Chapter 3
Maintaining the pressure
3.1
The committee is proud of the work that it has done in raising the
public profile of issues related to corporate tax avoidance. In addition, it
appreciates the work of investigative journalists and research organisations in
exposing and reporting on corporations that appear to be engaging in tax
avoidance and aggressive minimisation.
3.2
That said, the problem of multinational tax avoidance persists and while
recent reforms are a good start, the committee is adamant that more needs to be
done in the areas of transparency, transfer pricing and access to information
by the tax administrator.
Recent reforms
3.3
Various Australian governments over many years have sought to strengthen
the corporate income tax regime through introducing and amending laws in
relation to transfer pricing, debt loading and other mechanisms by which
multinationals can reduce their tax liabilities in Australia. These reforms
may, over time, address some base erosion and profit shifting risks. However,
the Commissioner of Taxation noted at Senate Estimates in early 2016 that a
number of the more recent measures that have been enacted—including expanded
general anti-avoidance provisions, new transfer pricing provisions, and thin
capitalisation provisions—remain untested.[1]
3.4
As such, it will be important for the Parliament to be vigilant and examine
the effectiveness of such measures as they take effect. For example, Australia
has adopted new multinational tax laws in relation to the avoidance of
permanent establishment which are not currently mirrored by any major economy
except the United Kingdom.
3.5
It will also be necessary to closely monitor tax policy developments in
other countries as the recommendations from the OECD and G20 Base Erosion and
Profit Shifting (BEPS) Project are implemented to ensure that Australia takes a
best‑practice approach. Indeed, the integrity of Australia's tax system
will increasingly rely on the implementation and enforcement of the
recommendations and action plan on BEPS.
3.6
Of particular relevance to addressing base erosion was the introduction
of the Multinational Anti-Avoidance Law. This legislation is intended 'to
counter the erosion of the Australian tax base by multinational entities using
artificial or contrived arrangements to avoid the attribution of business profits
to Australia through a taxable presence in Australia'.[2] In brief, it is designed
to prevent multinationals operating in Australia from using these artificial
arrangements to avoid paying tax in this country.[3]
3.7
The new legislation also recognised that information asymmetries between
taxpayers and tax authorities make it difficult for tax authorities to enforce
laws designed to prevent tax avoidance and profit shifting, such as transfer
pricing rules. The country-by-country reporting requirements will provide the
ATO with 'a global picture of how multinationals operate', which will allow the
ATO 'to better assess transfer pricing risks and allocate audit resources more
efficiently'.[4]
That said, it is unclear whether country‑by‑country reporting will
address access to information issues in relation to the implementation of
global tax plans as outlined in chapter 2.
3.8
The recently introduced multinational anti-avoidance law also means that
the penalty imposed for entering into a tax avoidance or profit shifting scheme
is doubled for significant global entities that do not have a reasonably
arguable position. The maximum penalty now is generally 100 per cent of the
amount of tax avoided under the scheme but, according to the Explanatory
Memorandum can 'be up to 120 per cent where aggravating factors apply'.[5]
3.9
The parallel legislation inquiry which examined the government's
multinational tax avoidance bill last year recommended that a
post-implementation review of the laws be undertaken within 3 years.[6]
This recommendation should be incorporated into a broader review of Australia's
progress in implementing the BEPS recommendations. This broader review of
progress should be undertaken within the next three years.
3.10
Even so, and in light of the tenacious endeavours of well-resourced
multinationals to resist disclosing their tax arrangements, the committee is of
the view that more should be done to place stronger disclosure obligations on
them. In this report, the committee has provided a few telling examples of the
way in which these companies value secrecy and resist disclosure. BHP
exemplified this approach when Mr Cudmore refused to answer a question in
a public forum about the profit made on the Singapore marketing hubs and the
tax paid on the hubs:
Mr Cudmore: As I mentioned
before, I do not have the specific numbers.
Senator XENOPHON:
But you will provide the answers or you will not?
Mr Cudmore: I
mentioned before that we consider those to be competitively sensitive.
Senator XENOPHON: If
it is competitively sensitive for you but not competitively sensitive for your
competitor, who is sitting right next to you, doesn't that make a mockery of
your arguments?
Mr Cudmore: I cannot
speak for any other company than BHP Billiton.
Senator XENOPHON:
Yes, but there is the fact that they are prepared to disclose that information
and you are not. Doesn't that destroy your argument with respect to that?
Mr Cudmore: I really
cannot speak on behalf of Rio Tinto, Fortescue or any other company. I can only
speak on our behalf and only convey our perspective.[7]
3.11
Such attitudes, particularly from Australian multinationals that see
themselves as good corporate citizens and taxpayers, are particularly
disappointing.
