House of Representatives

Treasury Laws Amendment (Combating Multinational Tax Avoidance) bill 2017

Second Reading Speech

Mr Morrison (Treasurer)

I move:

That this bill be now read a second time.

This bill implements the suite of tax integrity measures the Turnbull government announced in the government's 2016-17 budget to combat multinational tax avoidance.

Most taxpayers comply with Australia's tax rules and pay the right amount of tax.

However, there are some who do not; some who try to avoid paying Australian tax by diverting Australian profits to low-tax countries.

When this happens, other taxpayers, including families and small businesses, citizens who comply with our tax laws, are left to carry the taxation burden.

This government will not stand for tax avoidance. We will not stand for the deliberate flaunting of our tax laws by major multinational enterprises.

That is why the Turnbull government has introduced some of the strongest taxation integrity rules in the world-so that those taxpayers who attempt to avoid paying tax are caught and do not undermine our tax system, on which all Australian government services depend.

The government inherited a tax system that had not kept pace with developments in global trade and investment and digital commerce. It was left to this government to reverse the years of inaction on tax integrity, particularly in relation to multinationals, and ensure that the tax loopholes that they left open are now closed and multinational entities operating in Australia pay the right amount of tax.

We are determined to have the strongest rules against tax avoidance for these matters; to level the playing field and deliver a fairer tax system for all, so the important services-hospitals, schools and important targeted welfare benefits; all of these things-Australians can rely on into the future on a sustainable basis.

In 2015 the government introduced a package of three key reforms to combat multinational tax avoidance.

The first was the Multinational Anti-Avoidance Law to stop multinationals with significant Australian activities booking profits overseas to avoid paying tax in Australia. We are already seeing positive results from this measure-the dividends from taking action-with many multinationals now restructuring to book their income in Australia.

The second was to double the penalties for large companies that enter into tax avoidance or profit-shifting schemes-making them think twice before engaging in these behaviours.

Thirdly, we introduced country-by-country reporting which requires large multinationals to report to the Australian Taxation Office their income and tax paid in every country in which they operate. This is obviously consistent with the BEPS process, which we have been a key partner in with our partner jurisdictions around the world-particularly, driven through both the OECD and the G20.

It would be great if both these measures had received bipartisan support in this parliament but, sadly, they did not. And we were able to ensure passage of these measures through the other place with the support of the crossbenches. But we are aware that more needs to be done.

Increasing digitalisation, globalisation and technological advancements have changed the way in which multinationals do business. While the expansion of the global economy has delivered many benefits to Australian businesses and consumers, it has also created new and innovative ways for multinational companies to avoid Australian tax by shifting their profits from Australia to lower-taxing countries.

We are committed to ensuring that the Australian tax system keeps pace with the modern economy and that everyone doing business in Australia pays the right amount of tax on their Australian profits.

And that is why we are introducing this bill: a bill that delivers on our promise to ensure that Australia is at the forefront of the international fight against tax avoidance.

This is a bill that sends a clear message to multinationals-if you wish to operate in Australia, this government expects you to pay your tax, the right amount of tax, and prepare to be challenged and have this legislation and these measures enforced if you choose to violate them.

This bill implements a new diverted profits tax, ensures our transfer pricing rules remain international best practice and imposes even tougher penalties for large multinationals who fail to comply with tax reporting obligations.

The diverted profits tax and the tougher penalties for failure to comply with tax reporting obligations will apply to large multinationals operating in Australia with annual global income of a billion or more.

The transfer pricing measure will apply to all taxpayers who undertake cross-border transactions with related parties.

The diverted profits tax

Schedule 1 of this bill implements a new diverted profits tax from 1 July 2017. The diverted profits tax is targeted at multinationals entering into arrangements with offshore related parties that lack economic substance, in order to divert their Australian profits to lower tax countries and avoid paying Australian tax.

The diverted profits tax is also designed to encourage multinationals to provide relevant information and cooperate with the ATO in administering the tax law.

The diverted profits tax is expected to raise $100 million in revenue each year from the 2018-19 year and will reinforce Australia's position as having some of the toughest laws in the world to combat corporate tax avoidance. This is in addition to some $3.7 billion related to earlier measures combating tax avoidance that the government has already introduced.

The diverted profits tax will not replace the operation of the transfer pricing rules as they apply to ordinary transfer pricing disputes. It is intended that the transfer pricing rules will remain the primary mechanisms for pricing the cross-border transactions of multinationals.

It is expected that the diverted profits tax will apply in limited circumstances. Most companies do the right thing and meet their tax obligations. The diverted profits tax is focused only on tax avoidance arrangements that are artificial or contrived.

Importantly, the diverted profits tax does not expand the coverage of the corporate tax base but seeks to maintain its integrity.

The diverted profits tax does not apply to managed investment trusts or similar foreign entities, sovereign wealth funds and foreign pension funds. These entities have been excluded as they are low risk from an integrity perspective, as they are widely held and undertake passive activities. This exclusion will ensure that such entities do not face unnecessary compliance burdens as a result of the introduction of the diverted profits tax.

