Tuesday, 1 August 2023
Treasury Laws Amendment (Making Multinationals Pay Their Fair Share — Integrity and Transparency) Bill 2023; Second Reading
That all words after "That" be omitted with a view to substituting the following words:
"whilst not declining to give the bill a second reading, the House notes:
(1) the former Coalition government implemented more than a dozen measures to combat multinational tax avoidance including by:
(a) playing a leading role in the original OECD BEPS project, and committing to the OECD two-pillar solution to multinational tax; and
(b) introducing the Multinational Tax Avoidance Law; the Diverted Profits Tax; strengthening the thin capitalisation and transfer pricing rules; doubling penalties for multinational tax avoidance; and establishing the Tax Avoidance Taskforce;
(2) that despite promising to only raise taxes on multinationals at the election, the Labor Government have broken promises to raise taxes on superannuation, on unrealised capital gains, on franking credits, and end small business tax incentives;
(3) that the original form of this Bill, and its last-minute changes, show once again that Labor have an anti-business approach to consultation, regulation and policy to support business;
(5) that higher taxes are not a solution to a cost-of-living crisis and collapsing productivity under Labor".
I rise to speak on the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023. This is a two-schedule Treasury omnibus bill. Schedule 1 introduces new rules on the disclosure of information about subsidiaries for financial years commencing on or after 1 July 2023. Australian public companies, both listed and unlisted, must disclose information about subsidiaries in their annual financial reports.
Schedule 2 to the bill aims to strengthen the thin cap rules in division 820 of the Income Tax Assessment Act. The amendments seek to address risks to the domestic tax base arising from the excessive use of debt deductions. They introduce new thin cap earnings based tests for a certain class of entities. The safe harbour test will change from debt deductions up to 60 per cent of assets to debt deductions up to 30 per cent of profits defined as earnings before interest, tax, depreciation and amortisation—EBITDA. The amendments also establish an arms-length debt test in the form of a third-party debt test. The schedule introduces new subdivision 820-EAA, debt deduction creation rules. These rules disallow deductions to the extent that they are incurred in relation to debt creation schemes. Importantly, the new test excludes related party debt, supporting property and infrastructure investment.
The coalition won't be opposing the bill, whilst noting the shambolic approach to consultation that we've seen with this legislation. Schedules were pulled just hours before introduction, to the point where the explanatory materials refer to schedules of the bill that actually don't exist, Mr Deputy Speaker. We know Labor wanted this bill to be much more onerous, to tie businesses down in more red tape, which would not have improved the revenue raised by the bill but would have cost dearly in terms of the productivity of our economy.
We know the government wanted this bill to go further because their own explanatory materials, on page 9, refer to a third schedule. We know that at the last minute, amid extensive backlash, the government gutted this bill from what they'd proposed. They pulled out schedule 3 even though their reference to it remained in the explanatory materials. We welcome that change—it was the right change to make to the form that went to consultation—but we can't commend the government for the overreach in what was proposed to be in the bill. It's just another example of Labor's desire for overreach on tax, going further than was promised at the election and ignoring concerns of the community.
I see the member opposite, the member for Lyons, shaking his head, but the truth is that this is beyond what was promised at the election, ignoring the concerns of the community. And it was pulled, in a shambolic way, because of a big backlash against an unworkable proposal. They've been ignoring the concerns they've heard and denying and spinning to avoid the problem. We saw this with franking credits. We've seen it with superannuation taxes. We saw it with the gas industry. We almost saw it here, but, happily, that schedule and those proposals were pulled.
It's important to note that the coalition took extensive action over nine years in government to address multinational tax avoidance, and this is highlighted in the second reading amendment that I've moved. As 2014 G20 hosts, Australia played a leading role in the original OECD BEPS project, which was initiated in 2013 and delivered in 2015. We played a leadership role as an early and vigilant adopter of the OECD and G20 bas erosion and profit-shifting—that is, the BEPS—recommendations. These establish a multilateral approach to prevent tax avoidance and increase tax transparency for administrators.
