Second Reading Speech
This Bill amends the income tax law to protect the integrity of Australia's income tax system. These reforms come forward at a time of unprecedented global recognition that base erosion and profit shifting must be addressed.
Last night, the OECD released its latest report on Addressing Base Erosion and Profit Shifting, which identified modern transfer pricing rules and effective anti-avoidance rules as two of the key weapons in the fight against base erosion and profit shifting .
As the OECD report says, 'What is at stake is the integrity of the corporate income tax.
The Government is committed to taking steps where necessary to ensure the integrity and sustainability of the tax system.
Without these amendments, significant amounts of revenue that should be available for the benefit of all Australians would be at risk of not being collected.
Schedule 1 amends Part IVA of the Income Tax Assessment Act 1936 which is the income tax law's general anti-avoidance rule. The amendments ensure that Part IVA continues to counter schemes that comply with the technical requirements of the tax law but which, when viewed objectively, are conducted in a particular way mainly to avoid tax. Without this, there would be significant scope for taxpayers to plan their way around the law's intended operation and undermine the revenue base.
Part IVA applies when three elements exist. There must be a scheme; there must be a tax benefit obtained in connection with the scheme; and it must be reasonable to conclude that someone entered into the scheme for the sole or dominant purpose of obtaining a tax benefit in connection with the scheme.
Some recent cases have focused on the 'tax benefit' element of Part IVA's operation. A tax benefit exists if a scheme produces a tax advantage (for example, reduced assessable income or increased deductions) being an advantage that would not have been obtained, or might reasonably be expected not to have been obtained, if the scheme had not been entered into.
There are two limbs to 'tax benefit'. The first limb - concerning tax advantages that 'would' not have been obtained without the scheme - deals appropriately with cases where simply removing the scheme reveals a coherent taxable situation consistent with the substance of what happened.
The second limb - concerning tax advantages that 'might reasonably be expected' not to have been obtained absent the scheme - deals with cases where what is left after simply removing the scheme would not make sense or would be inconsistent with the taxpayer's actual commercial objectives and instead requires a prediction about alternative ways that the substance of what happened might reasonably have been achieved.
The amendments reinforce the view that the two limbs of the tax benefit element of Part IVA are alternative tests; that there is not just one test that merely spans a spectrum of likelihood.
The amendments also ensure, in deciding whether an alternative to the scheme is reasonable, that regard is had both to the substance of the scheme and to the non-tax results or consequences for the taxpayer that the scheme achieved. In making that decision, the tax consequences of the alternative are ignored .
The proper role for the tax benefit test is to compare the tax consequences of what the taxpayer actually did with the tax consequences of a reasonable alternative that achieves substantively the same thing. It makes little sense in an anti-avoidance provision to allow the tax consequences of what the taxpayer has achieved to act as a shield against the operation of Part IVA.
These amendments ensure that a taxpayer who, having achieved something from a scheme (tax results aside), cannot say they did not obtain a tax benefit by arguing that, absent the scheme, they would have pursued completely different objectives, or done nothing at all.
These amendments have been through an extensive consultation process. In addition to the Government's usual public consultation on draft legislation, the design process included a lengthy series of consultations with a roundtable of academic, legal and tax experts, and advice from a number of senior counsel. As a result, the Government is confident that these amendments will ensure that Part IVA properly protects the integrity of the tax law without unnecessarily interfering with taxpayers' normal commercial activities.
Schedule 2 to this Bill modernises Australia's transfer pricing rules in accordance with the Government's announcement in November 2011. It provides a new, comprehensive and robust transfer pricing regime that is aligned with internationally accepted principles.
The transfer pricing rules are critical to the integrity of the tax system. They ensure that an appropriate return for the contribution of Australian operations of a multinational group is taxable in Australia for the benefit of the broader community. The transfer pricing rules do not depend on the existence of a tax avoidance purpose. Transfer pricing rules ensure an arm's length tax outcome is achieved for non-arm's length arrangements or transactions, even where those arrangements or transactions have a legitimate commercial purpose.
A key feature of the new rules is their alignment with international best practice as set out by the OECD. Alignment with international norms improves the integrity and efficiency of the tax system, and reduces compliance costs and uncertainty for taxpayers.
The OECD's Transfer Pricing Guidelines are widely used by tax administrations and multinational enterprises globally. The amendments provide a clear legal pathway to the use of OECD guidance material to assist in applying the arm's length principle. As well as alignment with the OECD guidance material, several design features of the new rules will further promote efficiency and certainty.
The new rules operate on a self-assessment basis, bringing the transfer pricing rules in line with the overall design of the Australian tax system. In contrast to the old rules, which relied upon the Commissioner making a determination, taxpayers will now be able to self-assess their Australian tax position in accordance with the arm's length principle.
Specific rules linking voluntary documentation with a reduction in administrative penalties are included under the new rules. This approach balances compliance costs for taxpayers with incentives to adequately document issues relevant to transfer pricing matters It allows taxpayers to risk assess matters that could be the subject of administrative penalties and prepare documentation accordingly.
The new rules also introduce a time limit in which the Commissioner may amend a taxpayer's assessment to give effect to a transfer pricing adjustment. Under the previous rules, the Commissioner had an unlimited period in which to amend an assessment. These rules reduce this period to seven years. Given that transfer pricing audits often require information from other jurisdictions and involve complex arrangements spanning several income years, this time limit strikes an appropriate balance between providing the Commissioner with the time required to conduct an audit, and providing taxpayers with increased certainty as to their tax affairs.
The new rules also maintain the existing interaction between the transfer pricing and thin capitalisation rules that were developed in close consultation with industry during amendments to the transfer pricing rules last year.
The Government has engaged extensively with industry, corporate, and community representatives over the course of the reforms to Australia's transfer pricing rules. The Bill has benefited significantly as a result of the consultation process. I would like to acknowledge these important contributions to the policy design process. The measures contained in this Bill are vital for maintaining the integrity of the Australian income tax system.
Robust and properly functioning integrity rules are critical to maintaining a healthy tax system so that the Government can continue to deliver the public goods and services that Australians expect and require, like world class health and education systems, a strong social safety net and public infrastructure.
Full details of the amendments in this Bill are contained in the explanatory memorandum.