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Tuesday, 19 June 2012
Page: 7038


Mr HOCKEY (North Sydney) (18:19): I rise to speak on the government's Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012. Transfer pricing in general terms occurs when two parties related or unrelated supply goods or services to each other and transfer profits from one to the other. The parties to the transaction may be domestic entities, or the transaction may occur between resident and non-resident entities. The transaction can also be between related parties or non-related parties. Of course, for taxation purposes, the main issue occurs when the transaction is between related parties and one of those parties is a nonresident.

For Australian taxation purposes, where only one party is a nonresident, Australian tax can be minimised through applying deductions to the Australian entity through the purchase of goods by the resident entity at an inflated price or through allocating income from the Australian resident through the sale of goods from the resident entity to the non-resident entities at a discounted price. Specifically, division 13 of part 3 of the Income Tax Assessment Act is designed to ensure that transactions between Australian residents and nonresidents are done at arm's length for taxation purposes. This counters such activities as the shifting of deductions to the Australian resident from the nonresident or income shifting from the Australian resident to the nonresident. This is done so that appropriate taxation can be captured within Australia.

Not only is division 13 of the Income Tax Assessment Act relevant but so too are our international tax treaties, which are incorporated into our domestic law through the International Tax Agreements Act 1953. These treaties are commonly referred to as double taxation agreements. Where there is conflict between division 13 and a treaty, the treaty takes priority. Of particular importance within these treaties are the provisions relating to associated enterprises. These are usually contained within article 9 and deal with profit-shifting. As I mentioned earlier, they mandate an arm's-length principle for international dealings between associated enterprises. The Australian Taxation Commissioner applies the provisions within division 13 of the 1936 tax act along with the associated enterprises article within the international tax treaty when making transfer-pricing adjustments. The outcome of these adjustments should be consistent. Division 13 and associated enterprises articles within tax treaties are both based on the arms-length principle. However, consideration must be given as to the precise wording of the treaty. If the operation of division 13 and the relevant section of the tax treaty are inconsistent, the international tax treaty provisions will apply unless the treaty itself gives precedence to domestic law.

In 2011 the full Federal Court cast doubt on this premise for transfer-pricing adjustments in the Commissioner of Taxation v SNF (Australia) Pty Ltd. Transfer-pricing rules exist to ensure that appropriate taxation is collected on the contribution of profits from Australian operations and also to ensure that profits are not shifted between related parties and across borders. For the benefit of context I will briefly go over the key points of this case. The taxpayer was in that case a wholly owned French subsidiary who was a distributor of chemicals acquired from a non-resident related party and who sold these goods in Australia. SNF used what is known as the comparable uncontrolled prices—CUP—basis for its transfer-pricing methodology. SNF provided evidence of sale transactions from comparable entities to the Commissioner of Taxation which showed that SNF paid less for its acquired stock than prices paid by comparable independent entities.

SNF also used OECD guidelines in explaining its comparability factors. The commissioner disagreed with SNF's transfer-pricing methodology and calculation, arguing that Australian transfer-pricing rules meant that SNF could only compare an arms-length transaction with transactions of other taxpayers who had the same characteristics as SNF, apart from its association with offshore related parties. Some examples of similar characteristics that the commissioner argued would provide a basis for comparison include the size of SNF within its market, the market strategy that SNF was employing, and SNF's loss position. The full Federal Court rejected the commissioner's approach and upheld SNF's position. The court also highlighted that the approach taken by the commissioner imposed unreasonably high benchmarks for comparison when using the transfer-pricing methodology. This was, in part, acknowledged by the commissioner in the commissioner's decision impact statement on this particular case.

The commissioner's impact statement notes that the court found that the OECD's transfer-pricing guidelines were not a legitimate aid to the construction of either division 13 or the associated enterprises articles of Australia's double tax treaties as domestically enacted. This case was argued only on the basis of division 13. The government now believes division 13 does not adequately reflect the contributions or profits from Australian operations to multinational groups. As such, the government claims there will be instances where treaty transfer-pricing rules may produce an unintended taxation outcome relative to the application of division 13.

