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Second Reading: Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015
I listened intently to the member for Bendigo’s contribution to the debate on the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill 2015. I think if I had a dollar for every time she said ‘fair share’ and I donated it to the ATO, we actually would not have a revenue problem anymore. That was the incessant cry from that side of the chamber.
I am not going to go through in detail, like every speaker previous to me, the specific provisions in this bill. I want to speak a bit more broadly. Tackling tax avoidance, however it is formed, has been a role for government since time immemorial, and it will continue to be. Like any tax law, there will be taxpayers who try to find the most advantageous way to interpret or to structure their affairs within those rules. There will also be cases where taxpayers deliberately contrive arrangements to get around those rules. That is ultimately what we are talking about here when discussing combating multinational tax avoidance.
The Labor Party have all of a sudden discovered tax avoidance because it enables them to address one major problem. They have no savings measures, they have not released the costings on their so-called changes to multinational tax avoidance, and they can pluck this $7 billion figure out of the air and it fixes a few other issues for them. While in government, the Labor Party never spoke about multinational tax avoidance, even though our tax base was being eroded by an ever-changing economy. All of a sudden, in opposition, they discovered multinational tax avoidance. But for six years we saw nothing from them.
Inevitably our economy has moved from the old anvil industries of manufacturing. We still have good advanced manufacturing in this country. But, increasingly, our economy will be based on high-tech R&D, intellectual property. That poses a major problem for our tax system. A hundred years ago when we were manufacturing widgets, they may have been manufactured in one country and sold in another. It was very easy to ascribe the profit margin to a particular item, because it was manufactured in one country and it was marketed and sold in another. It was relatively simple. What are the inputs that go into the manufacture? What is the skill, the time and effort that goes into the manufacture? Whatever we ascribe to that, that is the profit attributable to that jurisdiction. What is the profit attributable to the jurisdiction in which that particular item is sold, where it is marketed, where the contractual arrangements are entered into? What are the profits we ascribe to that part? It was always in some senses a difficult task for governments, but the laws were in pretty good shape in determining what profit we would attribute to one jurisdiction and what profit we would attribute to the other.
That changes and becomes a lot more difficult when we involve multiple jurisdictions that may have many tens of inputs that come into one final product and, more importantly, where the inherent value in that product is not in the physical product itself. The member for Bendigo mentioned Apple and Google. Nearly all of us have an iPhone. We pay a fortune for them; they are expensive but they are extraordinarily valuable, and that is why we buy them. The cost attributable to the physical material of that phone is only a miniscule proportion of its actual cost, because the value of that phone is in its intellectual property in its components—how it works, the amount of time and value that people put in to developing that technology. That is where it becomes a lot more difficult for our tax system. Where do we attribute that value? Therefore, which jurisdiction has a right to claim that taxable amount?
While that was increasingly occurring when the former Labor government were in office, they did absolutely nothing and said nothing, but then, in opposition, they had a conversion on the road to Damascus. All of a sudden we hear them carping about combating multinational tax avoidance. If combating multinational tax avoidance were just the low-hanging fruit that the Labor Party suggests it is, every Western jurisdiction and First World economy would not be having this problem. It is extraordinarily difficult. That is why I commend the former Treasurer for his work with the G20—because one jurisdiction on its own cannot and should not purport to be able to fix this problem. Inevitably, we have to work with comparable jurisdictions to ensure that there is not anywhere that these multinationals, who operate across many, many jurisdictions, can hide or shelter income inappropriately.
There are inherent incentives for any economy—and we saw it in the last decade or so—to attract investment by trying to put in place extraordinarily attractive tax rates or extraordinarily attractive tax incentives. Whenever you have that inevitable contest between countries, there will be corporates, multinationals, that seek to get the best outcome. What we are doing through this legislation is attacking those companies that contrive structures purely for the tax advantage.
If, for example, you are a multinational company that operates in 100 jurisdictions—and it makes sense for you to do so because of your particular industry, for the particular service or product you are providing—it might make complete sense for you to be in Timbuktu or you name it and you will not be attacked by these rules. But what we will get to are the contrived arrangements, with companies trying to utilise double-tax treaties for their own advantage. That is when it gets really tough, because the reality is that historically we have had competition between jurisdictions. For every extra dollar that the Australian Taxation Office laid claim to, that was one dollar less that another jurisdiction got. So there was inevitable tension between nations.