The sorts of measures that we pursued included introducing a diverted profits tax, which limits a company's ability to shift profits out of Australia; introducing the multinational tax avoidance law, which ensures companies do not avoid a taxable presence in Australia; strengthening the thin capitalisation rules; strengthening transfer pricing rules; doubling the penalties for tax avoidance; and establishing the ATO Tax Avoidance Taskforce. The task force, which was created in mid-2016, enforces existing laws and supports the government's new tax avoidance measures. It targets multinational enterprises, large public and private groups and wealthy individuals. From 1 July 2016 to 30 November 2021, the ATO raised $24.2 billion in tax liabilities against large public groups, multinational corporations and privately owned and wealthy groups. This generated collections of $17.3 billion. Of the liabilities, $15.3 billion were raised against large public groups and multinationals.
Our system is undermined when people or organisations avoid their tax obligations. We welcome the continuation of the OECD two-pillar solution to multinational tax avoidance, which was started by the coalition and continued by this government. But this legislation also highlights an important point, as I mentioned earlier, about Labor's broken promises on tax. Those opposite often seem to think that election promises are there to be broken. We've seen many broken. No Australian has seen a $275 reduction in their electricity bills. No Australian has seen the cheaper mortgages promised by those opposite. They promised only to increase taxes on multinationals before the last election, and they have clearly broken that promise. They're raising taxes on superannuation. We know that for young Australians around half will be caught by what is proposed through a sneaky tax. Their excuse is: 'It's okay. They won't pay it until later.' The nature of superannuation is that you don't get the money until later.
Labor is taxing unrealised capital gains. Unrealised capital gains are just that—they are unrealised. So a small business that has unrealised capital gains will have to go and realise them. That means they have to sell their assets, and that means, whether it's a farmer or a small business with a piece of land that they operate on, they are going to have to sell that off. I've seen families in that position who are going to lose the assets that are the basis of their businesses. But they're not unionised businesses. They're not the kind of businesses that the Labor Party is particularly interested in.
Labor is increasing taxes on franking credits, and they promised they wouldn't do this, but they're banking half a billion in taxes from Australian companies and retirees. Ultimately this is all paid by Australian investors. Labor has ended small business tax concessions and decimated the instant asset write-off, all but burying the technology investment boost and ending loss carry-back measures. These are all important measures to encourage investment by the small- to medium-sized enterprises that are the backbone of our economy—or were. I hate to think where this is all going for small- to medium-sized enterprises in this country, but the position is clearly grim.
This is despite independent economist Chris Richardson predicting Labor will breach the coalition's tax-to-GDP cap in their first year in office. You don't beat a cost-of-living crisis—that's what Anthony Albanese called it, by the way, before the election. He doesn't call it that anymore. In fact, we've seen the Treasurer in the last week put out his wellbeing report, where he clearly ignored the mortgage stress that Australians are facing because he focused on the data on mortgage stress prior to 2021. He used data from three years ago. He came to the conclusion that there's no problem with mortgage stress because there wasn't. The problem is now, and he's burying that. He's trying to imagine that it isn't true.
The truth of the matter is that higher taxes will not help a cost-of-living crisis. Higher taxes will not help the fact that in the last 12 months labour productivity has collapsed by 4.6 per cent. That has never happened before. Labor's broken promises on tax won't help with the cost of living or collapse in productivity, but what we are seeing is that Australians are paying six per cent more for everything they buy than they were a year ago. Core inflation, at 5.9 per cent, remains amongst the highest of the advanced economies in the world.
Of course, that data just tells us what we know. We're seeing it every day on the ground: Australians are paying more for their mortgages, for their groceries, for their rent and for their energy bills. Australians are actually having to work more just to make ends meet, and we're seeing this in the data. They are working. They're taking on extra jobs. It means they can't pick up the kids after school, it means they can't go on holidays when they might have otherwise been able to and it means they don't get the family time they would otherwise want because that's the only way they are able to make ends meet. I see small businesspeople in particular who are dealing with these challenges, and the hours they're putting in are completely unsustainable—completely unsustainable. But when you're under this kind of pressure, this is the resilient nature of the people who go into small business in this country.
Meanwhile, the extraordinary thing about this is that the economy is shuddering to a halt. Of course, this is the answer that Labor has come up with to inflation: you just stop the economy. You stop the economy! That's what has happened: GDP per capita has gone backwards in the last quarter—it's negative. I see the member opposite shaking his head—
GDP per capita has gone negative in the last quarter. Labour productivity has gone backwards: minus 4.6 per cent in the last year! It has never happened before, but he thinks it is funny! He thinks it's funny that Australians can't pay their bills. He thinks it's funny that Labor has broken its promise on bringing down energy prices by $275. He thinks it is funny that the Prime Minister promised cheaper mortgages, and no Australian is seeing cheaper mortgages. In fact, we read today that we're going to see, in the next three months, 150,000 Australian households going over the mortgage cliff. That's $95 billion, and the member opposite thinks it's funny. Is this what the Labor Party stands for? If that is true, it's very, very sad.
