Mr Speaker, this Bill implements the Government’s 2015 Budget commitment to combat multinational tax avoidance.
This delivers on our promise to ensure Australia is at the forefront of the international fight against tax evasion.
We already have some of the strongest taxation integrity rules in the world, and we are determined to make these rules stronger still.
We know that some multinationals continue to try to avoid paying tax on Australian profits. This includes the use of egregious, complex and blatantly artificial schemes like the double Irish Dutch sandwich.
This undermines the public’s faith in the tax system and leaves families and small businesses to unfairly carry the tax burden.
This Government is absolutely committed to strengthening the system.
As G20 President in 2014, Australia led the global response to multinational tax avoidance. Under Australia's leadership, the first of the OECD/G20's base erosion and profit shifting recommendations were delivered last year.
We are continuing to work with the OECD and G20 to promote greater integrity in the international tax system and ensure entities pay tax where they have earned their profits. The OECD will report to G20 Finance Ministers in October 2015 on the outcomes and final recommendations of its action plan on base erosion and profit shifting.
Mr Speaker, Australia has been working hard at all levels to encourage our international partners to implement the OECD’s recommendations. At the most recent G20 Finance Ministers meeting in Turkey, I emphasised Australia’s commitment to the OECD action plan and to tackling multinational tax avoidance.
I also met with a number of my counterparts one-on-one to discuss this critically important issue and to tell them about what Australia is doing to advance the OECD/G20 agenda. I have had similar conversations with my English counterpart about what we can do with the United Kingdom to stop multinationals diverting profits.
While our international efforts are important, it is critical that we take appropriate action now to better protect Australia’s tax base, economy and jobs.
Last year we took action to tighten Australia’s thin capitalisation rules to limit the scope for multinationals to claim excessive debt deductions.
In the 2015 Budget, the Government announced a package of measures that will level the playing field for local businesses and ensure that competitors pay their fair share of tax.
This Bill implements a new Multinational Anti-Avoidance Law, stronger penalties for large companies that engage in tax avoidance and profit shifting, and Country-by-Country reporting to give tax authorities greater visibility of multinationals’ tax structures.
These three measures will apply to over 1,000 large multinationals with annual global revenue of $1 billion or more. These companies represent the highest risk to Australia’s tax base. The measures are consistent with the Government’s commitment to deregulation and small business.
Multinational Anti-Avoidance Law
Schedule 2 to this Bill implements a new Multinational Anti Avoidance Law from 1 January 2016 to stop multinationals artificially avoiding a taxable presence in Australia.
This delivers on our 2015 Budget commitment to target major entities with significant Australian activities who avoid booking profits in Australia.
The ATO estimates that around 30 large multinationals are engaging in commercial activities in Australia but use contrived structures to book billions of dollars of revenue overseas and avoid Australian tax.
The new Multinational Anti-Avoidance Law will allow the Commissioner of Taxation to force them to pay tax in Australia on profits from economic activities undertaken here.
This further strengthens the draft legislation that was announced in the 2015 budget.
We have strengthened the law by removing the condition for multinationals to operate in a ‘no or low’ tax jurisdiction.
All significant global entities with revenues over $1 billion who book their revenue offshore will need to consider these rules and may need to review their structures. With over 1,000 multinational entities operating in Australia with revenues greater than $1 billion, this means these rules will have far reaching effect and ensure multinationals do not inappropriately slip through Australia’s tax net.
This simplifies the law and makes it easier for the ATO to apply, removing the need to prove an additional requirement.
As a result if a multinational structures with a ‘principal purpose’ of avoiding tax the ATO will have the tools to catch them and ensure they pay their fair share.
By removing the ‘no or low’ tax condition and relying solely on a ‘principal purpose’ test we are sending a clear message that if you deliberately and artificially avoid paying Australian tax this is not acceptable.
Removing the ‘no or low’ tax condition will also provide additional certainty and minimise disputes around whether a company operates in a ‘no or low’ tax jurisdiction where it is clearly structured for a purpose of avoiding tax.
This rule will complement our existing anti-avoidance rules for multinationals by clarifying that the specific arrangements used by multinationals selling into Australia are considered to be tax avoidance.
This new measure will make it easier for the ATO to establish a case by:
- catching arrangements that are designed to obtain both Australian and foreign tax benefits; and
- lowering the purpose test from ‘sole or dominant purpose’ to ‘one of the principal purposes’.
This new measure will force entities to book their revenue in Australia where they have significant sales activity here.
Where a tax avoidance scheme is identified, the Commissioner of Taxation will be able to apply the tax rules as if the multinational had booked the profit from Australian sales here in Australia.
The company will have to pay the tax they owe on these profits (plus interest), and double the existing maximum penalties for tax avoidance and profit shifting schemes.
This new measure will protect Australia’s tax base by acting as a deterrent to companies from engaging in complex schemes.
Companies that pay their fair share will no longer be at a competitive disadvantage.
And this new measure is already starting to have an impact on the tax planning of multinationals.
The ATO has already been contacted to discuss how companies might restructure their activities to book their revenue in Australia and pay their fair share of tax.
Companies who think they might be affected by the new law are encouraged to contact the ATO as soon as possible.
Consistent with their voluntary disclosure policy, the ATO takes a favourable look at penalties for those companies undergoing a restructure to improve their tax compliance and cooperation.
Australia is leading the world in taking action to target these arrangements and this measure is consistent with the work being progressed by the OECD and the measures implemented by the United Kingdom in April.
Penalties
Schedule 3 to this Bill doubles the penalties for large companies that enter into tax avoidance or profit shifting schemes.
