Tuesday, 8 August 2023
Treasury Laws Amendment (Making Multinationals Pay Their Fair Share — Integrity and Transparency) Bill 2023; Second Reading
I also rise today to speak on the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill and to recognise the work of my good Canberra colleague the member for Fenner in bringing it to the House. I also want to recognise another champion for fair taxation in the House, the member for Fraser, and the contribution just made by the member for Jagajaga.
In Australia, we have a situation where we have two-fifths of multinational profits currently going to tax havens. This equates to some $100 billion of Australian money sitting in tax havens, in places like the Bahamas and Panama, where there are very low tax rates and where, in one estimate, four-fifths of the money is there in breach of other countries' tax laws. These aren't just tax avoidance mechanisms. These are also the places where terrorist, kidnappers, crime syndicates and drug lords store their money. We have a moral responsibility to crack down on tax havens because they are a blight on the global tax system.
It's laughable that the member for Deakin and Senator Hume, just a little while ago, put out a press release criticising the Prime Minister for wanting to do more on multinational taxation—laughable—particularly when, in their home state of Victoria, we had the incident a couple of years ago of the Stawell tyre dump being transferred to a company in Panama to avoid their clean-up obligations. Some nine million tyres were sitting at that dump. The owners attempted to shift its ownership off to Panama, to a tax haven, thereby avoiding their liabilities. We probably shouldn't be surprised by this approach to recycling, but this avoidance of responsibility is the sort of problem that this government wants to address.
Over nearly a decade in government, the coalition tinkered around the edges. They made tweaks here and there, but throughout their term, they very clearly showed which side they were on—not the side of working Australians, but on the side of multinational tax dodgers. What a side to choose! And before the 2022 election, they told Australians not to support anyone that proposed to raise taxes on multinational tax dodging. Just think about that for a moment. It was the view from Labor in opposition that, when the international community came together in 2021 to strike a deal on global taxation, it was a step in the right direction in what needed to be done. Now, as the Australian government, we're working to see those measures implemented.
During the 2022 election campaign, the Albanese government committed to ensuring multinationals pay their fair share of tax. That's why we are moving forward with this comprehensive legislation. The purpose of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 is to amend taxation incorporation laws to introduce new rules to protect the integrity of the Australian tax system and improve tax transparency. The OECD released its report titled Addressing Base Erosionand Profit Shifting. Subsequently, the OECD and G20 countries adopted the base erosion and profit-shifting action plan, which identified 15 clearly defined actions for implementation aimed at improving international tax cooperation and tax transparency. This plan was designed in response to a growing global perception that the domestic and international rules on the taxation of cross-border profits are now broken and that taxes are only paid by the naïve—a perception that must change.
This government's approach is split into two schedules. Schedule 1 is designed to enhance multinational tax transparency, specifically the disclosure of subsidiaries. The measure in schedule 1 targets Australian public companies, listed and unlisted, to disclose their subsidiaries and where they are located, which is something that should be pretty desirable for those interested in transparency. This will hold companies to account, particularly the large corporate groups, requiring them to be more transparent about their corporate structures and whether they are operating with opaque tax arrangements, such as those through subsidiaries located in low-tax jurisdictions. This information will support better economic analysis and help to inform whether tax laws are operating as intended in collecting the right amount of revenue. This amendment is part of the government's broader regulatory mix to improve corporate disclosures.
Ensuring this information is in the public domain will facilitate an informed discussion on tax compliance, helping to build trust in the integrity of the tax system. Companies will disclose this information as part of their annual financial report, helping to reduce compliance burdens. This is in line with international approaches. For example, the United Kingdom has a similar measure already in place. This measure was informed by stakeholder feedback in August 2022 and April 2023. This is aimed at ensuring increased tax transparency. It complements the ongoing work to implement a beneficial ownership register and public country-by-country reporting, which the government is continuing to engage with stakeholders on.
The intent is that increased public disclosure will lead to enhanced scrutiny on companies' arrangements, including on how they structure their subsidiaries and operate in different jurisdictions, including for tax purposes. From a tax perspective, the expectation is that more information in the public domain will help to encourage behavioural change in terms of how companies view their tax obligations, including their approach to tax governance practices, decision-making around aggressive tax planning strategies and potential simplification of group structures.
