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Picture of David Bradbury

David Bradbury

Assistant Treasurer, Minister Assisting for Financial Services & Superannuation and Minister for Competition Policy & Consumer Affairs

5 March 2012 - 18 September 2013

Speech of 15/03/2013


'Stateless Income' - A Threat to National Sovereignty

Address to the Tax Institute of Australia's 28th National Convention

Convention and Exhibition Centre, Perth

Friday 15 March 2013


[Acknowledgements omitted]

It is a pleasure to present the keynote address to this the 28th National Convention of the Taxation Institute of Australia.

Let me begin by acknowledging the significant contribution that the Tax Institute makes to the taxation policy debate in this country, something the Institute has been doing for 70 years now.

Introductory Remarks

Many of you will be aware of a speech I gave late last year on the importance of securing a fair, competitive and sustainable tax base for the future prosperity of the nation.[1]

I spoke about how structural changes occurring in the global economy combined with aggressive tax planning by some multinational entities posed a threat to Australia's corporate tax base.

And I made what to me is a self-evident observation – that the Australian community will not and should not accept a tax system that results in some multinational enterprises effectively escaping their tax obligations.

Left unchecked, profit shifting and international tax avoidance is a threat to Australia's sovereignty. It is a threat to our sovereign right to tax and to raise the revenue necessary to provide the public goods and services our society requires.

What I would like to do today is to expand on the themes of that speech.

Not just about the internet

Much of the media reporting on that speech focused on the discussion around the use of the "Double Irish Dutch Sandwich" tax planning structure.

I outlined that structure for two reasons.

First, it provides a real-world case study of "the lack of effectiveness in the digital age of international tax concepts created for the industrial age"[2] such as 'source' and 'residency'.

Second, the tax outcomes of that structure show that we are not simply talking about whether income is taxed in Australia or the head company's home country. Instead, we are often talking about income escaping the global tax net altogether.

However, the focus of that reporting has led some to conclude that the focus of the Government's concern in this area is limited to the rise of the internet and the spread of e-commerce.

It would be a mistake to think that the issues Governments around the world are confronting are limited to, or even dominated by, the internet and e-commerce.

In the first place, the companies employing the "Double Irish Dutch Sandwich" structure — or its Luxembourg or Swiss variants — are by no means limited to internet or e-commerce companies.

You don't need to be doing business on the internet to use this sort of structure.

What you do need is the global presence of a multinational enterprise and the ability to attribute a large part of your profits to intangible assets.

And we know that intangible assets play an increasingly important role in the modern global economy.[3]

Assets such as software, databases, patents, copyright, and perhaps most ubiquitous, goodwill, or more simply put, 'brand value'.

For more than a decade, investment in intangible assets has exceeded investment in tangible assets in the United States.[4]

In Australia, notwithstanding the current boom in resource investment, the long-run trend has been towards intangibles as an increasing share of overall investment.[5]

Challenges to the concept of source

Consider the implications of the increasing role of intangible assets for the concept of the source of income — one of the building blocks of the current international tax architecture.

As Justice Isaacs noted nearly 100 years ago:[6]

The Legislature in using the word "source" meant, not a legal concept, but something which a practical man would regard as a real source of income.

Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs.

But the ascertainment of the actual source of a given income is a practical, hard matter of fact.

At a time when economic activity was dominated by farms, factories and mines, it was usually straightforward to objectively determine the source of income by observing where the physical economic activity occurred; that is, where the factors of production were physically located.

In contrast, the rise of intangibles and the digital age pose significant challenges to the question of source of income for tax purposes: not just in how to apply it, but even whether it is the right concept to be using in allocating taxing rights in relation to intangible factors of production.

Let me be absolutely clear, I am not suggesting that Australia lead the charge to abandon the idea of source-based taxation of income.

As a number of commentators have noted, this would not be in the interests of a country that derives much of its exports from the exploitation of natural resources.

But we need to acknowledge that by its very nature the increasing importance of intangible capital to production challenges the very idea that we can always objectively determine where economic activity occurs.

