Introducing a global minimum tax on multlnationals

Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 - Second Reading Speech

It's important to see this in its historical and international context. No government in Australian history has done more on multinational tax fairness than the Albanese government. No government around the world is doing more to improve multinational tax integrity than Australia.

The Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 is part of a package of three bills which together will enact a 15 per cent global minimum tax and domestic minimum tax for multinational enterprises operating in Australia with an annual global revenue of 750 million euros (approximately A$1.2 billion) or greater.

These bills, upon receiving royal assent, will apply to fiscal years commencing on or after 1 January 2024.

The global minimum tax will enable Australia to apply top-up tax on a resident multinational parent or subsidiary company where the group's income is taxed below 15 per cent overseas.

The domestic minimum tax will enable Australia to apply top-up tax for any low-taxed domestic income before a foreign country would otherwise take that tax under the new rules.

These bills represent a landmark achievement in the international tax landscape and follow on from our government's 2023-24 budget announcement that we would implement a global minimum tax and a domestic minimum tax.

It marks further progress on the government's election commitment to support pillar 2 of the OECD/G20 Two-Pillar Solution to address the tax challenges from the digitalisation of the economy. It also builds on the government's multinational tax integrity package to ensure multinationals pay their fair share of tax. I'll come back to that in a moment.

This package of bills will align Australia with approximately 60 jurisdictions including the likes of Canada, the United Kingdom, the European Union, Japan and New Zealand who have all taken steps to implement either a global or domestic minimum tax, or both.

By implementing these minimum taxes alongside other lead jurisdictions as part of a coordinated global approach, Australia will be making a key contribution to prevent a race to the bottom on corporate income tax rates.

Establishing a floor on tax competition will help lead to a fairer domestic and international tax system.

The floor on tax competition offers Australia various important benefits. Chief among them, the incentive for multinationals to shift profits away from Australia to low tax jurisdictions will be reduced.

This is because the 15 per cent minimum tax rate will apply irrespective of which jurisdiction a multinational operates in, making it more likely that profits made in Australia will be taxed in Australia.

This will also improve the competitiveness of smaller domestic businesses in Australia due to the reduced tax advantages available to multinationals.

Further, implementing a global and domestic minimum tax will reduce the corporate tax rate differential between Australia and low tax jurisdictions, making Australia a more attractive place to invest in, which will boost economic growth.

The first global and domestic minimum tax returns, however, will not be due until 30 June 2026, giving multinationals time to adapt their compliance and reporting systems.

This bill implements the core rules of the global and domestic minimum taxes. In particular, it sets out the framework and scope for the imposition of top-up taxes under the two minimum taxes.

In giving effect to this, the bill has been drafted to be consistent with the Global Anti-Base Erosion rules as agreed and finalised by the OECD Inclusive Framework, a network of 145 member jurisdictions.

The Global Anti-Base Erosion rules set out the requirements and outcomes a jurisdiction's global and domestic minimum taxes need to meet.

For example, consistent with the Global Anti-Base Erosion rules, the bill will not apply to government entities, international organisations, pension funds, investment funds and real estate investment funds that are parent entities of a multinational group, not-for profit organisations and income associated with international shipping.

The government intends to finalise the subordinate legislation in the form of ministerial rules, which is necessary for the bill to operate effectively. Such rules will build upon the framework established by this bill, setting out various computational and administrative provisions necessary to give effect to the global and domestic minimum taxes in Australia.

The authority to make such ministerial rules is provided for in this bill. The bill further allows for any ministerial rules created after this bill is passed to operate retrospectively, being necessary to align with the bill's retrospective application from 1 January 2024.

Enacting this package of bills to implement a global and domestic minimum tax in Australia is estimated to increase receipts by $370 million dollars over the five years from the 2022-23 financial year.

Reforming multinational tax isn't just about protecting much needed revenue. It's also about fairness. A small company operating in suburban Australia isn't conniving to cut their tax bill by using a Cayman Islands subsidiary. Suburban firms shouldn't have to compete with tax dodging multinationals. A fair go for families and local firms is precisely what we're aiming to deliver.

Three years ago, academics from the University at Albany and the University of Missouri published a research paper arguing that company taxes should be abolished. Part of their argument was that transfer pricing by multinationals has become so widespread that policymakers should give up on corporate taxation altogether.

It's a stark reminder that when it comes to multinational tax reform what's at stake is nothing less than the future of the corporate tax itself. I believe it is good economics to save corporate tax, but it will take deft policymaking and proper tax administration to do so.

Company taxes go back over a century. The United States introduced a corporate tax in 1898, but it was overruled by their supreme court a year later. In 1913, after they had sorted out their constitutional issues, the US company tax rate was set at a measly one percent.

Australia introduced our company tax in 1915. Then Attorney General and future Prime Minister Billy Hughes told parliament that it was 'necessary to meet the great and growing liabilities created by the war'. Hughes put the issue bluntly: 'I know of no other means whereby we could raise the necessary revenue.'

Today, while the essential purpose of corporate income tax remains the same, the challenges of collecting corporate taxes have grown enormously. Part of that arises because company taxes are simpler in an economy that makes physical products. Agriculture, mining and manufacturing have clear locations of production.

But, if a company's output is digital, then it's easier to artificially shift the location of production to the place with the lowest tax rate. For instance, in 2016, Google's parent company, Alphabet, made US$19 billion in revenue in Bermuda, a small island where it had virtually no workers, where it owned virtually no assets and where the corporate tax rate is zero per cent. You get a billion here and a billion there, and soon you're talking real money. Summing up the problem, economists Thomas Torslov, Ludvig Wier and Gabriel Zucman estimate that close to 40 per cent of multinational profits—around US$600 billion—has shifted to low-tax countries each year.

