket from seven per cent to 15 per cent. Admittedly, under the Howard regime, it was 30 per cent. But, when we started to drop that foreign investment trust tax bracket, we gave the market notice. This government did not. Foreign investment companies, making conscious decisions as to where they are going to park their funds—bang!—woke up on Tuesday morning to hear the government saying, 'Righto, your foreign investment trust tax bracket has been raised from seven per cent to 15 per cent, and you may even be up for a tax bill that goes as far back as 2004.' That is something that I do not think we as a nation can afford if any more of the industry and manufacturing sectors suffer further financial pressures within this country and from abroad. You can imagine some of Australia's largest companies getting a penalty notice adjusting tax obligations covering the last eight years. The figure could run into the hundreds of millions of dollars.

When will this government learn that we cannot tax this nation into prosperity? I think we are now up to nearly 30 new taxes. We need to create a fiscal environment where we have businesses making profits, because, when they make profits, they pay taxes. I believe these measures in this bill are solely for the purpose of trying to secure and protect the wafer-thin surplus that this government so critically needs to hang on to political credibility.

The transfer pricing rules exist to ensure that taxation is collected on the contribution of profits from Australian operations to multinational companies and to ensure that profits are not shifted between related parties across borders without appropriate taxation. I actually support that in principle. It is not in our nation's interest to have businesses making genuine profits from the resources, banking or financial sector here in Australia and then, through complex international holding bodies that they may have offshore, being able to offset expenditure to reduce their tax liability in Australia. I support in principle that we as a nation are duty bound to secure tax that is generated here in this country for the benefit of our nation. But, as a coalitionist, I cannot support the retrospectivity of this bill—going back nearly eight years.

Transfer pricing rules are contained within division 13 of the Income Tax Assessment Act 1936. Australia has also incorporated international tax treaties into Australian law. During the Federal Court case in 2011, the Commissioner of Taxation considered these treaty transfer pricing rules contained in treaties as an alternative basis for transfer pricing adjustments in parallel with the relevant provisions of the Income Tax Assessment Act 1936. In 2011 the full Federal Court cast doubt on the second basis for transfer pricing adjustments, in Commissioner for Taxation v SNF (Australia) Pty Ltd. While this case was argued only on the basis of division 13, the government believes that, as a result of this case, division 13 does not always adequately reflect the contributions of profits from Australian operations to multinational groups and, as such, in some cases treaty transfer pricing rules may produce a higher level of taxation.

Whilst that may well be so, to retrospectively assess the tax liability through a change in playing field is hardly conducive to strengthening businesses positioning in global markets or the contribution they make to the employment of Australians and the tax they already contribute. The government has already stated during Senate estimates that it has no idea of the size of the retrospective tax impost and that it has no impact on the budget, but I beg to differ—of course they know. They will have brought it into account to assist in backing up their surplus claims for next year. Again I make the point that the government continually claims that we get expert advice from the taxation department and the Treasury, yet it beggars belief that in this particular case—with a court case that has been going since 2004, and hearings that went down in 2011—that we have no idea of the size of the retrospective tax impost it is going to have on business. I suggest that they do know because, I tell you what, the businesses who are lining up to pay that tax liability know to the very cent how much they are going to be in for. I suspect that the government have already made provision for that, to protect their wafer-thin surplus. The coalition will not support an amendment that forces on taxpayers retrospective obligations that did not exist one year ago, let alone eight years ago.

I do not believe for one moment that this government has given any thought to the perceived increase in the sovereign risk of this nation. That argument was quite diligently laid out earlier on by the shadow Treasurer in his opening remarks, in which he spoke extensively about the sovereign risk issues. Sovereign risk is one of the most critical measures of our position in global economics and the harm caused due to uncertainty to ongoing developments and investments in Australia.

Certainty and confidence in the business marketplace are already at lows that we have not seen for years, outside of our resources sector, where we have a one in 140-year spike in capital investment. But when you take that sector out and you look at our manufacturing sector—for example, our car manufacturers and some of our financiers—it will be affected by this bill. Transfer-pricing arrangements in this bill do not adequately address the real issues facing the nation at the moment. The member for Wentworth spoke briefly about the impact of Amazon and Google trading substantial amounts of money and business through Australia and paying relatively low amounts of tax to the nation.