Recommendations from the interim report
3.12
In order to ensure that relevant information is available in order to
maintain public pressure on aggressive tax practices, the committee wishes to
reinforce a number of the recommendations made in the interim report.
Mandatory tax transparency code (Recommendation
3)
3.13
While the committee notes that the government has asked the Australian
Board of Taxation to design a voluntary tax transparency code, the committee
does not believe that this initiative will suitably incentivise companies that
push the letter and spirit of the law to publish tax information. As such, the
committee restates its recommendation that a mandatory tax transparency code be
implemented. This code would require Australian corporations and subsidiaries
of multinationals with annual turnover above an agreed figure to publicly
report financial information on revenue, expenses, tax paid and tax
benefits/deductions from specific government incentives.
Tax transparency laws (Recommendation
4)
3.14
The tax transparency laws for private companies with turnover over
$100 million were repealed in 2015, but reinstated later that year with a
threshold of $200 million. The committee believes that the original
threshold of $100 million is more appropriate and that tax transparency laws
for all public and private companies with turnover greater than $100 million in
a financial year need to be reinstated.
Public register of settlements,
annual report to Parliament and ATO resourcing (Recommendations 5, 7 and 11)
3.15
The committee notes that the government has not acted on any of the
recommendations aimed at improving public and Parliamentary access to important
information about the operation of the tax system as it relates to
multinational tax practices.
3.16
To allay concerns about the tax dispute resolution process, the
committee considers that a public register of tax avoidance settlements should
be established to record settlements reached with the ATO where the value of
that settlement is over an agreed threshold.
3.17
Reflecting concerns that the Parliament is not being afforded the
information necessary to determine whether the integrity of the corporate tax
system is being compromised, the committee is adamant that the ATO, in
conjunction with Treasury and other relevant agencies, be required to provide
an annual public report to be tabled in Parliament on aggressive tax
minimisation and avoidance activities.
3.18
In the general interest of the government and the wider community, the
committee considers that the ATO be required to report to Parliament, at least
annually, on:
-
the number of audits or disputes launched concerning
multinational corporations;
-
the number of cases settled with multinational corporations;
-
the number of successful legal proceedings concluded against
multinational corporations; and
-
the staff resources allocated to tax compliance of multinational
corporations.
Grandfathered proprietary companies
(Recommendation 13)
3.19
In line with the recommendations proposed by the Australian Securities
and Investments Commission (ASIC) and government inaction on this issue, the
committee contends that the concept of 'grandfathered large proprietary
companies' be removed from the Corporations Act, and these companies be
required to lodge financial reports with ASIC.
Areas for further action
3.20
Consistent with the issues raised in chapter 2, the committee considers
there is scope for further action in a number of areas.
Special purpose accounts
3.21
As a result of this inquiry, the committee has found it increasingly
frustrating to access even basic information about the tax affairs of many
multinationals operating in Australia. Many multinationals, regardless of the
size of their operations, are not required to provide the same level of
disclosure as public companies. The committee doubts that the proposed
voluntary tax transparency code will provide the level of transparency that is
required to hold multinationals to account.
3.22
The Australian Accounting Standards Board (AASB) has recognised that the
reporting entity concept, which determines reporting requirements, is not
working well in practice. The committee agrees with the AASB and considers it
in the broader public interest for significant global entities to be required
to file general purpose accounts. It urges the government to amend the accounting
standards and make significant global entities file general purpose accounts
for their Australian activities which would be publicly available.
Transfer pricing
3.23
The evidence presented over the course of this inquiry indicates that
transfer pricing provisions do not serve Australia well. The committee appreciates
that there are no easy solutions to reforming internationally accepted
principles as they relate to transfer pricing. That said, the committee
considers that the current transfer pricing principles need to be fully explored,
and, where necessary, redrafted to ensure that transfer pricing cannot be
manipulated to the detriment of Australian tax revenue.
Stronger penalties to encourage
information provision
3.24
The ATO has noted that it faces difficulties in accessing information
relating to tax plans, including supporting correspondence about tax plans and
related contracts. The committee faced similar frustrations when questioning
representatives of Australian subsidiaries. In addition to the proactive
approach of the ATO to levy tax assessments based on the best available
information, the committee urges the government to consider implementing
stronger penalties to provide an additional incentive for companies to provide
this information in a timely manner.
The Panama Papers
3.25
Throughout the course of this inquiry, more and more evidence emerged to
suggest that tax avoidance is widespread among both individuals and
corporations. In light of the most recent release of the 'Panama Papers', the
committee has resolved that it should explore the wider implications of this
new information on tax avoidance and assess initiatives by the ATO to combat
tax avoidance and aggressive minimisation by individuals as well as
corporations.
Recommendation 1
3.26
The committee recommends that the inquiry be extended until
30 September 2016 to explore the implications arising from the Panama
Papers.
Senator Chris Ketter
Chair
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