Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017, Diverted Profits Tax Bill 2017

Second Reading Speech 

Tuesday 21 March 2017

I move:

That all the words after "That" be omitted with a view to substituting the following words:

"whilst not declining to give the bill a second reading, the House calls on the Government to explain why it is desperate to hide in this bill, and the Diverted Profits Tax Bill 2017, a $50 billion tax cut for big banks and multinationals behind a phoney war on tax avoidance".

Labor will support the Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017, but we do note, in debating this bill, that this government are 'the hollowmen' of multinational tax action. How is it that the government's actions on multinational tax end not with a bang but with a whimper? The $200 million of revenue that accompanies the diverted profits tax is the bounty of a government that has launched a phoney war on multinational tax avoidance, desperate to distract from their $50 billion tax giveaway to the very companies that they claim to be targeting with this bill. This is entirely in keeping with the government's inconsistency on the issue of multinational tax avoidance—when the coalition was in opposition and now in government. That should be no surprise to impartial observers. To paraphrase David Hume, the coalition are so much the same in all times and places that history informs us there is nothing new or strange in this particular. History's chief use is only to discover the constant and universal principles of their nature.

We only need to traverse through recent history to see this: from when the coalition voted against the previous Labor government's bill to strengthen transfer pricing and anti-avoidance provisions, through their watering down—once they were in government—of tax transparency measures that Labor had enacted, to the distraction we have before us today. The measures the government have introduced, to quote the Labor senators in the other place in their comments in the Senate inquiry into this very bill, have been 'patchy and belated', ' lagging behind the expectations of the Australian community that multinational companies pay their fair share of tax', and 'behind measures announced by the Labor opposition'.

In 2013, Labor began clamping down on the loopholes large companies use to siphon profits offshore and avoid paying tax in Australia. Nowadays, transfer pricing and the anti-avoidance rule have become part of the Australian tax lexicon, thanks to Labor's forward-thinking action and the work being done at the OECD under their base erosion and profit-shifting project. Yet the coalition were not having a bar of it. Here is what Senator Sinodinos said about closing tax loopholes in the 2013 bill:

We need less regulation, not more regulation. For that, among other reasons, we will be opposing this bill.

The former member for North Sydney, Joe Hockey, decided to cast aspersions on that bill's estimates of preventing $1 billion of tax losses by stating:

It is a nice round number: a billion dollars. It has a whiff of convenience to it, don't you think?

Well, that is five times more over the forward estimates than this bill is projected to raise. The now Minister for Finance, Senator Cormann, said to the parliament in 2013:

Let me just say up-front that the coalition will be opposing this bill—

it was a bill which was cracking down on multinational tax avoidance—

and we will be opposing it strongly because we think it is not in our national interest. It is a bill that is undermining our national interest.

Later on in his speech he described it as an 'overreaction'.

When Labor introduced the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 to crack down on companies overvaluing assets in international transactions, members opposite voted against it. It is almost ironic—and I use that word in the Alanis Morissette sense—that a coalition largely stocked with the same members and senators who voted against Labor's strengthening of transfer pricing rules are here today bringing to the parliament an update on transfer pricing rules that is in line with the 2016 OECD recommendations.

On this side of the House, Labor have continued the fight for tax transparency and for multinational tax fairness. This is a core issue for us. Over the last two years Australians have been given an insight into the tax affairs of large firms. Data from the Australian Taxation Office in December has shown that for two years in a row one in three large companies paid no tax. We only have that information thanks to Labor laws, opposed by the coalition.

Despite the fact that that information tells us that one in three big companies pay no tax, the Turnbull government still thinks that cutting company tax rates should be Australia's top economic priority—that was the centrepiece of last year's budget. Under laws largely passed by the former Labor government, public, private and foreign owned entities with a total income above $100 million had high level data released for scrutiny by the Australian public. But the coalition objected to those laws when they were in opposition, and then in government they did their best to shield some of Australia's largest firms from scrutiny. Initially their aim was to remove all tax transparency for large private firms, using arguments such as kidnapping risk, described by one expert as a laughable excuse. It is as though the BRW rich list had never existed!

