Innovation and reform: Labor’s multinational tax agenda
Speech to the Minerals Council of Australia Taxation Conference
I’d like to thank Brendan Pearson from the Minerals Council for the invitation to be here today. I’ve known Brendan for almost two decades, since he was a scribe for the Australian Financial Review, and I worked as trade adviser to the late Western Australian Senator Peter Cook. Brendan is consummately polite, thoughtful, and willing to engage with detail. I was very pleased when Brendan became Chief Executive of the Minerals Council in December 2013, and I know he has the respect of both sides of politics. At Brendan’s invitation, I’ve been involved in a number of Minerals Council events over the past year, and look forward to continuing our conversation in the years to come.
That said, I know I wasn’t your first choice for today, and I come bearing apologies from Shadow Treasurer Chris Bowen. Chris had a pre-existing commitment representing Australia’s interests at the 2015 Boao Forum, otherwise he would have been here.
On a visit to Perth earlier this month, I took a tour of BHP’s Integrated Remote Operations Centre. Many of you will have visited this centre – or its Rio counterpart. There’s something extraordinary about being at the heart of a network of computers that are operating one of the largest mining operations the world has ever seen. With my parliamentary colleague Alannah MacTiernan, we chatted with the rail operators, who are routing trains 1500 kilometres away; to the port team, who are monitoring dust levels in Port Hedland in real time; and to people who are operating individual machines. One man, sitting in front of half a dozen television monitors, was operating a machine to drill blast holes. He had worked for years as a drill operator, and reminded us that being in the cab is a lot tougher on your back. At its best, technology and ingenuity can boost productivity, and create better jobs.
On a trip to Port Hedland last year, Chris Bowen, Gary Gray and I heard about Fortescue’s ‘Have a Crack’ competition, which offers workers a $50,000 prize for the best productivity-boosting suggestion. The winning idea was designed to increase the efficiency of the machines that load iron ore onto bulk carriers. As you know, a bulk carrier is made up of a number of different compartments, or holds. When the loader finishes filling one hold, it has to stop the flow of iron ore for a few minutes while it moves to the next hatch.
In the past, stopping iron ore flowing onto the ship meant stopping it being picked up by the loader. But the winner of ‘Have a Crack’ saw that this didn’t have to happen. He came up with the idea of a surge bin that allowed the loader to store up extra iron ore, ready to go when the loader moved into place over the next hatch. Fortescue estimated that the idea of a surge bin is worth tens of millions of dollars each year. Not a bad return on a $50,000 investment.
This kind of innovation is what companies like the ones represented here today do so well. Coming up with the creative improvements which let workers do more with fewer resources. Honing in on the little productivity gains which make a big difference to profits and growth. As you well know, this is work that never ends. Companies like yours are always looking for fresh ways to stay ahead of the curve as technology and the global economy evolves.
It is much the same for governments when it comes to tax. In an economy which grows more globally-connected by the year, we can’t let our tax rules stand still. In an era where new types of commercial activity are always being invented, we need to make sure our tax system keeps up. You may not think that the kind of productivity-boosting innovations I just mentioned have much in common with policy innovation in tax reform. But actually they’re both about getting systems working more effectively so that the entity as a whole benefits. It’s just that one of those entities is a complex, multifaceted organisation worth hundreds of billions of dollars…and the other is the Australian economy.
Governments around the world are looking hard at their tax systems to see whether these are up to the task of ensuring a sustainable revenue base when business activity is global and finance is increasingly mobile. It’s relatively easy to keep track of how much tax a company should pay when they’re operating exclusively in your own backyard. But that task becomes much harder when companies have a worldwide footprint and an intricate arc of international holdings. That’s why both the G20 and OECD have identified multinational profit shifting as a major challenge for economies like ours.
In the communique issued after last year’s G20 Leaders Summit in Brisbane, the world’s 20 most significant economies highlighted the importance of acting now to address base erosion through profit shifting. These leaders committed to new initiatives that will support efficiency and equity in the global tax system, including the introduction of a Common Reporting Standard on financial account information and the dismantling of harmful tax practices like the infamous ‘Double Irish Dutch Sandwich’.
