It is self-evident that multinationals operating in Australia should pay tax on profits properly attributable to Australia.
As a Government we are committed to having a fair and sustainable tax system that deserves the confidence of the community, and that supports economic growth.
The Coalition Government is focussed on ensuring there is fairness and integrity in the taxation system, including on a global scale.
Australia has taken a lead role in developing measures to improve tax integrity across the globe, during our leadership of the G20 last year and in partnership with the OECD.
Tax avoidance strategies exploit gaps and mismatches in the international tax system, which has struggled to keep pace with the changing times, for example: the growing importance of intellectual property, greater use of digital technology and integrated global supply chains.
In 2014, the G20 delivered the first tranche of Base Erosion and Profit Shifting (BEPS) initiative recommendations, and yesterday the OECD released the final package of BEPS reforms. BEPS occurs when multinationals move their profits into lower-taxing jurisdictions thereby eroding the revenue base of the countries they are operating in.
BEPS activities give large multinational businesses an improper advantage over local, small, and family businesses which shoulder more of the tax burden. This practice also undermines confidence in the tax system more broadly.
The reforms aim to promote transparency and restore fairness to the international tax system by providing countries with a range of tools designed to ensure that profits are taxed where the underlying economic activities take place and where value is created.
The critical action items include Controlled Foreign Company rules, transfer pricing rules, Country-by-Country reporting, hybrid mismatches, enhanced tax treaty practices, and dispute resolution.
This BEPS package represents two years of work, and the cooperation of 60 countries, as well as regional tax associations and international organisations. It is a significant step forward in boosting the integrity of the international tax system. Its success now depends on all countries being willing and able to see its implementation through.
The changes won’t be radical for Australia, as we have already moved pre-emptively to strengthen our laws. Legislation is before Parliament to level the playing field and ensure multinationals pay their fair share of tax. This includes the multinational anti-avoidance legislation, which will encourage entities to book their revenue in Australia when they have significant sales activity here, and stronger penalties to combat tax avoidance and profit shifting.
The Government is also actioning OECD/G20 BEPS recommendations: we have legislation before Parliament to implement the OECD’s Country-by-Country reporting recommendation so that tax officials around the world have a better view of multinational activities; we have asked the Board of Taxation to consult on the OECD’s recommendations to combat hybrid mismatches, that is, mismatches designed to exploit differences in the tax treatment of entities or financial instruments by two or more countries to avoid tax; we have also taken action on harmful tax practices and pursued rules to prevent tax treaty abuse. We have doubled the penalties for those who choose to break the rules through transfer pricing and profit shifting schemes.
We will look closely at the final BEPS recommendations and consider what further steps need to be taken to strengthen Australia’s laws.
By contrast, the Opposition’s proposals on multinational tax avoidance would not be as effective. Their package misses opportunities where the potential to address profit shifting is greatest. At the same time they have the potential to adversely affect economic activity.
The Opposition’s proposed changes to our thin capitalisation rules, including the removal of access to the arm’s length debt test, would increase the cost of capital in Australia, which would negatively affect economic activity and, as a consequence, cost jobs; and they would likely have a significant impact on investment by foreign pension and sovereign wealth funds – considerable investors in Australian infrastructure.
The Coalition Government’s measures line up with the OECD recommendations to deliver tax laws that will combat tax avoidance and ensure our system is robust and equitable. We are already ahead of the game internationally, and we are working within the G20 and the OECD to promote transparency, integrity, and that quintessentially Australian virtue, fairness, in the global tax landscape.