16 May 2014

'Addressing BEPS and the Government's policy agenda', Address to the Clayton Utz BEPS Workshop


Check against delivery

This is a transcript of the minister's speech entitled 'Addressing BEPS and the Government's policy agenda'. It was presented at the Clayton Utz BEPS Workshop.

Thank you for the opportunity to address you on the topic of tax Base Erosion and Profit Shifting (or 'BEPS').

This issue is a high priority for the Government, not only as the current G20 President, but also from a domestic policy perspective.

BEPS is one of the key issues that the G20 is focussing on in 2014 and 2015.

I want to congratulate Clayton Utz and the Business Council of Australia for staging this important workshop. Open, frank and constructive engagement with the private sector on BEPS and how best to frame our response is critical.

Globalisation and digitisation are overwhelmingly positive developments that have enabled business to increase their efficiency and to realise new opportunities, driving economic growth and increasing our living standards.

However, globalisation and digitisation have also enabled multinational enterprises to minimise tax by artificially segregating profits from the countries in which value is created; or through exploiting differences in the tax rules of different countries in ways which result in double non-taxation.

BEPS is an important global issue: It undermines the trust and confidence that taxpayers have in the integrity of the tax system, and government more broadly; and it means that tax burdens are not being evenly distributed, allowing some companies to gain a tax inspired competitive advantage over others.

Of course, there is nothing new about BEPS.

Australia's current armoury of tax integrity rules are both robust and credible. In a number of areas, including thin capitalisation, CFCs, transfer pricing and general anti-avoidance, we are ahead of many other countries.

That said, given the cross-border nature of BEPS, national efforts need to be complemented by appropriate, coherent international responses.

These are needed for two reasons. Firstly, to prevent new gaps and arbitrage opportunities from emerging; and secondly, to help prevent individual countries putting in place damaging unilateral measures.

As G20 President in 2014, Australia is fully supportive of the G20's commitment to a global response to BEPS based on sound tax policy principles.

The multilateral process

G20 leaders and finance ministers are providing the political impetus for change, while the G20 has tasked the OECD with undertaking the technical work.

At the request of G20 Finance Ministers, the OECD published the Action Plan to Address Base Erosion and Profit Shifting in July 2013, a 15 point action plan designed to address BEPS in a comprehensive and coordinated manner.

The Action Plan is ambitious in scope with Action Items ranging from addressing the tax challenges of the digital economy, neutralising the effect of hybrid mismatch arrangements, preventing treaty abuse and the artificial avoidance of Permanent Establishment status, and ensuring that transfer pricing outcomes are in line with value creation.

Deadlines surrounding the Action Plan are tight in order to ensure that trust in tax systems is not further eroded, to maintain political momentum, and minimise uncertainty for business.

Seven Action Items have deliverables due for completion in September 2014 and the remaining deliverables will be completed in December 2015.

Restoring trust in the international system on a multilateral basis cannot be achieved by OECD countries acting alone and the G20/OECD BEPS Project has been inclusive, incorporating non-OECD G20 countries into the work of the OECD on an equal footing. However some tensions have started to emerge.

These tensions are an indication of the importance of the issues being discussed and reflect different national priorities, different perspectives on the underlying issues, and different views on taxing rights.

Australia has actively participated in the work on all Action Items so far, with representatives from Treasury and the ATO represented on all OECD Working Parties and bodies responsible for advancing the BEPS Project.

It is in Australia's national interest to be a participant when global tax rules are being negotiated and Australia has been vocal in advocating the need for the G20 to provide leadership on BEPS.

Australia's overall engagement strategy with OECD technical Working Parties has been to argue that changes should be principles based, pragmatic, proportionate to risk, and targeted to address unintended interactions and situations where tax outcomes are misaligned with economic substance.

The Australian G20 Presidency has made a positive start to advancing the G20's tax agenda and by the Brisbane Leader's Summit in November, a key milestone in the two year BEPS Project, we will begin to see actions to address BEPS.

Ongoing engagement with business

If I could take a moment to outline the Government's consultation strategy on BEPS with the business community.

The Government is committed to reflecting the views of Australian business in its engagement with the OECD.

The OECD has established a number of formal consultation channels where business can be involved in the G20/OECD BEPS Project. These include through its Business and Industry Advisory Committee (BIAC), regular briefings and webcasts, published discussion drafts for public comment, and a number of public consultation meetings.

The Business Council of Australia has been providing the BIAC Tax Committee with input on behalf of Australian business community as part of the OECD's BEPS project, and I encourage those interested in the Action Plan to share your views with the BCA or BIAC.

In Australia, as many of you know, Treasury has established a BEPS Tax Advisory Group with specialists from the business community, legal and accounting firms, and industry organisations. A number of you are members of this Group.

