Mathias Cormann (WA, Liberal Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

This Labor government is a high-spending, high-taxing, high debt and deficit government which, over less than five short years in government, has lost complete control of our public finances, having inherited a position of no government net debt, a $22 billion surplus and $70 billion of net Commonwealth assets. This fiscally reckless, irresponsible and very wasteful government has turned that situation around very quickly. We find ourselves in a circumstance now where we have $174 billion worth of accumulated deficits over the last four budgets. We are heading again for $145 billion worth of government net debt and this government is planning to spend nearly $30 billion just to pay the interest on the debts that it has accumulated so far over the last 4½ years.

You have to contrast this with the situation in the final year of the Howard government when it received more than $1 billion in interest payments, given that there was no government net debt and that there were $70 billion worth of Commonwealth net assets which had been invested prudently by the former coalition government through the Future Fund.

People across Australia know that whenever Labor are in government for a period of time they stuff things up when it comes to the budget. Labor do not know how to handle money and after a period of Labor in government it always comes down to the coalition to come back and fix up Labor's fiscal mess. The reason we end up with bills like the one before us—the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012—is that Labor are always casting around for more cash. They do not care how reckless and how bad it is for our reputation as an investment destination when they come up with, for example, legislation like this, which imposes a tax burden retrospectively.

That is exactly what this bill seeks to do. This bill seeks to make changes retrospectively to cross-border transfer pricing arrangements. The reason it is bad for governments to make changes to tax laws retrospectively is, firstly, that it is fundamentally unfair. Retrospective changes to tax legislation also significantly damage our reputation as a safe destination for investment. I put this question: how can anyone be expected to have complied with tax laws back in 2004, 2005, 2006 or 2007 that did not exist at the time? How can anyone across Australia have been expected to comply with tax laws back to 2004 that we are only just debating in the parliament now?

This is very bad practice and the only reason we are having these sorts of debates in this parliament now is because this government are so desperate to put their hands on some more cash to plug the hole that they have created in less than five years of bad and irresponsible government.

The coalition cannot support this bill in its current form. It is a large retrospective tax change which the coalition is opposed to in principle. The coalition will seek to amend the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 in order to give prospective effect to this bill. If this amendment is unsuccessful, the bill will be opposed by the coalition as the government has not made a strong enough public justification for the retrospective application of these changes. Transfer pricing rules exist to ensure that taxation is collected on the contribution of profits from Australian operations to multinational companies and to ensure that profits are not shifted between related parties across borders without appropriate taxation. Transfer pricing rules are contained within division 13 of the Income Tax Assessment Act 1936 and Australia has also incorporated various international tax treaties into Australian law.

The Commissioner of Taxation has historically considered these treaty transfer pricing rules contained in treaties as an alternative basis for transfer pricing adjustment in parallel with the relevant provisions of the Income Tax Assessment 1936. However, in 2011 the Full Federal Court cast doubt on the second basis for transfer pricing adjustments in Commissioner for Taxation v SNF Australia Pty Ltd. Whilst this case was argued only on the basis of division 13, the government now believes that as a result of this case division 13 does not always adequately reflect the contributions of profits from Australian operations to multinational groups and, as such, in some cases treaty transfer pricing rules may produce a higher level of taxation. This government essentially want to be able to pick and choose whether they are going to use Australian law or whether they are going to use the relevant treaty provisions, depending on what delivers a higher taxation outcome.

At the end of the day, if the law is as the taxation commissioner may have thought in past then there is no need to change it. If it is not the way the tax commissioner thought it was and has interpreted it to be then of course this is a massive change to tax laws retrospectively. The tax commissioner does not write laws. The tax commissioner implements, administers and executes the laws passed by this parliament. If the tax commissioner's interpretation of those tax laws is found to be inconsistent with the laws passed by this parliament, it is not right to then change the legislation retrospectively in order to bring the legislation in line with the tax commissioner's interpretation. What would be right is for the tax commissioner to change his interpretation to make it consistent with the laws passed by this parliament until such time as the parliament has decided to change those laws, and of course those changes ought to apply prospectively only.

On 1 November 2011 the government announced a review into the relevant division of the Income Tax Assessment Act 1936 and said it would legislate to clarify the transfer pricing rules in tax treaties and valid transfer pricing adjustments independent of the ITAA 1936. This change is to be retrospective from 1 July 2004. I have made the point, and I hope that the chamber is very clear on the fact, that the coalition has been opposing and continues to oppose retrospective tax changes which provide adverse consequences for taxpayers as a matter of principle. Retrospective changes that are beneficial to taxpayers are one thing, but retrospective tax changes which impose an adverse consequence on taxpayers and a beneficial outcome for government are not an appropriate way to legislate in the tax area.

The reasons the coalition is opposed to retrospective tax changes that are detrimental to the taxpayer as a matter of principle are that they can change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law as at the time the agreement was entered into; they can expose taxpayers to penalties in circumstances where taxpayers could not possibly have taken steps at the earlier time to mitigate the potential for penalties to be imposed; they may change a taxpayer's tax profile, which in turn can materially impact the financial viability of investment decisions and the pricing of those decisions, which were made in the context of the tax laws as they existed at the time; and they can increase Australia's level of perceived sovereign risk. In fact, that has already happened.

It is impossible for somebody in 2004 to have complied with a law that is yet to be passed by the parliament in 2012. That seems to be pretty obvious. How can anyone be expected to have complied with a law back in 2004 that the Senate is here now discussing on 20 August 2012? It is completely unreasonable and it exposes taxpayers to a completely unreasonable level of sovereign risk when tax laws and tax arrangements can be changed going back by eight years. Of course, a lot of investment and other decisions would have been made on what the understanding of the laws was at the time, and just because the tax commissioner takes one view and participants out in the economy take another view, it does not mean necessarily that the tax commissioner always gets it right. Of course, the proof is in the pudding; he does not always get it right.