Now, back to the important issues in this bill. The last-minute changes to this bill show that this Labor government does not know how to work with business, does not know how to manage the economy and is pursuing the wrong priorities. Changes to the multinational tax arrangements in this bill do not make up for Labor's attack on aspirational Australians—those hardworking Australians who are trying to get ahead and don't want to become the working poor. They don't want to become the working poor. The changes to multinational tax arrangements in this bill do not make up for Labor's year of inaction on dealing with the issues it promised it was going to deal with. Australians deserve a government that doesn't think these issues are funny and that doesn't want to bury them in a wellbeing report that uses data from three years ago. Australians want a government that takes these issues seriously, doesn't make jokes about them and gets on with the job.
That's what we want to see. We won't oppose this legislation, but do not apologise for holding this government to account on its broken promises on tax, on its failure to take action on productivity—in fact, allowing it to go into an unprecedented reversal on their watch—and on its failure to make aspirational Australians the centrepiece of its focus.
I rise to make my contribution to the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023. The purpose of the legislation is to make multinationals pay their fair share of taxation. This was a commitment that the Albanese Labor government took to the 2022 election, and it's a commitment that the government is fulfilling with this legislation. The bill implements measures announced in the October 2022-23 budget and forms part of the government's Multinational Tax Integrity Package.
Ensuring that multinational firms pay their fair level of taxation in Australia on profits made from Australian consumers is a principle of our government. This bill adopts the guidance of the Organisation for Economic Co-operation and Development to align debt deductions with economic activity—that is, earnings—and includes an Australian-specific approach for external debt in the form of a third-party debt test. There are two schedules to this bill.
Schedule 1, entitled 'Multinational tax transparency—disclosure of subsidiaries', introduces new reporting requirements. Australian public companies, both listed and unlisted, will be required to disclose information on the number of subsidiaries and their country of tax domicile. This will hold companies accountable, particularly the larger corporate groups. The measure will require them to be more transparent about their corporate structures and whether they are utilising complex and opaque tax arrangements for the purpose of avoiding their tax obligations in Australia, such as through the use of subsidiaries located in low-tax jurisdictions. This information will support more precise economic analysis and help inform whether tax laws are operating as intended in collecting the correct amount of revenue. Companies will disclose this information as part of their annual financial report, which will help reduce compliance burdens. The United Kingdom has a similar measure already in place. The measures contained in the bill are in line with international approaches. The new requirements are a step change to ensuring increased tax transparency and complement the ongoing work to implement a beneficial ownership register and public country-by-country reporting, on which the government is continuing to engage with stakeholders. The new requirements have an announced starting date of 1 July 2023.
Schedule 2, entitled 'Thin capitalisation', introduces a number of changes and is a revenue-raising measure. The schedule introduces measures to strengthen Australia's thin capitalisation rules to address risks to the domestic tax base posed by profit-shifting techniques used by global firms to avoid paying a fair level of taxation in Australia. It targets a known tax-planning arrangement by limiting multinational enterprises' debt deductions. The measures will strengthen Australia's thin capitalisation rules by limiting an entity's debt related deductions to 30 per cent of profits, using earnings before interest, taxes, depreciation and amortisation, or EBITDA, as the measure of profit. This new earnings based test will replace the current safe harbour test. The measures will allow debt deductions denied under the entity level EBITDA test—that is, interest expense amounts exceeding the 30 per cent EBITDA ratio—to be carried forward and claimed in a subsequent income year for up to 15 years. This will provide more flexibility for smaller entities with earnings volatility. In addition to this, the measures will allow an entity in a worldwide group to claim debt related deductions up to the level of the group's net interest expense as a share of earnings, which may exceed the 30 per cent EBITDA ratio. This new group ratio will replace the existing worldwide gearing ratio.
