Introductory Remarks
Thank you for that introduction and for inviting me to join you today.
I would like to thank Wolters Kluwer and CCH for hosting this event, and Michelle De Niese and the Corporate Taxpayers Association for facilitating.
It is great to be able to talk directly to the tax experts in many of Australia's large companies - and of course the specialist tax advisers here today.
Tax reform has been a major priority for the Government.
We initiated the Henry Review, which set out the principles that will guide tax reform in Australia for years to come.
We convened last year's Tax Forum to continue the conversation about tax reform started by the Henry Review.
Since then, we have set up a number of groups to keep that conversation going, including: the Superannuation Roundtable, the Not-for-Profit Sector Tax Concessions Working Group and the Business Tax Working Group.
Being tax managers of large corporations I am sure that you are keenly aware of the Business Tax Working Group and its work over the past 12 months. Iwould like to start today by talking about how important the Working Group is for the future of corporate tax reform in Australia and what the process has achieved to date.
I would then like to touch on the progress that we have made in reforms to Part IVA and to transfer pricing rules - two issues that I know are of interest to large corporate taxpayers.
Something that I think these reforms and the Business Tax Working Group process reinforce is the importance of consultation. As I have said on a number of occasions, the Government is committed to the continuous improvement of our consultation processes. However, consultation needs to be tailored to the issue and I would like to conclude with a few remarks on this point.
Business tax Working Group
The Business Tax Working Group was a key outcome from last year's Tax Forum. The Treasurer established the Group to bring together different perspectives on how to reduce the tax burden on new investment.
The Government recognises that new investment will be vital for Australian businesses as they adapt to the broader economic transformations happening across our economy and look for ways to improve their productivity.
And as we all know, lifting productivity will be crucial for raising living standards and maximising the opportunities for all Australians into the future.
So it is important that we get the policy settings for new investment right - this involves cutting red tape where we can and it also means looking at the role of tax, and in particular the company tax rate.
The Government understands that the company tax rate is important for Australian businesses to remain competitive and attract investment. So the Prime Minister announced at the Economic Forum in June that she wanted the Business Tax Working Group to focus on achieving a company tax rate cut as its highest priority.
However, any company tax rate cut comes at a cost to revenue and we have asked the Business Tax Working Group to identify ways in which that cost could be met from within the business tax system.
I would like to take this opportunity to address concerns that have been raised by some corners of the business community and the media around this revenue neutrality requirement. One of these concerns seems to be that this means reform is ‘pointless'.
It is worth noting that this seems to ignore decades of research about the potential benefits of taking a ‘broad base, low rate' approach and the importance of international competitiveness.
As I am sure all of you are aware, the Government is tightening its belt in a number of areas, and the cost of any new policy reform needs to be offset. This is no different for business tax reform. For this reason, we have asked the Working Group to identify savings from the business tax system to fund a reduction in the company tax rate. The Review of Business Taxation undertaken in the 1990's (Ralph Review) was subject to a similar constraint.
We will carefully consider the Working Group's advice on whether - and if so, how - a rate cut might be funded from within the business tax system.
Phase 1: Tax treatment of losses
However, I thought I might quickly take you back over the outcomes of the Working Group's initial phase of work on the tax treatment of losses - and how the Working Group's recommendations led to the Government introducing loss carry back for companies in the 2012-13 Budget.
The Working Group noted in its Final report on the tax treatment of losses that the asymmetrical treatment of profits and losses in the tax system can deter investors from taking otherwise worthwhile risks. The report noted that in the context of an economy undergoing structural change, risk taking and entrepreneurship is essential for businesses to restructure and invest in new products and business strategies.
As a result, the Working Group recommended that a limited form of loss carry back be introduced for companies. The Government announced in last year's Budget that companies will be able to carry back losses of up to $1 million a year, which translates to a cash benefit of up to $300,000 in a year.
The introduction of loss carry back brings the Australian tax system in line with a number of international tax systems including the United States, Canada and the United Kingdom, which also provide limited forms of loss carry back.