The rise of "stateless income"

In turn, this helps explain the emergence of what Professor Edward Kleinbard – former Chief of Staff of the US Congress's Joint Committee on Taxation – calls the phenomenon of "stateless income".[7]

Stateless income is income that is not taxed in the source country of the production factors that gave rise to the income — nor is it taxed in the ultimate parent company's jurisdiction.

Put another way, stateless income is income that doesn't belong anywhere for tax purposes.

We should not underestimate the challenge this presents to the international tax system as well as the concept of statehood and national sovereignty.

This helps to explain how profits of US controlled corporations in Luxembourg are 18 per cent of that country's GDP.[8] Even more striking, profits of US controlled corporations in the Cayman Islands and Bermuda are over 500 and 600 per cent of those countries GDP respectively.[9]

The head of the OECD's Transfer Pricing Unit Joseph Andrus has said:

Whatever it is we are doing isn't producing accurate results if it turns out that 75 per cent of the world's income, under a transfer pricing system, is reflected as being earned in Singapore, Switzerland, the Cayman Islands and Bermuda.[10]

The statements of these international experts should remind us of the importance of keeping the bigger picture in mind when we deal with the day to day business of tax policy and administration.

It's not just about intangibles

As important as it is to develop rules to deal with intangible assets, they are only one of the causes of the growing phenomenon of "stateless income". As Kleinbard notes:

Stateless income is not simply an artefact of transfer pricing abuses, but also arises from decisions as to where to place financial capital within a multinational group…, differences in implementation of different tax systems, hybrid instruments, and hybrid entities.[11]

I would like to spend some time examining a recent case that provides another real-world case study of how this operates in practice in multinational groups.

Before I do so, I want to make it clear that in doing so I am not seeking to in any way criticise the courts' judgments. I have always passionately believed that it is the role of the courts to interpret the law as it is written, not to re-write it.

And it is not my intention in discussing this case to single out the taxpayer involved.

Rather, my intention is to illustrate some of the types of behaviour that are increasingly used by multinationals to reduce or even eliminate tax on their income.

Commissioner of Taxation v Noza Holdings Pty Ltd ("Noza")[12] concerned an arrangement entered into in 2001 by a US multinational group that operated some 600 businesses in 40 countries, principally concerned with the manufacture and sale of consumer and industrial products.

The overall arrangement was designed to centralise ownership of the group's worldwide intellectual property (comprised of confidential customer information and trade secrets).

Part of this arrangement included financing transactions involving the group's Australian operations.

While the outcome in that case is a classic example of the sort of tax arbitrage that Kleinbard is referring to, the process of arriving at that outcome – as detailed in the judgment of Justice Gordon in the first instance – is just as revealing.

According to evidence adduced in the case, the details of the arrangement were being thrashed out between the company's advisors in Melbourne and Chicago.

The judgment outlines that at one stage the transaction that would take advantage of inconsistent tax treatment between Australia and the US is stymied because US accounting rules would require the recognition of foreign currency gains and losses, resulting in "large fluctuations in profit on what was essentially an internal transaction".[13]

The judgment reports unchallenged evidence that:

Until the accounting problem had been solved … there had been no discussion of the income tax consequences of this change.[14]

To cut a long story short, the tax and accounting issues were reconciled.

In an extraordinary email sent at midnight in Melbourne, with the subject "unbelievable improvements to the Australian structure", a tax adviser to the project explains how altering the structure of the arrangement would result in:

an instrument [being] treated for all other purposes of the Australian tax rules as debt [but] for the purposes of the foreign dividend exemption [of section 23AJ] it is a[n] equity instrument paying dividends.[15]

The email goes on to explain that:

The new magic involves the redeemable preference shares. … Under the Australian rules, this instrument will be treated as a debt instrument. However under the treaty [between Australia and the US] the payment will follow the form of the arrangement. As a result of this little slight of hand (sic) … no withhold will be due on the "interest".

Remember [the securities] are really debt securities under the Australian Debt-Equity rules. Consequently, they generate interest deductions which can be used by the Australian group. These deductions would be limited by the thin capitalisation provisions except for the fact that we have several secret and cool arguments against any limitation.[16] (Emphasis added)

The point of recounting this case is not to single out this particular taxpayer or their advisers, but rather to illustrate the flexibility that a multinational group has in arranging their capital structure, and the ability this provides to exploit tax arbitrage opportunities.