The Group has met on four occasions since its establishment in November 2013, and has also provided valuable input on a number of Action Items out of session.

Treasury and the ATO incorporate these perspectives into their contributions towards the development of OECD policy material and through their ongoing engagement with OECD Committees.

Business forums like this one are a particularly valuable supplement to the domestic consultation process.

As many of you know, Treasury and private sector sponsors KPMG, Deloitte, PwC, the Institute of Chartered Accountants Australia, the Institute of Chartered Accountants England and Wales, and the Global Accounting Alliance recently co‑hosted the G20 International Tax Symposium in Japan,.

The Symposium provided a broad range of stakeholders within our region, including business, the opportunity to engage with OECD and G20 representatives to discuss the G20 tax agenda.

At this point I think it is valuable to outline some of the key concerns we heard from business stakeholders regarding BEPS at the Symposium. .

When it comes to BEPS, business wants to make sure that the cure is not worse than the disease.

From the symposium we heard that the OECD Action Plan is taking a thoughtful approach to understanding the problems and targeting the most aggressive arrangements which can lead to double non-taxation.

The OECD and the G20 have made it clear that international tax rules have not kept pace with changing economies and it is up to us as policy makers to restore the intent of those rules.

Business has made it clear that they want certainty. OECD representatives at the Symposium articulated that one of the key reasons that the OECD Action Plan is running on such an ambitious timetable is to reduce the period of uncertainty for taxpayers. Multilateral tax reform of this nature on such a tight timeframe is unprecedented.

Business has told us they want rules that are easy to comply with. It is here that the interests of business and governments were aligned, because at the Symposium because we heard that revenue authorities also want rules that are easy to administer.

The presence of many revenue authorities around the table at the OECD working parties has meant that issues of simplicity and administrability are well represented.

We have also heard that business would like the benefits of a restoration of the tax base returned to taxpayers in the form of lowered rates.

A further lowering of the corporate tax rate is an election commitment of the Government, when it is prudent to do so.

We heard at the Symposium that the Action Plan, rather than simply being an exercise in collecting more tax, aims to better align tax outcomes with economic substance and provide a more equitable distribution of the tax burden between companies regardless of their size, location or structuring.

Indeed, the observed trend in OECD countries over the past thirty years has been that corporate tax base broadening has been accompanied by rate lowering.

And lastly, there has been a noticeable shift in attitudes with business no longer challenging the legitimacy of the BEPS process; rather, as we heard at the Symposium, they are focussing on the consequences of the proposed solutions. Business has recognised that the multilateral reform process is by far more beneficial than the alternative of unilateral country measures on tax.

Action Plan outputs

So what are the outputs that we can expect from the OECD Action Plan?  The Action Plan will result in proposals to change the OECD Model Tax Convention and Transfer Pricing Guidelines and associated commentaries, as well as 'best practice' recommendations for domestic legislation. It is important to stress that these will be 'model law' changes.

Ultimately, potential changes to Australian treaty policy and domestic law will be guided by the national interest and informed by further consultation with business and other interested groups.

Our responses to these recommendations will address BEPS in ways which are consistent with the Government's broader economic policy priorities, including our 'open for business' philosophy, our support for cross-border investment and trade and our deregulation agenda.

Addressing BEPS: The domestic policy context

I also wanted to discuss where the G20/OECD BEPS agenda sits within the Government's broader economic policy priorities and agenda.

G20 growth agenda

At the February G20 Finance Minister's Meeting held in Sydney the Treasurer joined with other Finance Ministers' in committing to the development of ambitious but realistic policies to lift G20 countries collective GDP by more than 2 per cent above the trajectory implied by current policy settings over the next 5 years.

To achieve this objective Finance Ministers agreed to take concrete actions across the G20 to increase investment, lift employment and participation, to enhance trade and promote competition, and through adjustments to macroeconomic policy settings.

Stronger growth requires lower, simpler and fairer taxes that don't stifle business activity, including the endeavours of small business. Lowering the company tax rate to 28.5 per cent on 1 July 2015 will support a broad range of Australian small businesses by boosting confidence, investment and cash flow, which can allow more reinvestment of profits into growing the business.

However, the ability of multinational enterprises to exploit differences in international tax rules to reduce their tax makes it harder for governments to maintain growth friendly tax systems and manage their budgets in a sustainable way.

Reducing unnecessary regulation

Stronger growth also requires a reduction in the regulatory burden that is strangling Australia's economic prosperity and development. Reducing the regulatory burden is a crucial undertaking for the Government.
The regulatory burden steals the time needed to grow a business, steals the energy needed to innovate, and is particularly onerous on the small businesses of Australia.

The Government has committed to immediate action to reduce the red tape burden and lift productivity as part of its deregulation agenda.