On occasion, taxpayers contest the tax commissioner's views and interpretations before the courts because they believe that the law says something different from what the tax commissioner says. Here there is a very bad trend where this government, whenever it comes to the tax commissioner having been found to have applied the tax laws in an inappropriate way, rather than ensuring that the tax commissioner applies the law the way it was intended to be applied, turns around and says, 'Well, let's make sure that for all of the years that the tax commissioner has interpreted the law in a way that is inconsistent with the way the law was passed we will just change the law to make it retrospectively consistent with the tax commissioner's interpretation.' It will do this rather than force the tax commissioner to apply and comply with the laws passed by this parliament.

It is the wrong way round. The reason the government are going the wrong way round on these things is because they are always so desperate for more cash given their absolute incapacity to handle money.

If the relevant treaty article, the associated enterprises article contained in Australia's existing double taxation agreements, operates to provide a separate taxing power, the question then becomes why the bill needs to have retrospective application. That is the proposition that has been put for the last however many years. However, if the associated enterprises article does not operate to provide a separate taxing power, can it be said that the proposed amendment is merely clarifying the law? If not, then it is surely the case that taxpayers who have complied in the past with the law as enacted are now retrospectively exposed to a new tax. In evidence to the Economics Legislation Committee on 26 July 2012, Mr Peter Collins, partner in PricewaterhouseCoopers, made a very concise exposition on this point in these terms:

… if the law is as clear as has been suggested in a lot of the debate today when we have been hearing about the tax office's point of view on this, then there is no case for change. Why do we need to change the law if it is so clear?

That is a completely appropriate question. The reason we are having this debate is because the tax commissioner's interpretation of the law went beyond what the law actually said. The reason we are here clarifying things is because this government wants to lock in significant additional cash. The retrospectivity of this bill will remove a taxpayer's accrued right to dispute an amended assessment for income years as far back as 2004-05 where the Australian tax office has raised the amendment in reliance on the treaty transfer pricing powers. That is surely unfair. The opposition does not accept that the government has made its case that the retrospective legislation is appropriate or required. No detail of the size of the retrospective tax impost is currently available. The government claims that this has no impact on the budget at all as it is a revenue protection measure. In fact, despite repeated requests, the Assistant Treasurer's office has been unable to fully quantify the cost of not passing this bill.

The coalition, as I mentioned at the outset, will be moving an amendment making the bill prospective rather than retrospective. This will ensure that the taxpayers are not forced to retrospectively comply with a tax regime they did not know existed at the time when they made business and investment decisions. This latest change comes on top of previous retrospective tax changes to the consolidation regime. It comes on top of the mining tax, the carbon tax and more than 20 other new or increased ad hoc Labor Party tax grabs. They have all got one thing in common: that they are driven by a desperate need for more cash in order to try to fill the holes. So far this government has been particularly unsuccessful in filling those holes. This government has been so unsuccessful in filling those holes but we were told initially that last year the deficit was going to be about $10 billion by the Treasurer when he was trying to make us believe that the government was on a return path to a fiscal surplus. Back in August 2010 the Treasurer, just before the last election, told us the deficit in the last financial year was expected to be $10 billion. When the budget came out a few months ago, we found that the deficit was $44.4 billion, a blowout in the deficit under this government of $34.4 billion in just one year. In the last financial year the government's deficit more than quadrupled compared to what the Australian people had been told before the last election. The government is running around and casting around for more cash because they cannot live within their means. Because they cannot live within the confines of the record revenues that the government has been collecting in recent years, the government is not able to live within its means so they are out there casting around for more cash by increased borrowings and increased levels of debt, and they are also casting around by coming up with new or increased taxes. They are even casting around by making retrospective changes to existing tax laws to force people to pay more tax than they were required to pay under the laws as they existed all the way back to 2004. This is a government that clearly has lost control of its finances. That is why they have to go ahead with these sorts of bills which have a very bad impact on our reputation internationally and a very bad impact on our economy domestically.

There is a better way. What we need is a government that is more prudent with taxpayers' money. We need a government that spends less. We need a government that is able to live within its means. We need a government that, because they live within their means, can tax less. We need a government that is focused on international competitiveness, a government that is focused on implications bills like this have on the preparedness of investors from around the world to invest their money here in Australia so that we can continue to grow our economy more strongly. If we had a government which spent less, which was less reckless with taxpayers' money so we could tax less, so we could focus on our international competitiveness moving forward, a government that was focused on driving productivity improvements, a government that was focused on growing our economy more strongly, what would happen in that circumstance is that by growing our economy more strongly not only would we improve and enhance our economic prosperity as a nation but we would actually deliver increased revenue to government without the need for all these new and increased Labor Party taxes. If you are a government that encourages stronger economic growth on the back of being more predictable, on the back of delivering lower taxes, productivity improvement and so on, as the economy grows then the revenue to government will also grow without having to impose all these new taxes.

Over the last four or so budgets, billions and billions in additional tax revenue have been collected on the back of all these new and increased Labor Party taxes. But despite all these billions in additional revenue the government is still not able to balance the books. Despite having benefited in recent years from the best terms of trade in 140 years—terms of trade which are now coming off and look as if they might continue to moderate—this government has imposed more than 20 new or increased taxes over the last four or so years. They have borrowed about $145 billion—they have taken net debt to about $145 billion on the back of $174 billion of accumulated deficits. In these sorts of circumstances, it is not surprising that this government is recklessly exposing our international reputation as a safe destination to invest with bills like this. Unless this bill is amended in the terms I have indicated, the coalition will not be in a position to support it.

Barnaby Joyce (Queensland, National Party, Leader of The Nationals in the Senate) Share this | Link to this | Hansard source

I rise to speak on the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. Transfer pricing is an issue that I have a lot of interest in, being an accountant and also from regional Australia.

I think the coalition is being extremely fair on this arrangement. We do not, as a principle, believe in retrospective changes because they make life impossible. How do you plan for a government that is making plans for you before you even know that the changes they would make would come about? So it is a very fair proposition to say that we will make changes on the prospective level—that is, from this point forward.