The bill retains an arm's length debt test, but only 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. This is an Australian-specific test designed specifically for the infrastructure and property sectors to allow debt to be deducted with no earnings test. These sectors tend to be more heavily geared and, especially in the construction phase of a project, have minimal earnings. This test will address the criticism made by some that making multinationals pay their fair share of tax will harm investments of foreign capital in Australia or make it harder for Australian businesses to expand overseas. This is nonsense. The amendments are designed to support ongoing investment in Australia, particularly in the infrastructure and property sectors. They are also designed to minimise costs for stakeholders. As with schedule 1, these provisions have an announced starting date of 1 July 2023.
There has been extensive consultation in relation to these measures. This included public consultation on the design of each schedule via a consultation paper in late 2022 and public consultation on exposure draft legislation in March and April of this year. The government has continued to engage industry stakeholders on a targeted basis with respect to schedule 2, specifically in respect of the property and infrastructure sectors. Furthermore, these policies are grounded in the OECD/G20 inclusive framework on base erosion and profit shifting, which commenced in 2013. Over 135 countries and jurisdictions are collaborating on the implementation of the measures to tackle tax avoidance, improve coherence of international tax rules and ensure a more transparent tax environment. The shift to an earnings based approach to debit deductions ensures that deductions are tied directly to a firm's economic activity.
Most OECD countries—including the United Kingdom and United States, and many of the European Union—have already implemented this form of earnings based interest limitation rules. This bill will bring Australia into line with these other jurisdictions. Given the global momentum towards ensuring multinational firms pay an appropriate level of taxation, it is clearly in the public interest for the legislation to be implemented.
In the middle of a cost-of-living crisis and amid growing multinational profits, failing to take action is, at best, irresponsible and, at worst, utterly unconscionable. Companies like Google, Facebook and Apple make a substantial level of profit from Australian consumers. They also should contribute a fair share of tax. Australian workers and taxpayers are paying their fair share, especially those I represent in Werriwa. Global firms must also be compelled to pay their fair share. When large multinational companies devise strategies to minimise and avoid their tax obligations in Australia they leave less money to be spent on important services that the government provides. Multinationals avoiding paying tax leaves less to be spent on Medicare, continued subsidies for medicines, social security payments and other forms of assistance that many Australians need to rely upon.
This legislation will also level the playing field for Australian businesses, particularly small businesses. It will also increase the transparency of firms' tax obligations. I commend the bill to the House.
In the explanatory memorandum that accompanies this bill, the minister says, 'Transparency is a key factor underpinning the integrity of the tax system.' On this observation, I could not agree more. However, the reality of this legislation is that it barely touches the tip of the iceberg when it comes to bringing that transparency to be, and we remain left waiting to see real, substantive improvements in the ways in which multinational companies are being held to account for their income and expenses in our market.
The measures contained in the bill, as currently drafted, do two things: (1) they require public companies to disclose information on the number of subsidiaries and their country of tax domicile; (2) they strengthen the thin capitalisation rules to limit multinational debt deductions in Australia. While I'm supportive of both of these measures—after all, they are important, long overdue elements of increasing tax transparency and integrity—alone, they do not go anywhere near far enough.
Indulge me on a short, potted history of these reforms. In the lead-up to the 2022 federal election, the Labor Party announced a multinational tax integrity package to address tax-avoidance practices of multinational enterprises and improve transparency through better public reporting of tax information. The election commitment included public reporting of tax information on a country-by-country basis, requiring large multinationals to publicly disclose how much tax they pay and how many workers they employ in each jurisdiction in which the enterprise operates.
In the recent budget, the government reiterated its intention to implement public country-by-country reporting—a commitment they then repeated when the exposure draft of this legislation was released earlier this year. And, yet, the bill we have before us today does not contain measures to implement public country-by-country reporting. It appears now that the implementation of that policy has been pushed back at least a year.
What we have before us, in this bill, is what I sincerely hope is the tasting plate or the entree, rather than the total meal. If this is as far as this government is prepared to go, as Australians seeking reform, we are going to be left wanting much, much more.
So what is country-by-country reporting and why is it so urgently needed? Public country-by-country reporting is an accounting practice that requires companies to publish how much profit and cost they incur in each of the countries they operate in, instead of publishing all of the profits and costs they incur around the world as a grouped sum amount. The introduction of country-by-country reporting here in our economy would require large multinationals operating in Australia to report key information about basic finances, such as earnings, profits, losses, the number of staff and taxes paid or not paid, for every country where they operate. By requiring companies to detail how much profit they're making in each country they operate in, we increase transparency. This is important because, where there is transparency, it makes it possible to spot companies shifting profits out of countries where they do business and into tax havens so they can pay less tax than they should. Country-by-country reporting doesn't just expose profit shifting; it actually deters it, too.
