Tuesday, 25 June 2013
Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013; Second Reading
Here we are. We have 20 minutes to deal with a piece of tax legislation that has massive implications for our economy, that has massive implications for our attractiveness as a destination for investment, that has not properly been thought through, that has massive potential for unintended consequences and that has not gone through proper processes. And here we are: we have a long list of coalition senators who are here ready to make a meaningful contribution, led by the coalition chair of the Senate references committee, Senator David Bushby, who was part of an inquiry into this particular bill, the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013. But we will not have the opportunity to do proper justice to actually airing all the arguments against this bill so that, in particular, Greens senators might be persuaded of the merits of the very sound arguments that will be put forward by the coalition in this very short debate.
Let me just say up-front that the coalition will be opposing this bill, and we will be opposing it strongly, because we think it is not in our national interest. It is a bill that is undermining our national interest. The coalition will always support well-considered, carefully drafted and appropriately targeted amendments to strengthen anti-tax-avoidance measures and counter multinational profit shifting. But we do not support Labor Party knee-jerk overreactions in the face of yet another desperate attempt to raid more cash to feed its spending addiction, which has been well demonstrated in recent years. In fact, the coalition in government has a long and proud record of improving and upholding the integrity of our business tax system and international taxation arrangements. However, we are very concerned that the amendments in this bill are in fact an overreaction. They go too far and should be subjected to more consultation and proper road-testing to avoid unintended consequences.
Alongside an increasing number of people across Australia, alongside a growing number of businesses across Australia, we do not trust this government. We do not trust this government with implementing change of this nature. This bill seeks to amend the income tax general anti-avoidance rule as well as make changes to Australia's transfer pricing rules. Back in March the House Standing Committee on Economics was not given the opportunity to have a public hearing into this legislation. We had to jump up and down and really use every last trick in the book to have any inquiry into this legislation at all, given that this government, which is always desperate to avoid proper scrutiny of its bad decisions, was so desperate to rush this complex legislation through the parliament, which is what it is doing now. The coalition will not support legislation that has not been properly tested or been subjected to due process. This government clearly has still not learned the lessons of its dysfunction and incompetence over the last five or six years.
Schedule 1 of the bill seeks to amend the general anti-tax-avoidance provisions in the Income Tax Assessment Act 1936, provisions that are commonly referred to as part IVA. The coalition is firmly opposed to tax avoidance, of course. Indeed, we have a proud history of preventing legislatively the avoidance of tax. For example, John Howard, as Treasurer, inserted part IVA to the tax act in 1981, and Peter Costello, as Treasurer, included a general anti-avoidance rule with the GST in 2000—so-called division 165. Confidence in our taxation system is vital, and a robust general anti-avoidance rule is important in maintaining that confidence. However, we must not countenance a change to the anti-avoidance provisions in the income tax law that goes too far and puts at unnecessary risk legitimate business transactions. And that is what this legislation does. Without further consultation, without further road-testing of this legislation—scrutiny that of course this government has actively sought to prevent from occurring—there is in fact a grave risk that the bill in its current form will do just that.
There can be a large disconnect between the way business is properly conducted and the way the government, in particular the Australian Taxation Office, would require business to be conducted—because, quite frankly, the Treasury and the tax office invariably do not understand how business actually legitimately operates. To taxpayers, profit after tax is a crucial metric. Suggesting otherwise introduces a sense of artificiality, even unreality. This bill risks overlaying complexity and compliance costs onto normal commercial transactions, be they business acquisitions, new investments or corporate restructures.
This is all part of a broader narrative under this government whereby the cost of doing business has continued to go up and up and up as a result of higher taxes, as a result of more red tape and as a result of slower productivity growth. And we have become less and less competitive internationally, which is why, under this government, our economy is heading in the wrong direction. Our economy is still in good shape, but our economy should be in much better shape. Our economy will be in much better shape if there is a change of government at the next election. If there is no change of government at the next election and we continue to go down the path that this current government has been taking Australia down, it will ultimately end in economic tears.
Are these amendments required at all? Submissions to the Economics Committee from pre-eminent professional and industry groups whose members have deep expertise in taxation law argue that these amendments are not necessary, certainly not in their current form. And let me just pause here to note that overwhelmingly the submissions made to the Senate Economics Legislation Committee inquiry were critical and were opposed to the legislation here before the Senate in its current form. Critics of this legislation include highly reputable organisations like the Corporate Tax Association, the Tax Institute, the Law Council of Australia and CPA Australia. They are not coming at this from a directly vested commercial interest point of view; they are coming at this as a result of having deeply considered all the implications and the policy merits of one approach versus another.
But we have a government here that has completely lost the plot. The bureaucrats are running amok because this government is so self-obsessed, so focused on itself—people with their hands on each other's throats, knives at each other's backs, jumping ship, packing bags. This government is not focused on running the government; it is the bureaucrats, quite frankly, who are going for a power grab here without this government putting proper checks and balances in place.