At the 2013 G20 meeting, world leaders called on the OECD to develop an action plan for countering base erosion and profit shifting in a coordinated and comprehensive way. The OECD handed down its first seven concrete policy deliverables on this in September last year. A further eight initiatives will be delivered later this year. The BEPS Action Plan has set an ambitious agenda which includes tackling thorny questions about digital IP and permanent establishment, hybrid mismatches and the transfer pricing of intangibles. In other words, this is the hamburger-with-the-lot of international tax reform.
Australia took an active role in the OECD’s BEPS work under the last Labor government. Working with our partners internationally to get the global tax system right will continue to be a priority for my party in the future.
But while we’re working on getting the international tax framework right, we also need to be thinking about how our rules work here at home. One of the areas that the OECD has particularly flagged as demanding domestic attention is the use of debt and deduction arrangements. It’s very reasonable for big companies like yours to claim tax deductions on business expenses like debt – after all, debt supports new investment that helps you grow and innovate. This becomes a problem, however, when companies start loading up the arm based in a high-tax jurisdiction with debt financed by another arm in a low tax one. Suddenly an important support for business morphs into a means to shift profits offshore.
Taking our lead from the OECD, Bill Shorten, Chris Bowen and I recently announced a package of proposed reforms which would update how debt and deductions are treated in Australia. This package has four parts which I’d like to briefly run through with you – if you’re not a devotee of tax technicalia, I won’t be offended if you choose this moment to check up on your Twitter feed.
Firstly, we’re proposing to move to a world-wide gearing ratio approach for calculating the amount of debt that companies can claim deductions on in Australia. This continues ongoing efforts by successive governments from both sides of politics to tighten the rules on thin capitalisation. Under our preferred approach, deductions would be assessed on the third-party debt-to-equity ratio of a company’s entire global operations. We’re proposing to achieve this by eliminating the existing safe-harbour and arms-length tests, and making the world-wide gearing ratio the only test for the level of allowable deductions. This is a shift away from the current safe harbor rules which let companies claim deductions on up to 60 per cent of their Australian debt, without needing to show how this debt relates to their real business activity.
Because the 60 percent ratio is an arbitrary figure, it is too generous for some businesses and possibly too strict for others. Our proposal aims to ensure there is strong support through the tax system for companies that have a legitimate need for high levels of debt. Indeed, if your multinational group has a worldwide gearing ratio of 70 percent, then our proposal will see you being able to claim up to 70 percent debt in Australia. For some entities, a worldwide gearing ratio is more generous than the arbitrary 60 percent cap.
Second, we propose to better align Australia’s rules on hybrid entities and instruments with tax laws in other countries. As many of you would know, these are often classified differently around the world, with some jurisdictions treating these instruments as equity, and others as debt. This sometimes creates opportunities for ‘double-dipping’ where companies can claim tax deductions in Australia without having paid tax on the equity elsewhere in the world. Under our preferred approach, the Australian Tax Office would have the power to deny deductions here if tax has not been paid anywhere else.
Third, we propose to bring forward third-party data matching rules to improve compliance outcomes. This builds on work Labor did when last in office to improve transparency about the tax affairs of big corporations. It also supports the OECD’s work on transparency through measures like the Common Reporting Standard and country-by-country reporting. I know that some big firms already take the proactive step of reporting their tax dealings to the community. I want to commend Rio Tinto for being an industry leader in this area of tax transparency, and also acknowledge the moves BHP Billiton is presently making toward that direction. Transparency is about companies doing the right thing and being seen to do the right thing. I know that many of you feel frustrated when you read media and other reports speculating on the tax affairs of big firms, particularly when these don’t always tell the full story. So companies like yours and the community alike benefit from a more informed public debate. Transparency has an important role to play in that.
Just as an aside on transparency, I’m sure you’d have seen that the Abbott Government is looking at rolling back the tax disclosure laws put in place by the Labor Government in 2013. Under these new laws, the Australian Tax Office is set to start releasing basic data about the taxable income and tax paid by companies earning over $100 million in revenue from this year.
Many firms find themselves frustrated when inaccurate tax figures are used in the public debate. In my view, the solution to this is more transparency, not less. The release of this tax transparency data provides an opportunity for companies to start a conversation with your customers and the wider community. It opens the door for you to explain how and why you’re doing the right thing, and set yourselves apart from those which aren’t living up to the community’s expectations. Like the MySchool website, which generated considerable controversy at the time of its launch, the release of appropriate taxation data can lead to a deeper public debate.