That does not diminish the requirement that we have to do something on transfer pricing. We must realise that nowadays 60 per cent of international trade—that is, trade that goes on between countries—is within companies. Transfer pricing is becoming a massive mechanism for the avoidance of tax in transactions between countries. The tax that companies avoid by transfer pricing has to be paid for by somebody, and that somebody is the individual—that is, the Australian taxpayer. The Australian taxpayer has to pick it up. If we believe the standard of social services we have should be maintained, then we must maintain the tax base to do it. It is interesting. It is something you probably do not want to try looking up on Google, because Google has been notorious for trying to get out of tax by transfer pricing. They use one of the mechanisms called the Double Irish agreement where they create a quasi-operation in the Bermudas and use that as a mechanism for the taxable entity, and the concessional tax rate means they miss tax.

The whole world seems to be going along this path where it is somehow believed that it is morally right for organisations to avoid tax within their operations between countries, but we will come down like a ton of bricks on individuals inside a nation who try to avoid tax. So more and more of the taxation burden is falling on individuals.

Each country seems to be playing this game. They all have their way of doing it. On the demise of the British Empire, they managed to keep their fingers on the financial empire well and truly operating. We know that a vast number of the hedge funds in the world are domiciled on Jersey Island. I do not think they are actually there, but that is where you will find their operations. Jersey Island, the Cayman Islands, Bermuda—we even see the Chinese making sure they keep Hong Kong and Macau going so that organisations within China have the capacity to get a differential tax rate and keep things opaque by moving away from transparency or closing up altogether.

You say, 'What has this got to do with Australia?' I quote to you from an inquiry that was held by this parliament in the last week that revolved around transfer pricing. A Mr Hamilton said:

If they were acting as a not-for-profit they would not necessarily be within the income tax system …

But in going on to a transfer pricing issue, Senator Fawcett brought to their attention:

The end point that the chair is probably coming to is that if country X has a sovereign holding in Australia, grows wheat—and let us assume they do not claim anything; they just self-fund the whole operation and they grow however many tonnes of wheat—

Mr Hamilton, representing the tax office, said:

And they export it. Would they be taxable? No.

So who does pay the tax? If those companies in transfer pricing are not paying the tax, then it is the person out in the street from here that pays the tax.

We now have a major issue because we demand our services are maintained at the same level and our capacity to finance them is lost. How are we making it up? We are just borrowing the money, so the debt is escalating.

It is an issue in the prospective form that we need to go forward and start closing these loopholes. I do not think we are ever going to win the battle. It will be a continual movement of funds away. The unfortunate thing is that, as international companies avoid tax believing that they are somehow omnipotent bodies which do not have to pay the tax that individuals or anybody else has to pay, the government borrows money. When they run out of money to borrow, they start printing money. If where you are storing your wealth is ink on paper and a government starts borrowing money, then it is a self-defeating proposition. In the end, you have done yourself in because all the money you have managed to divest and hold in certain accounts throughout the globe becomes worthless. As countries go into programs of quantitative easing, it diminishes the value or worth of whatever funds you have in the book denominated in that currency.

One country that has had the most dramatic forms of quantitative easing in the past, and which will continue to do so, is the United States of America. If you have wealth denominated in US dollars that you have managed to squirrel way, stuck up a log somewhere, and the US starts printing currency, you have not really done yourself any favours whatsoever. I do not know what you would do next—probably you would go back to hiding gold or something. So in relation to transfer pricing we have to make sure that, in the future, we are part of the global process to make sure that the advantages international corporations will always have are not so overwhelming that the tax burden falls unnecessarily on the shoulders of the individuals who are left here.

It has become even more opaque now with the advent of sovereign entities, sovereign wealth funds, state owned enterprises. If it is opaque for corporations trying to get transparency on transactions that run between countries, it is virtually impossible to get it when the entity making those transactions between countries is one of the countries themselves. If it is, we end up in a very awkward position if we ask that country to bring its books to our court to display to us what they are earning. It obviously works on the undeniable premise, the implied belief, that we think they are lying. If we drag another nation's government into a courtroom in the belief that they are lying, they may well read that as an insult and a loss of face for their country. So we would get ourselves into an awfully convoluted position which, undoubtedly, people would balance up: 'What are the ramifications of a bad outcome diplomatically with this country if we proceed with this case? They are far and away worse than the tax revenue we are trying to get back so we will just let them get away with it.'

Once that happens, the Australian people will say, 'If you are creating one law which somebody who does not even live here can get away with but I have to deal with it, that is inherently, completely and utterly unfair.' We will lose the respect and confidence of our own people because of our inability to deal with them in a manner equivalent to that with which we deal with other people or the government of another nation. It is not a case of getting an unfair advantage; it is making sure that there is some sort of parity.

As I said, 60 per cent of international trade is within companies. To try to find out exactly what an organisation has earned relies on the internal documents, which relies on the internal valuation. We always think it is easy, but it is not. For instance, take a large cotton farm, how are you going to know how much they are going to grow? How do you dig down? It is the internal dynamics of another country, another corporation. I suppose you work on the premise that you probably are not going to get everything that you want but, if you can get a fair share, then that is what you will take. There are instances with transfer pricing now where you basically get nothing at all.

The basic concept of how it can work is that a product is said to be removed from Australia at a certain price—a bale of cotton, for instance. They will say that the bale of cotton is only worth $300 or $400 a bale. It has been transferred to a mill in another country, where they mill it. Surprisingly enough they make a lot of money at the mill where they mill it but they make no money in the country where the cotton came from, and if the country where it came from is our country we do not collect the tax revenue. However, it requires and demands the utilisation of road resources and police resources and the laws and health standards that we expect, but we do not get the capacity to get our fair return from that entity to support that infrastructure, which is ours.

