SKY LUNCHTIME AGENDA
MONDAY, 2 MARCH 2015
SUBJECT/S: Labor’s multinational tax avoidance package.
LAURA JAYES: Today Labor has announced a new package of ideas on countering multinational profit shifting. The Shadow Assistant Treasurer Andrew Leigh joins me now – Andrew, this is something countries right around the world have been grappling with for quite some time, so why is it suddenly so simple?
ANDREW LEIGH, SHADOW ASSISTANT TREASURER: Well Laura, it has become more complicated as firms have moved towards virtual production. Three of the five biggest companies in the world are information technology companies and for firms like that, the location of production is less clear than it was in the old agriculture and manufacturing world. So the tax laws need to keep up and when Labor was last in office we put in place a $4 billion package to tackle multinational profit shifting.
JAYES: Yes on that package, what is different from that package to what we're seeing now?
LEIGH: Well there's an element of that package which the Government chose not to proceed with. At the same time as cutting the wages of the cleaners who clean their offices, they gave a billion dollars back to multinationals.
JAYES: Just on that, Treasury at the time said that through public consultation it became clear and apparent that the proposal would not be a sensible proposal to proceed on. The verdict from Treasury last time around was that it was not an implementable scheme, so have you rectified those issues?
LEIGH: The approach we're taking today is a different approach than what we'd pursued in Government and you can see that reflected just in the revenue.
JAYES: In what sense? What's the difference?
LEIGH: To be specific, we were looking at the repeal of section 25-90, and in this case we're looking at moving towards a world-wide gearing ratio test. They both go to the question of using claiming deductions for debt and making sure firms don't claim excessive debt deductions. We believe that this is a fair approach and it's certainly one that's grounded in work that the OECD themselves have done in an important discussion paper that they put out recently.
JAYES: We'll get to the OECD in a moment. But it looks like from this proposal what you're talking about on debt reductions is the thin capitalisation rules. What have you done here? What do you propose to do about going above and beyond what the Government has already done, because presumably the Government is acting and going as far as it can with the best Treasury advice?
LEIGH: Well the Government is acting but it is acting in the wrong direction – that's why it has given $1.1 billion back to multinationals. We're pretty sceptical when they claim that that revenue wasn't there.
JAYES: Isn't that going back to Treasury saying, after the last election, that your plan was unimplementable?
LEIGH: What we're putting on the table now is Parliamentary Budget Office-costed and is a package which we believe – in consultation with experts and talking to the OECD – will really work. The thing is Laura, constantly in this you see Joe Hockey talking the talk but not walking the walk. He's all mouth and no trousers.
JAYES: There was a lot of talk on this at the G20. There was certainly an agreement put in place, we'll get to that in a moment. But just back on thin capitalisation, this is the lion’s share — you hope to save about $1.6 billion if I'm correct – are you talking about changing the threshold? What exactly are you talking about?
LEIGH: There's three tests companies can use to claim debt deduction: the arms’ length test, the thin capitalisation threshold rule or the world-wide gearing ratio. We're proposing that the first two of those be removed, leaving companies just to use the world-wide gearing ratio. This has an intuitive appeal, Laura. It allows companies to look at how much they owe to third parties, and if their overall debt-to-equity ratio as a group is 10 per cent, then they can claim 10 per cent debt-to-equity for their Australian arm. But they can't load up a whole lot of debt onto the Australian arm in situations which they don't owe very much to third parties.
JAYES: This is a pretty complicated area that I'm just trying to break down so bear with me. But from the G20, it was clear from the nations that attended that the feeling was that nations can't act unilaterally on this because you just create holes that multinational companies can take advantage of. So is that your proposal? There are concerns about Australia moving unilaterally on this
LEIGH: Laura, there's two levels to this. Certainly in the long-term, countries might want to get together to look at things like the definition of 'permanent establishment' in the tax treaties. But that's hard because it's embedded in all our international tax treaties. Our announcement today doesn't seek to change that. Labor's plan works with our international tax treaties, unlike Joe Hockey's Google tax thought bubble.
JAYES: Just on the Google tax, the UK has implemented a so-called ‘Google tax’ and that is a 25 per cent levy on income generated in the UK but moved overseas. Assuming that the UK does have in place its own tax treaties, why haven't they breached them by doing that?
LEIGH: It's easier when you're a larger country like the UK to take measures which go over the limits of what the tax treaties allow. We don't believe it is in Australia's interests to be jeopardising our tax treaties.
JAYES: Wouldn't it be a simpler, more effective way to do it? With the Google tax, it has worked in the UK, why couldn't it work here?
LEIGH: Laura, it is neither simpler – it is indeed a much more complicated measure – and it's certainly not more effective. We explored that route, we carried out careful costings, we engaged with experts and the overwhelming advice that we got was that Joe Hockey's thought-bubble was just that. It wasn’t going to be implementable to obtain the sort of revenue or close the sort of loopholes that Australians would expect to close.
JAYES: So just going back on this entire plan, Treasury did have some concerns last time around. You are absolutely sure that this can be implementable and this revenue will be pulled back within the next four years?
LEIGH: Absolutely, Laura. And here's the offer that Labor is making to the Coalition: if they claim that they want to add revenue to the bottom line, here is $1.9 billion where the policy work has been done by Labor and where we can guarantee bipartisan support.
JAYES: Are you willing to be flexible on that?
LEIGH: I'm engaging with stakeholders across the board. Certainly we're keen to have those consultations, we're also keen to ensure the Government doesn't have to put a tax on sick people, doesn't have to close Aboriginal legal centres, doesn't have to cut the wages of the cleaners that clean their offices.
JAYES: We're only talking about $2 billion in revenue, Labor is blocking far more than that in the Senate. So this is not going to make up for all the savings the Government needs?
LEIGH: We've supported $20 billion worth of savings. But as a Labor Party, could you really expect us to support a tax on the sick? To support the cutting of the pension? To support the removal of the needs based funding for schools? Of course you couldn't. So Labor has put in place a serious policy proposal today. Still in the first half of this Parliamentary term, you've got a Labor party putting down a carefully costed policy.
JAYES: Just to stay on this: these companies, you'd agree, are not actually breaking the law? In their Senate submissions for an upcoming inquiry, both Google and Apple said that they weren't avoiding paying their fair share of tax, they believe that they are paying their fair share in Australia. So, how do you counter that? Isn't there broader cultural changes needed which are much harder to implement?
LEIGH: Laura, there are two ways of tackling that. One is making sure that we've got the appropriate audit resources. Labor funded a program when we were last in Government which is set to turn in over a billion dollars in revenue, as you'll see reported today. But for making sure that the rules are fair, we need a rules-based regime in which the rules that apply to James the carpenter are the rules that apply to James Hardie. Where the rules that apply to Glen the plumber are the same that apply to Glencore the miner. We need fairness between companies because that's at the very heart of what the Government ought to be doing.
JAYES: Just in your media conference not that long ago, you said in recent years the debate over multinational tax fairness have been broiling on the front pages and back bars of Australia — what bars are you going to where they’re talking about thin capitalisation?
LEIGH: Maybe it's a Canberra specialisation, Laura. But I do notice a lot of people saying: why is it fair that big companies are getting away with playing against the rule book rather than testing themselves against their competition? I'm an economist, I'm a pro-business guy and this is a pro-business package that Labor's putting on the table.
JAYES: Andrew Leigh, I look forward to talking about the details further down the track, thank you.
LEIGH: Thanks Laura.