David Bushby (Tasmania, Liberal Party) Share this | Hansard source

I rise today to also contribute to the debate on the government's Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, which is a bill that coalition senators do not support in its current form for a number of very good reasons.

Transfer pricing occurs when two parties, related or unrelated, supply goods and services to each other and transfer profits from one to the other. The parties to the transaction may be domestic entities or resident or non-resident entities. For taxation purposes, the main issue occurs when the transaction is between related parties and where one of those parties is a nonresident. For Australian taxation purposes, when one party is a nonresident, Australian tax can be minimised to apply in deductions to the Australian entity through the purchase of goods by the resident entity at an inflated price, or through allocating income to the Australian resident through the sale of goods from the resident entity at a discounted price.

This government bill seeks to ensure the transfer pricing articles contained in Australia's tax treaties are able to be applied and provide assessment authority independently of division 13 of the 1936 tax act. They are seeking to do this by creating express provisions within the Income Tax Assessment Act 1997. Of primary concern to the coalition is the retrospective implementation of this bill, with the bill currently proposed to commence retrospectively from 1 July 2004. So we are not talking here commencing 1 July 2012, two months retrospective, or 1 July 2011, or even 2010; we are talking 1 July 2004.

The argument for justifying this retrospective implementation is outlined in confusing terms within the explanatory memorandum to the bill as:

The 2004 income year commenced immediately after the Parliament’s most recent amendment to the income 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 adjustments.

The minister has stated in the other place that a decision to change the law from a date before announcement is not taken lightly. However, the coalition knows that this is not true, because this government is a government that constantly moves the goalposts in terms of dates. It has consistently sought to introduce retrospective legislation into the parliament since first coming into office. In fact, as recently as last year, this government legislated a retrospective tax change which dated back as far as 1990.

The coalition is generally opposed to retrospective tax changes, particularly in instances such as this, where the retrospective implementation of the legislation will impose a significant and detrimental burden upon taxpayers. Retrospective tax changes not only impact the relationship between a taxpayer and the government but can also change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law at the time the agreement was entered into. They can expose taxpayers to penalties in circumstances where they could not possibly have taken steps at an earlier time to mitigate the potential for penalties being imposed. And retrospective tax changes can alter a taxpayer's profile.

The Senate Economics Legislation Committee held an inquiry into this bill, and through that inquiry process the Senate Economics Legislation Committee heard from a number of stakeholders who all raised valid, serious and concerning issues in relation to the unjust nature of this bill and the impracticalities that will arise as a result of its retrospective implementation—and not surprisingly so. Many stakeholders expressed concern over the burden of proof for assessments that will arise as a result of the retrospective implementation of the bill. The Law Council of Australia submitted the following:

The amendment provided for in the Bill gives the Commissioner an independent and additional taxing power and increases the scope for application of profit based analysis using information more readily available to the Commissioner than taxpayers. As already observed, the burden of compliance with the proposed new laws, as well as the existing domestic transfer pricing regime which will continue to apply, will be significant for taxpayers. Accordingly, the Committee considers that the burden of proof in relation to the new measures should properly lie with the Commissioner. In the alternative, either the taxpayer should bear no legal or evidential onus to prove that the assessment is excessive or, upon leading evidence in support of positions taken, it should be expressly incumbent on the Commissioner to demonstrate that the taxpayer’s position is manifestly wrong.

A number of submitters to the inquiry also expressed concern that no time limit had been specified for when retrospective adjustments can be made by the commissioner. The Law Council of Australia has stated that the absence of a time limit for retrospective changes is likely to cause significant issues for taxpayers.

Mr Chris Peadon, a member of the Law Council of Australia, told the inquiry:

Taxpayers should be given certainty in relation to previous year's income so they can draw a line underneath it. There are also the issues about how long people keep records and keep all the relevant people around. If you go back further and further, it disadvantages taxpayers who have probably had a turnover of personnel and have probably moved their warehouses several times. How long do they need to keep the documentation? These are issues that crop up. It seems to us to be a very sensible reform just to insert a time limit, perhaps on the usual basis.

The Institute of Chartered Accountants submitted in relation to the retrospective nature of the bill:

A signal of the importance of freedom from retrospective laws has been held to be so critical to the basic rights of individuals and corporations that the constitutions of both the United States and Sweden have explicitly prohibited such a practice. Whilst Australia's constitution does not expressly prohibit the making of retrospective laws, the generally accepted practice of parliament has been to only exercise those powers sparingly, often only in extreme and exceptional circumstances …

The coalition is not convinced that the government have provided suitable justification for the retrospective implementation of this bill. And, as is the norm with this government, they have not adequately consulted with stakeholders or addressed stakeholder concerns. Also of concern is that the government have not officially or publicly provided any detail on the size of the retrospective tax impost.