The coalition supports prospective change to these laws, and Senator Cormann clearly spelled that out. To try to make sure that we get somewhere with this I hope that is truly considered. The reason retrospectivity is not appropriate is that it becomes a very bad rule to work by. Once we start talking about retrospectivity, we do not know where on earth it changes. It draws into question the plans of basically any organisation that is operating at the moment. To be prudent and astute, manage to get the changes in straightaway. But retrospectivity, especially in tax law, creates massive uncertainty because people just do not know where you will strike next. But I think it is absolutely fair that, prospectively, these issues that have become clouded, that will always be running second to astute accountants working in St James Square in London or working in Manhattan, devising ways with the utilisation of the Cayman Islands, Bermuda, Singapore, Hong Kong, Macau and the Jersey Islands to move money around so as to minimise or, if possible, avoid tax—if people believe that they do not have to pay any tax at all, then that is the tax they want to pay: none.

There are ways, and there have been mechanisms even in this parliament—I have been present when laws have been passed—to basically allow people to get out of tax altogether. Tax exemptions for non-rural property assets is one that comes to mind in recent times. I remember quite clearly crossing the floor on that and found that the Labor Party got up and crossed the floor in the other direction to make sure it went through. I wonder who they got the phone call from? These are the issues. To keep integrity in the tax base we must make sure that we manage the country so that people have to pay as little as possible and to make sure that those who should pay do pay. I think that is only fair. If we do not manage these things, if we leave it open for the movement of funds away from our taxation net, then, quite obviously, anybody who is prudent will do precisely that.

So, in closing, it is well worth the read to find out the sort of money that currently is being lost through transfer prices globally, which people believe is in the vicinity of about $3 trillion. When we say it is 'lost', it is not actually lost; it just means somebody else somewhere else has to pay it. Generally, it is an individual, but if it is not an individual it becomes an overloading on debt, so prudent management means prudent collection. Underlining that we have no belief in retrospectivity, it is fair warning to say that, prospectively, it is the role of any government to make sure that people do not pay excessively, that they pay their fair share, and that mechanisms that are built deliberately not for minimisation but just complete and utter avoidance are removed. You cannot live with the benefaction that is before a nation if you are not willing to kick the tin in some way to pay for it.

Nor should you be allowed the right, the privilege of operating in the country if you have no interest whatsoever in supporting the mechanisms that are vital to that country and supporting the people who underpin that country. It goes without saying that, in this continual torrent of moving funds to different corners of the world, even in the corners where they move it to and through, there is no real benefaction there. It is not as if you go to the Bahamas or Bermuda and these people are opulent; it is just the avoidance of tax. Where the funds ultimately flow to, the benefaction—you always find it—is to some individual at the end who has decided to make it their purpose in life to rip off other people.

David Bushby (Tasmania, Liberal Party) Share this | Link to this | Hansard source

I rise today to also contribute to the debate on the government's Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, which is a bill that coalition senators do not support in its current form for a number of very good reasons.

Transfer pricing occurs when two parties, related or unrelated, supply goods and services to each other and transfer profits from one to the other. The parties to the transaction may be domestic entities or resident or non-resident entities. For taxation purposes, the main issue occurs when the transaction is between related parties and where one of those parties is a nonresident. For Australian taxation purposes, when one party is a nonresident, Australian tax can be minimised to apply in deductions to the Australian entity through the purchase of goods by the resident entity at an inflated price, or through allocating income to the Australian resident through the sale of goods from the resident entity at a discounted price.

This government bill seeks to ensure the transfer pricing articles contained in Australia's tax treaties are able to be applied and provide assessment authority independently of division 13 of the 1936 tax act. They are seeking to do this by creating express provisions within the Income Tax Assessment Act 1997. Of primary concern to the coalition is the retrospective implementation of this bill, with the bill currently proposed to commence retrospectively from 1 July 2004. So we are not talking here commencing 1 July 2012, two months retrospective, or 1 July 2011, or even 2010; we are talking 1 July 2004.

The argument for justifying this retrospective implementation is outlined in confusing terms within the explanatory memorandum to the bill as:

The 2004 income year commenced immediately after the Parliament’s most recent amendment to the income tax laws in 2003 which again evidenced the Parliament’s understanding that tax treaties could be used as a separate basis for making transfer pricing adjustments.

The minister has stated in the other place that a decision to change the law from a date before announcement is not taken lightly. However, the coalition knows that this is not true, because this government is a government that constantly moves the goalposts in terms of dates. It has consistently sought to introduce retrospective legislation into the parliament since first coming into office. In fact, as recently as last year, this government legislated a retrospective tax change which dated back as far as 1990.

The coalition is generally opposed to retrospective tax changes, particularly in instances such as this, where the retrospective implementation of the legislation will impose a significant and detrimental burden upon taxpayers. Retrospective tax changes not only impact the relationship between a taxpayer and the government but can also change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law at the time the agreement was entered into. They can expose taxpayers to penalties in circumstances where they could not possibly have taken steps at an earlier time to mitigate the potential for penalties being imposed. And retrospective tax changes can alter a taxpayer's profile.

The Senate Economics Legislation Committee held an inquiry into this bill, and through that inquiry process the Senate Economics Legislation Committee heard from a number of stakeholders who all raised valid, serious and concerning issues in relation to the unjust nature of this bill and the impracticalities that will arise as a result of its retrospective implementation—and not surprisingly so. Many stakeholders expressed concern over the burden of proof for assessments that will arise as a result of the retrospective implementation of the bill. The Law Council of Australia submitted the following:

The amendment provided for in the Bill gives the Commissioner an independent and additional taxing power and increases the scope for application of profit based analysis using information more readily available to the Commissioner than taxpayers. As already observed, the burden of compliance with the proposed new laws, as well as the existing domestic transfer pricing regime which will continue to apply, will be significant for taxpayers. Accordingly, the Committee considers that the burden of proof in relation to the new measures should properly lie with the Commissioner. In the alternative, either the taxpayer should bear no legal or evidential onus to prove that the assessment is excessive or, upon leading evidence in support of positions taken, it should be expressly incumbent on the Commissioner to demonstrate that the taxpayer’s position is manifestly wrong.