It may be more the poor choice of cases, or the poor ability of those cases, that has caused the sorts of problems the ATO has experienced in court. Let me just make this observation: when the ATO loses a case in court, it does not mean the law is wrong; it means the ATO is wrong. If the ATO loses a case in court it means the court has settled the proper interpretation of the law. This is really an example of the inherent conflict that is currently present in the Australian Taxation Office. It is there to administer the law, it is there policing it and it is there prosecuting it, and if it does not get its way it gets the government to change the rules of the game. That is not the way the Australian tax system should be operating. People across Australia deserve much better than this. But this government is too weak, too dysfunctional and too incompetent to run proper policy development processes on these sorts of issues, or on any other issue for that matter.
I turn now to building up jurisprudence around part IVA. Amendments to fundamental parts of a taxation system, such as its general anti-avoidance rules, require many years to build up the jurisprudence around them. It is vital that such amendments are properly designed and scrutinised before coming into law. If the amendments to be made by schedule 1 are passed, then there will be a period, probably extending over a number of years, before there is a settled judicial view as to their correct application. Poor design and uncertainty can be the enemy of investor confidence. Even for the experts, these amendments are not easy to interpret, and their application will not be predictable.
Last year the Inspector-General of Taxation reviewed the ATO's management of litigation and found that the ATO's success rate before the courts was 56 per cent in 2009-10, 47 per cent in 2010-11 and 45 per cent in 2011-12 to May. The inspector-general went on to note that some industry stakeholders held the view that the reason for the ATO's losses on general anti-avoidance rule cases was the ATO's poor case selection of matters they considered appropriate to litigate. Stakeholders also informed the inspector-general that they had concerns about whether officers internal to the organisation could objectively review the facts and evidence in a case and determine independently of the compliance section whether the matter should be settled, defended or appealed.
A lack of objectivity in decision making inside the ATO is starting to have a growing impact on tax policy. The poor decisions about which cases to litigate, which have led to losses in court, are now inappropriately driving the government's legislative agenda. Unfortunately, there will be a cost imposed on a large number of taxpayers who must comply with the new general anti-avoidance rule. It is very difficult to justify the statement in the explanatory memorandum that the compliance cost impact of the amendment will be low. The Law Council certainly do not agree. They see this schedule as thrusting additional costs onto taxpayers by creating significant difficulties for ordinary taxpayers—small, large, Australian and foreign—in understanding their tax obligations. Justice Pagone of the Supreme Court of Victoria, an author of a leading work about part IVA, has explained how onerous a new approach to the general anti-avoidance rule would be for taxpayers since the onus of proof rests on them. With all these concerns, the government should do more work and conduct further consultations before proceeding with this schedule of amendments through the parliament.
Schedule 2 of this bill supposedly seeks to modernise Australia's transfer pricing rules. Australia's transfer pricing legislation has rarely been amended. Yet this government made retrospective changes last year, quite controversially. The coalition opposed those retrospective tax changes as a matter of principle, and this was the ground on which we opposed that bill. Retrospective legislation can change the substance of commercial arrangements after they have been entered into and can expose taxpayers to penalties in circumstances where taxpayers could not possibly have foreseen the implications of these arrangements. Retrospective tax legislation can alter the financial viability of investments, the value of assets and so on. Retrospective tax legislation increases Australia's sovereign risk profile. At the time, the government refused to answer questions around the quantity of revenue at stake. This government refuses to follow proper process, and every time it gets itself into more trouble.
This bill is again a significant change to important tax legislation. Once again, it has not been allowed sufficient consultation or scrutiny. Unlike the government's bill last year, transfer pricing changes in this bill do not have retrospective application. However, the bill replaces the existing transfer pricing rules in division 13 of the Income Tax Assessment Act 1936 by inserting three new subdivisions into the 1997 income tax act, covering companies, branches of companies and trusts and partnerships. These amendments apply to both tax treaty and non-tax-treaty cases.
In the interests of time, I am going to go through this really quickly so that my colleagues can have a little bit of time to make a contribution to this debate. Let me again point out that a number of submissions from highly reputable organisations were highly critical of the way this part of the legislation has been drafted, in particular in relation to the part on self-assessment and the de minimis threshold. The coalition also finds it difficult to fathom how the financial impact of this schedule is estimated at zero extra tax dollars per year, when the financial impact of schedule 1, which relates to general anti-avoidance provisions, is expected to prevent the loss of over $1 billion per year.
There are other concerns with this schedule worthy of further consideration and consultation. Fundamentally, the question has to be asked: is the power of the ATO to reconstruct transactions under these proposed transfer pricing rules consistent with what the OECD guidelines contemplate? We would question that. Also, do these rules, in the view of the impacted taxpayer, sufficiently align with the OECD guidelines so as not to leave unnecessary uncertainty? Again, we would question that.