Rolling back tax transparency laws will do nothing to alleviate the public’s concern that some companies aren’t paying their fair share. It will not stop the advocacy from community groups and NGOs for a more transparent and accountable corporate tax system. Going backwards on transparency does not seem to us a realistic path given the community’s ongoing concern about corporate taxation.
Returning briefly to our proposed package, Labor also plans to invest new resources in the Australian Tax Office. After major budget cuts under the Abbott Government, we want to ensure the tax office has the resources it needs to effectively carry out the work a future Shorten Labor Government would set for it.
As the people in this room well know, tax reform is not easy. We learned a thing or two about that during our last term in government. As Bill Shorten puts it, ‘the scale of the reform was more ambitious than the dialogue which Labor entered into’. That’s why we’ve consulted broadly with tax experts, academics and the OECD in putting our package together. Between now and the next federal election, I will continue to talk with business and other interested groups about our multinational tax ideas. I’ve already had very open and useful conversations with a number of the people in this room, and I’m looking forward to more of the same with those of you I’ve not yet sat down with. There is a genuine conversation to be had here about how we achieve the goal of fair and efficient taxation for major companies doing business in Australia, and Labor enters that conversation with goodwill.
If we are fortunate enough to be returned to office at the next election, we will then form a Multinational Tax Expert Panel to assist with the implementation and refinement of this package. We want to use this process to ensure our tax reforms strike the right balance between encouraging international investment and ensuring our tax system is up to date for today’s economy.
So that’s the ‘what’ of our package. But what I’d like to expand on with the time remaining is the ‘why’. Why Labor believes this is the right path for meeting our current challenges in corporate tax.
If we don't find ways to address multinational profit shifting, we're turning a blind eye to distortions in the market which will slow economic growth over time. Outdated features in the tax system, loopholes which reward the wrong kind of effort – these function a fair bit like old-fashioned subsidies. They distort the allocation of resources and give the biggest rewards to those who play the game by testing themselves against the rule book, not their real competition.
We need a tax system that rewards the productive, the innovative, the resilient, the clever and the competitive. We need an economy that rewards hard work in business. The crucial question is not: who do we want to pay more tax? It’s: who do we want to win in our economy?
Labor is passionately pro-business, and we want to see individuals and businesses succeeding. More than that, we want to see all businesses – big and small, local and international alike – have a fair chance of succeeding because they are competing on a level playing field where the same rules apply to all.
Recently, some representatives of Macquarie Telecom came to see me. Their company is one of Australia’s biggest providers of cloud hosting and ICT services, with data centers and offices around the country employing several hundred staff. Over the past 20 years, they’ve grown their business from offering basic phone services to supplying a broad range of cutting-edge ICT facilities. They’ve never stood still; instead they have invested in new infrastructure, hired creative staff and constantly sought out ways to innovate.
Macquarie Telecom does all of its business in Australia. It doesn’t have a network of international subsidiaries for swapping tax-advantageous transactions with. The company’s executives came to see me because they’re worried this is making their business less competitive. Many of their competitors are eligible for tax breaks they can’t access because they don’t have offshore arms in Singapore or Switzerland. That simply doesn’t seem fair to me. It’s also terribly inefficient because it encourages companies to make their tax affairs more complex simply for the sake of shrinking their tax bills.
As an economist, I think a lot about incentives. If our tax system offers benefits to those with complex offshore structures and penalises those who do all their business here at home, then it’s clear which way big companies will go. But if our system puts all kinds of businesses on a more equal footing, then the incentives are quite different. As politicians and policymakers, we are the architects of this incentive system. That means we have a responsibility to get them flowing in the right direction.
This is a point easily lost in a debate which can tend toward belting up a handful of firms who do the wrong thing. That’s not what we stand for. Instead, we believe in backing in the vast majority of big and small firms who do the right thing. That means getting the rules right so that firms like Macquarie Telecom aren’t forced to choose between being a good corporate citizen and making a decent profit. It means updating our approach so that there’s plenty of rewards for good business activity, but few for testing the boundaries. It means shaking out the kinks and loopholes that encourage inefficiencies.
I mentioned a moment ago the concern in the community that some companies aren’t paying their fair share. I don’t believe that concern is going to go away until governments act to update some of our tax settings which are open to misuse. Unless we adopt sensible and measured policies like the ones Labor is proposing, the community pressure to act is likely to lead to more populist and problematic proposals. The current Treasurer’s idea of a so-called ‘Google tax’ is one example that we have deep reservations about because there are so few details about how it would work or how it would interact with Australia’s existing international tax treaties. Unlike our package, it seems to have been announced on a whim because there was a spate of stories about digital companies not paying enough tax one week. Multinational taxation is a serious business, and governments need to take a serious, measured approach to it. If we don’t make sensible reforms now we’re likely to start hearing similarly whacky ideas in the future.