They went through their various excuses suggesting that somehow firms might be disadvantaged in negotiations with suppliers, that CEOs might be under kidnap risk or that people might feel 'envious', which was the word that the member for Kooyong used. Yes, it is possible they might have felt envious when they discovered that regular small businesses were paying tax and large private businesses were not. Ultimately, though, they found a way through. You can always rely on the Greens to come to a dodgy deal, and they did in this case. That is why tax transparency applies to large public firms with income over $100 million but only applies to private firms with income above $200 million. In effect, the dodgy deal between the Liberals and the Greens took two out of three large private firms out of the tax transparency net. Nonetheless, the data tells us a lot. If we compare the most recent figures, for 2014-15, with data for the previous tax year we see that the share of large firms paying no tax stayed unchanged at 36 per cent in both years. That points to the coalition's failure to crack down on multinational tax avoidance in their first term.

The first iteration of the coalition's attempts to mount a phoney war against multinational tax avoidance was the former member for North Sydney's own multinational tax avoidance bill—one which, when it was produced, had not budget estimates but asterisks. Not even Treasury could say how much revenue it would bring in. The multinational anti-avoidance law, or MAAL, had its genesis in a thought bubble, when the government said in 2014 it would adopt a diverted profits tax. The former member for North Sydney was floundering about looking for something to back up his rhetoric, and so he latched onto Britain's approach of a so-called Google tax. He dropped the idea just as quickly when it was pointed out to him that Australia already had anti-avoidance laws.

As I have noted, the bill that made it to parliament had a series of asterisks where there should have been revenue estimates. Let us be clear: if it was Labor that said to the Australian people 'We are really serious about cracking down on multinational tax avoidance, here is our multinational tax package which will raise asterisk of revenue', we would rightly have been laughed out of this place. Yet, that is exactly what the government did. Over the course of the first few years of the Abbott-Turnbull government saw we not only inaction on multinational profit shifting and the shielding of big firms and tax transparency but also cuts to the Australian Taxation Office. Over 3,000 jobs were slashed from the Australian Taxation Office. Then, when Labor proposed a suite of measures including closing debt shifting loopholes, cracking down on hybrid mismatches and a targeted spend on ATO staff in order to bring in additional revenue through compliance, it was ridiculed by former Prime Minister Abbott. Indeed, coalition MPs cheered when former Prime Minister Abbott told parliament in 2015:

So far the only idea Labor have come up with is to spend $100 million on the ATO to raise $1 billion. Well, next time they will be telling us to spend $1 billion on the ATO to raise $10 billion. That is the problem. All they can think of is spending more and taxing more. They just cannot help themselves. I actually think that deep down the Leader of the Opposition is better than that, and I would ask him to start demonstrating that now.

It should be stated that when you decimate the tax office—and that is being generous; it was worse than a decimation—you lose the auditors and the institutional knowledge that are vital to enforcing Australia's tax laws. When the biggest firms in the world are armed with armies of accountants and lawyers just looking for loopholes and you cut back on tax office staff, it goes without saying that you are going to see increased multinational tax avoidance. Without proper oversight, the revenue evaporates and multinationals get away with not paying their fair share.

Belatedly, the 2016 budget included some additional expenditure for the tax office—a $679 million investment, forecast to raise more than five times as much—$3.7 billion. That does raise two questions. First of all, what on earth was former Prime Minister Abbott, now the backbench member for Warringah, going on about when he said that it was a ludicrous idea that there was a link between how much you spent on tax office staff and how much you raised in revenue? In 2015 they were telling parliament that was a ludicrous idea; in 2016 it was an idea right in their budget. Their budget itself said that spending money on the tax office would return money to the budget. The other implication of that, of course, is that if a targeted spend in the budget can raise revenue, as Labor suggested when we put together our package which included a targeted ATO spend, it must also be true that cutting the tax office hurts revenue. It must be the case that the government's savage cuts to the Australian Taxation Office, axing thousands of jobs, have cost revenue over the past three years and have allowed multinationals to get off without paying their fair share.