The coalition will oppose the retrospective taxation in principle. The coalition will seek to amend the bill to give prospective effect to the bill. If the coalition amendment is unsuccessful then we will oppose this bill.

Bert Van Manen (Forde, Liberal Party) Share this | Link to this | Hansard source

Once again we stand here in this chamber to discuss a piece of legislation that sees the government changing the playing field for corporates and business in this country at the very time when business confidence is at very low levels and business certainty about the direction this government is taking the country in is at heightened levels. While we might have a robust economy in certain sectors, in my electorate of Forde and in the greater area of South-East Queensland the economy is not that great.

Tonight we are discussing the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. This bill comes out of the 2011 full Federal Court case which cast doubt on the second basis for transfer-pricing adjustments, the Commissioner for Taxation v SNF Australia Pty Ltd. While this case was argued only on the basis of division 13 of the tax act, the government believes that as a result of this case division 13 does not always adequately reflect the contributions of profits from Australian operations to multinational groups and as such, in some cases, treaty transfer pricing rules may produce a high level of taxation. I have no issue with that. I fully support the notion that our multinational corporations and international groups that operate in this country should pay their fair share of taxation.

On 1 November 2011 the government announced a review into the relevant division of the Income Tax Assessment Act 1936 and said it would legislate to clarify that the transfer-pricing rules in tax treaties are valid transfer-pricing adjustments independent of the Income Tax Assessment Act. The fly in the ointment for this bill is the fact that this change is retrospective from 1 July 2004. How on earth can our large companies, our multinationals, operate in an environment where the tax structure of the country is uncertain by virtue of the fact that the government decide to change tax laws—which is fine; they are well within their rights to do that—but then make it retrospective? In this case, it is for up to eight years.

This is essentially a large retrospective tax change and, as a matter of principle, we will oppose this bill in its current form for a number of reasons. Firstly, the proposed changes can change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law as at the time the agreement was entered into. They can expose taxpayers to penalties in circumstances where taxpayers could not possibly have taken steps at the earlier time to mitigate the potential for penalties. They may change the taxpayer's tax profile, which in turn can materially impact the financial viability of investment decisions and the pricing of those decisions, and they can increase Australia's level of perceived foreign risk. I think that the perception of sovereign risk these days, with this government, is no longer perceived but real and actual.

The coalition will seek to amend this bill to give prospective effect to the bill or to provisions in the bill only. If this amendment is unsuccessful, the bill will be opposed by the coalition, as we do not believe the government has made a strong enough public justification for the retrospective component and application in this bill. By way of background, transfer-pricing rules exist to ensure that taxation is collected on the contribution of profits from Australian operations to multinational companies to ensure that profits are not shifted between related parties across borders without appropriate taxation.

We have no issue with that, as I have already touched on, and the transfer-pricing rules contained in division 13 of the Income Tax Assessment Act deal with this. They are also incorporated in a number of international tax treaties which are incorporated into Australian law. The Commissioner of Taxation has considered these treaty transfer pricing rules contained in the treaties as an alternative basis for transfer-pricing adjustments in parallel with the relevant provisions of the Income Tax Assessment Act. In order to promote stability for business it is important that there be consistency of taxation and other regulatory impositions on business. In the bill the government provides no detail of the size of the retrospective tax impost, so how does business know what the impost on them is going to be? How would we like it if we had been paying our bills or our mortgage or our tax—let us focus on the tax here—and the government decided to change the tax laws and say: 'We're going back to 2004. We want to audit all of your tax returns for the last eight years, and, as a consequence, you might have a large tax bill.' That is exactly what is being proposed. Imagine the outcry if that was done to ordinary Australian mums and dads. But it seems that it is okay to do it to multinational companies, which, for the last eight years have tried to do the right thing by the Australian tax law—and nobody has proved that over the last eight years they have done anything outside the law. The government has just decided, on the basis of the decision in the court case, that it did not like the decision of the court so it will introduce a change to tax regulation to get the outcome it wants. As the member for Wright quite rightly pointed out, this change—which the government wants to make through this bill—will contribute to the government coffers, but the government cannot tell us what the amount will be. Maybe it is an attempt to achieve the mythical $1.5 billion surplus that I doubt we will see in September 2013.

