John Madigan (Victoria, Democratic Labor Party) Share this | Link to this | Hansard source

Since 1989 the ATO has obtained many billions of dollars of additional revenue for Australia as a consequence of legislation designed to make multinational companies pay their fair share of tax for the revenue and profits they earn in the Australian economy.

This retrospective amendment is intended to ensure that companies are not able to avoid their taxation obligations. In particular, transfer pricing between affiliates makes a joke out of our company tax rate of 30 per cent, which has been the subject of various promises by the major parties. The fact is that company tax falls heavily upon small- and medium-size Australian business and can be avoided through double tax treaties by major multinational companies.

The Age and the ABC reported some years ago about the Japanese strategy in the purchase of cattle feedlots. Basically, once they had purchased the feed lots they sold cattle from them at a loss to Japanese trading companies, who then resold to associated companies in Japan for sale to retailers. The profit was taken in Japan instead of Australia. This meant that Australian meat producers could not compete in export markets to Japan. Then there is the example of the closure of a major Japanese store in Melbourne, Daimaru, after 10 years of operation in Australia where they sourced all of their goods from their parent company. They made a loss every year and never paid tax, I believe. The closure of Nissan occurred with very significant tax losses, which again enabled Nissan to import motor vehicles and components and offset any profits against the losses that had occurred during the manufacturing period.

Whenever any company that is owned by a multinational parent shifts from local manufacture to imports, it creates an opportunity to manipulate transfer prices to maximise the taxation position of the corporation or another affiliate with a favourable taxation position. Multinational affiliates always have the opportunity to use double tax treaty rates of 10 per cent and 15 per cent instead of paying tax on profits of 30 per cent. This is done by simply characterising profits as payments for the purchase of intellectual property or payment of interest on loans rather than the remittance of profits to the parent company. This was a major reason for Ireland's manufacturing resurgence, which has now utterly collapsed. Multinational companies, particularly American companies, sold intellectual property such as manufacturing know-how, brand names and marketing systems to the Irish affiliate and then paid tax to Ireland at 12 per cent. I could go on and on. No matter what others might suggest, the world of taxation is not a level playing field and what we should remember is that Australia is home to 10,000-odd multinational affiliates.

Is the legislation detrimental to Australian manufacturing? I know some suggest it is, but I believe it is more detrimental to our manufacturers not to introduce these changes. After all, Australian manufacturers do not have the privilege of avoiding tax all over the world. That is what price transfer means. Retrospective legislation is normally a very bad idea. However, when there are significant threats to the national revenue and budgets, such legislation is justifiable. The best example is the 'bottom of the harbour' legislation, which basically involved getting rid of accounting information, often thrown into the bottom of Sydney Harbour, and then giving the ATO insufficient information to mount a case. That event resulted in massive retrospective claims for taxation and the jailing of some accountants. Transfer pricing, if allowed to proceed without challenge from the ATO, would actually involve a much greater sum of revenue loss than occurred in the case of the 'bottom of the harbour' tax schemes. The attitude at that time was that retrospective legislation is bad in general except when it prevents the development of a major hole in the national revenue that was completely unintended.

This legislation follows a substantial legal case which the ATO lost and which requires the government to introduce legislation designed to ensure that the ATO follows traditional transfer pricing methodologies introduced after some 30 years of discussion and debate by the member countries of the OECD. It is good that we are establishing legal precedents for transfer pricing that create certainty for companies, for the ATO and for the Australian taxation revenue base. The legislation is an important element in Australia's armoury of taxation measures designed to ensure that our taxation system is competitive, fair and equitable.

This legislation is valuable because it ensures Australian businesses that are subsidiaries and affiliates of multinational companies know where they stand. We need this certainty if we are to be a major player in the world economy that does not disadvantage its own manufacturers and their service providers in what is probably the most important area of commercial taxation law. All around the world multinational companies gain a competitive advantage against local manufacture through transfer pricing. That is why the OECD and all the other major manufacturing countries have common rules against it. All the government is trying to do is to fix up a hole in the legislation that has been exposed by a Victorian Supreme Court decision. For this reason I will be supporting the legislation.

Don Farrell (SA, Australian Labor Party, Parliamentary Secretary for Sustainability and Urban Water) Share this | Link to this | Hansard source

I thank Senator Madigan for his contribution and support, and I thank all of those other senators who have spoken in respect of the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. This bill ensures that Australia has an effective and internationally consistent transfer pricing rule. It confirms that transfer pricing rules contained in Australia's tax treaties and incorporated into our domestic law provide assessment and authority in treaty cases. These changes apply to income years commencing on or after 1 July 2004, that being the first income year following the parliament's last statement demonstrating the longstanding legislative intent that the law operate in this way. We have discussed the considerable evidence across the decades that parliament intended the treaty transfer pricing rules to operate 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 public expressed view of the law. I want to emphasise that the potential impact on taxpayers has been very carefully considered. Importantly, these provisions can only apply where a tax treaty is applicable and therefore a party affected by these measures will be able to access the treaty mechanisms designed to relieve any double taxation that could arise. Settled cases will not be opened as a result of these amendments, and the transitional rules will ensure that the penalty provisions of the income tax law apply as though this bill were never enacted. The government has engaged extensively with the business community in relation to this measure, and the measure is not wholly supported by multinationals and their advisers. Given that this is a robust integrity measure, this is not altogether unexpected.

That said, however, the bill has greatly benefited from the inclusion of some important features following the consultation by the minister. In particular, the bill clarifies the interaction between the transfer pricing and thin capitalisation rules. The bill also provides direct access to OECD guidance material in interpreting the 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 therefore commend the bill to the Senate.

Question agreed to.

Bill read second time.