Introduction
If we are to unleash the productive capacity of Australia’s economy, create new jobs and unlock innovation, foreign investment is essential.
That’s why this Government welcomes foreign investment. As we have said many times before, Australia is open for business.
But opening our doors to business also means ensuring that multinational companies pay tax in Australia on the income they earn here.
As the Prime Minister and I have both previously said, you should pay tax in the country where you’ve earned a profit. That’s not just an essential tax principle, it is rational and fair.
Of course, most businesses do comply with our tax laws.
But there is a small proportion of multinational businesses that set up sophisticated arrangements to avoid Australian tax. This is patently unfair – unfair on the Australian taxpayer and unfair on local businesses that are doing the right thing.
This Government won’t stand idly by while this is happening, and we are firmly committed to ensuring that Australian tax is paid on profits earned in Australia.
That’s why we are taking action on three fronts by: implementing effective domestic policy changes, collaborating with the Commissioner of Taxation to strengthen administration, and pursuing multi-lateral international change.
1. Australia’s integrity rules and legislation
Australia has a robust and sophisticated set of laws that deal with aggressive tax planning and international profit-shifting. They ensure that our tax system has integrity. These laws include specific provisions covering transfer pricing rules, thin capitalisation rules, controlled foreign company rules and general anti-avoidance rules.
I am advised that they are amongst the strongest anti-avoidance laws in the world. But the Government is acutely aware of the need to stay alert to constant changes in financial arrangements used for tax minimisation across the global economy.
Our actions underscore our strong commitment to making sure that multinational companies pay the correct amount of tax in Australia on the income they have earned in Australia.
When we came to government just 12 months ago we immediately dealt with 96 announced but unenacted tax measures with one dating as far back as March 2001. The Government methodically worked through the backlog and in December last year, after an expedited consultation process with tax experts, facilitated by the Board of Tax, we announced that we would proceed with 37 measures including some with amendment. We decided not to proceed with 55 measures on the basis that some were redundant, some were just too complicated to be complied with and some policy announcements were simply unable to draft in legislation.
As honourable members know, the House of Representatives currently has before it legislation that tightens the rules governing thin capitalisation.
There is further legislation before the Parliament that will prevent multinational companies using hybrid financial arrangements to circumvent the proper application of our thin capitalisation rules.
This is a flaw that’s been in our laws for more than a decade. I note that the previous Government recognised this and announced its intention to address the issue.
This Government is now building on the previous Government’s work and is legislating to fix thin capitalisation rules, by making sure that repayments of interest to companies in Australia from overseas subsidiaries are subject to tax even when they are dressed up as dividends.
These amendments are due to take effect from 1 July this year.
The previous Government announced several other measures without considering the full impact of the changes on Australian companies. One flawed proposal repealed section 25-90 which enables companies to claim interest deductions on investments in their overseas subsidiaries which produce exempt dividend income.
Soon after the election the Government was told that this measure would impose extra costs on Australian businesses seeking to expand offshore, and those already operating offshore, by denying legitimate business deductions for interest costs on their borrowings.
Increasing taxes on Australian businesses seeking to expand into new markets is poor public policy.
2. Australia’s tax administration
Good policy and robust legislation requires the support of well resourced and skilled tax administrators. We are working with the Australian Tax Office to create the best tax administration system in the world.
The Australian Taxation Office has extensive investigative powers and can take appropriate measures to ensure that multinational companies operating in Australia are not just complying with our laws but also paying their fair share.
I have asked the Commissioner of Taxation to double his efforts in this area by undertaking more extensive enquiries and audits of multinational companies considered a risk to Australian tax collections.
Australian consumers often pay much higher prices compared to United States consumers for identical IT hardware, software, music, games, sporting equipment and fashion, to mention a few. Members would also be aware of media reports detailing some companies selling these products pay little tax in Australia despite their products selling for much higher prices in Australia than elsewhere around the world.
Part of the Commissioner’s efforts will be examining whether these are location specific profits being generated and then shifted out of Australia. In such cases, Australia’s transfer pricing rules could apply to determine whether the appropriate amount of profit from Australian sales was booked to Australian operations. These rules, of course, are based on the OECD’s internationally-recognised transfer pricing rules.
I have also asked the Commissioner to double his efforts in applying our rules so that his officers are able to look at these price differences to ensure that profits earned in Australia are taxed in Australia.
Combined with our strengthened transfer pricing rules, the Commissioner’s proactive agenda will provide greater integrity to our tax system and help us collect the right amount of tax.