At the last round of Senate estimates, the Commissioner of Taxation said that 'they involve substantial sums, but not greatly substantial in the context of the broader picture'. So why then does this government feel the need to go back eight years to fix an issue that the commissioner deems 'not greatly substantial in the context of the broader picture'? As yet, the government has not released specific figures, despite asking the parliament to pass legislation that will have a retrospective commencement date causing significant burden for taxpayers although Treasury have indicated the dollar figure is likely to be in the vicinity of $1.9 billion.

Also of significant concern to the coalition is the threat retrospective legislation poses to Australia's sovereign risk profile. 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. Deloitte submitted to the inquiry:

… this is not the approach to international tax law expected from a sophisticated trading nation and does considerable damage to Australia's reputation for fair dealing in international trade and taxation …

Moore Stephens submitted to the inquiry that they are exceptionally concerned at the likely adverse impact and the reputational damage to the Australian Taxation Office and Australia as an investment destination that can be expected to follow in the event that the legislation is backdated as planned.

The coalition is also concerned that the government has not consulted with any partner countries to tax treaties with Australia, and we would like to know whether or not any partner countries have raised concerns as to the perceived impacts this bill will have on the negotiated agreements in such tax treaties.

The American Chamber of Commerce in Australia, which is the peak organisation for representing the interests of American companies undertaking business in Australia, noted in its submission to the inquiry that 'the most significant source of foreign investment in Australia is the United States' and further, that the retrospective nature of the bill will create 'unnecessary uncertainty and business risk, which in tum will negatively affect foreign investment in Australia.' And such comments were not isolated.

The committee also received submissions outlining similar concerns from large and reputable organisations such as the Australian Private Equity and Venture Capital Association, RSM Bird Cameron and the Business and Industry Advisory Committee to the OECD. I note that the passage of the bill was of sufficient interest that the embassy trade adviser of at least one of our major trading nations was present at the hearing, with a view to identifying issues for his nation's businesses operating in Australia.

But, as we on this side of the chamber know, this government is not a government concerned with protecting Australia's sovereign-risk profile or fostering a stable and attractive investment environment to encourage investment within Australia. We are seeing more international investment leave our shores with every bad policy decision it makes.

Another anomaly arising from this bill is that its changes apply only to countries that Australia has a tax treaty with, ignoring entities who are transacting with parties in tax havens such as the Cayman Islands. Taxpayers from countries without such a treaty will be subject to transfer pricing under Division 13—that is, a lower standard—while taxpayers transacting with an associated enterprise in a treaty country, those we should be closest to, will be subject to potential adjustments under this bill and its wider powers—that is, a higher standard. It defies belief, and is hugely concerning that the government would seek to penalise Australia's treaty-partner countries in such a fashion. This bill will impact a range of industries at a time when they least need it. It is not enough for this government to impose on industry a great big mining tax and a carbon tax we were never going to have; no, Labor needs to compound that with the implementation of retrospective, very complex tax legislation.

The coalition strongly believes that the Gillard Labor government have failed to adequately justify the need for the retrospective implementation of this legislation. As Senator Cormann referred to earlier, there is only one possible reason they would be doing it—and that is that they need to chase every rabbit down every hole looking for every last cent they can possibly get, to be able to deliver the so-called elusive 'surplus' they have promised for this financial year to offset the extravagant and wasteful spending that they have undertaken over the last four years, most of which has been ongoing spending which means that we need to have ongoing revenue to offset it.

If the government genuinely thought it needed the money to meet its ever-expanding spending base then it should look to taxes that are prospective and that can allow businesses and individuals to make appropriate plans, put in place appropriate arrangements to make sure that they do meet the tax laws as set up and as proposed and put into law. I think that Senator Cormann has made it clear that we would be more inclined to support this bill if it contained only prospective changes rather than retrospective changes. I agree with him on that, and say that that is what this place should look at, and make sure that we deal fairly with businesses and individuals who are subjected to tax laws in Australia.

Stakeholder concerns in this case have not been sufficiently addressed, nor have concerns about the impact that this legislation will have in heightening Australia's perceived level of sovereign risk. This bill will create further uncertainty for our largest taxpayers at a time when they least need it. We on this side of the chamber believe that taxpayers have the right to rely on the law as it has been consistently interpreted by the courts for many years and, as such, we do not support this bill as it currently stands.