I recently released exposure draft legislation for the loss carry back measure for consultation and I looking forward to introducing the final legislation into Parliament soon.
Phase 2: Longer-term reforms
As I mentioned earlier, in June the Prime Minister asked the Working Group to focus on ways in which a company tax rate cut could be funded from within the business tax system.
In August, the Group released a discussion paper that canvassed a number of base broadening options that could be used to fund a reduction in the company tax rate.
As the Working Group were keen to point out, an option's inclusion in the discussion paper was not an indication that it would necessarily be recommended by the Working Group.
The purpose of the discussion paper was to provide a sound basis for consultation on whether the revenue forgone through the tax expenditures identified would be better directed towards a company tax rate cut.
As corporate tax managers, you are all well placed to understand the implications of various options on the table for your business, particularly your plans for new investment. I hope that many of you have already made thoughtful contributions to the consultation process for the discussion paper, either individually or through organisations like the Corporate Tax Association.
During September, the members of the Working Group met with stakeholders in Sydney, Melbourne, Brisbane, Perth and Canberra. I think the Working Group should be applauded for the open and transparent manner in which it has consulted on the discussion paper.
The Working Group is now reflecting on what it has heard from stakeholders -both in meetings and through written submissions. As I am sure you're aware, the Working Group has indicated that it will be publishing a draft final report later this month. So you will have an opportunity to see how the feedback provided has been considered by the Working Group before the final report is provided to the Treasurer towards the end of the year.
I would like to reiterate that the Government has given the Working Group this task because we believe it is important. We will carefully consider the Working Group's advice.
I think I can say that we will all be looking forward to seeing what the WorkingGroup recommends at the end of the year.
Part IVA - anti-avoidance provision
As corporate tax managers, the operation of Part IVA, the general income tax anti-avoidance provision, will no doubt be an issue of particular interest to you.
As you would be aware, the Government is working on amendments to PartIVA.
As a former tax lawyer and now the responsible Minister, let me assure you that I understand the importance of Part IVA in the system and therefore the sensitivity of these changes.
We consider that amendments are necessary to ensure that Part IVA operates as it was always intended to operate. That is, to counter arrangements carried out in an artificial or contrived way to avoid tax.
Our focus here is on lawful conduct carried out in an artificial and contrived way to prevent a liability to tax from arising that would have arisen if the form of the transaction had matched its substance. Part IVA operates to expose the substance of the transaction to the ordinary operation of the taxation laws.
Tax avoidance can and should be distinguished from legitimate tax mitigation. Legitimate tax mitigation involves a taxpayer taking advantage of a choice offered by the tax law in circumstances where the taxpayer genuinely engages in the activity or experiences the economic consequences that Parliament intended to be engaged in or experienced by those making that choice.
Of course it is easier to express this distinction in the abstract than it is to identify it in practice. Blatant tax avoidance is not so problematic - for example - it's not so hard to identify tax avoidance when confronted with a highly complex arrangement involving multiple steps that, put together, serve no apparent commercial purpose. In those cases, the arrangements as a whole are obviously artificial and contrived.
It's another question again, when what is artificial or contrived is no more than a step or steps within a broader commercial arrangement. In those cases, the dividing line between avoidance and legitimate planning can be difficult to discern.
Broadly speaking, the Government thinks the dominant purpose test in PartIVA is working effectively to distinguish tax avoidance from legitimate planning. That is, we think it's getting the balance about right. That's because Part IVA requires an examination of whether, having regard to eight objective matters, including the form and substance of an arrangement, it could be concluded that the arrangement was entered into, in the particular way it was, for the sole or dominant purpose of obtaining a tax advantage.
As such, Part IVA does not inquire into the subjective motives of taxpayers. It does not therefore strike at every arrangement that is entered into with an eye to tax minimisation. For example, it does not strike at a taxpayer who, motivated by tax considerations, chooses to transfer an income producing asset to his or her spouse because the spouse pays tax at a lower marginal rate.