Labor is the party that has sought to take action on thin capitalisation changes. The 2013 budget had a detailed package protecting the corporate tax base from erosion and loopholes. Recently, the member for Higgins, speaking at the Minerals Council of Australia's tax conference, was taking credit for enacting that 2013 Labor budget measure to tighten thin capitalisation. It is true that the measure passed the parliament under the coalition, but it is, essentially, a technicality, given that it was a Labor measure—implemented reluctantly by the coalition. What the member for Higgins did not say to the Minerals Council of Australia's tax conference was that shortly after the election the government set about watering down that thin capitalisation package, which had been announced by Treasurer Swan in the 2013 budget. The coalition dropped Labor's proposal to deny deductions made under section 25.90 of the Income Tax Assessment Act 1997. At the time, Treasury put a $600 million figure on dropping the changes to section 25.90 of the income tax act—$600 million.

As the parliament well knows, Labor has continued to apply pressure on the area of debt deductions. In the 2016 election, we took a package to the Australian people which included a worldwide gearing ratio. What this essentially means is that right now big firms can pick their debt deduction rule. There are three rules in the tax act. They are: an arbitrary thin cap threshold; an arm's-length test; and a worldwide gearing ratio. Really, only one of them has strong economic sense. That is the worldwide gearing ratio—a rule that says if you owe a lot of money to the banks then your Australian operation can make deductions up to the same ratio. But if you do not owe a brass razoo to the bank, and if you have an inter-company loan coming into Australia in order that you can send profits out of Australia through the interest payments, then you cannot claim that as a deduction. You cannot claim as a deduction an inter-company loan if you are not a borrower, if your multinational group is not borrowing anything from the banks. It is a perfectly reasonable approach to take. So with three debt deduction rules in the Australian tax law, two of them are not grounded in strong economics and one of them is grounded in strong economics. Labor's proposal is that we keep that one.

The other thing that you can say about that measure is it is extremely clear for firms. I will not pretend that every multinational firm likes Labor's plan, but it is very clear what their position will be under it. Their accountants will naturally have looked at their multinational group's position under each of the three debt deduction rules and will know how they are affected according to which debt deduction rule is in place. That package was costed to raise $1.6 billion over the forward estimates, $5.9 billion over the decade.

There was a brief period in which Treasurer Morrison was tempted to actually take action on debt deduction loopholes. Prior to his first budget speech, the Treasurer's office was briefing journalists that the government would reduce the so-called safe harbour level and thin capitalisation rules from 60 per cent of total assets to 50 per cent. That would have still been an arbitrary approach economically inferior to Labor's, but it would have cut the amount of debt deductions from multinationals and added to the government coffers. But, at the last minute, Treasurer Morrison backed away from plans to address multinational tax avoidance. He got cold feet. He was, apparently, bullied—a word I know the government likes to use—into backing down. We know that it was a last-minute backdown because the budget includes a glossary term that is not in the budget. So it has a definition of thin capitalisation, but there is nothing in the budget about thin capitalisation. The only reason you would do that is if you had a thin cap measure which you then scrubbed from the budget papers and someone forgot to clean up the glossary. So it is very clear that the government is not serious about multinationals paying their fair share of tax. By contrast, it is clear that Labor is serious about making multinationals pay their fair share by closing debt deduction loopholes exploited by multinationals, a plan which would deliver nearly $6 billion to the budget bottom line over the decade.

We have also seen an ongoing drip feed of revelations about multinational tax avoidance. In April last year, the Panama papers hit the press. The Australian tax office, despite the staff cuts that it had been subjected to, was nonetheless on the front foot, with reports noting that it was investigating more than 800 high-net wealth Australian individuals using tax havens to avoid paying their fair share of tax. The ABC's Four Corners program reported on the legal twists, turns and loopholes that multinational companies and individuals use to avoid tax—that emerged from that explosively.