Similarly, the diverted profits tax does not capture entities with Australian income of $25 million or less.

The diverted profits tax contains a number of key features that will encourage greater cooperation between uncooperative multinationals and the ATO. As a result this will reduce the length of disputes between the ATO and multinationals.

These key features include:

allowing the commissioner to impose the diverted profits tax on the basis of a reasonable assessment of the available information-placing the onus on multinationals to demonstrate they have not diverted profits from Australia;
imposing an up-front diverted profits tax liability payable on the amount of the diverted profits at a penalty rate of 40 per cent; and
preventing multinationals from introducing new information on appeal to the Federal Court that was not previously made available to the ATO, unless exceptional circumstances apply.

Increased penalties

Schedule 2 of this bill increases the administrative penalties that can be applied by the Commissioner of Taxation to significant global entities for breaching their tax reporting obligations.

From 1 July 2017, the government will increase the maximum penalty 100 times for these entities where they fail to lodge tax documents on time or take reasonable care when making statements to the ATO-a one-hundred-fold increase.

The penalty regime that was in place when we came to government was wholly inadequate and was not commensurate with the gravity of reporting offences that could be committed by significant global entities.

As a consequence, this bill which I am introducing today, will raise the maximum administrative penalty for significant global entities who fail to comply with their tax reporting obligations from $5,250 to $525,000 when taking into account the increase in the value of Commonwealth penalty unit announced in the 2016-17 Mid-Year Economic and Fiscal Outlook.

The government is also doubling the penalties for these entities when they make false or misleading statements to the ATO.

These changes will make the penalties applicable to significant global entities more commensurate with their turnover, and provide greater incentive for them to lodge tax documents on time and take reasonable care when making statements to the ATO.

This schedule also includes a minor amendment to ensure administrative penalties apply as intended where a significant global entity does not lodge a general purpose financial statement as required under the taxation law.

These changes send a clear message that the government will not tolerate inaccurate or delayed tax reporting and administration by large multinationals-more so than any other government prior to this one.

Transfer pricing

Schedule 3 of this bill amends Australia's transfer pricing law to give effect to the 2015 OECD transfer pricing recommendations.

The amendment will apply from 1 July 2016 and directly tackles inflated transfer pricing by multinationals.

Australia's transfer pricing rules currently specify that they are to be interpreted to best achieve consistency with the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations as last updated in 2010.

As part of the OECD's Base Erosion and Profit Shifting Project, the BEPS, the OECD updated these guidelines in 2015 to better align transfer pricing outcomes with value creation.

The updated guidelines will make it clearer how intellectual property and other intangibles should be priced, and ensure that the transfer pricing analysis reflects the economic substance of the transaction rather than the contractual form.

Adopting these changes will keep our transfer pricing rules in line with international best practice and help ensure that profits made in Australia are taxed in Australia.

This also sends a clear message to multinationals and the international tax community that Australia is absolutely committed to combating multinational tax avoidance.

Further government action

Last July I attended the G20 Finance Ministers and Central Bank Governors Meeting and High-Level Tax Symposium where I shared Australia's experience in implementing tax policies which drive innovation and promote growth.

I also spoke about the importance of tackling tax avoidance through the coordinated and comprehensive implementation of the BEPS action plan.

In ensuring innovation and promoting growth in Australia, I cannot stress enough the importance of combating multinational tax avoidance and maintaining momentum on our own domestic implementation of the BEPS process.

The Turnbull government is absolutely committed to tackling tax avoidance, and ensuring that everyone who does business in Australia pays the right amount of tax.

The Turnbull government's extensive plan to target tax avoidance was outlined in the 2016-17 budget. Importantly, this plan builds on key announcements in the 2015-16 budget including the Multinational Anti-Avoidance Law.

This government also announced in the 2016-17 budget that Australia would implement OECD anti-hybrid rules to ensure that multinationals are not able to take advantage of differences in how countries tax hybrid financial instruments or hybrid entities.

We have ensured a level playing field for all domestic suppliers by passing legislation that has ensured GST is charged on digital products and services imported by consumers. But we are now going even further and we will remove the low-value imported goods GST threshold. This means that GST will be charged on all low-value goods imported into Australia regardless of their price.

The government is taking a strong, world-leading, but balanced approach to multinational tax avoidance.

The Turnbull government has said that enough is enough when it comes to multinationals diverting profits offshore and failing to meet their tax disclosure responsibilities.

Adopting the changes in this bill will keep our transfer pricing rules in line with international best practice and help ensure that profits made in Australia are taxed in Australia.

The Turnbull government is ensuring that Australian taxpayers do not get dudded by multinationals, and we have backed that up with serious and consistent measures that we have introduced into this parliament. It is disappointing that, on previous occasions, they have not enjoyed bipartisan support as they should, and I would urge this House to show that bipartisan support now for at least these measures. The details of these measures in this bill are contained in that bill and outlined in the explanatory memorandum.

Debate adjourned.