The government claims that the change will have no impact on the budget, as it is a revenue protection measure. If the change is not going to have any impact on the budget, why does it need to be retrospective? Why can't it just be prospective, as proposed in the amendment put up by the coalition? The Assistant Treasurer's office is not even able to fully quantify the cost of not passing this bill, so it is another example of the government saying, 'We'll just put this out into the wind and see what happens.' The bill provides no certainty and no understanding of the difficulties faced by anyone who is affected by it. Unfortunately, that seems to be the mode of operation of this government: 'That's a good idea; let's float it out there and see what happens.' The question must be asked: why is the retrospectivity required when the government makes the claim that the bill will have no impact on the budget and that it is purely a revenue protection measure? Is it because of this government's prolific spending over the past 4½ years that it needs every little bit of revenue it can get from every corner of our economy to try to make ends meet and cover up its profligate waste of money?

The coalition will be moving an amendment to make this bill prospective rather than retrospective. This amendment will ensure that taxpayers will not be forced to retrospectively comply with a tax regime that did not exist at the time they made business and investment decisions. We cannot expect our business community to have confidence in our tax system and our regulatory system if governments are just going to change things at their whim and make the changes not only prospective and for the future but also retrospective and for the past by saying, 'Now you have to go back and fix this, because we decided that that is what we want.' That does not engender confidence. In particular, in a global marketplace it does not create confidence for foreign investors who want to invest in this nation. The government talks readily about the $500 million pipeline of foreign investment that is supposedly coming over the next few years, but, if you were a foreign investor looking at this bill and thinking of investing $100 million in a mining project, would you do it? You would not know what the position will be for your business in four or five years time and whether the government will make another decision in four or five years time which will affect what you have already done. This bill provides no confidence whatsoever to our business and trading community. I commend to the House the amendment which we will move.

David Bradbury (Lindsay, Australian Labor Party, Assistant Treasurer ) Share this | Link to this | Hansard source

I thank those members who have contributed to this debate on the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. This bill ensures that Australia has effective and internationally consistent transfer-pricing models. It confirms that transfer-pricing rules contained in Australia's tax treaties and incorporated into domestic law provide assessment authority in treaty cases. The changes in the bill will apply to income years commencing on or after 1 July 2004. That was the first income year which followed parliament's last statement demonstrating its long-held understanding that the law operates in this way. We have discussed the considerable evidence across the decades that parliament understood that treaty transfer-pricing rules have operated in addition to our unilateral transfer-pricing rules since at least 1982. The amendments contained in this bill are also entirely consistent with the Commissioner of Taxation's long-held and publicly expressed view of the law.

I emphasise that the potential impact on taxpayers has been carefully considered. Importantly, the measures in the bill can only apply where a tax treaty is applicable, and therefore a party affected by the measures will be able to access the treaty mechanisms designed to relieve any double taxation that could arise. Settled cases will not be reopened as a result of the measures in the bill, and penalties will only apply in relation to prior years to the extent that they can arise under the current law. The government has engaged extensively with the business community on this bill. The measures in the bill are not wholly supported by multinationals and their advisers—and, given that they are robust integrity measures, this was not altogether unexpected. That said, the bill has greatly benefited from the inclusion of some important features following consultation. In particular, the bill clarifies the interaction between the transfer-pricing and the thin capitalisation rules. The bill also provides direct access to OECD guidance material in interpreting rules, avoiding the need to get costly expert advice on whether such guidance may be used. This reflects the best international thinking on transfer pricing. Other provisions of the bill support these key features and ensure the provisions work and interact appropriately with the rest of the income tax law. I commend the bill to the House.

Kirsten Livermore (Capricornia, Australian Labor Party) Share this | Link to this | Hansard source

The question is that this bill be now read a second time. There being more than one voice calling for a division, in accordance with standing order 133 the division is deferred until after 8 pm.

Debate adjourned.