But it is not a zero sum game. Unfortunately, what has happened in recent years is that income has been sheltered from both jurisdictions. Take the case of arrangements with, say, a US multinational that sells products into Australia. They might contrive a structure by utilising European tax treaties, which means that not only does Australia not get the tax that should be attributable to the profits but the US does not either. So we actually now have a real incentive. That is why I commend the former Treasurer for really leading the charge at the G20 to bring these first-world economies with robust tax systems together to actually try to address these issues.
Let us remember that we do have an extraordinarily robust tax system. But, as I said at the beginning of my contribution, tax laws are not set and forget. The minute you come up with one law there will be a creative way to structure your investment differently, to get a different tax outcome for that taxpayer. So governments must be nimble.
Today is not the end of it. Last year we did a great job in reducing the debt that was allowable under the thin capitalisation rules. That was one piece of the puzzle. Today we are debating this bill—and I am glad that we have bipartisan support—which has a range of measures to combat multinational tax avoidance. These will not be the panacea at all. It would be disingenuous for anyone to say that they would be. But I am very confident that these rules will have a material impact, most importantly, on the future behaviour of multinationals that have income over $1 billion and that are operating in, in many cases, in tens of jurisdictions.
Again, I say that I am very pleased that Labor has had the conversion on the road to Damascus. It is now supporting this legislation, although if I were a person in the gallery listening to the contributions from those in Labor, I would walk out of parliament and say, ‘I’m sure they must be voting against that legislation. I’m sure they must be voting against it because I just heard 15 minutes from the member for Bendigo about how little we’ve done and how disappointed she is with this so-called inaction.’
Well, she might want to look at what was done for six years under the Labor Party. Our tax system and our tax base were being eroded and they were asleep at the wheel. It is very easy to discover these problems in opposition. I am very proud to be part of a government that is actually trying to address these things in a methodical and sensible way. Let’s remember why we have to be methodical, consultative and sensible—it is not just for the relationships with our trading partners. In some cases, as I said, every extra dollar of tax that we put our hands on means a dollar less for someone else. But we do not want to discourage investment in this country. We want people to invest by the rules.
I say to some people in the community that, as PAYG taxpayers, we do not have the ability to structure our affairs or to reduce our tax. We get our paltry tax deductions each year on various little bibs and bobs, but by and large we do not have those opportunities, and nor should any multinational. But it is a bit like grasping sand at the beach—the tighter you hold it, the more it slips through your fingers. And so we have to be very careful here that we structure arrangements in a way where multinational companies will have certainty in their investments and, provided they have not entered into those contrived arrangements, that their structures and their investments in this country will be respected.
As I said earlier, let’s remember that in a world where increasingly our wealth will be embodied in intellectual property and investment in research and development—not in hard commodities, like they were 100 years ago—it is more difficult for any jurisdiction to actually point to the point in the chain of what value is attributable to that, like in the example of the iPhone that I used earlier. In Australia we import the iPhones; they go into an iPhone store—that is where I bought mine—and they are sold for a few hundred dollars. What part of that profit is attributable to Australia? Should more be attributable here because this is where the purchase is made? Or should more be attributable to the jurisdiction which had the hundreds of highly-skilled people working for Apple to come up with all the component pieces of the iPhone? I am talking about the software here.
In my view, that is where the value is embodied in an iPhone. It is not the physical plastic or the physical metal; it is not the components on the inside. It is a bit of a lump of plastic and metal, if you ask me. But its value is in the intellectual property. That is why these rules are so important. It is so much more complex in the way that we need to do that.
But we have to strike the right balance. For years Australian taxpayers have been struggling under the weight of transfer-pricing documentation. I would not want to see any proposals put into this parliament that increased those requirements. In many cases—and I saw it in practice—it was an exercise done to tick a box with the ATO rather than trying to achieve a substantive outcome. I think, having read through this bill, that it will strike that balance.
I also think the country-by-country reporting is important as well, and I think anything that adds more accountability to these large companies will hopefully mean that they do stick to those sensible investments, to structures that make sense rather than the contrived arrangements that this legislation is trying to attack. We do not want to see companies structuring their investments into Australia in such a way as to get a benefit from either our tax system or, quite frankly, the tax systems of our trading partners. Unfortunately, if that happens, it will only end up being a race to the bottom. I congratulate the former Treasurer and the current Treasurer on this bill and I commend it to the House.
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