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Economics References Committee
Corporate tax avoidance

STEWART, Professor Miranda, Director, Tax and Transfer Policy Institute


CHAIR: Welcome. Committee members, I have already apologised to Professor Stewart on behalf of the committee that we are running quite a bit late now and that we are going to try and truncate to try and get back on time, because we have people who have travelled across the country to be here for 3.15. Professor Stewart, do you have any opening remarks or statement you would like to make?

Prof. Stewart : Thank you for the opportunity to speak. I will just make some very brief opening remarks. We put in a written submission. I might just explain a little bit about that submission, because it was a partial report, and then I am happy to answer questions if there are any. That might be the best way.

I am currently a professor at the Australian National University. The Tax and Transfer Policy Institute is a new policy research institute, established about 18 months ago, with a small endowment from the federal Treasury but independent and in the university. Previously I was a professor at the Melbourne university law school and I have in the past also worked both in the tax office, in business tax policy and legislation, and in the private sector, advising large corporates on tax matters.

The submission that I and a research assistant put into the inquiry was a preliminary investigation of publicly available documentation about tax planning through Luxembourg. We decided that it would be interesting to investigate what we could learn from the publicly available material on the record that was released and available on the web as part of the 'Lux leaks' process. We looked only at the about 32 rulings that had some connection to Australia in some way—there was either an Australian entity or some Australian association of the multinational enterprise. The documentation is very partial. We have put it in as a preliminary report because we really did not know what we could learn from such a partial fragment of multinational tax planning. At this stage we are not taking the project further, although we might do so. To do so would involve looking at the several hundred rulings in relation to other countries going through the Luxembourg jurisdiction, and, again, it is not that clear what one can learn from such a partial snapshot of the multinational planning.

What we learned, very briefly, is not that surprising but it does support the general perception that the main use of low-tax jurisdictions is in hybrid debt equity transactions—that is, transactions where there might be interest deductible returns to equity not taxable; intellectual property transactions; royalty-type payments, obviously flowing through a jurisdiction which has lower tax on royalty income in some circumstances; the use of environments like Luxembourg together with some other jurisdictions or havens; and, potentially, treaty shopping. We did learn a couple of things that I think are quite interesting as well. One of the things we learned, at least in relation to the small number of Australian rulings we looked at, is that these are not mass-marketed, cookie-cutter-type tax schemes. In every use of Luxembourg in the rulings we had, which were for the period 2002 to 2010, every transaction was different. These are not mass-marketed-type schemes. These are used by multinational enterprises or funds of lower tax jurisdictions in respect of particular investments or business activity—generally, commercial business activity. They are also not always concerned with base erosion of the Australian tax base, but very often in connection with other jurisdictions. I would suggest that an anti-avoidance approach or anti-abuse type rule is not going to be successful in dealing with these sorts of transactions to the extent that law reform is needed. It should be to do with the core rules that we apply to international transactions.

Finally, jurisdictions like Luxembourg are used to aggregate or facilitate international capital flows, so they are used as an intermediary hub in respect of ongoing investment or transactions into other jurisdictions, rather than being an end in themselves, if that makes sense. I was not going to say anything further on our submission unless there are questions about that. I am happy to answer questions more broadly.

Senator MILNE: Thank you for your submission. In your submission you make it very clear that companies are using Luxembourg's tax laws for a whole range of, as you say, company-specific negotiated outcomes. Did you find in your research that the Australian companies involved were all represented by the four big accounting firms that have offices here in Australia as well as in Luxembourg?

Prof. Stewart : The rulings that we looked at were only the rulings that were publicly available on the website—the international journalists' website. In the submission we list the adviser. These rulings about the Luxembourg tax treatment were leaked, I suppose. They are not rulings about Australian tax treatment at all.

Senator MILNE: No. I am talking about Australian companies though, there.

Prof. Stewart : This is on the public record—the firms are PricewaterhouseCoopers and Ernst & Young, who have both appeared before the committee already.

Senator CANAVAN: These are obviously large companies. How many large companies would not use a big four accounting firm to do their tax?

Prof. Stewart : It would be unlikely. There is no doubt that those big four firms operate very substantially in the market.

Senator MILNE: Coming back to this, you outline the problems very well in your submission. The question is: how do we deal with it in terms of the core problem here, and how do we need to reform the tax laws? That is the whole point of this committee. Your submission outlines in detail what has been apparent in most of the sessions that we have had. There have been a couple of suggestions made to the committee: tightening up part IVA; around the transparency measures, for example; moving on issues of recording and the accounting standards around materiality and around those issues of subsidiaries and so on. Having looked at it all, the answer we always get is: 'Yes, of course people are going to utilise the law as it currently is to maximise the tax avoidance and minimisation of their clients.' So the issue is not whether it is legal or whether it has been tested or otherwise. The issue is what do we do to fix it, to maximise the tax return in Australia. If you had one suggestion or a couple of propositions that you would make, given your expertise in this field, what would they be?

Prof. Stewart : With this challenge of corporate tax in the global environment you can think about it in a short-term, medium- and long-term way. There might be some short-term steps—I understand that with your currently being our political representatives, you are obviously concerned with the short-term—but I would urge you also to think about the medium and longer term. Not all of these things can be solved straight away. In the short term I would strongly support further investigation by the ATO and further enforcement of our current rules. I believe the commissioner has already appeared. I have read his introductory statement, and I do think it is appropriate to put resources into a really substantial investigation into whether current rules, especially current transfer pricing and debt equity rules, are being properly applied. That would be a good use of resources.