The bare fact that a taxpayer pays less tax if one form of transaction rather than another is made does not demonstrate that Part IVA applies. Tax is a cost of doing business and it would be expected that it will be taken into account in commercial transactions. So, to take another example, just because a taxpayer makes a decision to lease rather than buy an asset, it does not follow from the fact that the rent is deductible that the taxpayer's dominant purpose in entering into the lease was the obtaining of the deduction.
Rather than focusing on a taxpayer's motives, Part IVA focuses on the way in which an arrangement is carried out. The intention is that it should strike at arrangements that have unnatural and contrived features that are explicable solely or principally by the desire of a person to produce a tax advantage. That is, at arrangements that are dressed up to be something that they are not. This includes arrangements that, viewed as a whole, achieve discernible commercial ends. As the courts have observed, it is a false dichotomy to suggest that a particular course of action cannot be “both ‘tax driven' and bear the character of a rational commercial decision”.
In the Government's view, the problem with Part IVA is not with the operation of the purpose test. That is why I have made it clear, publicly, that we are committed to maintaining the ‘core operation' of the dominant purpose test.
The Government considers that a problem exists with the way in which Part IVA goes about identifying and measuring the ‘tax advantage' secured by an arrangement entered into for the purpose of avoiding tax.
That is - to use the language of PartIVA - how it identifies and measures the ‘tax benefit'.
Simply described, Part IVA measures the tax benefit secured by an arrangement by comparing the actual tax position achieved by the arrangement with the tax position associated with a comparator arrangement - often referred to as the counterfactual.
The difficulty lies in the way in which the counterfactual is being ascertained. The recent decisions confirm that the counterfactual is to be identified by a hypothetical inquiry into what else the taxpayer would have done if it hadn't entered into the scheme.
Counter intuitively, the counterfactual does not have to be another way in which the substantive results of the scheme, if there were any, might have been achieved. The consequence of that is that taxpayers who enter into arrangements in a particular way, with the dominant purpose of avoiding tax, appear able to escape the operation of Part IVA simply by demonstrating that they would not have entered into the arrangement if they had known it would attract tax. For example -they might argue that they wouldn't have done anything at all or they would have done something with a different substantive effect from the arrangement that they actually entered into.
This was never intended by Parliament. In the Government's view, this is a technical deficiency in the definition of ‘tax benefit' that has the potential to undermine the effective operation of Part IVA.
The amendments we will be making to Part IVA will be targeted at this problem and this problem alone. Taxpayers will not be affected by the amendments unless they participate in arrangements for the sole or dominant purpose of obtaining a tax advantage.
Having said that, I am aware that taxpayers and advisers alike are concerned about the prospect of changes to Part IVA. That stands to reason since the distinction between tax avoidance and legitimate tax planning can be elusive.
That is why the Government has made it clear from the outset that we would consult on how to implement the policy without causing any unintended consequences.
And it is why I have put a comprehensive consultation process in place to ensure that the vast majority of taxpayers who do the right thing and pay their fair share of tax are not inadvertently affected by these changes.
Treasury is in the process of conducting a series of roundtable discussions with industry representatives, legal experts and academics to identify and explore possible approaches to clarifying the law. As part of this process, Treasury will be seeking advice from senior tax Barristers with expertise on Part IVA.
Once we have settled on a preferred approach to clarifying Part IVA, we will consult with the public on the draft amendments, through the usual Treasury public consultation processes for draft taxation legislation.
I know that some might like to see the Part IVA changes implemented more quickly. But given the complexity of this area of tax law it is important to recognise that hurrying the consultation process may pose risks to the quality of the final outcome.
We are taking the time to make sure that the change is right the first time.
Reform of Australia's transfer pricing rules
Australia's transfer pricing rules play an important role to ensure that multinational firms pay their fair share of tax on profits in Australia.
This taxation is based on an amount of income which reflects the economic activity attributable to Australia and is determined in accordance with internationally accepted approaches.
As I'm sure you know, the Government announced in November 2011 its review of Australia's transfer pricing laws. This will ensure that our rules align with international best practice as set out by the OECD.
We are implementing this in two phases.
