Coalition Senators' Dissenting Report

1.1        Coalition members of the committee support measures to strengthen anti-avoidance measures and multinational profit shifting.

1.2        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.

1.3        However, we remain concerned that the amendments in this bill are an overreaction, go too far and should be submitted to more consultation to avoid unintended consequences.

Is it the law or application of the law that is currently poor/deficient?

1.4        Many key stakeholders argue credibly that it has been the ATO’s poor choice of cases (in conjunction with some poor prosecution of those cases) that has led to the losses it has suffered in the Courts. This is especially the case for recent prosecutions under Part IVA of the tax law. The overwhelming view put to the committee by key stakeholders is that the current law is actually adequate to catch tax evaders if properly and competently applied.

1.5        The Tax Institute (TI), the Corporate Tax Association (CTA), and the Law Council of Australia (LCA) have all made the point that the failures of the current Part IVA provisions have more to do with the ATO’s poor case selection or management, or its attempts to extend the application of those provisions to circumstances where the rule was not intended to apply.

1.6        While Treasury argued that the amendments in this bill were trying to address 'the reasoning' used in various court decisions[1], they did not allay concerns that the inadequate application of the law as opposed to the law itself is in large parts to blame for the outcomes which are driving this legislation. More specifically, neither Treasury nor the ATO was able to allay concerns that that better case selection and management under Part IVA could remove the need for these significant changes to these general anti-avoidance provisions in the tax law.

1.7        Coalition members of the committee are concerned that in overreacting to a number of court cases the Commissioner of Taxation has lost when applying Part IVA in recent times, the government is proposing to give the Commissioner too much power in the context of alleged income tax avoidance.

1.8        Further, complex changes to complex tax law – integrity rules that cover tax avoidance in general – are likely to cause undue and unnecessary uncertainty.

1.9        Existing tax laws are not wrong as a matter of course just because a Court of Law found that the Tax Commissioners' interpretation of those tax laws was unlawful.

Financial impact

1.10      The government asserts that legislating Schedule 1 (anti-avoidance) of this bill will prevent the loss of over $1 billion in revenue per year. This seems like a conveniently round and large figure, which stakeholders have not been able to reconcile. In fact none of the stakeholders had heard of that figure during consultations.

1.11      Neither Treasury nor the ATO were able to clearly articulate how they arrived at this $1 billion per year estimate, or why it was not aired or used in prior consultations.

1.12      This measure was originally announced on 1 March 2012 and its description was included on page 29 of 2012 13 Budget Paper No. 2. In that description, it said “As this measure confirms the existing operation of the law, it is not expected to have a revenue impact over the forward estimates period.”

1.13      Given the Gillard government's bad track record of estimating revenue or expenditure Coalition members of the committee have no confidence in the government's asserted $1 billion 'revenue protection''.

1.14      Given the assertions now are inconsistent with previous assertions, presumably that update will be reflected in the 2013/14 Budget.

Compliance cost impact

1.15      The government asserts that the additional compliance cost impact of Schedule 1 is expected to be ‘low’. 

1.16      However, the basis on which the government reached that conclusion is very unclear.

1.17      The extra 'second guessing' powers the ATO would have as a result of this bill (discussed below) will increase compliance costs further, because taxpayers will have to expand on their second guessing of the ATO's likely second guessing. The ATO second-guessing what would have gone on in analysing a taxpayer’s 'tax-savvy transactions and dealings' and making judgements what would have been the likely tax outcome, is likely to force taxpayers to hypothecate more of their income based on what the ATO might think and to document their rationales even more thoroughly than they used to.

1.18      Neither Treasury nor the ATO were able to clarify how many taxpayers were expected to be affected by these Part IVA amendments.

Annihilation provision – applies when scheme has only tax (non-commercial) results

1.19      Many of the submissions expressed concern that the drafting of proposed subsection 177 CB(2) – also known as the “annihilation” provision or the “would” limb – was too broad.  Even the Explanatory Memorandum says that this provision is only supposed to apply where the scheme does not result in any non-tax (i.e. commercial) results.