In November last year the government announced a review of division 13 of the 1936 tax act and announced that it would legislate to clarify the transfer-pricing rules and tax treaties are valid transfer-pricing adjustments independent of the ITAA 1936. The bill currently before the House deals with these changes to legislation. The government's bill seeks to ensure that transfer-pricing articles contained in Australia's tax treaties are able to be applied and provide assessment authority independent of division 13. They are seeking to do this by creating express provisions within the Income Tax Assessment Act 1997. The government's bill also seeks to ensure that transfer-pricing rules are interpreted as consistently as possible with the relevant OECD guidelines. Finally, this bill seeks to clarify the interaction between transfer pricing and thin capitalisation rules, which have previously only been dealt with through administrative arrangements.

Of great significance to us on this side of the House is that the government is again, through this bill, raising the spectre of sovereign risk. This bill seeks to retrospectively amend transfer-pricing legislation following the outcome of the full Federal Court decision in the SNF (Australia) case. This change is proposed to apply retrospectively to 1 July 2004. The explanatory memorandum suggests a basis for starting on 1 July 2004 on this confusing argument:

The 2004 income year commenced immediately after the parliament's most recent amendment to the tax laws in 2003, which again evidenced the parliament's understanding that tax treaties could be used as a separate basis for making transfer-pricing arrangements.

In his second reading speech to the House, the minister stated:

A decision to change the law from a date before announcement is not taken lightly. It is generally only done, as in this case, where there is significant risk to revenue that is inconsistent with the parliament's intention.

This is curious rationalisation from a government that have only served to heighten sovereign risk perceptions. They have cast doubt on investor confidence on the Australian economy, having implemented a raft of decisions in taxation law with retrospective effect since coming into office only 4½ years ago. As recently as last year the government legislated a retrospective change dating back to 1990. They sought to clarify the taxing point and the way it is determined for the purposes of the petroleum resource rent tax. This was to pre-empt the outcome of a taxpayer appeal to the full Federal Court.

This government has a bad habit of bringing retrospective legislation to the House. This bad habit is damaging Australia's sovereign risk profile and damaging international investor confidence. The coalition has serious concerns regarding the government's justification for the retrospective application of this bill. The explanatory memorandum to this bill fails to quantify the impact on government revenue on the basis that this bill is a 'revenue protection measure'. The government has not provided any detail on the size of the retrospective tax impost. The government is asking for this parliament to pass legislation that will have a retrospective commencement date going back eight years. For the government to do so, I suggest, requires the government to make a compelling case for the need for the amendment. Indeed the unlimited power to make amendments provides another reason why it is incumbent on the government to make public any evidence it has that makes it so important for this House to pass a bill containing such a significant retrospective measure.

We are not convinced. During recent Senate estimates, responding to a question from the coalition about cases in dispute and the amount of revenue at stake that was being addressed by this egregiously retrospective bill, the Commissioner of Taxation said:

They involve substantial sums, but not greatly substantial in the context of the broader picture.

What the hell does that mean? Again I call on the government: can you justify publicly why you need to go back to 2004 to fix an issue that is 'not greatly substantial in the context of the broader picture' as the Commissioner for Taxation says? We will pursue this matter vigorously through the Senate Economics Legislation Committee inquiry into this bill. In the meantime the coalition will not accept the government's case. It has not been a strong case and certainly publicly it has not been made satisfactorily to justify such significant legislation as this, which is retrospective. The government's justification for such change within the explanatory memorandum to this bill was that:

Australia incorporates its tax treaties into municipal law through the International Tax Agreements Act 1953 (ITAA 1953). The Commissioner of Taxation (the Commissioner) has long held and publicly expressed a view that the treaty transfer pricing rules, as enacted, provide an alternate basis to Division 13 for transfer pricing adjustments.

Many stakeholders and professional groups do not agree with this statement in the explanatory memorandum. The Law Council and the Corporate Tax Association, among others, take issue with this statement. I wonder if the ministers know the true impact of the legislation that they are trying to steer through this place. This creates real sovereign risk—and the Commissioner of Taxation is of no help whatsoever in this process. The Taxation Committee of the Business Law Section of the Law Council of Australia stated in its submission on the exposure draft of this bill that 'the justification for retrospective operation of the amendment from 1 July 2004 was on a spurious basis'. They said:

The Committee rejects the suggestion that there has been any clear expression of Parliamentary intention that the associated enterprises articles of Australia’s double taxation agreements (DTAs) were to operate as an independent taxing power. Nor has Parliament previously indicated an intention to fundamentally alter the principles to be applied in interpreting the provisions of the DTAs conferring the taxing power.