What's the cost of this activity to the revenue base of countries such as Australia? In a separate analysis, Ludvig Wier and Gabriel Zucman have tracked the damage done by the global profit-shifting industry. They calculate that, in 2019, around 10 per cent of corporate tax income was lost as the result of global profit shifting. They estimate that, back in 1975, this figure was less than 0.1 per cent. A race to the bottom between nation states has seen average corporate tax rates fall from 49 per cent in 1985 to 24 per cent in 2019.

Australia relies more heavily on company tax relative to other OECD countries, even though Australia's aggregate tax burden across all levels of government is lower than the OECD average. Since company taxes comprise 19 per cent of Australia's revenue base, to accept the accounting tricks and dodgy behaviour that multinationals engage in would have a massive impact on Australia. Multinational tax avoidance means fewer resources available to fund our schools and hospitals. It means small businesses face unfair competition from large multinationals that are using tax dodges that aren't available to smaller firms. The situation for local small businesses ends up being like a team forced to play against a headwind through the entire game.

Among the shenanigans we've seen are shell companies created in low- or no-tax jurisdictions, allowing multinationals to funnel huge profits into secret locations where they have zero employees and no physical office. We've seen one part of a multinational group purporting to owe another part of the same group a huge amount of debt, shifting profits by paying large amounts of interest to itself in another country and deducting those payments from their Australian tax bill. The accounting details may be complex, but the principle is simple: all companies, large or small, should pay their fair share.

These examples of companies exploiting tax lurks are only possible for companies with cross-border operations. This gives them an unfair advantage over local firms and comes at a cost to other participants in the economy. This unfair advantage ultimately weighs on the broader health of the economy, limiting productivity, economic growth and wages. This bill should be seen in the context of the Australian government's strong commitment to multinational tax integrity.

We've already delivered four significant multinational tax reforms. First: our new subsidiary disclosure law will require public companies listed and unlisted to disclose information on the number of their subsidiaries in the country of tax residency. This will shine a light on how companies structure their subsidiaries including for tax purposes.

Second, and as part of the Buy Australia Plan under the Fair Go Procurement Framework: companies with tenders and government procurement processes valued above $200,000 are now required to disclose their country of tax residency. This change complements broader changes the government has implemented in taking decisive action on tax adviser misconduct, including by increasing tax promoter penalties and increasing the powers of tax regulators.

Third: we've boosted funding for the Australian Taxation Office's Tax Avoidance Taskforce in the October 2022-23 budget by around $200 million a year. In the 2024-25 budget, we've further extended the operation of the taskforce to 2028. This investment has bolstered Australian Taxation Office crackdowns on tax dodging by multinational enterprises, large Australian public and private groups and extremely wealthy individuals.

Fourth: we've taken aim at a common technique that multinationals use to minimise tax by tightening Australia's thin capitalisation rules. Our new approach reduces the ability of taxpayers to create artificial interest-bearing debt in Australia as a way of maximising interest-related deductions that in turn reduce their overall tax bill.

We've also created the new debt deduction creation rule, which will work hand in glove with the thin capitalisation rules, to target the use of related party debt to artificially inflate an entity's interest expenses, minimising their tax paid.

In addition, we're in the process of delivering five further multinational tax reforms.

First, the government's bill to create a public country-by-country reporting register has been introduced to parliament and once it has passed, reporting requirements will apply from 1 July 2024.

Creating a public country-by-country reporting register will deliver a key part of the government's multinational tax integrity election commitment. It will see Australia put in place a world-leading set of disclosure laws.

Second, the government is progressing its election commitment to implement a public register of beneficial ownership, which will show who ultimately owns, controls or receives profits from a company or legal vehicle operating in Australia.

Third, we've also added to our election agenda, by strengthening the way our foreign investment system reduces the risk of multinational investors avoiding tax. On 1 May 2024, the Treasurer announced changes to deliver a stronger, more streamlined and more transparent approach to foreign investment.

Foreign investment has a key role to play in our economy but only if it's in the national interest. So we're making sure that foreign investors pay their fair share of tax in Australia. This includes releasing updated guidance about the kind of tax arrangements that will attract greater scrutiny—such as those that are overly complex.

Fourth, to further protect our tax system from foreign investments where investors currently have incentives to circumvent intended outcomes in our tax settings, we're strengthening the foreign resident capital gains tax regime.

As part of the 2024-25 budget, the government announced it will strengthen the regime in line with the OECD standards to ensure foreign residents pay their fair share of tax in Australia and to provide greater certainty about the operation of the rules.

Fifth, in this year's budget, we also announced a new royalty penaltyFrom 1 July 2026, the penalty will apply to significant global entities (with annual revenue of $1 billion) where they avoid Australian royalty-withholding tax by understating the value of royalty payments or disguising them as some other kind of transaction.

These nine measures—four that we have delivered, five that are in train—demonstrate the government's strong commitment to multinational tax integrity.

It's important to see this in its historical and international context. No government in Australian history has done more on multinational tax fairness than the Albanese government. No government around the world is doing more to improve multinational tax integrity than Australia.

Full details of the measure are contained in the explanatory memorandum. I commend the bill to the House.

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  • Andrew Leigh
    published this page in What's New 2024-07-09 14:07:53 +1000

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Cnr Gungahlin Pl and Efkarpidis Street, Gungahlin ACT 2912 | 02 6247 4396 | [email protected] | Authorised by A. Leigh MP, Australian Labor Party (ACT Branch), Canberra.