The first phase ensures the law operates in a way that is consistent with the Parliament's longheld understanding and widely disseminated ATO guidance material that treaty transfer pricing rules apply to provide assessment authority in treaty cases. The first phase amendments received Royal Assent on 8 September 2012.
I know that there are strong held views about those changes - and that applying the amendments back to 2004 was controversial.
I want to emphasise that the potential impact on taxpayers was 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 in the unlikely event that it arose. Evidence provided to the Senate Economics Legislation Committee on this point demonstrates the excellent track record of Australia in successfully resolving any issues of this nature with our treaty partners.
It is important to note that settled cases won't be reopened as a result of these amendments.
And the Tax Office has publicly stated at the highest levels that they will not change their approach to transfer pricing cases as a result of the amendments, precisely because the amendments are entirely consistent with the Commissioner of Taxation's long held and publicly expressed view of the law.
The need for reform
But I want to talk today about the second phase to reform Australia's transfer pricing laws.
Several factors led to the Government's announcement to review Australia's transfer pricing laws, including:
- First, International thinking and business practices on transfer pricing have evolved significantly since the laws were introduced in 1982.
- Second, In 2010 the OECD released revised Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
- Third, recent transfer pricing cases such as Roche and SNF have highlighted areas of uncertainty in the existing law.
Second Phase: Towards International best practice
With phase one of the transfer pricing reforms now passed by the Parliament, the second phase of the reforms is well underway.
This will be a wholesale modernisation of Australia's transfer pricing regime.
The reforms will provide certainty by aligning Australia's transfer pricing law with the most recent benchmarks of international best practice as set out by the OECD.
The OECD revised Transfer Pricing Guidelines released in 2010 contained a number of changes to the internationally accepted approach to transfer pricing.
At the core of these Guidelines is the arm's length principle.
To be consistent with the arm's length principle, the Australian transfer pricing rules should ensure that cross-border profits attributed to the Australian tax base appropriately reflect the economic activity undertaken here. Broadly, tax should be based on an arm's length return for Australia's economic contribution.
This economic contribution is measured through an analysis of the functions performed in Australia, the assets used or contributed by Australian operations, and the risks assumed on the Australian side.
In making this analysis, aligning our laws to the international benchmarks of the OECD will reduce uncertainty, minimise compliance and administrative costs and reduce the risk of double taxation - thereby facilitating international trade and investment.
Countries around the world recognise the benefits of a consistent approach to cross-border transfer pricing. Australia's major trading and investment partners look to the OECD material on transfer pricing to provide that consistency.
This has been our longstanding practice and, as a general proposition, it is a desirable goal that outcomes from applying the treaty provisions and the domestic transfer pricing rules are in alignment as far as possible. The proposed reforms are aimed at achieving this by aligning the domestic transfer pricing rules with the OECD guidance on transfer pricing.
The second phase reforms also aim to increase efficiency and certainty for taxpayers in a number of ways. Most notably, the rules will now apply on a self-assessment basis. So whereas the current rules operate on the Commissioner's determination, the new transfer pricing regime will be consistent with the self-assessment approach underlying other income tax rules.
As part of this, the Government is giving serious consideration to introducing a time limit on the Commissioner's power to amend assessments.
This reflects the recommendations of The Review of Unlimited Amendment Periods in the Income Tax Laws (2007) and The Report on Aspects of Income Tax Self-Assessment (2004).
Any change will need to balance the benefits of added certainty to taxpayers with the need to provide an adequate time for the Commissioner to conduct transfer pricing risk reviews and audits where necessary.
The benefits of consultation
In designing the transfer pricing reforms to date, the Australian Government has consulted widely with industry and stakeholders. The Government has made it a priority to consult stakeholders on broader policy issues, as well as on specific measures-and the Government has engaged extensively with the business community in relation to the transfer pricing reforms.
The consultation process has delivered considerable benefits in relation to the design of the phase one amendments, for example in relation to clarifying the link between the transfer pricing and thin capitalisation rules. This was something that was strongly called for by business and tax practitioners.
And in our discussions so far with industry and stakeholders, there appears to be broad support for the phase 2 reforms.