Of course, from a tax adviser's perspective many of you will say that there is nothing wrong with that — they are just doing their job of minimising their client's tax according to the law.

To be clear, I am making a fundamentally different point — if this is the kind of behaviour the international tax system encourages then it needs to be changed.

Need for a well-informed public policy debate on these issues

This brings me to one of the strongest reactions to my speech – that it was inappropriate for a Minister of the Crown to mention an individual taxpayer by name who was complying with the rules set out in the tax law.

My speech was not, as some have suggested, an exercise of "naming and shaming" individual companies.

Rather, the point I was making was that there was, and is, a need for a well-informed public policy debate on these issues.

As I noted:

There is a strong public interest in drawing attention to practices that have the potential to undermine the future sustainability of Australia's corporate tax base.[17]

What sort of world would it be if the minister responsible for an area of the law is not allowed to comment publicly on outcomes that the law produces?

There is a strange circularity in the argument that large and multinational companies should be allowed to do what the tax law allows, but public policy debate on the appropriateness of those laws should not be informed by describing what those taxpayers have been and are doing.

There is a similar inconsistency in demanding that Governments produce evidence that base erosion and profit shifting is a significant problem in the tax law while at the same time opposing measures that would increase the transparency of the tax affairs of large and multinational enterprises.

Why should Australia care if companies avoid tax in other countries?

I have been asked a number of times why Australia should care if multinational enterprises avoid paying tax in another country.

I am not sure whether proponents of this view are being disingenuous or merely naïve.

As I have outlined, in the modern global economy it is difficult to objectively determine where economic activity occurs, and hence where income is derived.

Multinational enterprises are hardly disinterested parties in the carve-up of taxing rights between tax authorities.

It is no accident that Australia does not have a tax treaty with 'zero tax' countries.

But gaps, mismatches and inconsistencies in tax rules in other countries can pose risks to the integrity of the international tax system generally.

And this can clearly have consequences for the Australian tax base.

More generally, some Australian firms have also been seeking to minimise tax by locating high‑value mobile intangible capital in low or no tax jurisdictions.

Where large, multinational firms have a greater capacity to exploit tax minimisation opportunities than purely domestic firms and small businesses, such as through base erosion and profit shifting, it undermines the fairness of our tax system.

It also distorts the allocation of resources across sectors and reduces the efficiency of our economy.

As I have said before, when multinationals don't pay their fair share, they gain an unfair competitive advantage over domestic companies and disadvantage Australian taxpayers who must make up the tax shortfall or accept fewer Government services.

What is being done about this?

Whenever I talk about challenges facing the tax system, the first response to me as Assistant Treasurer is to say "well, you are in Government, what are you doing about it"?

Reforms to crack down on tax avoidance and profit shifting

The Government has a track record of taking action where necessary to ensure the integrity and sustainability of the tax system, including our corporate tax base.

Reforms currently before the Parliament will boost the Government's ability to tackle the challenges of base erosion and profit shifting, with amendments to the general anti-avoidance provisions of Part IVA and ensuring Australia's transfer pricing regime is consistent with world's best practice.

The Part IVA amendments ensure that the general anti-avoidance provisions continue to counter schemes that comply with the technical requirements of the law but which, when viewed objectively, are carried out with the sole or dominant purpose of avoiding tax.

Amendments to modernise Australia's transfer pricing rules provide a comprehensive and robust transfer pricing regime that is aligned with internationally accepted principles, as set out by the OECD.

These are important and necessary reforms that will help protect the integrity of Australia's tax system.

They have also benefited from constructive engagement and consultation, including from Tax Institute members, to ensure the legislation is consistent with the Government's policy intent.

In particular, I would like to acknowledge Grant Wardell-Johnson's contribution to the Expert Roundtable on Part IVA, where he represented the Tax Institute.

I understand that, despite welcoming the progress made in these consultations, a number of taxpayers and their representatives still have concerns with some aspects of these measures.