Since 2014, a huge number of documents, including those from the Panama Papers and the Paradise Papers scandals, have been leaked by the International Consortium of Investigative Journalists, unveiling how tax evasion and avoidance have become standard business practice right across the globe. The Tax Justice Network estimates that at least one in every four tax dollars lost by the world to multinational corporations using tax havens can be prevented by requiring multinational corporations to publish their country-by-country reporting data. If available, country-by-country reporting data would give us a clear line of sight not only of the scale of a company's activities in our market but also of the company's profits declared and tax paid in each jurisdiction where they operate. Making the data transparent allows public scrutiny of profit shifting and has been shown to raise the effective tax rates paid, even without additional policy changes.
In this context, then, none of us should be surprised that the OECD has called for this level of reporting to be adopted internationally. Why wouldn't we heed those calls here in Australia when you consider that the annual tax transparency report released earlier this year by the Australian Taxation Office revealed that over 30 per cent of the nearly 2½ thousand large and medium corporate entities operating here in Australia paid no tax at all here in the last financial year? They paid no tax at all. An industry breakdown showed that half of the mining, energy and water companies, like Adani Mining, ExxonMobil Australia and Santos, paid no income tax in the financial year of 2020-21. Shockingly, despite having a total income of $9.1 billion and a taxable income of $113 million, Chevron paid just $30 in income tax in Australia, according to the report.
When you bring that right back to what it means daily in economies right around the world, it can be argued that this sort of behaviour—tax evasion and avoidance—is fuelling poverty and denying nations, including our own, their capacity to achieve their ultimate goals. There are 11 more billionaires in Australia now than before the COVID-19 crisis. With extreme wealth and extreme poverty on the rise, our government needs to identify and collect tax where it is fairly due. The United Nations Principles for Responsible Investment, representing investors with $89 trillion worth of assets under management, states that tax avoidance is the key driver of inequality, which is associated with poor long-term business and social performance. By increasing transparency over what profits are made and what taxes are paid by global corporations in every country in which they operate, we could hold big corporations to account and ensure they pay their fair share of tax to lift people out of poverty.
According to recent academic research, Australia lost an estimated 14 per cent of its corporate income tax to multinational companies' use of tax havens in 2019. That represents a loss of over US$9 billion. If country-by-country reporting could help us recapture this lost revenue, our government would have more than enough money to do any one of a number of things that it is seeking to do, including meeting the needs of our childcare educators, teachers, nurses and aged-care workers or working with communities right across Australia to electrify everything.
Importantly, by ensuring that those who should pay do just that, we could shift the burden away from individual taxpayers, who in this year's budget alone accounted for 48 per cent of our total revenue. This overreliance on personal income tax is unsustainable, especially as the number of workers per retiree is rapidly decreasing. In this context, I call on the government to lead us through a process of comprehensive tax reform to reduce reliance on personal active income and review opportunities that are fairer to future generations by looking at how significant passive income is taxed.
Corporate tax transparency is just one reform. Globally, companies and governments will be under increasing pressure to respond to demands for transparency. Large financial sector firms in the European Union have been required to disclose public country-by-country information for nearly a decade. Recently investors advanced shareholder resolutions calling on Amazon, Microsoft and Cisco to begin publishing tax and operational data on a country-by-country basis, garnering the support of independent shareholders collectively and representing hundreds of billions of dollars.
To address briefly what I suspect may be some of the objections of some multinational enterprises to country-by-country reporting, I'd like to note that the potentially in-scope companies here in Australia have in many instances been reporting similar data, albeit confidentially, to the tax authorities in the OECD, and many are preparing to comply with the EU public country-by-country reporting directive. I'm convinced, therefore, that these experiences to date in other jurisdictions demonstrate that country-by-country reporting can be done without revealing commercially sensitive information and without a negative impact on competition. It's hard to see the detrimental effect of increased transparency, and in fact country-by-country reporting would level the playing field for companies operating in Australia.