Further consultation will take place in the near future and I encourage you all to participate.
Consultation Process and Forward Work Program
Introduction
I would next like to speak to you about community involvement in setting priorities for tax reform and during the process of policy and law design.
I've spoken before about the high priority this Government has placed on tax reform. But this Government has also placed a high priority on improving the process of designing taxes.
Within three months of coming into office this Government set up a Tax Design Review Panel to examine the ways tax law quality could be improved through better community consultation. The Panel was also charged with examining methods to increase community input in prioritising tax law changes.
The Government accepted in principle all 26 of the Panel's recommendations, contained in its 2008 report, Better Tax Design and Implementation.
I recently released the Board of Taxation's Post-Implementation Review into the Panel's recommendations. This report outlined the improvements which have been made as a result of our acting on the Panel's recommendations.
Community input into setting priorities
The Government has also made efforts to increase community involvement in setting priorities for law changes.
In many ways, these efforts began when the Government established the Henry Review in 2008. The Henry Review received over 1,500 submissions and over 4,600 items of correspondence. In addition, the members of the review panel attended stakeholder events across the country and separately met with over 130 stakeholders.
And last year's Tax Forum is another example of sharing views. It brought together around 180 participants, including representatives of business and community groups, tax practitioners, academia, state and local government, unions and the superannuation industry.
More recently, I have announced that I will be holding twice yearly meetings with the Joint Professional Bodies. Among other things, these meetings will enable the Government to better understand of the community's top priorities for tax reform. These meetings will also enable the Government to provide feedback about the Government's own priorities for tax reform.
Since February 2009, Treasury has been releasing a Forward Work Program on tax measures on its website. The Program sets out the consultation currently being undertaken and the consultation planned in the months ahead. This document provides an indicative timetable to assist the community in responding to consultations the Government is undertaking. Treasury now publishes this Program on a monthly basis.
Purpose of consultation
In addition to increasing community input into setting priorities, the Government has made significant efforts to increase community consultation on specific tax policies and tax law.
Consultation plays a vital role in Government decision making. In a complex area like tax law it is particularly valuable.
When developing policy, consultation can assist the Government to understand the commercial and practical issues relevant to particular industries. This can provide the Government with a broad understanding of the options for reform.
When designing law, consultation can draw on the expertise and knowledge of people who deal with the law on a day-to-day basis. This can improve the design and quality of the tax law and help to ensure it reflects the policy direction.
Tailoring consultation - public and targeted consultation
Most tax law changes affect a wide range of stakeholders. Therefore consultation is typically most beneficial when conducted publicly. That's why public consultation is this Government's default position for consultation on policy development and law design. This ensures that all stakeholders have the opportunity to contribute to the improvement of the tax system.
It is sometimes taken for granted that consultation on tax policy and legislation is the norm. But it is worth remembering that up until the early 2000s consultation was infrequent and largely confined to administrative matters.
But not all tax law changes are the same. Each has its own characteristics. And each consultation process should be tailored to these characteristics.
Sometimes law changes only affect a particular industry, or a particular group of taxpayers. In these circumstances, targeting consultations can enable a greater depth of consultation with affected parties.
Complex changes require comprehensive consultation - Part IVA
The complexity of a tax law change will also help determine the optimal consultation process. As I have already outlined today, the change being made to Part IVA of the 1936 Income Tax Assessment Act is one example of change in a particularly complex area of tax law.
I talked about Part IVA earlier, but I want to elaborate briefly on the consultation process the Government put in place.
Consultation on Part IVA has taken place in three stages. Firstly, the Government undertook targeted consultation before deciding to make a change. Secondly, I established an expert roundtable to provide advice on the implementation of the change. The roundtable comprises legal professionals, academics and representatives from tax and accounting bodies. The advice of the expert roundtable is complemented by advice provided by senior tax barristers. And lastly, the Government will undertake public consultation on an exposure draft of the amended Part IVA legislation. I look forward to seeing any views you might have once this exposure draft is released.
