People who pay their fair share of tax rightly get angry when big companies use every trick and loophole to avoid paying tax.
House of Representatives - 2 August, 2023
If you go and stand outside any set of shops in Australia on the weekend, as I and I know colleagues regularly do, one of the things that will always come up if you're there for an hour or more is the intense frustration that Australians feel about multinational companies that dodge their tax.People who pay their fair share of tax rightly get angry when big companies use every trick and loophole to avoid paying tax, and it's a serious problem not just in Australia, as this bill deals with, but globally.
The OECD estimates that base erosion and profit shifting costs countries between US$100 billion and US$240 billion in lost revenue annually, and it's growing. That's the equivalent of at least four to 10 per cent of global corporate income tax revenue gone. It means that governments across the world are denied hundreds of billions of dollars that should be able to provide services and infrastructure, lower the tax burden on workers and reduce debt.
Multinational tax avoidance, though, is more than just lost revenue to governments and societies. It undermines the fairness and integrity of the tax system, and, as the member for Makin rightly observed, it's unfair to small businesses and other businesses operating in Australia that these big multinationals get a competitive advantage over them and can claim more market share because they are dodging their tax, while Australian companies are paying it.
Global multinationals can pay armies of lawyers and accountants millions of dollars to reduce their tax bills, yet Australian workers, families and small businesses are the losers. It also has a deterrent effect in a bad way. It undermines voluntary compliance of taxpayers, both individuals and small businesses, because they see big multinational companies not paying their fair share and think, 'Why should I?' So they give it a crack.
How do multinationals do this? It's a nerdy topic, but base erosion and profit sharing, or BEPS, refers to tax planning strategies used by multinational enterprises to exploit gaps and mismatches in tax rules between companies. They are very clever and invest a lot of money doing this, but they exploit those loopholes in the misalignment of rules to avoid paying tax.
Companies artificially shift their profits to low- or no-tax locations where there's little or no economic activity to erode taxes bases through deductible payments such as interest, royalties, inflated loans between them and selling marketing services from one country to another.
These practices have become more and more sophisticated in recent years as companies use intangible assets such as intellectual property that they then hold in low-tax jurisdictions and incredibly complex valuation arguments that cost governments million to prosecute.
rapid growth of the digital economy has actually exacerbated the issue. It will get worse, not better, if we don't act.
Although some of the schemes used are illegal, most of them are not, and that's where we as the parliament come in. We have got to tighten the law and address this. Frankly, it's not a problem that any country can address alone; it can only be dealt with through coordinated global action across more than 100 countries.
Of course, it does require domestic action, like we are doing in this bill, to increase tax transparency, align laws and shut down the ability of big companies to dodge corporate tax. That's exactly what the government is doing.
This legislation implements key parts of the plan that Labor took to the election to ensure multinationals pay their fair share of tax. It levels the playing field for Australian businesses and increases transparency. It's key. It shouldn't take leaks from corporate whistleblowers for countries and citizens to find out who owns the company, how many subsidiaries there are or where they are paying tax.
The reforms will hold companies to account — particularly those large corporate groups — on their corporate structures and whether they are operating with opaque or atypical tax arrangements. Given the global momentum—it has taken years, but there is global momentum to this because the problem is getting worse—towards ensuring that firms pay their fair share of tax, it's in the public interest that shareholders have more information of this kind.
Australian taxpayers paying their fair share rightly expect their government to make sure that global forms operating in our country are paying their fair share of tax too.
These laws are more urgent because of a decade of Liberal division, dithering, delay and failure under the Abbott- Turnbull-Morrison regime to take meaningful action on multinational tax avoidance and crack down on it.
The Coalition's failure for a decade was deeply unfair to Australian firms. If you are starting a new business, you are not socking your money away in the Bahamas. If you're an Australian startup, you're not looking for a lurk in the Cayman Islands. Instead, you are working hard to try and come up with a new business model, monetise it, make it profitable, grow wealth, grow the economy and create jobs.
But the previous government was content to sit by and let startups and small business face the potential of being cheated in an unfair playing field by multinational firms and tax dodgers who are investing all this money to use tax havens.
The voting record of the Liberals and Nationals speaks for itself. When Labor was last in office, the coalition voted against Labor's multinational tax measures under prime ministers Rudd and Gillard. One measure which I think the Gillard government legislated later saw Chevron, under the Liberals, forced to pay an extra $300 million in tax, which the Liberals—I was here—astoundingly tried to claim credit for. If we had emojis in Hansard we'd put a 'facepalm' in it at this point. They voted against Labor's crackdown on multinational tax, and then, when it actually worked, they claimed credit for it. Duplicitous.
Then there is a record of the Abbott, Turnbull and Morrison governments—I don't mean the ATM government whirring out the cash, giving away billions to big business during the pandemic and putting it on the national debt. When Tony Abbott was elected, they actually scrapped multiple multinational tax measures which were there and ready to go. Then Malcolm Turnbull's main tax priority—we endured it for two or three years, sitting over there—was to cut corporate tax. That was his big economic reform priority—to cut corporate taxation. Scott Morrison's main fiscal achievement, of course, was $1 trillion of Liberal debt and record deficits.