The coalition is opposed to unnecessary red tape and regulation. There are plenty of examples across government where that has happened in recent years. We are opposed to this sort of legislation being pushed through the parliament without appropriate scrutiny. For these and all of the other reasons that I have outlined in my remarks, the coalition will be opposing this bill.
I rise also to speak briefly on the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013. As Senator Cormann has so correctly pointed out, it is an absolute abrogation of democracy, and abrogation of due process, that we have been given around 20 minutes to discuss this bill in this place. These bills, as Senator Cormann rightly pointed out, are tax laws which have a far-reaching impact. They are bills which have been put forward and elicited a response from experts in the tax field—as outlined by Senator Cormann—who work with tax every day, whose agenda is nothing other than ensuring that we have a tax system that works well, is fair and equitable, and is reasonable in terms of protecting the revenue but also reasonable in protecting the rights of taxpayers. These people and organisations have all consistently raised objections about these bills. They have noted that these tax laws are far-reaching, that they are an overreaction to tax office losses in court, that they impose a huge increase in uncertainty and in compliance costs and that they also, to some degree, have retrospective tax implications. All of this together suggests that there should be far more than 20 minutes discussion in this place on these bills.
But that is what we are facing in this place this week. We are facing a total abrogation of normal democratic principles. We are seeing over 50 bills rammed through this place in one week with the use of the guillotine on every single one of them and with inadequate debate on most of them. This bill is one that deserves a proper debate. It is not the first time that we have seen this gagging by this government. By the end of this week it will have managed to force through well over 200 bills without proper debate and by using the guillotine at the end.
There are a lot of things I would like to say, and I have pages and pages of detailed analysis of this bill. I was the deputy chair at the inquiry and a lot of issues were raised. I will try and run through a couple of things, but there is no point trying to go through it in detail because the time I have been allotted is totally inadequate and I could not even touch the surface. I also want to give Senator Sinodinos a few minutes to speak. I would, however, like to note that the coalition is always supportive of actions that strengthen anti-avoidance measures and is against multinational profit shifting.
As Senator Cormann has already pointed out, the coalition have a strong and proud record of improving and upholding the integrity of our business tax system and international taxation arrangements. However, we remain concerned that this bill represents an overreaction, will not necessarily increase compliance and other costs, and should not be supported in this place tonight. Once again the Senate has before it a poorly drafted piece of legislation that has been constructed with minimal stakeholder consultation. To the extent that stakeholder consultation occurred, it does not appear to have been listened to. It is a bill that will impose further red tape on businesses that are already drowning in a plethora of restrictive and costly regulation that has been imposed upon them by the Rudd and Gillard government.
The government did not allow the bill proper scrutiny in the other chamber. They blocked the opportunity for the House committee to have a public hearing into this legislation and they required that committee to complete its report only on the papers. We were fortunate in this place to achieve a Senate inquiry. We did hold a hearing, and at that hearing we heard from the stakeholders, which Senator Cormann mentioned, and others regarding the serious concerns and issues that the bill contains, which remain unaddressed to this day.
I am conscious of the fact that Senator Sinodinos also wants to say a few words on this, so I would encourage those listening to this debate to have a look at the dissenting report to the inquiry that was prepared by the coalition senators. We go through some of the issues that were raised, including the need for further consideration and consultation before this bill is passed.
I rise to support my colleagues in their remarks on the Tax Laws Amendment (Countering Tax Avoidance and Multinational Profit Shifting) Bill 2013. I do so wearing my hat as chairman of the coalition's deregulation task force. Yet again, after all the attention that regulation and deregulation have received over the last few years, we have a classic case of a bill which really could do with more genuine consultation with the private sector. If anything, I think it brings to mind that the interface between what the tax office thinks business should be doing and what business thinks business should be doing seems to be missing. There is no interface and there seems to be quite a big gulf of understanding.
I notice that the philosophy being spoken about in this place is that, in effect, tax should be out of the equation and we should be able to judge an activity by whether it would occur in the absence of taxation considerations. That is all very well from first principles, but in the real world people have to react to the tax system that they face. My concern is that many of the cases—and they have been talked about by my colleagues—that the tax office may have selected to use as a basis for taking people to court may not have been the right cases. The question then becomes whether there is a process within the tax office to look at itself, if you like, and consider whether it would have a better process for judging cases which would be successful.
Last year the Inspector-General of Taxation reviewed the ATO's management of litigation and found the success rate before the courts to be 56 per cent in 2009-10, 47 per cent in 2010-11 and 45 per cent in 2011-12. He went on to note that some industry stakeholders held the view that the reason for these losses may be due to the ATO's poor case selection of matters they considered appropriate to litigate. I notice that the new tax commissioner is seeking to take some action in terms of the split between, if you like, the prosecutorial part of the tax office and those who appeal cases and the like. I encourage the tax commissioner to do what he can to shake up and change the culture within the tax office. We cannot keep acting in this place to increase the volume of legislation to deal with this. We need less regulation, not more regulation. For that, among other reasons, we will be opposing this bill.