Second Reading SpeechMr Bradbury (Assistant Treasurer and Minister Assisting for Deregulation)
That this bill be now read a second time.
This bill ensures the effectiveness of Australia's transfer pricing rules.
Transfer pricing rules are critical to the integrity of the tax system. This bill will play an important role in ensuring that an appropriate return, for the contribution of Australian operations to a multinational group, is taxed in Australia for the benefit of the broader community.
This is an important issue: in 2009 cross-border trade within multinational groups was valued at approximately $270 billion, or about 50 per cent of Australia's total trade flows.
Last November the government announced that it would reform Australia's transfer pricing rules. As part of these reforms, the government also announced it would move to end the uncertainty around whether or not the transfer pricing rules contained in our tax treaties could apply independently of the unilateral rules in division 13 of the Income Tax Assessment Act 1936.
The bill deals with the second announcement. It confirms transfer pricing rules contained in Australia's tax treaties and incorporated into domestic law provide assessment authority in treaty cases.
These changes apply to income years commencing on or after 1 July 2004, being the first income year following the parliament's last statement, demonstrating the longstanding legislative intent that the law operated in this way.
There were a number of important issues in the forefront of the government's mind in developing these rules.
Firstly, the government is keen to ensure that the law is fully effective in the way parliament has clearly intended it to operate.
Secondly, we need to ensure the integrity of the tax system is not compromised. This particular measure is designed simply to protect Australia's existing revenue base-it was not designed as a revenue-raising exercise.
Thirdly, these amendments reflect the bargain we have struck in our treaties. They are consistent with internationally accepted transfer pricing rules.
Finally, the government noted the long-held view of the Commissioner of Taxation that, arguably, the current law already gives effect to the intent of parliament. In this context the government is clarifying the operation of the law.
The government was mindful of differing views on this point. A decision to change the law from a date before announcement is not taken lightly. It is generally only done, as in this case, where there is a significant risk to revenue that is inconsistent with the parliament's intention.
There is considerable evidence, across the decades, that parliament intended that the treaty transfer pricing rules operated in addition to our unilateral transfer pricing rules in division 13. This is fully described in the explanatory memorandum accompanying this bill.
In summary, Australia's current unilateral transfer pricing rules were introduced in 1982 in the form of division 13.
The treaty transfer pricing rules and the division 13 rules were intended to operate as alternatives in the event that one more effectively dealt with profit shifting than the other.
The explanatory memorandum circulated by former Prime Minister and the then Treasurer, John Howard, explained that specific amendments would operate that way and I quote:
... the provisions of a double taxation agreement that deal with profit shifting, either under a 'business profits' article ..., or an 'associated enterprises' article ..., may have to be applied instead of Division 13.
Even in 1982, profit shifting through transfer pricing practices was seen as such a threat to the Australian tax base that there was clear bipartisan support for the measure.
The important role that treaties play in this regard was evident in the debate.
The then shadow Treasurer noted, and I again quote from the House of Representatives Hansard of 28 April 1982:
Possibly the most significant aspect of our treaties, ... is the section modelled after Article 9 of the model OECD agreement which allows the reconstruction of profits of associated entities which have obviously been engaging in transfer pricing activities.
This provision has generally been regarded as a more effective weapon against transfer pricing than the current section 136 which, of course, was the predecessor to division 13, because the provisions of the Income Tax (International Agreements) Act prevail over the ordinary provisions of the Income Tax Assessment Act.
The amendments contained in this bill confirm the way parliament intended the law to operate since at least 1982.
There are at least six subsequent statements in the parliament, as set out in the explanatory memorandum, which reflect a strong consistency across decades of parliament's intent in relation to the transfer pricing rules.
Further to parliament's previously stated intent, the amendments contained in this bill are also entirely consistent with the commissioner's long-held and publicly expressed view of the current law.
In light of this there are strong arguments for concluding that under the current income tax law, treaty transfer pricing rules apply as an alternative to division 13.
If this is the case, these amendments constitute a mere confirmation of these rules.
To the extent that there is any uncertainty in relation to the operation of the current law, these amendments ensure the law can operate as the parliament intended.
The potential impact on taxpayers has been carefully considered.
Importantly, these provisions only apply where a tax treaty is applicable and therefore any party that these measures apply to will be able to access the treaty mechanisms designed to relieve any double taxation that could arise. Further, settled cases will not be re-opened as a result of these amendments.
Settled cases would only be re-opened when the taxpayer breaches a term of the settlement, when the settlement has been entered into on the basis of a fraudulent misrepresentation or when re-opening the settlement would deliver a more favourable outcome to the taxpayer.
Penalties are another important issue when considering any law that has application to prior years.
A transitional rule is included in these amendments to ensure the penalty provisions of the income tax law apply as though this bill was never enacted.
The ATO's ruling on how penalties generally apply in transfer pricing cases is to calculate the penalty based on the lesser of the amount determined under division 13 or the treaty.
This transitional rule ensures the practical operation of the penalty provisions is not disturbed.
This government has engaged extensively with the business community in relation to this measure. The measure is not wholly supported by multinationals and their advisors-and given this is a robust integrity measure-this is not altogether unexpected.
That said, the bill has greatly benefited from the inclusion of some important features following consultation.
The bill will essentially achieve three key objectives.
First, as explained, it will ensure the transfer pricing articles contained in Australia's tax treaties are able to be applied and provide assessment authority independent of division 13.
This will be achieved through providing an express liability provision in the Income Tax Assessment Act 1997.
Secondly, it will require that the transfer pricing rules in this bill are interpreted as consistently as possible with the relevant OECD guidance.
The work of the OECD reflects the best international thinking on transfer pricing and has shaped transfer pricing regimes around the world. The OECD's transfer pricing guidelines are widely used by tax administrations and multinational enterprises globally.
This provision will provide a clear legal pathway to the use of OECD guidance. It will avoid the costly necessity for users to get expert advice on whether the state parties to a particular treaty apply the guidance and will make it clear which set of guidelines is to be used.
Finally, as mentioned, the government has had many discussions with the business community in developing these rules. As a result of those talks we are moving to clarify the interaction between transfer pricing and the thin capitalisation rules.
Previously, this interaction was only dealt with through administrative arrangements.
Other provisions of the bill essentially support and enable these key features and ensure the provisions work and interact appropriately with the rest of the income tax law.
They ensure there can be no double taxation at a domestic level.
They ensure that the commissioner can make a determination and provide taxpayers with appropriate information for the ongoing management of their tax affairs; and they ensure that where an adjustment is made, consequential adjustments can also be made to ensure a taxpayer is not unfairly disadvantaged (or subject to double taxation).
Lastly, I have mentioned the contribution of the business community in consulting on these rules. On the subject of consultation, I would like to note the involvement of the NGO community. I would like to thank the Justice and International Mission Unit of the Victorian and Tasmanian Synod of the Uniting Church for its ongoing contribution. Full details of the measures in this bill are contained in the explanatory memorandum.