A number of submitters to the inquiry also expressed concern that no time limit had been specified for when retrospective adjustments can be made by the commissioner. The Law Council of Australia has stated that the absence of a time limit for retrospective changes is likely to cause significant issues for taxpayers.

Mr Chris Peadon, a member of the Law Council of Australia, told the inquiry:

Taxpayers should be given certainty in relation to previous year's income so they can draw a line underneath it. There are also the issues about how long people keep records and keep all the relevant people around. If you go back further and further, it disadvantages taxpayers who have probably had a turnover of personnel and have probably moved their warehouses several times. How long do they need to keep the documentation? These are issues that crop up. It seems to us to be a very sensible reform just to insert a time limit, perhaps on the usual basis.

The Institute of Chartered Accountants submitted in relation to the retrospective nature of the bill:

A signal of the importance of freedom from retrospective laws has been held to be so critical to the basic rights of individuals and corporations that the constitutions of both the United States and Sweden have explicitly prohibited such a practice. Whilst Australia's constitution does not expressly prohibit the making of retrospective laws, the generally accepted practice of parliament has been to only exercise those powers sparingly, often only in extreme and exceptional circumstances …

The coalition is not convinced that the government have provided suitable justification for the retrospective implementation of this bill. And, as is the norm with this government, they have not adequately consulted with stakeholders or addressed stakeholder concerns. Also of concern is that the government have not officially or publicly provided any detail on the size of the retrospective tax impost.

At the last round of Senate estimates, the Commissioner of Taxation said that 'they involve substantial sums, but not greatly substantial in the context of the broader picture'. So why then does this government feel the need to go back eight years to fix an issue that the commissioner deems 'not greatly substantial in the context of the broader picture'? As yet, the government has not released specific figures, despite asking the parliament to pass legislation that will have a retrospective commencement date causing significant burden for taxpayers although Treasury have indicated the dollar figure is likely to be in the vicinity of $1.9 billion.

Also of significant concern to the coalition is the threat retrospective legislation poses to Australia's sovereign risk profile. This bill will confirm that the transfer pricing rules contained in Australia's tax treaties provide a power through express incorporation into Australia's domestic law, to make transfer pricing adjustments independently of Division 13. Deloitte submitted to the inquiry:

… this is not the approach to international tax law expected from a sophisticated trading nation and does considerable damage to Australia's reputation for fair dealing in international trade and taxation …

Moore Stephens submitted to the inquiry that they are exceptionally concerned at the likely adverse impact and the reputational damage to the Australian Taxation Office and Australia as an investment destination that can be expected to follow in the event that the legislation is backdated as planned.

The coalition is also concerned that the government has not consulted with any partner countries to tax treaties with Australia, and we would like to know whether or not any partner countries have raised concerns as to the perceived impacts this bill will have on the negotiated agreements in such tax treaties.

The American Chamber of Commerce in Australia, which is the peak organisation for representing the interests of American companies undertaking business in Australia, noted in its submission to the inquiry that 'the most significant source of foreign investment in Australia is the United States' and further, that the retrospective nature of the bill will create 'unnecessary uncertainty and business risk, which in tum will negatively affect foreign investment in Australia.' And such comments were not isolated.

The committee also received submissions outlining similar concerns from large and reputable organisations such as the Australian Private Equity and Venture Capital Association, RSM Bird Cameron and the Business and Industry Advisory Committee to the OECD. I note that the passage of the bill was of sufficient interest that the embassy trade adviser of at least one of our major trading nations was present at the hearing, with a view to identifying issues for his nation's businesses operating in Australia.

But, as we on this side of the chamber know, this government is not a government concerned with protecting Australia's sovereign-risk profile or fostering a stable and attractive investment environment to encourage investment within Australia. We are seeing more international investment leave our shores with every bad policy decision it makes.

Another anomaly arising from this bill is that its changes apply only to countries that Australia has a tax treaty with, ignoring entities who are transacting with parties in tax havens such as the Cayman Islands. Taxpayers from countries without such a treaty will be subject to transfer pricing under Division 13—that is, a lower standard—while taxpayers transacting with an associated enterprise in a treaty country, those we should be closest to, will be subject to potential adjustments under this bill and its wider powers—that is, a higher standard. It defies belief, and is hugely concerning that the government would seek to penalise Australia's treaty-partner countries in such a fashion. This bill will impact a range of industries at a time when they least need it. It is not enough for this government to impose on industry a great big mining tax and a carbon tax we were never going to have; no, Labor needs to compound that with the implementation of retrospective, very complex tax legislation.

The coalition strongly believes that the Gillard Labor government have failed to adequately justify the need for the retrospective implementation of this legislation. As Senator Cormann referred to earlier, there is only one possible reason they would be doing it—and that is that they need to chase every rabbit down every hole looking for every last cent they can possibly get, to be able to deliver the so-called elusive 'surplus' they have promised for this financial year to offset the extravagant and wasteful spending that they have undertaken over the last four years, most of which has been ongoing spending which means that we need to have ongoing revenue to offset it.

If the government genuinely thought it needed the money to meet its ever-expanding spending base then it should look to taxes that are prospective and that can allow businesses and individuals to make appropriate plans, put in place appropriate arrangements to make sure that they do meet the tax laws as set up and as proposed and put into law. I think that Senator Cormann has made it clear that we would be more inclined to support this bill if it contained only prospective changes rather than retrospective changes. I agree with him on that, and say that that is what this place should look at, and make sure that we deal fairly with businesses and individuals who are subjected to tax laws in Australia.

Stakeholder concerns in this case have not been sufficiently addressed, nor have concerns about the impact that this legislation will have in heightening Australia's perceived level of sovereign risk. This bill will create further uncertainty for our largest taxpayers at a time when they least need it. We on this side of the chamber believe that taxpayers have the right to rely on the law as it has been consistently interpreted by the courts for many years and, as such, we do not support this bill as it currently stands.