This commitment includes $1 billion in red tape reductions each year and a requirement that Cabinet submissions proposing legislative changes with a significant regulatory impact will no longer be exempted from the regulatory impact assessment process.

Any domestic implementation of G20/ OECD BEPS related measures will need to be advanced within the context of the Government's deregulation agenda.

Competitiveness and trade

The Government understands that effective competition is a vital element of ensuring a strong economy that allows business to grow and prosper.

Competitive markets have a number of benefits including putting downward pressure on prices for the benefit of consumers, encouraging efficiencies to reduce costs for business, and promoting innovative new products and services.

The Government supports fair tax competition that takes place in a transparent manner consistent with international tax rules.

This kind of tax competition creates incentives for Government to provide services and public goods in an efficient manner.

It also provides incentives for genuine business activity, private investment and international trade.

However, BEPS raises concerns that some companies are gaining a competitive advantage relative to others based on their tax planning opportunities rather than market ones, disadvantaging smaller and domestically focused businesses in particular.

Therefore, the G20/OECD BEPS Project provides an opportunity to better align international tax laws with economic substance in a manner that supports the competitiveness of small business and domestically focused companies.

On election night the Prime minister memorably declared that 'Australia is under new management and is once more open for business'.

Since then the Government has elevated economic diplomacy to a core objective of Australian international policy, given priority to concluding long-running free trade negotiations, and enhancing Australia's commitment to both regional and multilateral trade negotiations.

We are already seeing results with negotiations concluded on a free trade agreement with South Korea and an economic partnership agreement with Japan.

The Government continues to work on free trade agreements with China, India, and Indonesia, and is working towards the multilateral Trans‑Pacific Partnership and Regional Comprehensive Economic Partnership agreements.

In the G20 context, the Treasurer has said that investors need to have confidence that G20 economies are open for business. In this regard, removing the impediments to the free flow of global private sector trade, investment and competition are critical.

Ensuring the integrity of the international tax system will be a part of this challenge.

Specifically, it is important that G20 countries remain committed to an inclusive, multilateral approach to reform that minimises the risks of unilateral action and the re-emergence of double taxation which would damage international trade.

Promoting infrastructure investment

Infrastructure is a core priority of this Government, indeed the Prime Minister has said that he wants to be known as 'an infrastructure prime minister'.

We recognise that well-designed economic infrastructure is critical in connecting manufacturers to markets, consumers to products and commuters to workplaces.

In addition to our significant infrastructure funding commitments announced in the Budget, the Government is taking steps to enhance private sector investment in infrastructure, and to improve infrastructure planning and governance.

In this regard, we are concerned to ensure that potential proposals to address BEPS will have no undue effects on the funding of private sector infrastructure investment in Australia.

Fiscal sustainability, budget consolidation and repair

As the Treasurer recently noted, the IMF Fiscal Monitor released in April this year found that, based on current policy settings, Australian healthcare and pension expenditure would be $61 billion a year higher in today's dollars by 2030.

To pay for the growth in health and pension expenditure alone the Government would need to raise the equivalent of the existing company tax, or an amount greater than all the revenue currently collected by the GST.

The National Commission of Audit report has provided the Government with a list of recommendations regarding Commonwealth expenditure to ensure the services and support Australians require are provided as efficiently as possible.

In the budget the Treasurer has indicated the Government's priorities in response to the Commission's recommendations.

However, the task of paying for the services that the Australian people have come to expect also requires a consideration of the sustainability of Australia's revenue base. It is here that BEPS is a critical issue.

The 2013 Treasury Scoping Paper Risks to the Sustainability of Australia's Corporate Tax Base concluded that the extent to which BEPS is currently affecting Australia's corporate tax base is unclear.

However, there was acknowledgement that the rising importance of global value chains, the digital economy and intangibles have increased the risks of BEPS.

BEPS also raises broader concerns for the sustainability of the Australian tax system.

If taxpayers (including individuals) think that multinational corporations can structure their affairs to take advantage of differences in countries' tax laws it could undermine voluntary compliance by all taxpayers — upon which modern tax administration depends.

The path ahead

I think you'll agree the Government's plan to restore Australia's international competitiveness and secure long-term fiscal sustainability is both ambitious and necessary.

The Government's approach to addressing BEPS will have an important role in supporting our broader policy priorities in these areas, and I hope I have made some of these connections tonight.

We need to recognise that over the course of two years we are creating with the BEPS Action Plan a base for coordinated responses to international tax reform. It will then be the job of national governments to secure legislative reform where appropriate and after consultation with taxpayers.

We need to understand from you the costs and benefits of the proposed options for your business.

I encourage companies to get engaged in the conversation concerning the G20/OECD Action Plan, and the G20 tax agenda more broadly.

The Government appreciates different perspectives on the issues and options raised under the Action Plan.

Thank you.