It seems completely counterintuitive, but the reality is that here in Australia multinational companies that are domiciled elsewhere are not held to the same level of account as Australian companies. In this way, incredibly ironically, we are stacking the cards against Australian listed companies, who pay the corporate tax rate of 30 per cent while their direct competitors operating in Australia but domiciled elsewhere are not. Public country-by-country reporting would create a fairer and more competitive environment for Australian businesses by removing a competitive disadvantage for local businesses who are doing the right thing while also closing a loophole for foreign companies. Ultimately, most businesses that don't create complex corporate structures to shift profits to tax havens and avoid domestic obligations are losing out. These are the good guys. The good guys are being left high and dry whilst they're doing the right thing. The revenue base of Australian taxpayers is deliberately and systematically gamed.
I call on the government, then, to stand bravely by its pre-election promises and its legislated budget measures and introduce public country-by-country reporting. To do anything less than that would be to fail to live up to the expectations of those who have sent this government to lead in this time. It is time to deliver true corporate tax transparency so that community trust in the tax system can be restored. Thank you.
The Albanese government, during the 2022 election campaign, made a strong commitment to ensuring that multinationals pay their fair share of tax. This pledge is founded upon the principles of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting initiated in 2013. As part of this collaborative effort, more than 135 countries and jurisdictions are working together to tackle tax avoidance, enhance international tax rules coherence, and foster a more transparent tax environment.
The first schedule of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 focuses on improving multinational tax transparency by introducing new reporting requirements for Australian public companies, both listed and unlisted. This mandate will require disclosure of crucial information, including the number of subsidiaries a company possesses and their country of tax domicile. This measure is a vital step towards holding corporations accountable, particularly larger corporate groups, by compelling them to be transparent about their corporate structures and whether they are employing opaque tax arrangements such as utilising subsidiaries located in low-tax jurisdictions. In short, we are demanding, on behalf of Australian taxpayers, signposts through the legal mazes these corporations have built. By doing so we aim to make better-informed economic analysis and ensure that as a government we can collect the right amount—the fair amount—of revenue. This information will be disclosed as part of the company's annual financial reports, thereby reducing compliance burdens.
Similar approaches have already been implemented successfully in other countries, such as the UK. The implementation of schedule 1 represents a significant stride towards increasing the accountability of Australian public companies, listed and unlisted, with regard to their subsidiaries and tax domicile. By mandating the disclosure of this information, we are empowering the public, investors and regulatory authorities to gain a clearer understanding of corporate structures and tax arrangements. Transparent corporate structures are essential for fostering both public and investor confidence and ensuring that companies are operating in a fair and responsible manner.
By revealing subsidiary information, we can identify potential tax avoidance or profit shifting, bolstering our ability to collect the right and fair amount of revenue. This increased transparency will enable better economic analysis, and that helps us make better informed decisions regarding policies and improving the coherence of international tax rules. This measure reduces compliance burdens for companies as it is aligned with international best practices. Countries like the UK have already adopted similar measures, showcasing their effectiveness and practicality in promoting corporate transparency.
This schedule is the result of extensive stakeholder consultations conducted in August 2022 and April 2023. It reflects the inputs and concerns of various entities, ensuring a more balanced approach to addressing tax transparency issues. In conjunction with other initiatives, such as the beneficial ownership register and public country-by-country reporting, this measure demonstrates our commitment to enhancing tax transparency and combatting tax evasion.
Schedule 2 provides a critical measure designed to strengthen Australia's thin capitalisation rules and address potential risks to the domestic tax base arising from the use of debt deductions as a base erosion or profit-shifting technique. The approach taken aligns with the Organisation for Economic Co-operation and Development's guidance—now run by that well-known socialist Mathias Cormann—which advocates for debt deductions to be linked to economic activity. This is achieved through the implementation of entity-level earnings before interest, taxes, depreciation and amortisation or an EBITDA test limiting debt related reductions to 30 per cent of profits. This new earnings based test replaces the existing safe harbour test.
In recognition of the unique characteristics of certain industries, such as the infrastructure and property sectors, an Australian-specific approach has been developed. The third-party debt test allows entities in these sectors to claim debt related deductions without an earnings test, providing them with more flexibility during the construction phase of projects where earnings may be minimal. To maintain fairness and align with international efforts, the proposed thin capitalisation amendments will bring Australia in line with many OECD countries that have already implemented earnings based interest-limitation rules. Such rules have been adopted by the UK, the US and most of the EU.