To be fair, they did make a few tweaks here and there, but they were window-dressing; they were fundamentally designed to make people think they were doing something but not actually crack down on the problem. So I will stand by Labor's record on cracking down on multinational tax avoidance any day, because it is fundamentally one of fairness. It goes to the core value and the core purpose of the Labor Party to provide a level playing field, in this case, for Australian businesses to compete.
But it's not just their record of inaction; before the election, Liberal MP Michael Sukkar, the member for Deakin, and Senator Jane Hume put out a press release actually criticising Anthony Albanese, now Prime Minister, for wanting to do more on multinational taxation. They were actually criticising the Labor Party for saying we need to do more on this.
These policies are grounded in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, which began in 2013. That's 10 years ago. We should have been doing these measures years ago, as others countries have. We're way behind. The reporting of subsidiary information in this bill is in line with other international approaches—for example, the United Kingdom's listing rules, which were introduced around 2016. That would be seven years ago! Anecdotal feedback from some industry groups was that this change in the United Kingdom actually resulted in companies simplifying their corporate structures.
How will this bill work? The new rules bring Australia into line with other comparable jurisdictions around the world. The legislation has been carefully designed. It's been the subject of two intensive rounds of consultation. Because we're a proper government that run a cabinet process and actually go and talk to business rather than making stuff up at press conferences, the government actually made changes to the exposure drafts because we listened to businesses about how these rules will work. The legislation has then been carefully designed to balance the tax integrity issues with economic considerations, particularly and importantly to make sure that we remain an attractive place for productive investment.
The bill will implement the OECD's global two pillars plan, which was designed to address challenges created by the digitisation of our economies. This includes a global minimum tax proposal to ensure that multinationals pay an effective rate of at least 15 per cent tax on the profits they make around the world. It's so important. What we've seen now for a couple of decades is what I've talked about before: a race to the bottom. When Turnbull and the Libs over there—a lot of them who were here then are still left over there—were arguing for that, it was like any cut to the corporate tax was always a good thing. If you take that logic, then zero per cent corporate tax would be nirvana.
We've got to stop this race to the bottom, so that governments around the world have sufficient revenues and so that corporations are not rent-seeking but actually making a contribution back to the society that provides the space, framework, rules and courts within which they can do business and make profit.
The second pillar is a fairer distribution of profits by multinationals, particularly digital firms. Working together within the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, over135 jurisdictions and are collaborating on the implementation of these tax measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.
Just briefly: schedule 1 deals with multinational tax transparency and the disclosure of subsidiaries, which I talked about. They are rules that have been in place in the UK for seven years. We should have done it years ago, but here we are. It introduces these new reporting requirements for Australian public companies, listed and unlisted, to disclose information on the number of subsidiaries, stuff like where they're located and their country of tax domicile. As I said, it's been informed by extensive consultation. It was introduced in the winter sitting to enable the changes still to take effect on the 1 July start date.
When this legislation is finally passed—it will be interesting to see how they vote and try to water it down, if you look at their record—it will require these large corporate groups to be more transparent about their corporate structures and whether they're operating with those opaque tax arrangements like subsidiaries in low- tax jurisdictions. This information will not only improve revenue collection but support better economic analysis and help to inform evaluation as to whether tax laws are operating as they're intended in collecting the right amount of revenue or whether further measures are required.
With the way it's been designed, companies will need to disclose this new information in their annual financial statements, which will help to reduce the compliance burdens. Again, that is in line with international approaches and how things have been done in the United Kingdom for some years. The stakeholder feedback in August and then April that led to this bill is that it really is a step change in ensuring tax transparency and that it complements the ongoing work to implement a beneficial owner register and public country-by-country reporting, which the government is continuing to work through with stakeholders.
Schedule 2 deals with thin capitalisation. It introduces Australia's thin capitalisation rules to address the risks to the domestic tax base arising from the use of debt deductions as one of those base erosion and profit-shifting measures.
I'll conclude where I started: it's fundamentally important that Australia's tax regime—and the rules that we're putting in place with this bill and subsequent reforms which are being worked on at the moment and will come to the parliament in due course—aligns with those of other countries, that we harmonise the frameworks and that we shut down the loopholes and the places that multinational corporations are able to utilise in order to avoid their tax. We need to close off those options.
There is an Australia-specific approach, given the unique characteristics of our economy, for external debt—a third-party debt test—to support ongoing investment, including in the infrastructure and property sectors. There were particular concerns sensibly raised by those sectors throughout the consultation, and the government has taken them on board to minimise the transition cost for stakeholders.
Schedule 2 is a revenue-raising measure, and I know that sometimes makes those opposite twitch. It is a revenue- raising measure because the country has a structural budget deficit that the Liberals have left behind. This is an entirely appropriate place for the government to seek to raise some more revenue by making multinational corporations pay their fair share of tax.
Frankly, if the Liberals had actually done this work in their last couple of terms of government, the deficit wouldn't be as big as the one we inherited, the national debt wouldn't be as big as what we inherited, and the country would be in a better position.
Australian businesses would have been able to operate in a more competitive and fairer environment if the previous government had actually done their job instead of standing on the record, as they outlined earlier, of at every point under the Rudd and Gillard governments voting against measures to crack down on multinational tax avoidance—claiming credit for Labor's achievements back then when they worked and not taking any real action.