3. Global Action
The third area we’re taking action on is on the international front.
International cooperation, of course, complements both our robust domestic laws and our administrative efforts to counter international tax avoidance.
The ATO has placed greater emphasis on its cooperation with other tax authorities. We now have a significantly improved understanding of international tax planning arrangements, where the risks lie and there is better targeting of compliance activities.
As you will know, I am meeting other G20 Finance Ministers in Cairns in two weeks time. Along with other parts of the G20 agenda, we will be discussing the progress of the G20’s work on tax reform, and we will be undertaking further work to accelerate global integrity measures.
The G20’s tax agenda responds to international concern about the ability of multinationals and high wealth individuals to avoid or evade their tax liabilities. The G20 is committed to making our international tax system fairer for all countries, whether they are fully developed economies or not.
The G20’s tax agenda focuses on addressing base erosion and profit shifting (or BEPS), tackling tax avoidance and promoting tax transparency and automatic exchange of information. It is getting strong technical assistance from the OECD but it is a fully inclusive work program involving the twenty largest economies in the world. It was endorsed at the 2013 St Petersburg Summit. Significant progress has been made.
An important theme for our upcoming meeting in Cairns will be tax transparency and information exchange. When tax authorities provide better information on individuals as well as the global operations of multinational companies, that data becomes a powerful tool to crack down on tax avoidance.
I have further promoted the work at G20 Finance Ministers meetings in Sydney and Washington this year.
Australia is a leader in exchanging information with other countries. This involves transmission of individuals’ information on financial accounts and income to other tax authorities where they are resident. Currently the ATO automatically sends information to around 40 countries, and receives it from around 20 tax authorities.
3.1 Common Reporting Standard
A new Common Reporting Standard for the automatic exchange of information was endorsed at our G20 Finance Ministers and Central Bank Governors meeting in February in Sydney. This is a single global standard for the collection and reporting of financial account information on non-residents.
This will result in a large increase in the amount, accuracy and comprehensiveness of financial information exchanged between tax authorities. It will help the Commissioner of Taxation to identify and catch tax cheats.
We will detail our implementation plan for this initiative along with other G20 countries at the upcoming meeting in Cairns.
Australia will not be alone in moving to the new standard. Over 60 other countries and jurisdictions have committed to doing the same, including Luxembourg, Switzerland, Singapore, the British Virgin Islands, and the Cayman Islands.
This exchange of information will catch hidden assets and undisclosed income.
We have provided Australians with a one off opportunity to disclose those assets without severe penalty.
Accordingly, I encourage Australian residents with offshore investments to take advantage of the ATO’s voluntary disclosure initiative, Project DO IT. They should now come forward and disclose unreported foreign income and assets before the end of this calendar year.
3.2 Base Erosion and Profit Shifting
At Cairns the G20 will also ensure progress on the OECD Base Erosion and Profit Shifting (or BEPS) Action Plan.
We are half way through an ambitious two year work program to update international tax rules for the 21st century. The Action Plan is aimed at ensuring that international tax rules keep up with advances in multinational companies’ business models, such as greater use of intellectual property and information technology, and integrated global supply chains.
The OECD has developed a comprehensive 15 point action plan that includes articulating the challenges of collecting tax on the digital economy, and developing responses to these.
At Cairns we will review the work to date, which involves progress on country by country reporting of tax information by multinationals, assessments of harmful tax practices, and responses to business use of hybrid funding instruments to avoid tax.
The OECD has made progress on all 15 action items, and Australia continues to lead the global response to tax base erosion and profit-shifting as G20 President.
Concluding comments
As I have made quite clear, the Government is committed to a fair and efficient taxation system.
We are determined that multinational taxpayers will not be able to avoid their Australian tax obligations by shifting their international profits to low tax or no tax jurisdictions.
We already have strong domestic laws and an active, effective tax administrator who is working with other tax administrators internationally, to put together a global picture of these multinationals.
We will continue to monitor our domestic laws in response to the changing international economy, and make sure they remain effective in countering arrangements designed to shift profits out of Australia.
And our leadership role in the G20 tax agenda demonstrates just how determined we are to maintain the integrity of our tax system.
In its role as G20 President this year, Australia has taken the lead in global efforts to address international profit-shifting arrangements.
That leadership will continue well into the future.
Over the next few weeks in the lead up to the Leaders’ meeting in November, Finance Ministers will continue to meet in Cairns, Washington and then again in Brisbane to deliver real progress ensuring tax evaders are caught wherever they may be located.