Ian Macdonald (Queensland, Liberal Party, Shadow Parliamentary Secretary for Northern and Remote Australia) Share this | Link to this | Hansard source

I will make some small contribution to the debate on the Tax Laws Amendment (Cross-Border Profit Transfer Pricing) Bill (No. 1) 2012 but before I do I note in passing how fortunate the parliament is, and indeed Australians are, to have people of the calibre of Senator Bushby and Senator Cormann speaking on such rather technical bills that require a professional understanding of what they are about. I could not help but be impressed by the knowledge of both Senator Cormann and Senator Bushby on these very technical issues. I have to say that, as a small town country lawyer of the past, I profess no expertise at all in taxation matters, particularly in relation to transfer pricing and, unlike Senator Joyce, who was a practising accountant, I do not have that intimate knowledge. But I join my colleagues in opposing legislation which is retrospective in a taxation and financial way. As Senator Cormann and Senator Bushby have clearly pointed out, were these proposals prospective then I suspect the coalition would have supported them. I certainly support the amendments that Senator Cormann will be moving to make them prospective. If they are adopted by the parliament or the Senate then I expect that we will be supporting the legislation. If they are refused, as has been indicated by the Labor Party however, then I would join my colleagues in opposing this legislation.

My principal reason for contributing to the debate on this bill relates to the broad position of foreign ownership, particularly of farming land in Australia. I do not want to go into that in any depth except to say that there is a very good discussion paper out which raises a lot of those issues and which I encourage people to contribute to. I recognise the need to be very cautious about who owns Australia's land and who owns Australia's farming enterprises. I am very conscious of a thought that is gaining precedence around the world. Whilst the last couple of decades have been the decades of the mining boom, there is this belief around parts of the world, which I share, that the next decade could be the decade of the food boom and indeed I think the work being done by some Asian countries in securing their food supplies into the future supports the proposition that the world will more closely look in the years and decades ahead at how we are going to feed ourselves. Many Asian countries and other countries as well are looking to secure sources of food from countries beyond their borders and many are looking at Australia and that has engendered a debate.

Foreign ownership of Australia's farming assets is not new. In fact, in my area up in the north of Queensland, particularly in the sugar areas, I often remind people that the sugar industry was nurtured on foreign money, albeit British and Scottish money, back at the turn of the previous century. There have been big investments by those foreign countries in the sugar industry ever since. We remember the Rum Jungle and Lakelands Downs proposals of the fifties and sixties whereby a lot of foreign money was invested in Australia in agricultural pursuits and we know that many feedlots are owned by Japanese or Indonesian investors and Australia generally welcomes any investment in our agricultural output, be it foreign or local. But I agree with concerns that we have to be careful about just who owns our food and our means of producing food.

The first step, of course, is to find out who owns various pieces of land around Australia, a bit of data that, shamefully, has been missing from our public records for many years and I hope that something will be done at some time to ensure that at least we do know who owns Australia's land. But, generally speaking, I welcome investment in our food production from whatever source but, in some arguments with my very good and learned friend Senator Heffernan, he has alerted me to issues of transfer pricing. I know little about this, I confess, but if there were not some element of transfer pricing relief in the wind then I would also become very concerned about foreign investment in our land which then produces crops which are then taken, in situ almost, from Australia to the investors' homeland and not sold, so there is no price on the way through, meaning that out of the whole exercise Australia benefits little. I will put it the other way: if foreign investors come in and produce any sort of goods here, be they manufacturing or agricultural, and then they sell them in Australia at a price, they will—like everyone else—pay Australian income tax or company tax or payroll tax or any of all the other taxes that every other investor in Australia pays. If that is the case, I do not have a great deal of concern. I do not care whose money is helping to build Australia and build our food production as long as they pay their fair share of tax and as long as they abide by Australia's industrial relations laws and other laws that apply—but there is a suggestion which has been put to me.

I have no capacity to follow through and work out whether what has been suggested to me is accurate or not, but I accept what is said to me and understand that it has been the subject of evidence given at a Senate committee which my friend and colleague Senator Heffernan chaired just recently. If there is nothing in the Australian taxation system at the present time which allows for a transfer pricing component on food and agricultural products grown in Australia but sent overseas, then I think there should be. I think the Australian taxation system should be carefully looked at for that purpose.

I do not speak with a great deal of technical knowledge. My understanding of transfer pricing is confirmed from Wikipedia, a source I often go to. Wikipedia tells me that nearly all countries permit related parties to set prices in any manner with goods produced in the country but permit tax authorities to adjust those prices where prices charged are outside an arms-length range. Rules are normally provided for determining what constitutes such arms-length prices and how any analysis should proceed. Prices actually charged are compared to prices or measures of profitability for unrelated transactions, and parties and the rules generally require that market level functions, risks and terms of sale of unrelated party transactions or activities be reasonably comparable to such items with respect to related party transactions or profitability being tested.

My very untechnical understanding is that in the 1940s and 1950s international carmakers used to make parts in Australia. Rather than sell them at a market price in Australia and pay Australian tax on them, they would ship them to their overseas parent at no cost at all. So the Australian company was making no profits, therefore paying no tax in Australia, but was sending the parts at a next-to-nothing price to the parent company overseas who would then assemble the motor vehicle, sell it and pay tax on the sale price in a country which had a much lower taxation regime than occurred in Australia. The Australian Taxation Office came in and said, 'Right, you can sell to your parent overseas at whatever price you like, but we are going to assume that you sold it at the market price and we are going to tax you accordingly.' So Australia got its fair share of tax on work and products produced in this country. That is what I understood transfer pricing to be.

I am surprised to hear that we do not have a similar regime for food. I am told if, as a foreign company you grow a bushel of wheat in Australia and then you ship it overseas without having a sale price in Australia, you do not pay any taxation in Australia. You do not pay any income tax or company tax in Australia because you have not sold at a profit. I would have thought that the Australian Taxation Office would have had a similar arrangement in place as I understand it does in car manufacturing and other manufacturing industries—that is an assumed price is fixed so that Australia can get a fair share of tax. If that does not apply in agriculture, I want to know why it does not. I suspect that if Senator Heffernan is encouraged to enter this debate he might be able to explain why. I hear from talking to Senator Heffernan in the corridors that there is a bit of discussion about this and so there should be.