But Australians were also getting to know a new Prime Minister and getting to know that this new Prime Minister, Prime Minister Turnbull, said nothing and did even less on multinational tax avoidance. The silence was deafening. Not one coalition MP appeared on the program—not even to rhetorically condemn tax avoidance. The former Prime Minister, the member for Warringah, said:

… fundamentally the Turnbull government is seeking election on the record of the Abbott government.

He was referring in part to the multinational tax space—a record which showed a government that had gone soft on tax avoidance by individuals and firms, that had slashed 3,000 tax office jobs and that had undermined their investigative and enforcement abilities.

In response to the Panama papers, other countries stepped up to the mark. Then US President Barack Obama said: 'We should not make it legal to engage in transactions just to avoid taxes. There is a basic principle of making sure that everyone pays their fair share.' IMF head Christine Lagarde said: 'The rules appeared to be skewed towards some and do not apply to all.' Finance ministers of Britain, France, Germany, Italy and Spain put out a joint statement, saying

The recent extensive leaks from Panama show the critical importance of the fight against tax evasion, aggressive tax planning and money laundering.

Then World Bank President Jim Yong Kim said:

When taxes are evaded, when state assets are taken and put into these havens, all of these things can have a tremendous negative effect on our mission to end poverty and boost prosperity.

And yet here in Australia it was the deafening sound of silence from a government that is not interested in cracking down on tax havens and multinational tax avoidance.

We have seen too the government's foot dragging on the issue of the beneficial ownership register. Almost a year ago, the member for Higgins Kelly O'Dwyer told The Guardianthat 'there needs to be a registry of beneficial ownership in our country' and confirmed that Australia would establish a public register of beneficial ownership for firms. However, at an international summit shortly afterwards on the issue, Australia would only commit to 'exploring options' for a beneficial ownership register. In October 2016 the government committed to consult by the end of December. Halfway through February 2017—well beyond their self-appointed deadline—the government finally released the consultation paper. The failure of the government to make good on its promises on a beneficial ownership register can only be put down to one thing: this is a government focused on looking after the big end of town; its only ability is to get tough is on the weak, but it goes jelly at the knees when it comes to taking on the strong. It is unable to ensure that we have the transparency measures necessary to force multinationals to pay their fair share.

Then there is the Common Reporting Standard. Under Treasurer Hockey the government dragged its feet in signing Australia up to the Common Reporting Standard. It refused to join the Early Adopters Group—a large group of countries that were willing to move quickly on automatic information exchange. When introducing the bill to implement the Common Reporting Standard in Australia, Treasurer Morrison then set the timetable which would have let the companies off the hook by not having their accounts reported until the end of 2019. Labor would not have it; we forced amendments on the government to bring forward the reporting date. Rather than letting big companies off the hook and having their accounts reported at the end of 2019, we ensured that that timetable was accelerated. Labor's amendments also ensured that the Taxation Office publishes an aggregated report of Australian financial holdings by foreign residents from each individual tax jurisdiction. The purpose of that is to increase public transparency about Australia's place in the global money flows, because we have seen the transparency matters—whether it is the Panama papers, the Lux leaks, the Senate committee hearings run first by Senator Sam Dastyari and then Senator Chris Ketter who followed Sam Dastyari as chair. Public attention on multinational tax avoidance has been critical in making sure multinationals pay their fair share.

Tax transparency groups have called for the amendment that Labor forced on the government. They called for it because they wanted to ensure that Australia was not inadvertently playing a part in tax avoidance schemes originating in neighbouring countries in our region. The government criticised Labor in the House of Representatives for attempting to amend the Common Reporting Standard and then saw sense in the Senate and agreed to support these important changes.

Any multinational tax avoidance measure requires appropriate penalties. With the government's tepid measures, the maximum penalty a firm would pay if it failed to lodge country-by-country reports was $5400. For a company with $1 billion of revenue that represents 0.00054 per cent of their annual revenue. To put it into context, the fine for failing to lodge country-by-country reports was lower than the fine for streaking at the Sydney Cricket Ground. Naturally that raises the risk that big multinationals will simply opt to pay the fine rather than to do the right thing and launched their country by country reports.

