Daniel Mulino (Fraser, Australian Labor Party) Share this | Hansard source

Tonight, we discuss one of the most important areas of taxation policy and, indeed, I think many would say, one of the most important areas of policy, full stop. What we're discussing tonight goes to the very heart of the sustainability and integrity of our tax system, which in turn goes to the capacity of government to fund services that are so important for our society. Multinational taxation is an issue that has been becoming more and more important over recent decades for a range of factors that I'll touch on before going to the specific issues of this bill. We are coming out of a period where, as the previous speaker mentioned, not enough has been done. That's why this step forward—this significant step forward—that we see tonight is so important.

Why is multinational taxation becoming more and more of an issue? One obvious factor is that we're living in a more and more globalised world. More and more economic activity, more and more innovation, and more and more value-add are being undertaken by companies that straddle the globe. What that means is that those companies have the capability of shifting their profits to whichever jurisdiction they wish. That has serious consequences for the ability of individual jurisdictions to maintain taxation at a level that is needed for services to be provided. Another issue is that not only are we seeing a significant proportion of economic activity being undertaken by multinationals but an increasing proportion of economic activity is being undertaken in the digitised world. What that means is that it's less and less obvious where the transaction that is taxable occurs. Does it occur at the point where the person presses the button? Does it occur at the point where the company that is managing the transaction is incorporated? Does it occur at the point where the good is sent from or the service is provided? There are so many complications, depending on the specifics, but the digitised world is a much more difficult one to tax. It's more difficult to figure out how it should be taxed, and, of course, on top of that, it's more difficult to actually undertake the taxation as well.

I would argue there are other trends as well. For example, over the recent decades, there has been the rise of a lot of forms of asset in the corporate world, like intellectual property or the value of an algorithm. These are very difficult to place in a geographic or physical sense, and yet these aspects of a corporation have real value. These aspects of a corporation are invested in—their intellectual property, their brand and, as I said, a lot of IT aspects. So, from a taxation point of view, it makes it very difficult to tax a lot of these multinationals in a way that makes sense. Finally, we see borrowing. Borrowing has always been there, but the rise of debt around the world has added to the difficulties of multinational taxation because the interest, as a result of internal borrowings within corporate structures, can be shifted in such a way as to shift corporate profits to jurisdictions with the lowest tax rates.

I want to make the point that, in addition to all of these complexities with taxation, in OECD and G20 countries we see rising needs for taxation, because we see, and rightly so, increasing calls from the public for strong public services, for social services that are sophisticated, that provide a strong social safety net. We see pressures on those social services because of an ageing society. We see pressures on those social services because the cost of providing many of those services is increasing faster than inflation. So, on the one hand, we have an erosion of the tax base and, on the other hand, we have ever greater needs for solid reliable tax revenue to provide the services that people rightly expect.

As the previous speaker mentioned, governments will rely upon forms of taxation, such as income taxation, that often fall very heavily on people who aren't in as good a position to pay, towards the tax system, as compared with, say, multinational corporations. So it provides a tension point, and many question the fairness of the system quite apart from its effectiveness. What we see today is a series of measures that go to making a fairer and more effective tax system, a more sound system, in terms of its policy basis. For those two core reasons, what we see tonight is a very significant step forward.

What we're seeing tonight is a step being taken by the Australian government that is very much aligned with the OECD G20 base erosion profit-shifting initiative, the BEPS initiative, which has formed a very important alignment across all of the major economies of the world over the last decade. It's very important that this initiative form part of this government's moves to continue Australia's moving forward on a range of multinational tax issues in alignment with other major economies.

The BEPS package is an OECD G20 initiative. That covers a significant proportion of world GDP. One of the core policy rationales is that taxation should be restored or at least aligned, to some degree, to the place where the economic activities and value creation occur. Why is this important? I think it's very important from a fairness perspective but also from a policy soundness perspective.

Firstly, from a policy soundness perspective, it makes more sense for the taxation revenue to be aligned, as far as possible, to where the economic activity is occurring rather than according to tax minimisation or tax avoidance. If it's aligned with where the economic activity is occurring, it is aligned with where the economic inputs are being joined together to create the economic value-add, where the capital, the labour, the land and the know-how are being added together to create what the consumer is wanting, what the consumer is paying for. It's where the profits are being created. If that is not what we are trying to align our tax system towards, we will almost inevitably find ourselves aligning the taxation of activities with where they can be shifted to the lowest possible tax rate, which does not make any policy sense.

