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Tuesday, 19 June 2012
Page: 7048

Mr TURNBULL (Wentworth) (19:01): As the House knows, the opposition opposes this bill, the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012, on the basis that it is retrospective. I could not improve on nor add to the powerful arguments advanced by the shadow Treasurer on that score, although I endorse and adopt all of them. I want to turn to some matters that the member for Chifley touched on, including the question of transfer pricing in the digital age. Regrettably, this bill, whatever its merits, even having regard to its prospective merits, really does nothing about the critical problems faced in Australia and in many other countries as a consequence of globalisation of commerce and the way in which so many transactions nowadays are occurring in the cloud, the internet, in a way that, perfectly legitimately and without a hint of evasion or skulduggery or anything of that kind, is beyond the reach of the laws, including this law, for transfer-pricing arrangements that we have.

A few years ago the OECD said in its report on transfer pricing—it is an apposite point:

Not long ago, transfer pricing was a subject for tax administrators and one or two other specialists. But recently, politicians, economists and businesspeople, as well as NGOs, have been waking up to the importance of who pays tax on what in international business transactions—

with more than 60 per cent of world trade taking place within multinational enterprises. The transfer-pricing regimes, globally and certainly within Australia, depend really on two possible circumstances. One is the multinational company having a subsidiary in Australia or having what is called a permanent establishment. The vice of transfer pricing that legislation has sought to address is the circumstance where the multinational, no doubt from a tax haven, is selling its products to its local subsidiary in Australia at a very high price so that there is very little profit made in Australia, perhaps just enough to pay the overheads here, and such profit is racked up in the tax haven.

Of course, a similar arrangement can take place. You do not need to have a subsidiary corporation here; you could have a permanent establishment and, if that permanent establishment has under the tax treaties an effective connection with the transactions in Australia, similar principles can be brought to bear. The principle, of course, which is easy to state but very hard to define and assess is the arms-length principle. What is the arms-length price? There are plenty of simple examples one can imagine. If a subsidiary in Hong Kong is selling aluminium ingots to its associate in Australia at a price that is above the LME price, then obviously the ATO will say it is over the odds and look to apply the transfer-pricing rules. But none of this is really relevant to the transfer-pricing issue, or the issue that we are dealing with at the moment, which is not, strictly speaking, a transfer-pricing issue at all.

The honourable member for Chifley mentioned Google and he suggested that I had been unfair to Google. Far be it from me to take on such a leviathan, but the fact remains that Google, a great multinational company and a very innovative one indeed which the government often quotes in its support for the NBN, pays virtually no tax in Australia. The Australian division of Google recently released accounts showing that in 2011 it paid $74,000 in tax. It is widely estimated to be generating somewhere between $1½ billion and $2 billion of revenue out of this market. And, if you look at its global accounts, it is a very, very high-margin business. There are literally hundreds and hundreds of millions of dollars of profit being accrued by Google on those sales in Australia, but there is no tax being paid in this country. There are some cynical souls, such as me, who just make the observation that it is all very well for Google, paying $74,000 of tax in Australia, to be encouraging the Australian taxpayer to spend $50 billion on an NBN, of which Google will be an enormous beneficiary, but it is not contributing anything to the tax base here to enable that investment to be made. Google would be more credible if it actually put its money where its mouth was.

I am not suggesting that Google is breaking the law—far from it. But the fact is that what Google is able to do, and this applies to many other companies in the digital realm, is to sell advertising to Australians online from an entity—until very recently it was an entity located in Ireland which, I might say, was generating well over €11 billion of revenue out of Ireland, just in that entity alone; obviously, that plainly was not coming out of the Irish market. And it can transact directly with customers in Australia, from Ireland, over the web. It arranges its affairs so that its business in Australia, its permanent establishment in Australia, has no effective connection with that transaction and, therefore, there is no basis for the transfer-pricing rules to apply. Of course the same thing can be said about Amazon. You go onto the web, you order some books or whatever you want from Amazon or another online vendor, and again there is no local connection.