Schedule 2 constitutes a crucial measure designed to address tax planning practices, utilised by multinational enterprises through excessive debt deductions. By limiting MNEs' debt deductions and aligning them with economic activity, we aim to ensure these corporations contribute their fair share of taxes and level the playing field for Australian businesses.
The entity-level EBITDA test, capping debt related deductions at 30 per cent of products, is a robust approach to curbing base erosion and profit-shifting techniques. By basing deductions on earnings, we prevent MNEs from manipulating their debt levels to minimise tax obligations. This alignment with OECD guidance and international best practices reinforces Australia's commitment to global efforts in addressing tax integrity risks. Furthermore, the measure allows for any debt deduction denied under the EBITDA test to be carried forward and claimed in subsequent income years, up to 15 years. This provision provides flexibility for smaller entities facing earnings volatility, ensuring they can maintain a stable financial position whilst still adhering to the debt deduction limits.
In addition to the entity-level test, an Australian-specific approach for external debt, known as the third-party debt test, has been developed to support ongoing investment, particularly in the infrastructure and property sectors. By allowing entities in these sectors to claim debt related deductions without an earnings test, we aim to promote investment and development in projects that contribute to Australia's economic growth. It's important to note that this measure does not apply to financial entities and authorised deposit-taking institutions. We have taken into consideration the unique nature of these entities and their relevance to the broader financial system, aligning Australia with global efforts of most OECD countries, including the UK, US and EU, which have already implemented earnings based interest limitation rules. By adopting similar rules, we are harmonising our tax system with international standards and reinforcing our commitment to combating tax avoidance practices globally. While we acknowledge that some sectors such as infrastructure and property have sought exemptions from these changes, it is essential to address potential base erosion risks across all sectors to maintain the integrity of our tax system.
At its core, this bill is about fairness. It's about ensuring Australian workers don't bear an unfair tax burden. We are happy for multinationals to operate in Australia and make stonking profits, but we want them paying their fair share of tax and not manufacturing legal labyrinths to escape those obligations. United States Senator and former presidential candidate Elizabeth Warren has a terrific quote that I'd like to read. She said of the US:
There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory …
Now look, you built a factory and it turned into something terrific, or a great idea? God bless! Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.
I think that's a terrific quote that really comes to the heart of what a fair taxation system is all about. What Senator Warren is saying is simple: you have a right to build your empire, and we support the entrepreneurship, the innovation and the drive that people have when they want to build their businesses. No-one wants to take that away. But, when you utilise public roads and transport goods to market, police services to provide protection and security to the town you are based in, and doctors and nurses when you need medical attention, you too should pay your fair share of tax because your fair share of tax helps build the infrastructure and the social fabric that enables that wealth creation in the first place.
Australia is the land of opportunity, and you have the right to make your money, but we need to make sure Australia remains the land of opportunity for this generation and generations to come. That's why we need a fairer tax system, and that's what this bill will ensure. The Australian government understands the importance of foreign capital and investment in stimulating economic growth. These measures are essential to ensuring companies operate on a level playing field. A transparent and equitable tax system ultimately fosters investor confidence in Australia's economic stability and contributes to long-term, sustainable growth that benefits us all. Stakeholder consultation has been integral to the development of these legislative proposals. I won't pretend there's no opposition to this; of course there are some multinationals out there that would like to hold on to every dollar they are currently making and don't want to pay more tax. I get it. But we're here to create a fairer tax system for all.
The Australian government has engaged with various entities in multiple rounds of discussions and considered feedback to shape the final legislation. While complex changes require careful consideration, we believe the introduced measures strike the right balance between transparency and practicality. The global 15 per cent minimum tax is a significant step towards curbing tax avoidance. Our measures align with these global efforts and strengthen our commitment to promoting fair and transparent tax practices worldwide. By actively participating in the OECD/G20 Inclusive Framework, we contribute to the progress towards a more equitable international tax environment. The loopholes are closing for companies that try to evade their obligations.
These legislative proposals before the House are both a fulfilment of the Labor government's election commitment and a fundamental step towards fostering a fairer and more equitable tax system. Schedule 1 enhances multinational tax transparency while schedule 2 strengthens Australia's thin capitalisation rules. By working within the framework of the OECD/G20 Inclusive Framework we are aligning our efforts with more than 135 countries and jurisdictions to address tax avoidance and promote a transparent tax environment.