The Government makes no apology for taking action needed to preserve the integrity of our tax system — and we will continue to do so where necessary.

In doing so, however, we will always endeavour to engage in a genuine process of consultation to identify and prevent unintended consequences.

While there are areas where we can strengthen our domestic laws to limit the erosion of the corporate tax base, we should also be aware of the limits of what one country, acting alone, can achieve in this area.

We are aligning our transfer pricing rules with international best practice.

However, as I outlined earlier, a number of aspects of the international rules on transfer pricing are themselves in urgent need of reform.

As the OECD's Transfer Pricing Guidelines note in relation to intangible assets:

[The arm's length] principle can, however, be difficult to apply to controlled transactions involving intangible property because such property may have a special character complicating the search for comparables and in some cases making value difficult to determine at the time of the transaction.[18]

That is why the OECD has a major project underway to improve its guidance on the application of transfer pricing rules to intangible assets.[19]

And it is an example of why the legislation before the Parliament includes the ability to incorporate through regulation updates to international best practice in applying transfer pricing rules.

This is not, as some have suggested, an abrogation of Australia's sovereignty.

Rather, it is a sensible way of ensuring that our transfer pricing rules keep pace with multilateral reforms.

Treasury Scoping Paper and Specialist Reference Group

Late last year I asked the Treasury, led by the head of its Revenue Group, Rob Heferen, to prepare a scoping paper that will set out the risks to the sustainability of Australia's corporate tax base from multinational tax minimisation strategies and identify potential responses.

I also announced that Treasury's work would be informed by a specialist reference group, made up of experts from business, tax professionals, academics and the community sector.

The Treasury had its first meeting with the Specialist Reference Group last month.

The Government intends to release a draft paper for consultation and comment in late April, with the final scoping paper being presented to the Government before the OECD's consideration of its draft action plan in late June and the G20 meeting in July.

When it comes to reviewing the appropriateness of concepts such as source and residency, we should not assume that there are easy answers to these issues.

But the Government is determined to do what we can to drive reform in this area.

Greater transparency of tax paid by large and multinational businesses

One of the ways we are doing this is to improve the level of information available to the public on these issues, in order to inform public debate.

Early last month I announced that the Government would be improving the transparency of Australia's business tax system.

The Government asked the Treasury to seek the views of the Specialist Reference Group on how this proposal might best be implemented.

It is fair to say that there was a range of views expressed by reference group members – from those who thought it went too far to those who thought it didn't go far enough.

There were also concerns about the potential for information to be misunderstood.

After all, sometimes the reason why a company is not paying any tax is that they are not making a profit.

And sales, after all, are not the same as profits.

These are legitimate points, but shouldn't they be the start, rather than the end, of the public conversation?

That is, companies could provide more information to explain how much tax they pay and why – as, indeed, some companies already do voluntarily.

The proposition that such information is too complex for non-experts to understand runs a real risk of alienating the public and looking like there is something to hide.

International Developments

Before concluding, I would like to recap on international developments on this issue since I spoke last year.

Because I get the sense that when I talk about the need for multilateral action to address these issues, the cynics out there will be thinking – "well, that will never happen".

Perhaps past experience would support such cynicism.

However, past experience may not prove a good guide to future action on this occasion.

As many of you will be aware, the OECD released a report on Addressing Base Erosion and Profit Shifting ahead of last month's meeting of G20 Finance Ministers.

This report represents a sea change in the OECD's approach to these issues.

The report makes substantial progress in identifying the root causes that facilitate profit shifting.

It highlights the need for a comprehensive approach, with a realistic, multilateral and well prioritised action plan that builds and maintains momentum for fundamental reform of international tax arrangements.

The OECD has highlighted a number of key pressure areas for early action, including:

  • Increased transparency on effective tax rates of multinationals;
  • International mismatches in entity and instrument characterisation including, hybrid mismatch arrangements and arbitrage;
  • Application of treaty concepts to profits derived from the delivery of digital goods and services;
  • The tax treatment of multinational debt-financing, captive insurance and other intra-group financial transactions;
  • Transfer pricing, in particular in relation to the shifting of risks and intangibles;
  • The effectiveness of anti-avoidance measures, in particular general anti avoidance rules, CFC regimes, thin capitalisation rules and rules to prevent tax treaty abuse; and
  • The availability of harmful preferential regimes.

