Chapter 2
Views on the bill
2.1
This chapter summarises the views held by stakeholders on the bill and
its effects.
2.2
The bill contains 5 schedules. A total of five submissions were received
for the inquiry. The submissions from the Tax Justice Network Australia
(TJN-Aus) and the Australian Securitisation Forum (ASF) commented only on the
measures pertaining to the OECD hybrid mismatch rules set out in Schedules 1
and 2 of the bill. The remaining three submissions commented only on the producer
offset measure contained in Schedule 3 of the bill. As such, this chapter will
examine the evidence received in relation to the measures in Schedules 1 to 3.
Support for hybrid mismatch rules—Schedules 1 and 2
General comments
2.3
TJN-Aus were welcoming of the measures in the bill to address the
problem of hybrid mismatches and their misuse by some corporations to avoid
paying taxes in the places where business is really being conducted.[1]
2.4
TJN-Aus observed the substantial loss to governments due to base erosion
and profit shifting (BEPS), noting that the OECD has estimated global revenue
loss 'to be conservatively between US$100 billion and US$240 billion a year'.[2]
2.5
TJN-Aus cautioned the committee of the risk that there will be attempts
to circumvent the hybrid mismatch rules through 'the design of more elaborate
hybrid mismatches'. Expanding on this point, TJN-Aus submitted that:
The hybrid mismatch rules will require constant monitoring to
ensure proper application. Resolving the arbitrage questions raised by hybrid
payments, entities, and transfers is easier said than done. The complexity
comes from attempts to narrow the range of transactions covered.[3]
2.6
TJN-Aus also expressed its specific support for a number of aspects of
the hybrid mismatch reforms proposed in the bill, including, but not limited to:
-
'...that the hybrid mismatch rules will apply regardless of whether
the hybrid mismatch scheme was entered into or carried out in Australia or
outside Australia or partly in Australia and partly outside of Australia'.[4]
-
'...that a structured arrangement be assessed on the basis of if it
is reasonable to conclude the hybrid mismatch is a design feature of the scheme
which the payment was made, rather than the much higher bar test to try and
prove the tax payer intended the hybrid mismatch'.[5]
-
'...the amendments to limit the scope of the exemption for foreign
branch income and to prevent a deduction from arising for payments made by an
Australian branch of a foreign bank to its head office in some circumstances'.[6]
Exemption for securitisation
vehicles
2.7
The ASF raised specific concerns regarding the effect of the bill on the
Australian securitisation industry. The ASF highlighted that both the OECD
Action 2 Report and the Board of Taxation Report had recommended that the
hybrid mismatch rules include a specific exemption for securitisation vehicles.[7]
2.8
The ASF explained that the Australian financial services sector is
heavily reliant on securitised funding and that, without an exemption, ordinary
securitisation transactions could be adversely affected by the proposed hybrid
mismatch rules:
If securitisation vehicles are unexpectedly subject to
taxation as a result of the existence of a hybrid mismatch there is a risk that
they will lose their credit ratings, and new securitisation vehicles may be
unable to obtain credit ratings, since the applicable credit rating
methodologies require tax neutrality in the vehicle. This would have serious
implications for the certainty and credibility of the Australian securitisation
market.[8]
2.9
According to the ASF, Treasury has indicated that the proposed
legislation is not intended to disrupt securitisation transactions or the
financial services market more broadly. Despite the repeated efforts of the ASF
to raise this issue, the draft bill was not amended before being introduced
into Parliament.[9]
2.10
The ASF considered that it was important that the explanatory material
provided clear guidance on the issue for the Australian Taxation Office when it
looks to prepare its own guidance. To this effect, the ASF suggested that the
following additional text should be added to the Explanatory Memorandum:
It would not be expected that payments made upon tranches of
debt issued by a bona fide securitisation vehicle (for example, a vehicle engaged
in "securitisation" transactions as defined in the Prudential
Practice Guide APG 120 released by APRA) would be regarded as having been made
under a "structured arrangement" for the purposes of section 832-210.
For example, if payments on certain tranches of notes issued by the
securitisation vehicle were taxed at a later time in the noteholder’s country
of residence than when a deduction is allowed in Australia, and it would not be
reasonable to conclude that the issuer had regard to the hybrid tax outcome in
the pricing and marketing of those notes, then in the absence of any other
indicia the requirements of section 832-210 should not be satisfied.[10]
2.11
In layman's terms, the clarification requested by the ASF could
otherwise be expressed as:
The "structured arrangement" definition is not
intended to impinge upon ordinary commercial transactions, including ordinary
bond issuances and securitisation transactions, where, although participants
would reasonably be expected to take into account the tax treatment of the
investment in making their investment decision, it would not be reasonable to
conclude that the issuer had regard to the availability of hybrid tax outcomes
in the pricing and marketing of those notes.[11]
Changes to the producer offset—Schedule 3
2.12
As outlined in Chapter 1, Schedule 3 of the bill seeks to amend the Income
Tax Assessment Act 1997 (ITAA 1997) to limit what is qualifying Australian
production expenditure (QAPE) under the producer offset. Specifically, the bill
imposes an additional Australian residency requirement on individuals that
perform services outside Australia through a company or permanent establishment
if a film reasonably requires a foreign location to be used for principal
photography.[12]
2.13
The principal objective of the proposed amendment is to ensure that the
producer offset is better targeted at supporting the Australian film industry
when an offshore location is used for principal photography.[13]
Industry consultation
2.14
Some submitters expressed concern that the amendment to the producer
offset has progressed to legislative enactment without sufficient industry
consultation.
