Julie Owens (Parramatta, Australian Labor Party) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics, I present the committee's advisory report, incorporating a dissenting report, on the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013, together with the minutes of proceedings.

In accordance with standing order 39(f) the report was made a Parliamentary Paper

by leave—The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 makes a number of amendments to the tax law. Schedule 1 amends part IVA of the Income Tax Assessment Act 1936 with the aim of ensuring that the act continues to counter schemes that comply with the technical requirements of the tax law but which, when viewed objectively, are conducted in a particular way mainly to avoid tax.

Schedule 2 of the bill aims to modernise Australia's transfer pricing rules and provide a new, comprehensive and robust transfer pricing regime that is aligned with internationally accepted principles. The objective of these new transfer pricing rules is to ensure that an appropriate return for the contribution of Australian operations of a multinational group is taxable in Australia for the benefit of the broader community. Both schedules were the subject of prior public consultation by the Treasury.

On 1 March 2012, the government announced that it would introduce amendments to ensure part IVA continued to be effective in countering tax avoidance schemes. The government's announcement was made after reviewing a number of judicial decisions. The government was concerned that some taxpayers had argued successfully that they did not get a tax benefit because, absent the scheme, they would not have entered into an arrangement that attracted tax, because they would have entered into a different scheme that also avoided tax, or because they would have deferred their arrangements indefinitely, or because they would have done nothing at all.

Schedule 1 amends part IVA to address weaknesses that have come to light as a result of judicial decisions in determining whether there is a tax benefit in connection with a scheme and what that tax benefit is. Schedule 1 provides that the Commissioner of Taxation may use either of two alternative approaches to cancel a tax benefit obtained by a taxpayer in connection with a scheme that was entered into for the sole or dominant purpose, objectively ascertained, of avoiding tax.

These alternative postulates are an annihilation approach, whereby the scheme must be assumed not to have happened but all other events that actually happened must be incorporated; and a reconstruction approach, which must represent a reasonable alternative to the scheme but disregard any potential tax costs. The result of either of these postulates will be that the tax effect is less advantageous to the relevant taxpayer than that secured by the taxpayer in connection with the scheme.

It was claimed in some of the submissions that the amendments in schedule 1 are unnecessary as the court decisions are reasonably unique and of limited application. There are further claims in some submissions that it is not clear how the alternative postulates will operate. However, it is the committee's view that the amendments in the bill are a measured response to exposed weaknesses in the operation of the tax benefit concept.

The Treasury emphasised in its submission to the committee that the annihilation and reconstruction approaches are clearly intended to operate as alternative bases for identifying tax benefits and will not lead to more income tax being payable than results from the ordinary operation of the tax law.

Schedule 2 of the bill is vital to modernise Australia's transfer pricing rules and bring these into line with accepted international arm's length principles recommended by the OECD. Transfer pricing refers to the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises in different tax jurisdictions.

The arm's length principle is the international standard that OECD member countries have agreed should be used for determining transfer prices for tax purposes. This principle is that each enterprise within a multinational enterprise should be treated as a separate entity and it should be determined what independent entities would have done in the place of the parties. This provides a broad parity of tax treatment for members of multinational groups and independent enterprises.

The committee notes claims in some of the submissions it received that the bill is not consistent with OECD transfer pricing guidelines and that schedule 2 goes beyond the exceptional circumstances specified by these guidelines for a tax administration to disregard the structure adopted by a taxpayer for a controlled transaction.

It is also proposed in several submissions that the seven-year limit for a transfer pricing adjustment to be made by the Commissioner of Taxation is too long and should be four years only, as applies to general income tax assessments.

However the application and effect of the proposed reconstruction rules are clearly based on the language used in the OECD guidelines and the bill also contains a guidance provision that requires the relevant rules to be interpreted consistently with these guidelines. The Treasury also asserts that a four-year limit to conduct transfer pricing adjustments would not provide the commissioner with adequate time to conduct transfer pricing audits.