The Government is already acting on a number of these issues in our domestic tax laws, and Australia is one of many voices in the growing international chorus calling for action.

In January, at the National Press Club, the Prime Minister noted that this was an area where the G20, which Australia will chair next year, can and should find a fruitful agenda and Australia will use our special status to get this done.

The Deputy Prime Minister recently attended the G20 Finance Ministers meeting, where Australia, joined with France, Germany and Britain in calling for global action to boost tax transparency to tackle profit shifting and base erosion.

The G20 also agreed to step up efforts to combat the unfair practices of these companies, develop measures to address base erosion and profit shifting, take necessary collective actions and review a comprehensive action plan from the OECD in July.

Led by the UK Chair, international tax reform has also been flagged as a major issue for the G8's agenda in 2013.

The Heads of Revenue of the BRICS countries (Brazil, Russia, India, China and South Africa) had their inaugural meeting in January 2013. Among other things they agreed to the:

development of international standards on International Taxation and Transfer Pricing taking into account the aspirations of developing countries in general and BRICS Countries in particular.[20]

And last December, the EU released an "Action Plan to strengthen the fight against tax fraud and tax evasion".[21]

There have also been a number of reports and proposals by individual countries, including the United States[22], France[23] and New Zealand[24].

In January this year, a Parliamentary Committee in the Netherlands discussed its role in these issues — the Dutch cheese in the Double Irish Dutch Sandwich. Ed Groot, a member of the ruling Dutch Labor Party said:

We should not be a tax haven. If they go somewhere else we are not sorry at all because they spoilt the name of Holland. Otherwise you can wait for retaliation measures and this we don't want.[25]

The momentum is clear — the world is moving and it is in Australia's interest to do so as well.

We intend to take full advantage of our more influential role in the G20 Troika this year, and in 2014 when we host the G20 to pursue global solutions to these problems .

There is a lot of pressure on the OECD to deliver a credible action plan.

Australia is committed to being actively involved in its development.

We have also stressed the importance of non-OECD member countries being closely involved in the development and consideration of the action plan.


My intention today was to give you a clearer picture of the Government's concern around corporate and international taxation issues.

What we are concerned about and why.

What we have already done to address these issues, and a sense of our future direction.

We will continue to act where necessary to ensure the integrity of our tax system.

And we will be working with other countries to improve the international tax architecture.

We are under no illusions as to just how difficult this will be.

But we also know that effective action is critical – nothing less than our national sovereignty and the integrity and credibility of our tax system is at stake.

Thank you.



[3] OECD, Measuring Innovation: A New Perspective – online version

[4] Corrado, Haskel, Jona-Lasinio and Iommi, 2011, 'Intangible Capital and Growth in Advanced Economies: Measurement Methods and Comparative Results. Data for US chart on intangible versus tangible investment found at

[5] Productivity Commission 2009, Investments in Intangible Asset's and Australia's Productivity Growth

[6] Nathan v FC of T (1918) 25 CLR 183 at 189-190.

[7] Kleinbard, Edward, 2011, "Stateless Income", Vol 11 699 Florida Law Review.

[8] Grevelle, Jane, 2013, Tax Havens: International Tax Avoidance and Evasion, US Congressional Research Service -

[9] Ibid.

[10] Martin, Julie, "OECD Moving Quickly With Base Erosion Project", February 14 2013.

[11] Edward D. Kleinbard, Throw Territorial Taxation From the Train, 114 TAX NOTES 547, 559 (Feb. 5, 2007)

[12] [2011] FCA 46 (Federal Court); [2012] FCAFC 43 (Full Federal Court)

[13] Par 67

[14] Par 103.

[15] Par 110

[16] Par 110

[17] OECD, Measuring Innovation: A New Perspective – online version

[18] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, par. 6.13.

[19] Silberztein, Caroline, "Transfer pricing aspects of intangibles: the OECD project", Transfer Pricing International Journal,