In February last year I introduced a private member's bill to toughen up penalties for companies that do not comply with Australia's new country-by-country tax reporting rules. Labor raised that issue and took the job of taking a stick to companies that do not comply with the Australian tax laws. In May the government finally did an about-face and announced the higher penalties contained in the bill that we are debating today. Like so many other Labor policies that the government has adopted—cigarette excise increases, better targeting of superannuation concessions—we welcome it, but it beggars belief that it took so long and that it came in waves of bluster. The thing about Treasurer Morrison is that he is always confident: he is confident when he is attacking Labor and he is confident when he is adopting Labor measures. He never waivers for a moment in his public delivery; it is his policies that are always wavering.

Ten months ago the Treasurer announced the Diverted Profits Tax, but there are hazards in playing catch up—most notably, the propensity to trip as you are attempting to catch up. Immediately before the election and then again in October, the Treasurer promised Australians that he would introduce the Diverted Profits Tax before the end of the year. Was it introduced in this place before the end of the year? No, it was not. He failed to keep that promise, and in October 2016 at the Senate estimates hearings, Treasury officials informed Senator Ian Macdonald that 'the legislation is yet to be drafted'. Eventually draft legislation was introduced but it turned out that what was brought to parliament was a draft—given today's track-covering amendment changes the government's own bill.

Let's not forget that the multinational anti-avoidance law established by the former Treasurer was a de facto diverted profits tax. This Diverted Profits Tax aims to ensure that tax paid by significant global entities with a global income greater than $1 billion properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through contrived arrangements. Since the draft legislation was introduced, the government has made tweaks, most behind closed doors. At the last minute we see that the government has been diverted on the diverted profits tax, because now they are amending their own bill. The government has been unable to meet their own timetable on a diverted profits tax. They have been unable to bring to this parliament a measure that raises serious revenue. Let's not forget that Labor's measure over the forward estimates would raise eight times as much as the diverted profits tax we are debating today—Labor's measure would crack down on multinationals eight times more stringently than the government's diverted profits tax. But they cannot even get the drafting right, and that is why today we are seeing the government amending their own Diverted Profits Tax Bill.

Of course, while they are failing to make multinationals pay their fair share and fighting for a $50 billion corporate tax cut for the big end of town, the government are punishing working- and middle-class families by taking away penalty rates that will cost a weekend worker $77. In the middle of this year, a millionaire will receive a personal income tax cut from Prime Minister Turnbull which is worth $16,400. The benefits of that will go only to those earning over $180,000 a year, and 94 per cent of the benefits of this top income tax cut will go to the top one per cent—a group that has doubled its share of national income in the last generation.

While we have seen wages grow three times as fast for the top 10th of the distribution when compared to the bottom 10th, we have a government that wants to cut penalty rates which disproportionately go to lower paid workers. With one hand, they are cutting penalty rates for low-paid workers. With the other hand, they are giving a tax cut to millionaires worth $16,400. With one hand, they are wanting to give a company tax cut worth $50 billion to the largest companies in Australia—$7 billion alone will go to the big banks. With the other hand, they are going weak on multinational tax avoidance, raising a mere $200 million—raising a tiny fraction through this bill of what they will give back to multinationals through their $50 billion handout.

I do not have time in the minutes remaining to me to go through the economic arguments against the corporate tax cut. But, for those who are interested in the economics of it, I would urge them to do nothing more than to look at the government's own modelling. Look at what the government's own modelling says will happen to households as a result of their corporate tax cut. There are three scenarios as to how you might raise the revenue. The first is a federal land tax. We have not had one of those since 1952, so it will probably not be that. The second is cuts in spending—well, they have increased spending, so it probably will not be that. And the third is higher income taxes.

A corporate tax cut funded by higher income taxes will boost household income, according to the government's own modelling, by 0.1 per cent—not per year but in total. There is a month's income gain which is, according to the government's own modelling, projected to be delivered in the 2030s. The government needs to drop its corporate income tax cut and adopt Labor's plans to get tough on multinational tax avoidance.

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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.