Because you’ve asked me here to talk about taxation, I haven’t addressed the many issues on which Labor is working on policies to boost the long-term productivity of the resources sector. These include a sustained investment in geoscience, focused infrastructure planning and ensuring our education system rises to the challenge of supporting more students to become skilled in science, technology, engineering and mathematics. These are some of the foundations that will support a strong, adaptive and highly productive resources sector in Australia.
Companies innovate. They change with the times and respond to the market as it evolves around them. They learn lessons from what has come before, and they use those insights to be smarter, more focused.
Governments must do the same when designing the frameworks within which companies operate. We are working to build a modern, equitable and efficient tax system which can meet the challenges of an increasingly global business environment. This is Labor’s goal. My colleagues Bill Shorten, Chris Bowen, Gary Gray and I look forward to an ongoing conversation with all of you as we work towards it.
Question and answer session
QUESTIONER: [INAUDIBLE] ...It sounds like your proposal is going to involve a lot more red tape than the safe harbour system with a benchmark where parties know what they're dealing with.
ANDREW LEIGH, SHADOW ASSISTANT TREASURER: Thanks very much for the question. On red tape, I don't think you're right. Because what we're proposing doing is using an existing rule that is already in the tax system. The OECD proposal, in their discussion paper last year, was a different type of world-wide gearing ratio than the one that exists in the tax system at the moment. We've advocated using that world-wide gearing ratio as it exists in current Australian tax law because that provides a little bit of certainty for firms. Many large firms would already have estimated their bottom-line position under each of the three debt deduction rules. So they would have a reasonable level of certainty about how Labor's rules would affect them. To your point about projects, this is a reflection of how our corporate tax system operates in general. One of the benefits of a large multinational is that you're able to offset gains in one project against losses in another. So I'm not sure if makes sense to think about a project-by-project approach. If your group as a whole has higher levels of third-party debt, then its Australian arm will have an entitlement to high levels of debt deduction under a world-wide gearing ratio. But when you look at, for example, tax structures that have been released through the ‘Lux Leaks’ process, it is pretty clear that the use of debt deductions in some companies has gotten out of control and is being aimed not at boosting best business practice, but at shifting corporate tax obligations into low tax or no tax jurisdictions. So that's why the OECD recommended that approach, and it's why we're going down that path.
QUESTIONER: We'd be curious to know what tax experts have been consulted in the formulation of the debt deduction proposal?
LEIGH: I spent some time over at the OECD last year speaking with some of their experts. We've also engaged with people in academia and in various accounting firms, and certainly people from the Minerals Council as well. I certainly won't stand before you and say that 100 per cent of the people we've spoken to recommend an approach of this kind. But a much higher share recommend a world-wide gearing approach than think that Treasurer Hockey's 'Google tax' is a good idea. So we have consulted, we'll continue to consult, and if we're fortunate enough to win government we will use that Expert Panel to make sure that we get the implementation right.
QUESTIONER: Just to follow up on that point. You rightly said that there's concerns in the community that some multinationals aren't paying their share, and I think there's even some empirical evidence that in some sectors that is the case. But I think it is harder to find empirical evidence that multinationals in the minerals sector are not paying their fair share because there are different products. Many of the things you mentioned were intangibles, and it's easy to shift your tax base when you're a Google or an Apple. Over the past four years a large body of work has emerged to determine what the effective tax ratio, or tax and royalty ratio is for this sector, and the latest work that Chris Richardson has produced is that this ratio is now above 50 per cent. So I understand the concern; I understand that there might be empirical evidence in some sectors, but I'm a bit nervous that there isn't empirical evidence in this sector of the sort of practices that you're talking about.