The maximum penalty applicable will be 120 per cent of the amount of tax avoided under the scheme.
Stronger penalties will help deter taxpayers from taking aggressive tax positions and will apply from 1 July 2015.
Deterrence is recognised as a key element of the fight against tax avoidance behaviour.
Larger multinationals have access to greater resources for tax minimisation, greater opportunities to avoid tax through offshore activities and larger potential tax savings if they are successful in avoiding tax. Stronger penalties are required to help deter these major taxpayers from taking aggressive tax positions.
Country-by-Country
Schedule 4 to this Bill implements Country-by-Country reporting from 1 January 2016. This is one of the key recommendations of the G20/OECD BEPS Action Plan and Australia will be one of the first countries to implement it.
Whilst Australia is leading the way, we expect the Country-by-Country measures to be implemented broadly by other jurisdictions.
Country-by-Country reporting will require large multinationals to report to the ATO their income and tax paid in every country in which they operate.
This will be exchanged between tax authorities to assist in the assessment of transfer pricing risk and targeting of audit enquiries.
This will allow the ATO to lift the veil on large multinationals and for the first time get an understanding of aggressive taxpayer behaviour beyond our shores that may be shifting profits that should have been booked in Australia.
These new transparency arrangements are a significant step in improving transparency for tax administrations.
For entities doing the right thing there is nothing to be worried about.
But for those large foreign multinationals shifting profit to avoid tax we are sending a clear message you are no longer able to hide.
Consistent with the OECD’s guidance this Schedule will also require two more reports to help manage transfer pricing risk.
Firstly, companies will be required to lodge a master file, which will require detailed information on the multinational’s organisational structure and financial activities. This will provide context to revenue authorities for the multinational’s transfer pricing practices.
Secondly, companies will be required to lodge a local file, which will focus on specific information on transactions between the reporting entity and related entities in other countries. This will include the entity’s detailed analysis of the transfer pricing determinations that they have made.
This Schedule provides flexibility for the Commissioner to determine the localised form of this reporting and the scope for exemptions to ensure that the measure does not impose unnecessary compliance costs on taxpayers involved in low risk transactions.
The ATO is consulting on how these reports will interact with the current reporting requirements and will issue draft guidance before the end of 2015.
Further Government Action
This Government is proud to have made significant progress on strengthening the integrity of our tax system.
We are closing the tax loophole so that GST is charged on digital products and services imported by consumers. This levels the playing field for domestic suppliers.
We will be introducing legislation later in the Spring Sittings to give effect to this measure following approval from the State and Territory governments.
Further, the government has asked the Board of Tax to commence consultation on the implementation of the OECD's anti hybrid rules.
This will tackle the use of different tax rules in different countries by multinationals to claim a tax deduction in one country but not pay tax in the other.
Also, the ATO has already commenced exchanging information with other tax administrations on preferential tax regimes.
This will help the ATO identify secret tax deals provided to multinationals by other countries that may contribute to tax avoidance in Australia.
On treaty abuse, the government is acting now to incorporate the OECD's recommendations into Australia's treaty practice, so that multinationals do not exploit treaties to avoid tax.
The 2015 Budget also announced that Australia will sign a multilateral international agreement to enable Common Reporting Standard information to be exchanged between tax administrations. This agreement was signed in June 2015.
The Common Reporting Standard will combat tax evasion by exposing taxpayers with hidden offshore investments.
The Government has committed to implementing the Common Reporting Standard from 2017 and signing the Multilateral Competent Authority Agreement is a further step towards implementation.
The Government has asked the Board of Taxation to work with businesses to develop a voluntary code for greater disclosure by companies of their tax information. I expect that the Board of Taxation will look at ways to provide more information to help inform the public about companies' tax information.
Together the Government and the Commissioner of Taxation are focussed on combating multinational tax avoidance and we are providing the ATO with unprecedented resources to allow the ATO to undertake more extensive enquiries and audits of multinational companies.
This additional funding is delivering results and through this programme the ATO has already raised over $400 million in additional tax, and is estimated to raise $1.1 billion in total.
Opposition position
The Government is taking a strong and balanced approach to dealing with multinational tax avoidance.
In contrast, the Opposition has proposed a number of harmful measures which they claim will deal with multinational tax avoidance – principally, limiting interest deductions through the use of a worldwide gearing test only.
Unlike the Government’s actions, these proposed changes to the thin-capitalisation rules would deter investment and cost jobs.
This would adversely impact the legitimate activities of many Australian headquartered multinational companies and could actually drive them to locate offshore.
The Opposition’s policies on multinational tax avoidance do not even go to the heart of the issue. Their policy, which primarily targets debt deductions, ignores the fact that the Government has already taken action to significantly tighten Australia’s defences in this area.
As such, the Opposition’s policy does not focus on areas where there is the greatest potential to address profit shifting by multinational companies.
As a result, Labor’s policies will be both ineffective in targeting the real problem and damaging to Australia’s economy.
The Government’s measures are well-considered and balanced and will effectively strengthen our taxation system to ensure it is fair and sustainable.
But the fight against tax avoidance by multinationals does not end here.
We are continuing to work with the G20 and OECD to implement the two-year Base Erosion and Profit Shifting Action Plan to ensure companies pay tax in the jurisdictions where they earn their profit.
The OECD will report to G20 Finance Ministers in October 2015 on the outcomes and final recommendations of this Action Plan.
We will continue to take the lead in the OECD and G20 and the final recommendations will provide a strong platform for further action to strengthening the integrity of our tax system and to ensure it is fair and sustainable.
Full details of the measures are contained in the explanatory memorandum.