The past year has seen many developments in Australian taxation law, including a number of significant legislative and policy changes that have strengthened Australia’s reputation as a jurisdiction leading the way in global efforts to tackle tax avoidance and respond to the challenges of BEPS.
Australia and the BEPS debate
When I gave a wide-ranging address to the annual tax conference of the Institute of Chartered Accountants Australia a year ago, I was determined to ensure that Australian policymakers, practitioners and corporate leaders became engaged in the global BEPS debate.
Throughout 2012 I led the implementation of two important reforms to tackle tax avoidance and profit shifting (both of which represented the most significant changes to these regimes since their enactment in the 1980s): a strengthening of Australia’s General Anti-Avoidance Rule - Part IVA; and the modernisation of Australia’s transfer pricing regime.
As we advanced the Part IVA and transfer pricing reforms it became evident there would continue to be limitations to the effectiveness of these laws in tackling some of the practices that were being highlighted by the US Permanent Subcommittee on Investigations and UK Public Accounts Committee inquiries.
This led me to establish a Specialist Reference Group on Ways to Address Tax Minimisation of Multinational Enterprises to advise the Australian government on options to address these practices. Taking unilateral action to protect Australia’s revenue base would be an important part of the response needed, but given the global nature of the BEPS challenge it was clear that multilateral action would be needed.
In the knowledge that Australia was scheduled to host the G20 in 2014, our government began, particularly through the formal advocacy of Deputy Prime Minister and Treasurer Wayne Swan, to build momentum for the issue to be advanced as part of the G20 agenda.
In recent weeks, the incoming Treasurer Joe Hockey has confirmed that the Liberal-National government recognises the importance of advancing the BEPS agenda as a key priority for Australia as host of the G20 next year.
The need for new tax rules for the modern economy
Many of the concepts and rules governing international taxation have passed their use-by date. Designed for the industrial age, these rules have failed to keep pace with changes in global commerce.
In the modern, knowledge-based economy profits are increasingly attributed to the creation and use of intangible assets, like intellectual property (IP), marketing and licensing rights. A growing proportion of these highly-mobile intangible assets are located in low-tax or no-tax jurisdictions.
While many of these strategies have been pioneered by technology companies, over time we have seen the same strategies embraced by companies in more traditional sectors, loading up their profits from tangible commodities into intangibles like brand names and research. All of this makes profits a moving tax target, supported by complex transactions and arrangements that exploit differences in domestic and international tax laws to reduce a company’s global tax liability.
The case for reform
The global BEPS debate has gained considerable momentum and provided policymakers with a unique opportunity to revisit many of our longstanding international tax rules.
While governments around the world grapple with the fiscal challenges of an ageing population, slowing and negative growth, excessive government debt, and the need to bring greater equilibrium between revenue and expenditure commitments, there is no doubt that the fresh memories of many large corporations behaving badly and contributing to the global economic troubles of recent years has created fertile conditions for reform.
When some of the world’s most profitable companies are paying no or virtually no tax, other businesses and individuals are left to carry a heavier tax burden. In Australia, this state of affairs is contrary to the principle of the “fair go” and consequently, continued community faith and confidence in the integrity of our tax system demands action.
Equally, there is an imperative for multinational enterprises to ensure that their tax arrangements pass the ‘good corporate citizen test’. The reputational damage that the microscope of public scrutiny can inflict has clearly emerged as a key factor motivating more corporate leaders to participate in the BEPS debate. This is a welcome development.
Some other corporate leaders and practitioners protest that the actions of their companies and clients are within the letter of the law. There is no clearer case for why reform of our laws is so urgently needed.
It will be crucial that efforts to address BEPS occur on a multilateral basis. While there has been considerable rhetorical support for this cause by many key global leaders, the proof of the pudding will be in the eating.
It is perfectly understandable for governments to focus on making their tax systems internationally competitive. What is not sustainable is for national governments to ignore the global implications of turning a blind eye to their own harmful preferential regimes, especially where the interactions between their laws and the laws of other nations are facilitating the rise of stateless income or worse still, stateless entities.
Protecting Australia’s corporate tax base
Building upon the Part IVA and transfer pricing reforms, the Labor government announced a package of measures in the 2013 Budget designed to protect the corporate tax base, which the new Liberal-National government has said it will largely take up.
The corporate tax base protection package was complemented by a number of other actions taken by the Labor government, including the introduction of rules to require the publication of tax paid by Australia’s largest companies, the strengthening of administrative assistance between the Australian and Swiss revenue authorities through a revised tax treaty with Switzerland, and the continued investment in targeted enforcement action by the Australian Taxation Office, including Project Wickenby and the newly established Trusts Taskforce.
Maintaining momentum
The past year has seen Australia emerge as a more vocal contributor to the BEPS debate. With the G20 heading ‘down under’ in 2014 it looks certain that BEPS is shaping up as a key priority for the host nation.
Having announced and implemented a number of unilateral measures to curb base erosion and profit shifting – initiated by the outgoing Labor government and adopted by the incoming Liberal-National government – Australia is well-placed to play a lead role in ensuring that the implementation of key elements of the OECD’s Action Plan receive the attention that they deserve at the G20 in 2014.
This is an extract from a longer print article written exclusively for International Tax Review by David Bradbury, former Assistant Treasurer of Australia. Look out for the December/January double issue of International Tax Review magazine for the full version.