Consultation before decisions are made - Business Tax Working Group
Sometimes there can be benefits in consulting early, before the Government makes a decision. This is particularly true when there is an exploration of new and complex proposals or major reforms.
One example of this is the consultation being undertaken by the Business Tax Working Group as I talked about earlier.
As we have already discussed, the Working Group recently consulted on a discussion paper that canvassed a range of ways that a cut to the corporate tax rate might be fully funded from within the business tax system.
Clearly, this process has shown that early and widespread consultation is not always universally welcomed, especially where particular industries and sectors believe that such a process may lead to decisions being taken that may not be entirely favourable to them.
Nonetheless, the Working Group has been open and transparent in engaging the wider community on these important issues and will continue its consultation efforts with the release of a draft final report later this month.
Shared responsibility
Since entering office, the Government has made significant efforts to improve the involvement of the community in the tax design process. And I believe that the increased participation of the community brings significant benefits by leading to more enlightened decision making by the Government.
But this can be subverted when participants are not open and honest, or in the extreme when participants misrepresent the commercial and practical effects of a proposed tax change in what can often become an exercise in rhetorical brinkmanship. While some participants may see benefits from this in the short run, the possibility of a need for future revisions down the track can lead to an environment of greater uncertainty for all.
Increased participation in the tax design process brings with it increased responsibility. The responsibility for the health of the tax system is shared by all participants.
As such, participants need to come to the table with more than just their clients' or shareholders' interests in mind.
Consultation also does not automatically mean that stakeholders will get everything they want out of that process. The job of government, in the end, is to make decisions that weigh up the interests of a wide range of stakeholders and that deliver balanced outcomes.
Participants need to be mindful of this reality and their own duty to progress the national interest, not just sectional interest. Whether during consultations or engaging in public debate, we all have to make a commitment to be upfront and honest with each other. The tax system belongs to all of us. And those with the skills and expertise have a responsibility to maintain and to improve the tax system, for the benefit of all Australians.
The Board of Taxation addressed this issue in their recent report on the tax design process. The Board recommended that, at the outset of consultations, the Government obtain a commitment from all stakeholders to seeking good tax system outcomes. The Board also recommended the Government consider developing an explicit ethical framework for participants in the tax design process.
Last month in an address to the Tax Institute Queensland Corporate Retreat, I invited the tax community to provide me with any ideas on what an ethical framework might look like in practice. I would like to extend this invitation to all of you and in particular invite you to provide me with any ideas about how such a framework might apply to corporate tax managers.
I am looking forward to discussing this issue at the first of my twice yearly meetings with the Joint Professional Bodies
Good faith from all parties - Exposure draft on GST refunds
A recent consultation over exposure draft legislation on GST refunds illustrates how the consultation process needs to be underpinned by a presumption of good faith by all parties and a commitment to improving the design of our tax laws.
In this case the genesis of the measure was the 2008 Board of Taxation Review of GST administration which recommended that the Commissioner's discretion to refund overpaid GST be clarified. Many taxpayers saw the discretion as requiring the Commissioner to refund. On the other hand, the Commissioner saw his discretion as one where he need not refund.
When we released exposure draft legislation in August this year, the design of the measure had changed to take account of other developments - namely a new self-assessment regime for indirect taxes and court decisions concerning the scope of the existing restriction on GST refunds.
The Government has received 12 submissions in response to the draft exposure legislation. While acknowledging the need for change, many stakeholders have expressed concerns that the draft legislation went beyond what was recommended by the Board of Taxation and may give rise to unintended consequences. The Government appreciates the efforts of professional organisations in participating in the consultation process. I understand that the Corporate Taxpayers Association made a submission regarding the exposure draft, and efforts are being made to address the concerns raised.
Leaving aside the merits of any particular concerns, I think this example emphasises that the consultation process should be a collaborative effort, undertaken in good faith, and drawing on the knowledge and expertise of people to improve the design and operation of the tax law.
Conclusion
There is more I could say on the subject of consultation but I will summarise by saying that the Government is committed to continuously improving community involvement in policy development and law design processes, and in setting priorities for tax reform.