I would also support increased transparency and reporting. There is no doubt that more information—in particular from agency to agency but also in many contexts to the public—is going to assist. Probably the most important meeting this year is not any OECD meeting; it is the Forum on Tax Administration meeting that Chris Jordan will go to, which is being held in China for the first time this year. I urge you as our political oversight to keep an eye on that work by the ATO and encourage that.

Senator WHISH-WILSON: On that and on the OECD and G20, would a country like Luxembourg be involved in these kinds of negotiations and discussions?

Prof. Stewart : Luxembourg is certainly one of the potential parties to any further action. In the past sometimes Luxembourg has not signed up to multilateral activity—and of course that is any sovereign nation's right. I would hope that the majority of developed countries, together with the BRICS and many developing countries, could work together regardless of whether some haven countries are engaged.

Senator WHISH-WILSON: We have had that evidence from a lot of people today. I think everyone would agree that we would like to see a multilateral approach, but what happens if countries do not sign up to it because they see a tax competitive advantage? Are we still going to be in the same situation in 10 or 20 years if there are a number of nations offering lower corporate tax rates and these kinds of schemes?

Prof. Stewart : Yes, there is certainly a very likely risk that there will be some jurisdictions that would operate with a lower tax generally or a particular type of haven or concession for intellectual property or something like that. It is possible to enact defensive measures—for example, to have a situation where if an amount is deductible or not taxable elsewhere, then a transaction that comes in or out of Australia would be taxable, so to have backup rules in our domestic jurisdiction that we would not exempt income or profits in Australian corporates if there has been a deduction allowed overseas. There is some work in that direction in the BEPS project, which I also urge that we stay engaged with. As well in the European Union where there has been a deduction on one side in a transaction there will not be an exemption in the other country. I think it is quite clear that countries can collaborate to enact such defensive measures and Australia should look to that.

In the short term I suggest Australia also look more closely at the way we deal with interest expense in corporates. There is no doubt that that is the most flexible of financial transactions.

Senator XENOPHON: Professor Stewart, you have said that using general anti-avoidance provisions is not the most effective way of dealing with these things. Do you think greater transparency in terms of requiring companies to publish in their accounts what their overseas transactions are would be part of the building block of a more effective international tax system?

Prof. Stewart : I would certainly support—and I hope Australia continues to support—the country-by-country reporting, the reporting in transfer pricing of corporates. In relation to the disclosure of subsidiaries, I do think we should visit the ASIC concession for foreign owned businesses such that they do not always have to declare all subsidiaries or the details of what happens in the corporation.

Senator XENOPHON: So you are saying that that concession is unfortunate in the context of this whole debate?

Prof. Stewart : One can understand why it is there in terms of facilitating international trade and investment but I think in light of concerns about tax it might be that that simplification or deregulatory measure is not appropriate, that we should have consistent disclosure between corporate and tax environments.

Senator XENOPHON: Thank you.

Senator WHISH-WILSON: We had evidence today from Mr Martin Lock, who used to work at the ATO. He said taxation in the country is essentially by negotiation. His issue was a lack of expertise within the ATO itself. You are in a unique position to provide some perspective on this because I presume you are one of the experts who have been referred to constantly throughout the inquiry. Do you think there is a level of expertise needed in the ATO, for example, to make rulings, litigate and uphold legislation in relation to tax treatment?

Prof. Stewart : The tax office is one of our most important national agencies and there is no doubt we should have adequate expertise there; similarly, the federal Treasury, I might point out. So I do think it is important to keep an eye on those things. I did not hear the earlier evidence about paying corporate tax by negotiation. I have read Professor Richard Vann's comments from your earlier hearing. There is no doubt that Australian corporates that have Australian shareholders pay a substantial amount of tax. In accordance with the law, they paid a substantial fraction of tax as a proportion of gross-operating surplus as well as a proportion of their corporate taxable income. So the risks arise more with foreign owned enterprises, which do not have that incentive to pay Australian domestic corporate tax.

Without having seen the details, I would probably take issue with the idea that corporate tax bills are by negotiation. The challenge with transfer pricing is that there is a question as to what is the value of transactions and what is the appropriate price and level of income to be attributed to these very high-value, intangible flows. That is something where there is a question of judgement.

Senator WHISH-WILSON: Specifically, what he was saying was the tax department has lost a lot of its expertise in special areas in recent years. He was in the international tax department. Both the tax department and the large overseas companies rely on the big 4 to provide a lot of their expertise in terms of the negotiations on rulings and that kind of thing.

Prof. Stewart : I cannot comment on the specifics of who is inside the tax office in those divisions. Obviously, I know who some of those people are, but I could not comment more generally. I do think it is important for the Australian government to maintain a core level of expertise in international taxation. You may wish to put that question to the commissioner. You may have already done so about the appropriate level of staffing.

CHAIR: Professor Stewart, thank you so much. You provided a fantastic submission and so much expertise. It is unfair for someone with your level of expertise to be squeezed into 20 minutes. My apologies. I am sure there will be a few things we will ask you on notice.