They went on to say:

The Committee is concerned that paragraph 1.10 of the Draft EM seeks to justify the retrospective operation of the amendment from 1 July 2004 on a spurious basis.

The purported basis for electing this particular date is that Parliament spoke to this issue in 2003, and that the current amendment is a ‘clarification’ of prior intention. The Draft EM cites the International Tax Agreements Amendment Act 2003 (Cth) and its explanatory materials as Parliament’s most recent demonstration of its intention that DTAs provide alternative and independent transfer pricing liability provisions to those contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936).

The Committee strongly disagrees that the 2003 amendment or its explanatory materials gave any signal—explicitly or implicitly—that the transfer pricing rules would operate as suggested. Furthermore, no further attempt at ‘clarification’ has been made by Parliament in the eight years since this time despite the issue being questioned by the courts on a number of occasions.

That is a hugely important point. The parliament never sought to repair, change or clarify this piece of disputed bill in all that time, even though the matter had gone to the courts on a number of occasions. They went on to say:

For these reasons it is plainly inappropriate to select this date and, if the provisions remain retrospective, the Draft EM (particularly paragraphs 1.8 to 1.10) should be modified to make it clear to Parliament that this is the case.

This evidence seems to contradict the government's justification for the retrospective application of the bill: that it was the parliament's understanding that tax treaties could be used as a separate basis for making transfer pricing adjustments.

The coalition is opposed to retrospective tax changes as a matter of principle. People are entitled to proceed with the law as it stands. There have been exceptions. But under this situation the law has been clear since 2003, operating in an unfettered fashion even though invited by the courts. If it was done wrongly the previous coalition government is as guilty as the current government. I am not pretending otherwise. But it is going to create enhanced sovereign risk when sovereign risk is the most disputed and contentious issue in global financial markets at the moment.

The coalition understands that it can change the substance of bargains struck between taxpayers who have made every effort to comply with the prevailing law as at the time the agreement was entered into. Retrospectivity can expose taxpayers to penalties in circumstances where taxpayers could not possibly have taken steps at the earlier time to mitigate the potential for penalties to be imposed. People believed they were complying with the law. It may change a taxpayer's tax profile, which in turn can materially impact the financial viability of investment decisions and the pricing of those decisions. Most importantly, the retrospective application of the change will heighten Australia's level of perceived sovereign risk.

In submissions in the consultation period for these proposed changes, various peak taxation and accounting bodies all expressed concern over the retrospective application of this proposed legislation. The Institute of Chartered Accountants of Australia in its submission to Treasury stated: 'The retrospective amendment to the law being proposed in the exposure draft legislation cannot be justified on either a policy or revenue integrity basis.' The Tax Institute's submission states that it 'has grave concerns as to the appropriateness of retrospective legislation to effect this announced change.' CPA Australia stated:

We reiterate our earlier view that no clear business case has been advanced to justify the retrospective application …

This is an inequitable outcome for taxpayers who may be potentially subject to audit for up to 7 years on matters which they may reasonably regard as having been finalised. The enactment of these retrospective changes may also damage the international reputation of Australia as a jurisdiction in which key foreign investors can invest and trade with certainty and confidence.

And these guys opposite wonder why there is a lack of business confidence in Australia and why there is a lack of consumer confidence in Australia! Here it is, before the House—retrospective legislation. People who believed, in good faith, that they were complying with the law as it stood now find that they are going to have back audits for seven years and back penalties, potentially, for seven years, and whatever transactions they entered into in good faith must now be unwound with potential back losses to the organisation.

Those opposite cannot understand why there is a negative sentiment out there in the commercial world, a negative sentiment that involved some five different versions of a mining tax and four different positions on a carbon tax—let alone what they are doing on the interest withholding tax. And there are a range of other measures from employee share buyback schemes—which they promised they would not touch and they completely muddled—right through to an overinvestment in an NBN with no business case. How is it that those opposite cannot understand how confused the Australian business community would be about their incompetence?

Now before this House we have retrospective tax legislation going back seven years, and we have a Commissioner of Taxation who, when asked about what the revenue implications are, just dismissed them as insubstantial. If they are not that substantial, why are we putting our reputation on the line for increased sovereign risk for international investors? Why would you do that? Since 1788 we have needed to import money into this country. The risk that is being posed by retrospective tax legislation is an even greater reason that people should be concerned about investing in Australia.

