Tuesday, 8 August 2023
Treasury Laws Amendment (Making Multinationals Pay Their Fair Share — Integrity and Transparency) Bill 2023; Second Reading
When this legislation was first introduced, I think many stakeholders breathed a huge sigh of relief. The government's consultation for country-by-country reporting and changes to the thin capitalisation rules have caused concern for the impact they would have on entirely legitimate business activities. To its credit, the government accepted feedback from stakeholders and made sweeping changes to its proposal to both be workable and address the integrity issues that the government is legitimately pursuing. But that relief was short lived.
It has now become apparent that there are new rules that have been inserted after the consultation, the debt deduction creation rules, that would, once again, have a significant impact on legitimate business activities. The rules would impact multinationals which loan money to a subsidiary in order to purchase assets from another subsidiary. The borrowing subsidiary is entitled to claim a tax deduction with regard to the interest expense. Each element of this is routine. Conglomerates often provide loans to subsidiaries, as it is cheaper than external finance, and related parties often acquire assets from each other. The integrity concern is that the parent entity may set an excessively high interest rate on the loan and allow profits from Australian businesses to be siphoned offshore. This is a legitimate concern, and I support the government's actions in terms of ensuring that we prevent this. The debt deduction creation rules, the DDCRs, are intended to deal with this concern appropriately.
It seems that the stakeholders I've spoken to are broadly supportive of the integrity principle that the government is trying to pursue. However, they have serious concerns with how broadly these rules have been drafted. They're likely to capture legitimate business activities, denying a tax deduction for those activities and thereby creating undue distortion in the market. These rules are likely to force some businesses to seek external financing when internal financing is available, or to acquire assets from third parties when they are already available internally. They will also create an inconsistency when the same activity incurs different tax treatment for different business types.
These changes, as far as I can tell, are not the intent of the legislation. They will increase the complexity and cost of certain business activities in Australia but serve no public benefit. There is no real justification I've seen for these changes, and, from my conversations with stakeholders and their submissions to the Senate inquiry, it is clear that they're unworkable. I'm certain that the government understands that the changes are unworkable and do not believe there is any chance of them passing into law in the present state. Given this, I'm not clear why the House is considering the bill. The legislation should be deferred until these concerns are resolved or discharged from the Notice Paper.
I'd also like to share concerns with the consultation process. I think it's absolutely critical in this House that we engage with stakeholders to understand the impact that legislation will have and ensure changes are well targeted with minimal unintended consequences. There were two rounds of consultation on this bill, which is appropriate. However, I do find it concerning that the problematic parts of the bill, these ones that I'm talking on right now, were not consulted on. It is hardly surprising that problems emerge when policies are produced without the input on those important parts from those who are affected. The government does sometimes do better in this, and certainly can do better on this, and I think the government should, in the case of this particular bill, try again. Given all of this, I'm actually alarmed that the government is nevertheless asking the House to agree to this bill.
When Labor were in opposition they were extremely critical of how the coalition governed, and promised Australians they would govern responsibly. I have to say that that is difficult to square with the claim on this bill. I also think that it is inappropriate for the government to try and pass legislation in this House which it surely knows is unworkable. Even if they are going to consult and defer consideration to the other place, I think the bill will then return to the House completely transformed for us to consider once again. I would like to ask the government to consider whether this process is the best use of the government's time. Perhaps it would be better to defer consideration by the House until the government can consult with stakeholders and prepare amendments. This is the point of my second reading amendment, which I now move:
That the following words be added after paragraph (5):
"(6) that parts of the Bill have not been subject to consultation but will have significant unintended impacts on businesses, which ought to have had an opportunity to review the proposal and provide constructive feedback prior to the Bill's introduction;
(7) that the Government has an ethical and practical obligation to undertake consultation and engagement with stakeholders on all significant changes across all portfolios; and
(8) it calls on the Government to:
(a) defer further consideration of the parts of this bill not yet subject to consultation until concerns about unintended impacts have been resolved; and
(b) establish an independent Tax Reform Commission, which could undertake genuine consultation on changes to Australia's tax laws and provide neutral, expert advice to the Government and Parliament".
This amendment makes the point that businesses ought to have had the opportunity to provide feedback on the changes that affect them before the legislation was introduced, and it calls on the government to defer consideration until those concerns have been resolved. It also calls on the government to establish an independent Tax Reform Commission. There is a serious problem with our tax policy making institutions when a government can propose three tax measures—multinational reporting, thin capitalisation and debt creation rules—with each of them being problematic. An independent commission could provide the government and the parliament advice on how tax policy issues could be resolved based on expert advice and broad effective consultation. It could be based on the Australian Law Reform Commission, a Whitlam innovation that was built on by the Howard government and enjoys strong bipartisan support today. This would be a significant improvement to existing processes and would provide the community with more confidence in the proposals put before the parliament. It would be an important and valuable change to the policymaking process, and one that I encourage the government to consider.
Today I'm also moving my consideration in detail amendments, which would simply remove the unworkable provisions from the bill. This would allow for the timely passage of the rest of the bill while the government undertakes proper consultation and resolves concern with the debt creation rules. This would be a sensible way for the parliament to proceed with this legislation. I hope the government will recognise it is simply not appropriate to ask the House to support legislation which the government has no intention of implementing in its current form.
Finally, I'd like to make a comment on tax reform more broadly. This is a bill around tax reform. I have been very vocal in the House and externally in my support of tax reform. But I urge the government, when it is looking at these tax reforms, to develop an institute such as a tax reform commission and to use it to help develop detailed policies that would help improve the tax situation and the tax laws in this country. I believe that if we have that support for micro-reforms and for small-scale and technical but very important reforms, we will also help build the muscle for broader reforms for the tax system, which are absolutely critical for our ongoing prosperity, for equity in our communities and for other important social and economic objectives such as housing and climate action.