1.20      The current drafting of the annihilation provision clearly goes beyond that.

1.21      Treasury and the ATO at the hearing suggested that, with further consultation and re-drafting, greater alignment of the proposed law with the agreed intent in the Explanatory Memorandum could be achieved.

1.22      Coalition members of the committee consider that this should happen before the legislation is put to the Parliament.

The “disregard tax” provision

1.23      Many of the submissions expressed significant concerns over subsection 177 CB(4) and, in particular, the existence of paragraph 177 CB(4)(b) – also known as the “disregard any tax result” or “disregard tax” limb provisions. 

1.24      Key stakeholders reasonably argued that better drafting would render the “disregard tax” limb unnecessary. If retained, they argued, it would constitute a significant over-reach as it would give the Tax Commissioner potential power to punish taxpayers for failures in the tax law by imposing a ‘maximum tax’ alternative, not just a reasonable alternative, as subsection 177 CB(3) intends.

1.25      Most stakeholders who gave evidence to this inquiry were not persuaded by the arguments Treasury and the ATO put to the previous inquiry into this bill (by the House Economics Committee, where no hearing was accommodated) on the need for the “disregard tax” limb.

1.26      Treasury and the ATO were not particularly clear in this hearing either on why the drafting of the “disregard tax” limb was necessary.[2] They were unable to disprove stakeholder assertions that this change, if kept and applied, would allow the Tax Commissioner to pursue potentially unreasonable maximum-tax alternatives, as opposed to just reasonable ones as subsection 177 CB(3) intends.

1.27      The concerns about this provision, together with our concerns about the other provisions in Schedule 1, leads Coalition members of this committee to the conclusion that the government should do more work and further consultations before proceeding with this bill through the Parliament.

Schedule 2

1.28      The Coalition members of the committee remain concerned that amendments in this schedule will disproportionately increase compliance costs relative to the risk to revenue spared.

1.29      As such, albeit for different reasons than schedule 1, it too would benefit from further work and consultation to improve the current drafting and to ensure the right balance is struck.

'De minimis' threshold internationally inconsistent and set too low

1.30      Schedule 2 makes the transfer pricing rules self-executing – that is, taxpayers must apply, or comply with, these rules as part of their tax self-assessment each year.  They are no longer just used by the Commissioner in his/her transfer pricing investigations and determinations (and in any defence by the taxpayer targeted).

1.31      This increases the requirement for a 'de minimis' threshold – a mechanism in the law that excludes small or low risk taxpayers from these rules, which is now self-executing. Such a threshold should be easily observed, calculated and verified and one that carves out many smaller taxpayers from having to apply those rules.

1.32      Ideally, this should be a safe harbour – based on either gross turnover, the proportion of the business that could possibly manipulate transfer pricing, another readily observed business variable, or some combination thereof, that represents reliably the size of the business and/or transfer pricing risk posed.

1.33      Most stakeholders argue that the current 'de minimis threshold' seems too low and applies in relation to penalties only. The Coalition members of the committee believe that further thought should be given to the most appropriate de minimis threshold. The government should consider the relevant thresholds used in other countries – especially those that use the OECD transfer pricing guidelines – for suitable alternative prototypes (safe harbours). Further consultation with industry should help identify a more appropriate and internationally consistent de minimis threshold for Australia. Such a consultation could also agree appropriate settings for the prototype chosen that strikes the right balance between compliance costs and revenue risk.