2.15
For example, the Media, Entertainment & Arts Alliance (MEAA) noted
its concern that the measure 'has been developed without any apparent
consultation with industry participants'[14],
further contending that:
We can see no evidence for Treasury's claims that the
amendment will ensure that the producer offset is 'better targeted at
supporting the Australian film industry' and that '[existing] expenditure does
not directly support the Australian screen industry'. A proper process of
consultation would enable all parties to test these assertions.[15]
2.16
Screen Producers Australia (SPA) also noted a lack of industry
consultation as a preliminary concern with the bill, and argued that while the
policy argument for the change is the 'integrity' and 'strength' of the Australian
film industry, there is 'no clearly articulated evidence provided of the
problem that needs to be fixed'.[16]
Implications for the Australian
film industry
2.17
Submitters disagreed with the objective of the amendment as set out in
the explanatory memorandum to the bill, and expressed concerns that, if
enacted, the proposed changes could damage the reputation, operation, and
competitiveness of the Australian film industry.[17]
2.18
For instance, SPA contented that, if implemented, the bill will 'reduce
Australia's competitiveness in the global market for finance, talent and
audience'. Elaborating on this point, SPA explained that:
These three market forces are linked: talent attracts
finance, which goes into producing high-quality Australian content that
attracts audiences locally and internationally. Any restrictions on access to
production talent (directors, actors and crew), affects access to finance. The
proposed Bill creates a disincentive to include foreign locations in Australian
productions, thereby limiting international sales and audiences.[18]
2.19
Matchbox Pictures (Matchbox) also considered the effect of the bill with
regard to the ability to attract talent to Australian productions. Matchbox
took the view that '[w]e must not be penalised for attracting international
talent to our productions'.[19]
2.20
Matchbox argued that:
We expect talent with an international profile will be increasingly
necessarily to finance our productions at a level that will be competitive with
the high-end productions coming out of North America, the United Kingdom and
the rest of the world. It is necessary to attach international talent to
finance higher budget programs – the types of programs that have the highest
cultural impact and generate the most local economic activity.[20]
2.21
MEAA characterised the proposed producer offset measure as leaving the
sector 'with the incongruous situation whereby non-resident wages on Australian
locations are eligible for offsets, while non-resident wages incurred by
Australian productions in offshore locations will not'.[21] MEAA further submitted that:
This seems to punish Australian productions while providing a
'rails run' for major international studios. Some might rightly claim that this
measure sends a message that the Australian government actively prefers foreign
studios over innovative Australian producers.[22]
Retrospective application
2.22
The retrospective application of the producer offset measure proposed in
the bill to expenditure incurred on or after 1 July 2017 (see paragraph 1.26)
was raised as a matter of concern by some submitters.
2.23
MEAA strongly opposed this retrospective application and warned that it
'could only have a negative impact on affected projects'.[23] Additionally, MEAA highlighted its concern regarding implications for
production continuity 'if personnel changes are caused mid-production due to
what can and cannot be claimed against QAPE'.[24]
2.24
Similarly, Matchbox also expressed concern regarding the retrospective
application of the proposed changes, noting that it has 'not been able to
calculate any potential effect on our business'.[25]
Committee view
2.25
The committee notes that the hybrid mismatch rules implemented by this
bill build upon previous action taken by the government on tax avoidance. As a
result of these rules, multinational companies will no longer gain an unfair
advantage over their solely Australian based counterparts. The committee considers
that the hybrid mismatch rules, together with other measures in the
government's comprehensive Tax Integrity Package, will ensure that Australia
continues to be at the forefront of global efforts to address multinational tax
avoidance.
2.26
The committee notes the concerns raised by the ASF regarding the
potential unintended consequences of the hybrid mismatch rules on
securitisation transactions and more broadly on the market. The committee notes
that the Australian Taxation Office is able to provide clarity on whether
ordinary securitisation transaction vehicles will not be caught under the
proposed structured arrangement definition.
2.27
The committee is cognisant of the mobile nature of international film
and television production and acknowledges the concerns raised by submitters
with regard to the amendment in Schedule 3 of this bill to limit what is
qualifying Australian production expenditure under the producer offset.
2.28
However, the committee is confident that by encouraging the employment
and use of Australian cast and crew at all stages of production, the proposed
measure will support the Australian screen industry and maintain its
well-renowned reputation for high quality content.
Recommendation 1
2.29
The committee recommends that the bill be passed.
Senator
Jane Hume
Chair
Navigation: Previous Page | Contents | Next Page