Schedule 2 of this bill addresses issues around thin capitalisation. Thin capitalisation may be described as the process of financing subsidiaries with more debt, in comparison with equity, than would be normal in an arms-length funding arrangement. Such a process may be carried out for tax related reasons. Schedule 2 is a revenue-raising measure. It targets a known tax planning arrangement by limiting a multinational's debt deductions, ensuring they pay their fair share of tax in Australia, and helps to level the playing field for Australian businesses. This measure limits a multinational's debt deductions by strengthening Australia's thin capitalisation rules. By strengthening Australia's thin capitalisation rules, we can combat multinational profit shifting and tax avoidance by ensuring that debt and interest deductions are linked to an entity's economic activity and taxable income in Australia.
This legislation has its objectives. You simply don't make too many friends when making multinationals pay their fair share. Some naysayers will argue that these amendments put Australia at a competitive disadvantage to other countries. Of course, they're not speaking in their own self-interest. But the system will not be a global outlier. Reporting of subsidiary information is in line with other international approaches—for example, the United Kingdom's listing rules introduced around 2016. Anecdotal feedback from some industry groups was that this change resulted in some companies simplifying their corporate structures. The reality is that the new rules bring Australia in line with other comparable jurisdictions around the world. Most OECD countries have adopted the '30 per cent of earnings' benchmark ratio, including the UK, the US, Canada and most EU countries. Each country has their own nuanced version of the rules.
The final legislation has been designed to balance tax integrity with broader considerations, such as continuing to ensure Australia is an attractive destination for investment. Some will argue that this legislation needs transitional rules given the suddenness of the changes, but these changes are not sudden. This has been Labor policy for a long time. The amendments were first announced in April 2022 as part of the government's election commitment platform. They have since been subject to extensive stakeholder consultation, and the final legislative approach reflects this stakeholder feedback to accommodate genuine commercial arrangements as much as possible, noting that this is a tax integrity measure.
These critics also want to know why there are no carve-outs from these amendments. The amendments adopt the existing exemptions within the existing thin capitalisation rules. This excludes smaller entities with less than $2 million in debt deductions and entities whose assets are mostly Australian. However, there are no sectoral specific exemptions. The use of third-party and related party interest is one of the simplest profit-shifting techniques available in international tax planning. This is a technique available to entities in all sectors. Excessive interest deductions or debt deductions are a risk to Australia's domestic tax base and are commonly used by multinationals as a base erosion and profit-shifting tax avoidance strategy.
Representatives in the property and infrastructure sectors have sought an exemption on the basis that the United States, the United Kingdom and Canada provide some form of exemption. However, the Australian approach introduces an Australia-specific rule expected to be used by the property and infrastructure sectors, to allow genuine third-party commercial financing arrangements, such as with greenfield construction projects, to be deducted with no link to earnings, subject to some eligibility rules.
These amendments will hold companies, particularly large corporate groups, to account on their corporate structures and whether they are operating with opaque or atypical tax arrangements. Given the global momentum towards ensuring that firms pay their fair share of tax, it's in the public interest that shareholders and the community have more information of this kind. This legislation represents the Albanese Labor government getting on with our election commitments and joining a global fight to stop companies shifting profits to tax havens.
We on this side of the House believe that, if you make money in Australia, you should pay tax in Australia. It should come as no surprise to the House that it's up to Labor to fix this. Only one party in this parliament has the record in promising and delivering tax reform to ensure multinationals pay their fair share, and you only need to look back at history in this space. But, when the previous government came to office, they abandoned multiple multinational tax measures which were ready to go, and they've been on the go-slow on multinational taxation ever since.
Labor has a track record here. We'll continue to focus on that issue in government because we believe it's fundamentally one of fairness. Australian business shouldn't be disadvantaged by going up against multinational firms that are channelling their profits through tax havens. If you're a new start-up business, you're not banking your money in the Bahamas, you're not looking for an accounting lurk to run through the Cayman Islands and you don't have an army of lawyers and accountants to seek out every loophole. Instead, you're working hard to try and come up with a new business model. But, right now, you face the potential of being cheated by multinational firms and tax dodgers who are using tax havens.
We still have a lot more to do to level the playing field and support those Australian businesses, but this is a huge step in the right direction. I commend the work of the minister and the assistant minister, and I commend this bill to the House.