My contribution to this debate on transfer pricing—in addition to agreeing with Senator Cormann on the bill before us—was to say to the Australian Taxation Office and to the government, if we do not have rules that apply transfer pricing principles to agriculture, then we should have. I hope that someone in the Australian Taxation Office may be listening to this or may read it in Hansard sometime later and write to me, 'You are completely wrong, Senator Macdonald. What you say is not accurate. We can do that.' I would be delighted if they did because, if they did, that then addresses one element of a very much broader question of foreign investment in Australia's land and farming production activities.

I repeat that, if there is no such transfer pricing arrangement in place, then there should be. The government should be giving that very close attention. I hope the taxation department or someone might say to me, 'Mate, you are wrong and we have got that covered.' If that is the case, then it fractionally confines the debate on investment in Australia's agricultural production. It is still a debate that has to be had. It is still a very interesting issue and one that a very good discussion paper is canvassing. But this element of taxation is one that concerns me and, if it has not been addressed, it certainly does need to be addressed. I support the amendments to be moved by Senator Cormann. If they are not accepted by the government, I will be voting against this legislation.

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

I too have significant concerns about the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill 2012 in its current form. It seems that the nub of the argument here is in relation to the whole issue of retrospectivity. I note that Senator Macdonald has carefully canvassed that, as has Senator Bushby.

I understand and support the government's intention in relation to this bill in broad terms but I am very concerned about the retrospectivity clause. I acknowledge the government's explanation that the intention of the bill is merely to clarify what has been the parliament's and the ATO's position since 2004. But the government's argument seems to be quite circuitous, because if this has always been the acknowledged interpretation of these laws then why is there a need for this bill, unless the laws have not been enforced in the way that the government intended? If this is the case, if there is any room at all for misunderstanding or inconsistencies, then backdating these changes to 2004 is unfair. Businesses who acted in good faith and obeyed the law as it seemed to be then and who were not told differently by parliament or by the ATO do not deserve to be hit with what could be an excessive tax bill now. However, if there are corporations who have deliberately exploited loopholes or taken advantage of miscommunications then they need to be brought to account.

It is worth noting that it was the Fraser government who brought in retrospective legislation in relation to the bottom-of-the-harbour tax schemes. But that was a case where it was obvious from a public policy point of view that what was being done was an abuse of the tax system. It was clearly a rort. It was clearly a contrived mechanism to try to avoid tax, and so that retrospective legislation was justified. In this case, if the government is aware of any examples of deliberate exploitation or loopholes, it would go some way towards explaining the need for retrospectivity. But without any evidence to indicate that this is the case, it is hard to see how retrospectivity is either fair or in accordance with the spirit of the law.

I would like to put on the record that I have met with the Federal Chamber of Automotive Industries. They have made submissions to the inquiries into this bill and have approached Treasury with their concerns, and I think they have been quite well articulated by the chamber. The FCAI is concerned that the retrospectivity in this bill will provide uncertainty for the tax years since 2004 and will potentially not only land their member organisations with larger tax bills but also lead to issues with foreign taxation offices. So it will have a cascading effect in terms of its impact on other tax offices.

FCAI represents the automotive industry in Australia, which we all know is facing significant challenges—the high Australian dollar being one of them. The government has spoken many times about the importance of this industry to Australia, and I support those comments. But now the government is potentially placing that industry at risk with these amendments. In the FCAI's submission to the exposure draft of this bill, Chief Executive Ian Chalmers wrote:

FCAI members do not believe it is good tax policy to empower the Commissioner of Taxation to apply the new rules retrospectively to 2004, as advised in the Assistant Treasurer's Press Release. FCAI members have complied with tax legislation in accordance with the tax laws as enacted at the time. Applying the proposed changes retrospectively may result in some members being placed in unfavourable tax positions through no fault of their own. In practice, revenue officials in the foreign jurisdiction may not agree to amend prior year assessments or those assessments may be out of time for amendment. This will result in double taxation without treaty relief.

These are legitimate concerns, and if the government has reasons to believe that businesses, particularly in manufacturing, will not be negatively affected by this legislation then it needs to be open and transparent about that and to share those reasons during this debate; otherwise, I cannot support the retrospective aspect of this bill without safeguards in place.

While I support in general terms what the bill is trying to achieve, the retrospectivity part of it is, for me, a deal breaker. I think it is something that needs to be taken into account. The government has not made a case for retrospectivity. If it is going to pass retrospective legislation then there needs to be a much heavier onus on that, and I do not think that onus has been discharged by the government to date.

Bill Heffernan (NSW, Liberal Party) Share this | Link to this | Hansard source

Following directly on from Senator Xenophon's remarks, the retrospectivity elements of the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill 2012 is an admission of fault by the legislators, not the taxpayers. If the thing is flawed then it means there are umpteen holes throughout the tax legislation. We have taken evidence on that in the Senate inquiry into foreign investment and the national interest test to the point where it is now patently obvious that a super fund or whatever has a serious profit advantage in taking capital out of Australia and then bringing it back. When we have got to that stage we have got serious problems. But why go back eight years because the people who drew up the legislation—and it does not matter who the government of the day was—got it wrong? So you punish the people who have obeyed the law, and the people who drew up the faulty legislation probably got a bonus. What sort of ratbaggery is that?

Nick Xenophon (SA, Independent) Share this | Link to this | Hansard source

Or a promotion.

Bill Heffernan (NSW, Liberal Party) Share this | Link to this | Hansard source

Yes, or a promotion. It is well documented—and you can read the transcript of the various hearings we have had on this, with one as late as last Thursday—that the resources required to audit transfer pricing are not there. It is simply mission impossible. Hence, the article the other day where, globally, there are companies—and these characters are all likeable rogues; as Kerry Packer said, 'You're a mug if you don't try and minimise your tax; God bless him—avoid paying trillions of dollars in tax annually as a result of the mismanagement of transfer pricing.

