Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity And Transparency) Bill 2023
Second Reading, Summing up speech
Wednesday 9th August 2023
Dr Leigh (Fenner—Assistant Minister for Competition, Charities and Treasury, Assistant Minister for Employment):
First, I want to thank those members who've contributed to this debate. The Australian government went to the 2022 election with commitments to tighten tax integrity and to play a meaningful part in driving international tax reforms. We made that commitment more than one year ago, and the timelines we set were to allow for meaningful consultation with affected stakeholders. That consultation has indeed taken place.
Through the exposure draft, Treasury has conducted 10 meetings with interested stakeholders, ranging from peak groups to individual firms. Since the bill was introduced, Treasury has carried out seven more consultation meetings, again, with a range of peak groups and investors. The exposure draft received 54 written submissions, and those submissions that asked to be made public have been published on the Treasury website.
More than a year on from the election, I stand here to speak in favour of a government that seeks to implement its election commitment. The measures we brought to parliament have benefited from the guidance and input of industry and civil society, but we bring these amendments to the parliament with a clear eye to the main game. For too long, multinational profit shifting has left a hole in our corporate tax revenue. For too long, artificial debt deduction mechanisms have been used and misused to allow revenue to drain away to low- or no-tax jurisdictions. When that happens, households and businesses pay more, and that's why this bill the government brings to the House is a pro-business measure.
As the member for Chisholm so articulately put it, this is about creating a level playing field across all Australian businesses. If you are a local small business just trying to make payroll, you're not thinking about how you're going to restructure your arrangements to set up a high-interest loan coming out of the Caymans so you can reduce your tax bill. If you're a regular mum-and-dad business just trying to get by, what you ask is to be placed on a level playing field with other firms. Multinational tax is complicated, but the very principles at stake in this bill are simple: do we want multinationals to pay their fair share, or do we want to allow the status quo to continue?
We have given industry over a year to prepare for these changes. The consultations have helped ensure our integrity measures are properly targeted to tighten loopholes that can be used to allow the strategic erosion of our tax base. We don't want to affect legitimate commercial arrangements. Our commitment is to shift the norms, not maintain the status quo, and that reflects the consensus embodied in the OECD/G20 process. That inclusive framework on base erosion and profit shifting has seen over 140 countries and jurisdictions collaborate on the implementation of measures to tackle tax avoidance to improve the coherence of international tax rules and to ensure a more transparent tax environment. It brings an end to the notion that we should just allow a race to the bottom in corporate taxation, with a global 15 per cent minimum floor on corporate taxation.
The commitments in this bill work in the spirit of the OECD/G20 reforms. We took them to the last election. They were confirmed in the October budget. They sit alongside our commitment to introduce a public country-by-country reporting register and to limit the deductions multinationals can make on payments relating to intangible assets when those payments are made to low-tax jurisdictions. They interact with other transparency reforms taking place in the European Union and with like-minded countries such as Canada and the United Kingdom. We are committed to working with like-minded international partners in order to close multinational tax loopholes, in order to improve transparency, in order to implement the global minimum tax that was at the heart of the OECD/G20 arrangement. There is now a growing number of jurisdictions committed to implementing a global minimum tax from 2024, and these measures are designed to complement those key multinational tax reforms. Australia has championed the global 15 per cent minimum tax. We have committed to have that and the domestic minimum tax apply from 1 January 2024. We are delivering on our promise to make multinationals pay their fair share. We are doing it methodically and responsibly.
Schedule 1 of this bill is a transparency measure. It applies from 1 July 2023 and requires Australian public companies, listed and unlisted, to disclose information about their subsidiaries in their annual financial reports. Schedule 1 to the bill is part of the government's broader regulatory mix to improve corporate disclosures, ensuring that appropriate public scrutiny can be brought to bear to build trust in the integrity of the tax system. If you have significant assets hiding in the Caymans or the Bahamas or another tax haven, then it is only reasonable that your investors know about that and the potential tax risk that might pose. So we are asking public companies to make that information available to investors so investors can make an informed choice as they look across firms that are domiciled in tax havens and those that are not.