It is clear that the OECD transfer pricing guidelines are currently the 'best thinking evident in transfer pricing'. The committee considers that reconstruction powers in exceptional circumstances are a core part of modern transfer pricing regimes and that the bill implements these powers consistently with the OECD guidelines.

In conclusion, the bill will enable the Commissioner of Taxation to objectively and reasonably enforce tax avoidance measures and collect revenue to which the Commonwealth is entitled under the law, and the bill should pass.

On behalf of the committee, I thank the organisations that assisted the committee during the inquiry through submissions. I also thank my colleagues on the committee for their contribution to the report, and I thank the secretariat, who have worked in what is a very complex area of tax law. I commend the report to the House.

Steven Ciobo (Moncrieff, Liberal Party) Share this | Link to this | Hansard source

by leave—I am pleased, on behalf of the coalition, to raise some of the objections put forward in the dissenting report by coalition members with respect to this so-called inquiry—predominantly because there was no inquiry. The Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013 was a bill which was referred for inquiry to the House of Representatives Standing Committee on Economics for which there was no inquiry. Liberal members were particularly concerned because it did not provide us with an opportunity to test the information that was provided—to test, not only in terms of public opinion but also with a number of key and specialist stakeholders, a number of the assertions that were made by various parties and of course by the government in relation to this bill.

With respect to questions about the financial impact of this bill and specifically how schedule 1 applies to part IVA of the Income Tax Assessment Act, the explanatory memorandum to the bill states:

The amendments are expected to prevent the loss of over $1 billion a year.

But the reality is that there was very little detail provided as to how this amount had been quantified. Also, it would have been prudent to confirm whether there was any financial impact from the changes put forward in schedule 2 of the bill, relating to the modernisation of transfer pricing rules, despite the fact that the explanatory memorandum stated that the impact would be nil. On those two principal bases alone, we as coalition members of the Standing Committee on Economics have sincere and grave concerns that we did not have the opportunity to inquire into this bill.

Specifically, with respect to schedule 1, coalition members have legitimate concerns that the drafting of this schedule may once again be an overreaction by this Labor government with respect to the operation of part IVA of the Income Tax Assessment Act. There have been a number of instances over the past several years with respect to part IVA where the Commissioner of Taxation has lost high-profile court cases, and there is a real risk, frankly, that the government, via these amendments, is overreacting and giving the commissioner too much power to raise tax and penalties in the context of alleged income tax avoidance. I note that this is a view that seems to be held and shared by, among others, the Tax Institute, the Corporate Tax Association and the Law Council of Australia.

With respect to schedule 2, the modernisation of transfer pricing, the reality is that Australia's transfer pricing regime has stood the test of time. But the committee, as a consequence of not holding hearings, was unable to look at whether or not the new proposals that have been put forward, the amendments encapsulated by this bill, will in fact achieve the same longevity as the previous framework did—and, again, we do not know whether or not this has the full support of stakeholders. For example, many submissions, including from the Corporate Tax Association, PricewaterhouseCoopers, KPMG and the Tax Institute, all shared our concern about ensuring that it was robust and workable and will stand the test of time. But, as I said, without the opportunity for a public inquiry, we do not know whether or not that is the case. I note that the TI—that is, the Tax Institute—said on page 7 of their submission:

… we are concerned that the Bill as currently drafted will not yield many of the lauded simplicity and certainty benefits and will increase the compliance burden especially and disproportionately on small to medium enterprises.

Now, that is something that resonates with coalition members, because this side of the chamber understands small business; this side of the chamber has a background of small business. And, frankly, it stands in stark contrast to, firstly, the government's lack of understanding on small business and, secondly, the sometimes hollow safeguards or guarantees the government put forward with respect to the application and consequences of bills that are introduced. So, for those reasons that I have outlined, we dissented from the main report.

I want to thank the committee secretariat for their assistance to the government members and to some extent, albeit minor, to the coalition members! But it has ever been thus and, I suspect, always will be thus. I am grateful to have had the opportunity to speak.