We saw the Foreign Investment Review Board approve the sale of Myer. We asked FIRB, 'Would you have approved it if you knew that that Myer sale was going to avoid $700 million in tax that was due to Australian taxpayers?' They did not answer it. That is because they are simply not resourced. That sale went through Luxembourg. We missed out on $700 million. There is no end to this. What Senator Macdonald said was not quite correct; I can correct him now: there is tax on food sent out of the country by corporations if it is packaged for business. If it is packaged with the tax exemption for charities, it is not.

As the ABS have pointed out to us many times, what we have got to come to terms with, as much as this legislation is probably designed to try and end some of the leakage, is that there is a serious leakage of Australian revenue, which I have been banging on about for quite a while, through the generosity that we provide to foreign capital. Foreign capital is obviously very much an essential part of the working engine of Australia and has been for many years. It is well recorded over the years that a lot of foreign capital that comes into Australia does a good job and finances a lot of infrastructure. But in agriculture the people that bring it in usually do the investment, spend a lot on infrastructure, which is great for the area and the district it is in, and eventually go out with their tail between the legs because they did not allow for droughts or they did not understand that farmers do not pay themselves overtime and do not pay the board bonuses, and most of these companies have gone broke. But what we are talking about here is serious revenue leakage. The bit that Senator Macdonald spoke about can be captured by transfer pricing. The pieces that cannot be captured are the sovereign investors.

I note that over the weekend Mr Brian Wilson, the new Chairman of the Foreign Investment Review Board, referred to the fact that FIRB may have to reposition itself on the national interest test with regard to operations by sovereignties that are not commercial. If it is not commercial, you are not looking for a return on your money, you can distort the capital market, you can distort the commodity market if you bypass the commodity market, and you also avoid the tax system.

It has been confirmed by the tax office to the committee that passive investment by a foreign sovereign entity is not taxable. They talked about—and it took us an hour on Thursday night to get them to the point—the fact that they would first assess whether there is a business. They said you can be a sovereign business but when it comes to the tax you can get an exemption, even though you are in the business system. Then you can declare your production is for a humanitarian purpose—and we all realise that the coming food challenge barring a human catastrophe, unless we do not arrive at nine billion people by 2050 and 12 billion people by 2070, means we have got a huge problem. Some foreign countries are a wake-up to that and they are going to other countries, and in a lot of countries they are going to they pay as much for bribing government officials, which is the normal way of doing business in Asia, as they do for acquiring the asset. These people have told me that: 'What's wrong with you Australians? Don't you accept bribes the way the others do? Wake up!' We do not, and thank God this parliament does not have endemic corruption like a lot of other parliaments.

When AA Company, Australia's largest agriculturist, comes to the hearing—Senator Back was there at the time—and says, 'We are seriously disadvantaged with onshore financing of super funds into agriculture because we don't get the advantage of going around the loop and going out through some tax haven,' we have got a serious problem because I do not think legislation, however good it is, for transfer pricing is going to fix. If you set your book right and you declare your production in Australia from agriculture is for a humanitarian purpose, and if we know that a place like China, for instance—and you are supposed to be xenophobic to mention that—has to produce half its food by 2070 with 1.8 billion to two billion people from someone else's agricultural resource, and if you declare that is not a business transaction but a humanitarian task, then you can avoid the tax system. What sort of brain-dead proposition for Australia's revenue base is that?

My point is that it is all very well to try and play catch-up back eight or 10 years with retrospective legislation. It does not matter how much legislation you have and how much you amend it, Senator Conroy, if you do not audit it and allow the resources to audit the transfer pricing then the likeable rogues out there are still going to get away with it. You would have to read the transcript of the hearing, and there obviously is not time here to go through the details of what it is all about, but I, like the rest of the opposition, say that retrospectivity is a confirmation of failure. But why would you punish the people that have obeyed the law when you should punish the legislators that legislated shonky legislation that requires us to go back eight or 10 years on transfer pricing?

As I said at the hearing about the guys that are buying the wool, God bless them all, down in the wool country and transferring it direct to a woollen mill overseas, we do not have the resources to know whether it is dags or crutchings or 3A combing. They did not give an answer but they said, 'Well, we'd have to find some average sort of thing.' An average sort of thing? We bought 34 containers of dirt in from China that was supposed to be fertiliser and it got through AQIS and Biosecurity and ended up on a farm at Condobolin. It was supposed to be fertiliser and it was dirt. It was bought on the approved Chinese government site and it took us six months to negotiate with China to get them to agree to take their dirt back home because we did not want it, it was full of rubbish—weeds and bloody seeds and all sorts of things. If you have not got the resources, I will not use the language I would use in the bush but you are kidding yourself if you think you can audit transfer pricing.

The United States have estimated they miss out on $700 billion to $900 million in tax through transfer pricing lack of auditing. It is estimated to amount to $3 trillion on the planet. Where is this to go? I think that we really need to rethink this. I accept there is a serious problem with Australia's leakage of revenue. I guess you employ a smart accountant every time they change the tax law if you are in the business of minimising your tax on the edge of the skating rink, unlike most Australian wage earners who have just simply got to cough up. But do not think that you can tick it off in a bureaucratic way with retrospective legislation on transfer pricing when it is well recorded that it is impossible to do the auditing. If we send out wheat and a foreign entity says that it is feed wheat or AUH2 or something when it is actually AGP1 or APW1, the tax office does not know what it is. It does not have the resources to go and look if they could not look in the containers that were supposed to be fertiliser. To their credit, the reason the Customs and AQIS people did not look was because the bookwork was written in such a way that they did not have to open the containers; in that case the bag sizes in the containers were such that they got a green light corridor through Customs. When the poor cocky up at Condobolin opened the thing and thought, 'Gee, I've saved $200 a tonne on this fertiliser'—

Debate interrupted.