Schedule 2 to the bill amends Australia's thin capitalisation rules to limit the amount of debt that entities can deduct for tax purposes. The amendments introduce earnings-based interest-limitation rules for general class investors to replace the existing asset base rules. Specifically, the current safe harbour rule lets an entity deduct debt up to a threshold of 60 per cent of assets. Under the new rule, that threshold will become 30 per cent of profits. That ensures that an entity's debt deductions are directly linked to its economic activity, to its earnings, which is a more robust approach to addressing the use of debt as a base-erosion and profit-shifting risk. This amendment is consistent with the OECD's best practice framework rules.
The amendments in schedule 2 also introduce the third-party debt test to replace the existing arm's-length debt test. While this test excludes related party debt—a higher base-erosion and profit-shifting risk activity—from being deductible for tax purposes, it's expected to be used by the property and infrastructure sectors to ensure genuine commercial arrangements can deduct third-party arm's-length debt without an earnings limitation. These amendments together implement the government's multinational tax election commitments, helping to ensure a fairer and more sustainable tax system.
In closing, I want to draw the House's attention to an amendment moved by the member for Wentworth. I have strong respect for the member for Wentworth and admire her keen interest in tax. There aren't many tax nerds in the parliament, and it's always good to see another member of that fraternity. Her interest in tax reform is admirable, and I understand that it comes from a desire to achieve a good outcome.
But I have to say that the effect of the member for Wentworth's amendment would be to do the opposite. It would cost the budget millions of dollars by keeping open a multinational tax loophole, which would then have to be paid by small businesses and households—millions of dollars which would not be available to spend on services, such as health and education, and which would be flowing to the shareholders of multinational firms that have chosen to use artificial debt arrangements.
The member for Wentworth's speech referred to consultation, but, as I have taken the House through, there has been extensive consultation on this bill. The consultation on this bill has taken place through the ministers' offices and directly through the department. We have seen an exposure draft process, as is usual for this kind of reform. We have engaged extensively with industry, with civil society and with tax experts in crafting this bill. But we are committed to closing a multinational tax loophole. We are committed to a level playing field.
I do welcome the opposition's announcement that they will not be supporting the member for Wentworth's announcement. I welcome the announcement from the Liberal and National parties that they will be voting with the Labor Party to close this multinational tax loophole. It's the right thing to do. We must ensure that the misuse of debt arrangements does not gut corporate tax revenues in Australia. We must ensure that we stand up against the trends that have seen: globally, too many dollars of multinational tax profits channelled through no- or low-tax jurisdictions. We must stand up against the complicated corporate structures, the debt artifices, which see profits on which tax should be paid in Australia being siphoned offshore.
Every multinational tax expert acknowledges the importance of debt deductions and their abuse and the way in which that is forming a challenge to the multinational tax system. If we don't close down these loopholes, they will continue to cost the Australian taxpayer. It will be the constituents that sent us here who will have to pay higher taxes if multinational firms get away with these artificial debt contrivances. It'll be these local firms that are doing it tough and working long hours, who never have a thought of doing business in the Caymans, who will end up paying more if we leave these multinational tax loopholes open. It'll be Australia's services that suffer if we don't get the corporate tax revenues that will flow from closing multinational tax loopholes.
Closing multinational tax loopholes is not easy—and I want to commend the work the officials have done in engaging with a range of stakeholders, domestic and international, to put this package together—but tax reform needs to be done. The world is looking at the issue of multinational tax avoidance as a major challenge to the corporate tax base. If we don't do something about it, corporate tax itself could one day come under threat. So, we've done this. We've consulted with industry, we've consulted with stakeholders, and we've brought forward these important reforms today. I urge the House to support the bill but not to support the amendments that are being brought to it. I commend the bill to the House.