This mob opposite keep referring to a 'pipeline of investment'. Well I can tell you that a pipeline of investment can soon dry up in the wake of a government that creates uncertainty. It was Ivan Glasenberg who wrote the speech he made in London where he said that he could get greater sovereign certainty out of the Congo than he can get out of Australia—and he is one of the largest investors in Australia. The coalition did not write that speech. The coalition did not write the speech of Jac Nasser, the Chairman of BHP, or that of Marius Kloppers, the Chief Executive of BHP, when they flagged their intention to hold back on investment in Australia, citing the cost of doing business in Australia as one of the great challenges.

We did not write the press releases and press statements for Gerry Harvey, the head of Harvey Norman, or John Singleton or John Symond or the conga line of businesspeople out there who have been putting their reputations on the line to come out and warn about sovereign risk in Australia and the dangers of an incompetent government. We did not write those words; they are writing those words. If you want evidence of the very actions that cause these people to warn of the risks of doing business in Australia, look at what is before the parliament now—retrospective tax legislation, going back seven years.

A fundamental question is: how can taxpayers be expected to have complied with laws they did not know existed at the time but which they were supposedly expected to comply with? They were expected to comply with laws that did not exist. How is that fair? How is that stable? How is that inviting a confident and reliable stream of investment? This bill is the very evidence of why business and investors are so nervous about dealing with this government.

The changes contained within this bill will confirm that the transfer pricing rules contained in Australia’s tax treaties provide a power, through express incorporation into Australia’s domestic law, to make transfer pricing adjustments independently of division 13. The coalition further questions whether the government has consulted with any tax treaty partner countries. If so—and no-one has given us an answer—did those countries raise any concerns as to the perceived impacts that this will have on the negotiated tax agreement as well as any flow-on consequences to trade and investment? In the context of investment with the United States, in its submission on this bill, the American Chamber of Commerce said:

It is clear, therefore, that the US interprets the treaty as limiting its right to increase US taxation on an Australian-owned entity. It is our understanding that the US would expect Australia to interpret the Double Tax Agreement similarly. Based upon this, it is ill-founded for the Assistant Treasurer to allege that the amendments proposed are consistent with Australia's Double Tax Treaties, without including an exception for the United States.

Another anomaly arising from this bill is that it applies to countries that Australia has a tax treaty with, ignoring entities who are transacting with parties in tax havens such as the Cayman Islands. So this applies to the guys we have treaties with, but for anyone operating out of the Cayman Islands it is, 'You're fair game—go for it, guys.' Such taxpayers will be subject to transfer pricing under division 13 only, whereas taxpayers conducting business with an associated enterprise—say, in Japan, a treaty country—will be subject to potential adjustments under this bill and its wider powers. Does the government seriously believe this is good policy? The member for Chifley is about to stand up. Does he seriously believe this is good government where, if you operate out of a tax treaty country that in good faith negotiated a tax treaty with Australia, you are subjected to the pain associated with this but, if you are operating out of a tax haven, you do not have that same application and you are subject only to division 13? It is an unusual policy outcome, isn't it? We call on the government to explain this anomaly.

Then there is the issue raised by PricewaterhouseCoopers that would see taxpayers being tied up in complex discussions under the mutual agreements procedure in most treaties, which would be aimed at mitigating potential double taxation outcomes from the bill. As PwC said:

We acknowledge that the risk of double taxation is present under the existing provisions and that the ATO may contend that the MAP process has traditionally worked effectively … However, in our experience, the process can take years and there is no compulsion under Australia’s treaties for the competent authorities to reach agreement.

And so on. So the coalition will actively pursue the matters that I have raised in respect of this bill today through the Senate Economics Legislation Committee inquiry into the bill. In the meantime, the coalition believes the government has failed to make a strong enough public justification for retrospectivity in this bill. Therefore, I am foreshadowing that the coalition will seek to move an amendment to give only prospective effect to this bill. If our amendment is unsuccessful, the coalition will not support the passage of this retrospective legislation. Enough is enough. You cannot continue trashing Australia's safe haven sovereign risk reputation. Enough is enough.