What we are seeing is a very substantial diminution in and erosion of the Australian tax base. You can say, 'Taxes are bad; nobody should pay tax; we are all in favour of no taxes.' But, at the end of the day, somebody has to pay for the schools and the hospitals and the Army—the defence minister was here a moment ago—and the more that commerce is taken out of Australia and into the internet cloud, the less revenue is available in this country and the heavier the burden that has to be carried by those entities that cannot avoid paying tax in Australia.

This is a very big challenge. I have raised this not in the sense of having an instant solution to it, because there is no instant solution. This is a problem that the United States faces. There are large multinational technology companies which have literally tens of billions of dollars of retained earnings stashed up in tax havens, or low-tax jurisdictions, around the world, which they do not want to repatriate to the United States because they would have to pay tax in the US, and they have had the chutzpah to go to the US Congress and say, 'If you give us a tax break we will bring the money back into the country.' So you can imagine how affronted the US legislators are.

This is a very big issue. Senator Conroy, when I raised this, gave his usual flip, instant response and said that this legislation would deal with it. This legislation has got nothing to do with it. I wish it did. It does not. It is not pertinent. The transfer-pricing arrangements that we have, and other developed countries, other OECD countries, have, are really inadequate to deal with the globalisation of commerce. I just raise that as a very important matter for the House.

There is one way, of course, that it can be addressed, to some extent, and that is through levying a VAT or, in Australia, a goods and services tax—a GST. There is no restriction on the jurisdiction whereby the Australian government could levy GST on these internet transactions if they result in a sale to an Australian customer, and the international online businesses have the perfect capacity to do that. In fact, if you go onto an online retailing site and order some goods and you nominate an address in Australia, you will see a price for the goods and a price for the freight and the total. If you then were to nominate an address in a state of the United States—take New York—you would then have a price for the goods, a price for freight, and some New York taxes. So it is perfectly feasible for them to collect GST for Australia.

This matter has been raised in the past by Australian retailers on the basis that the fact that these transactions are not paying GST exposes them to a competitive disadvantage. I suppose it does, though I think it is literally a rounding error in terms of the disadvantage that they face. But it is a very significant factor in terms of the erosion of our tax base.

The point I want to make to the House tonight and to honourable members is that we have to take this issue seriously because there is a tendency to ignore these issues until it is too late, and to be a little bit like the frog in the kettle that does not realise he is in trouble until the water is boiling and he is dead. This issue is growing on us and we have to address the challenges of the erosion of the tax base.

It is a huge issue within the United States, because they do not have a national goods and services tax; the various states and cities have different sales taxes and, of course, companies like Amazon are able to locate themselves in a way that effectively forum-shops and can, in a very material way, pull retail activity, retail sales, out of one jurisdiction into another and deprive not only the local retailers of that business but the community of the tax revenues that they need to pay for all of their services.

So, with respect to the member for Chifley: like him, I admire Google; nonetheless, I think that everybody should pay their tax. There is a real issue. This is not—

Mr Husic interjecting

Mr TURNBULL: The honourable member mentions the miners. I am really glad he did that. I will tell you, in the few minutes left to me, about the counsel of despair. This is what the weak-minded and the gutless will do: put the taxation of international transactions into the too-hard basket and simply focus taxation on immovable property such as resources and real estate. Before too long you will have a Labor government wanting to have a national land tax so residential householders would have to pay tax.

The honourable member opposite me here, the member for Oxley, shakes his head. He is very wise to shake his head. But I say to my honourable friend across the table that that is where you end up if you are not prepared to recognise that the nature of commerce is changing and that taxation and regulation has to change in line with it. Otherwise you end up with a situation where your tax base narrows to only those assets and activities that cannot move. They are real estate, resources and PAYE taxpayers. That is too narrow a tax base. This is a big challenge for this government. It has not addressed it. Instead of pretending that this law deals with the matter, they should come up with some responsible answers that deal with this very significant erosion of Australia's tax base.