1.34      We agree with Mr Tony McDonald of Treasury when he said in relation to choosing the right de minimis threshold type and setting(s):

Indeed. I think our view would be that, ultimately, these are matters for ministers and for the parliament, and that the balance that is struck here must be the appropriate one. But different people could look at the same elements and reach a different conclusion.[3]

ATO power to reconstruct transactions

1.35      Many of the submissions to this inquiry expressed concerns that the rewritten transfer pricing rules of Schedule 2 may be giving the ATO too much scope or power to reconstruct (or annihilate) transactions that it considers are unlikely and/or uncommercial.  Many claimed that the scope of this reconstruction power is far broader and would be used by the ATO more often, than appropriate and intended. There is widespread concern that this power would not just be used by the ATO “in exceptional circumstances only”, as the OECD commentary in the guidelines contemplates.

1.36      The Coalition members of the committee share those concerns.

Drafting matters and remaining divergences from the OECD guidelines

1.37      A number of submissions (e.g. General Electric) expressed concern that the OECD guidelines/provisions in these rewritten transfer pricing rules have been reworded, rather than simply referred to, which could cause problems down the track.[4]

1.38      The limited time available at the hearing did not allow Treasury or the ATO to address these concerns raised.

1.39      In addition, there was insufficient time at the hearing for Treasury and the ATO to address concerns about the remaining divergences between the rewritten transfer pricing law and the OECD guidelines that it sought to incorporate and align with.

Extent of Secondary adjustments

1.40      At the hearing, Treasury and the ATO suggested that, to the extent transactional methods were used in transfer pricing adjustments, secondary or consequential adjustments to, for example, withholding taxes and customs duties (applied to those adjusted transactions) would not only be possible but also mandatory.[5]

1.41      Treasury suggested that such secondary adjustments could also flow from transfer pricing adjustments based on profit (i.e. non-transactional) methods – that the extra profit raised from the method could be broken down or distributed into its hypothetical component parts which would then enable secondary adjustments to withholding taxes and customs duties to be made.

1.42      This did not appear to accord with the view of the Federal Chamber of Automotive Industries (whose concerns here were raised in their submissions to the inquiry and the hearing) and seems to be another area of the schedule that could benefit from further consultation.

1.43      Unfortunately, time did not permit Treasury or the ATO shedding light on international practice, and the OECD approach, in relation to secondary adjustments.

Financial impact

1.44      The government asserts that the financial impact of Schedule 2 (transfer pricing) is expected to be zero tax dollars per year whereas the impact of Schedule 1 (anti-avoidance) is expected to prevent the loss of over $1 billion per year.

1.45      If the rewrite of the transfer pricing rules is expected to have no financial impact, yet more taxpayers are exposed to increased compliance burdens, the question has to be asked why the government is pursuing these changes at all and what the benefit and the urgency of these changes in Schedule 2 actually is.

Profit shifting via offshoring IP to tax havens – the “Google, Apple, Starbucks” issue

1.46      Coalition members of the committee note that these rewritten transfer pricing rules in Schedule 2 leave the IP mechanism of profit shifting largely unaffected.  That is, these proposed rule changes do little if anything to curtail the abilities of multinationals to offshore their IP to tax havens and charge large, but difficult to quantify, royalty-like fees to their related party users in high tax countries (e.g. Australia) to minimise tax globally.

Concluding Remarks

1.47      Coalition members of the committee consider that the Parliament should not allow passage of this bill at this time. The government should be forced to do more work and conduct more consultations to ensure it gets the balance right with appropriate compliance to ensure the integrity of the tax system while avoiding excessive additional compliance burdens which would inevitably follow from the passage of this bill in its current form.

1.48      As such, Coalition members of the committee make the following recommendations:

Recommendation 1

That the Government withdraw the bill to do more work and conduct further  consultation on the currently proposed amendments to ensure that each is still necessary and (of those that are determined to be necessary) that:

(a) their drafting is tighter and better reflects policy intent; and

(b) their settings are more appropriately targeted to ensure a much better balance between extra compliance costs on the one hand and reduced revenue risk on the other.

 

 

Senator David Bushby	Senator Alan Eggleston
Deputy Chair

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