LEIGH: I think it's an important point and we don't want to start beating up on individual firms. I get deeply uncomfortable when this becomes a debate about particular firms and sectors. Because I think it detracts firstly from the fundamental truth that it is businesses which find productivity gains, create jobs and are ultimately the key part of our path to future prosperity. But also because it encourages the idea that you might write a corporate tax code which differs across industries and I don't think that's the right approach. I think it was Jan du Plessis who said that 'many multinationals are getting away with murder' and that reflects the sense in parts of your industry that this is not chiefly a challenge for the mining industry. We also need to put this into context: Labor is proposing a package which raises $2 billion over four years; my back of the envelope has every dollar fall in the iron ore price costing governments - federal and state - around $1 billion. So we're talking about a package which raises, in four years, something in the vicinity of what is raised when the iron ore price goes up $2 in a single year.
QUESTIONER: We had Rob Heferen from Treasury speak quite eloquently yesterday about corporate tax and the analysis being that a cut in the corporate tax rate is good for workers. It seems to me that point doesn't always get translated across the broader labour movement – if I think about press releases coming out of the ACTU and other places about the big end of town versus the workers. Can you give us some reflections on whether there are conversations going on within the labour movement about these issues, and about what is a sensible, rational tax debate that includes company tax?
LEIGH: I think you're right that the incidence of the company tax is predominantly on workers, and that's because investors are more supply-elastic than workers. That then leads you to think about whether there are opportunities to bring down our corporate rate. Chris Bowen has very clearly said that he would like to see a lower corporate rate for Australia. And if you go across the three big heads of taxation in Australia – consumption taxes, average income taxes and corporate taxes – the one where Australia sits above the OECD average is its corporate tax rate. In an environment in which the gap between revenue and spending has blown out from 5 per cent in 2013 to 13 per cent now, that's obviously a challenge. The government has had an $80 billion blowout in debt since coming to office, and so it is going to be heavily constrained in what it can do on corporate taxation. I think this has to be a core part of the long-term agenda for Australia. Particularly thinking too about incentives that have an immediate impact on marginal investments. That's why accelerated depreciation for small businesses had a significant impact during the Global Financial Crisis - that's the instant asset write-off rules. So we should be thinking about ways that we can encourage marginal investments to go ahead.
QUESTIONER: [Inaudible] …tax reform in general, with the release of the Tax White Paper next week.
LEIGH: I felt that the international tax dimension would be of most interest to the audience today, but I actually believe that if you look at the deadweight cost of various taxes, the ones that you see at the top of the list are things like insurance taxes and stamp duty. Tax reform has now gotten to the hard stage because dealing with those involves making really tough trade-offs for state and territory governments, and involving the COAG process which is always more time-consuming. But there's huge gains to dropping the tax rate on insurance. The notion that in New South Wales, some insurance bills can be 50 per cent tax seems dumb for a country where you'd like people to be able to hedge against risks to a greater extent. The notion that in a country with a housing affordability crisis, we require you to pay a stamp duty which is, in many cases, equal to the value of a car just to downsize a home, again doesn't seem like best practice in tax terms. The ACT has got a long-term plan to move from stamp duty to land tax, which I think will bring big social gains for the ACT, and Tom Koutsantonis in South Australia is moving towards the same thing. So there are really important, but probably not so sexy aspects of tax reform. We'll obviously have a conversation around things like superannuation tax expenditures, which are now reaching the point where what we spend on super tax concessions is similar to what we spend on the aged pension. So that will clearly be a part of the conversation, and I hope the Tax White Paper will tackle that head on, although the fact that this is coming so late in the electoral term means that perhaps we can't hope for tax reform in this parliamentary term.
QUESTIONER [BRENDAN PEARSON, MINERALS COUNCIL CHIEF EXECUTIVE]: Is minerals-sector specific taxation and the MRRT in particular dead, buried and cremated?
LEIGH: I've been very clear that Labor isn't planning a mining tax, we have taken that lesson squarely on the chin. One of the things that's really struck me since you took over as CEO of the Minerals Council is that ability to have really deep engagement on a set of other issues. One of the things that happened in 2010 to 2013 was that we lost the ability to engage on questions like Indigenous employment in the minerals sector, which is one area where I think Australia can be enormously proud. Or the Mining for Development agenda; one of the best things Australia can do to alleviate world poverty is to focus on lessons from how we've managed to use our mineral resources here to raise our overall prosperity. By contrast, most developing countries suffer from the 'resource curse'. Then there's also issues around education and skilling. So I want that conversation to be a broader and deeper one than I feel it has been in the past, and that's why I've given you a pretty categorical answer.
No more questions? Thank you again for having me here today.
MEDIA CONTACT: JENNIFER RAYNER 0428 214 856
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