I would argue that there is also a very important fairness principle here. It is important that taxation occurs where the economic value-add occurs, because that is where the multinational corporation is receiving so much social and public support. Multinationals depend on roads and transport infrastructure. Multinationals depend on the skills training for their workers that is provided, by and large, by the public sector. Multinationals' workers rely on the social safety net and, indirectly, multinationals do. So multinationals don't act in a vacuum.

The value-add of multinationals is very much built upon the fact that they are operating in an orderly society, with rule of law and all of the other benefits that accrue from the institutions that occur in the kind of society that Australia provides. In addition to that, multinationals benefit, as does the broader society, from all of the kinds of other social and economic infrastructure that they directly and indirectly benefit from. So it's entirely sensible and fair that the taxation system aligns to where the value-add, the economic activity, occurs for that reason also.

The second broad policy objective of the BEPS program is closing loopholes so that there is a sensible, sound taxation of economic activities, not one based upon contrived accounting arrangements which have no bearing on the actual sources of profit. Finally, there should also be an increase in transparency.

I believe this bill is a step forward on all of these three key measures. It definitely aligns the taxation revenue more closely with where the economic activity and economic value-add occurs. It will definitely close off loopholes where there are contrived arrangements, where thin capitalisation is used as a means by which profit is shifted from one jurisdiction to a lower tax jurisdiction, where it doesn't actually relate to the underlying economic meaning or grounding of the transaction itself. Finally, it's a significant step forward when it comes to transparency.

It is critical, as I mentioned before, that this is a part of the broader BEPS initiative, because this is a global phenomenon. It is very important that Australia design its multinational tax initiatives so that they are broadly aligned with the initiatives that the OECD and G20 are taking up. If we don't have alignment, if we have countries trying to move on their own and acting unilaterally, we find there is a significant pressure towards a race to the bottom. That is why it is so important that this bill is aligned with that broader initiative.

The BEPS initiative contains 15 actions, which have been grouped across four themes. Three relate to the broad theme of coherence, six relate to substantive efforts to adjust the taxation sources, five relate to transparency and two relate to the horizontal issues of digitisation and multinational instruments. As I mentioned, digitisation in particular has been driving challenges to the ability of individual governments to tax economic value-add right across the economy.

This bill contains two very important measures that go to the heart of transparency. The first, schedule 1, relates to multinational tax transparency. It will hold companies to account, particularly large corporate groups, requiring them to be more transparent about their corporate structures and whether they are operating with opaque tax arrangements. This information will be inherently good, because sunshine is the best disinfectant. More transparency is a sensible thing. It will also enable better economic analysis. It is so critical, in this very complicated area, for governments to be in a better position to decide whether their multinational tax arrangements are fit for purpose. Companies will be required to disclose this additional information as part of their annual financial report, which of course they have to prepare anyway. The additional information required will create very little additional red tape or compliance burden, and this is in line with other major jurisdictions such as the United Kingdom. On the issue of transparency, schedule 1 is a significant step forward.

As I mentioned, the other schedule relates to thin capitalisation. I won't go through all of the details, but this relates to a number of well-known tax planning arrangements whereby some multinationals set up debt arrangements between different parts of their organisational structure so as to contrive interest payments that might be high in one jurisdiction, with income then flowing to another jurisdiction in such a way that overall taxes across the group are minimised. This bill has been designed with a considerable amount of consultation. It is designed in such a way that there is flexibility and that it won't unintentionally capture arrangements which are designed to reflect genuine intragroup borrowings.

There are a number of arrangements. For example, thin capitalisation rules will be adjusted to limit an entity's debt-related deductions to 30 per cent of profits using EBITDA. This new earnings-based test will replace the current safe harbour test. It will allow debt deductions denied under the entity-level EBITDA test to be carried forward and claimed in a subsequent income year, and it will retain an arms-length debt test as a substitute test, which will apply only to an entity's external or third-party debt, disallowing deductions for related-party debt under this test. The earnings based approach, I might add, is very much in line with the earnings based approach that's been adopted in a number of other jurisdictions such as the UK, the US and most of the EU.

To return to the overarching rationale for this: we have a transparency measure, we have a substantive measure related to thin capitalisation and at the heart of all of this is an attempt to make our tax system fairer but also more soundly based on policy. Through the measures in this bill, we are going to align tax revenue more closely with where the actual taxable value add and economic activity occurs, and that is very sensible from a policy perspective. It really is the most sound way in which to approach the taxation of economic activity. It is also, in my opinion, a fair approach because it reflects the fact that, where multinationals operate in Australia and benefit from all of the things that our society provides, whether it be training, transport infrastructure, social infrastructure, the rule of law or anything else, they should contribute to that. It closes a loophole and it provides transparency, so it's very aligned with international moves to provide a more effective and fairer tax system.

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