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Treaty tabled on 3 December 2008

CHAIR —Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of the parliament and warrants the same respect as proceedings of the House and the Senate. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of the parliament. If you nominate to take any questions on notice, could you please ensure that your written response to questions reaches the committee secretariat within seven working days of your receipt of the transcript of today’s proceedings. I invite you to make some introductory remarks before we proceed to questions.

Mr Rawstron —Thank you. The proposed agreements with the British Virgin Islands include a tax information exchange agreement, a TIEA, and an agreement on the allocation of taxing rights. In our view the proposed agreements will benefit Australia by enabling us to better administer and enforce our tax laws. The agreements on taxing rights, which allocate taxing rights over certain income between two countries, is part of a package of additional benefits designed to encourage jurisdictions to conclude TIEAs with Australia. Essentially that agreement will relieve double taxation of certain cross-border income derived by residents of Australia and the British Virgin Islands. Due to its limited application to government employees and students, the cost of the agreement to Australia will be negligible.

The proposed agreements are an important element of Australia’s ongoing commitment to the OECD’s efforts to curb tax avoidance and evasion through enhanced international cooperation. Australia, along with other OECD countries, is actively pursuing bilateral tax information exchange agreements with low-tax jurisdictions that are committed to the OECD principles of tax transparency and effective information for tax purposes. The proposed agreement requires treaty partners to have in place necessary legal and administrative frameworks to support their commitment to information exchange and, further, the ability to exchange information cannot be hindered by restrictions such as bank secrecy laws. In conclusion, TIEAs are an important tool in Australia’s efforts to combat offshore tax evasion and we therefore recommend that members of the committee support the treaty action proposed.

CHAIR —Thank you. Are the British Virgin Islands significant from an Australian perspective in terms of tax evasion?

Mr Allen —The British Virgin Islands is one of 35 countries that signed up with the OECD around the transparency initiatives. From that extent, we are interested in signing with all of those countries because from a taxation perspective we do not get to see the whole view of an Australian taxpayer’s overseas dealings. In the 2008 financial year about $2.2 billion came into Australia from the British Virgin Islands. As a benchmark, from all those 35 countries there was a total of about $29 billion, so in terms of overall dollar flows it is quite substantial. I would have to qualify that, but a lot of those dollars are legitimate financial transactions that have a genuine business or tourist type purpose. We tend to look more at numbers of transactions. We are more interested in who is doing the dealing and assets that, in those transactions between Australians and BVI, may indicate that there are other dollars of interest to the Tax Office.

Mr BRIGGS —What other countries are part of the 35—Switzerland?

Mr Allen —The ones that we have signed tax info exchange agreements with are Bermuda, Antigua and Barbuda, the Netherlands, Antilles, BVI and the Isle of Man. They tend to be non-OECD countries. Switzerland is an OECD member.

Mr BRIGGS —So it is not part of the 35.

Mr Allen —No. There are other activities within the OECD to look at tax competition between OECD members.

CHAIR —How many countries are covered by this type of agreement and how many are outside it? Are there countries that are regarded as tax havens where we have real problems that are outside the agreement?

Mr Rawstron —There are certainly countries outside the agreement, but our economic relationship with them would be pretty minor. From memory, the 35 comes from work that the OECD did in the early 2000s where they identified countries which had not committed to OECD principles. Obviously countries like Switzerland and Austria are part of the OECD. They may not be fully committed to the current standards but they are certainly fully committed to previous standards which have subsequently been improved and enhanced. I think, for the remaining 35, the only ones which still remain uncommitted are Monaco, Liechtenstein and Andorra. All the others have made commitments. Whether they follow through on those commitments is a different question, but they have all made commitments apart from those two.

CHAIR —How broad is your coverage with this kind of treaty? Do you think you have the places pretty much locked down or do you think there are significant areas where the tax haven that people can use as an offshore mechanism for tax evasion still flourishes?

Mr Allen —We have signed agreements with five countries, and there are probably another six of which we would hope to get, if not all, the vast majority signed this calendar year. The negotiations are close.

CHAIR —Which are they?

Mr Allen —Aruba, Grenada, Guernsey, Jersey, Nauru and the Marshall Islands.

Mr Rawstron —I will also add that, of the 35 countries, Australia was one of the few nations to write to all but two seeking to have tax information exchange agreements. I think the two we did not write to were the two which were not committed.

CHAIR —Given that we are talking about $2.2 billion in transactions, is it your expectation that Australian tax evasion will be discovered as a consequence of this agreement?

Mr Allen —I imagine there will be, based on what we have seen with other countries. I think it is important to note that we would generally identify the taxpayer or the transaction of interest first. The agreement does not let us go fishing for Australians doing business in the British Virgin Islands; we actually have to have a tax reason to go and ask for the information.

Where these kinds of agreements have been useful with those that we have signed to date is where we will find something like a taxpayer using a credit card from one of these countries to repeatedly take cash at automatic teller machines in shopping centres—we are getting people doing up to 200 or 300 withdrawals a year of hundreds or thousands of dollars. This lets us go back to the countries and identify through their banking system who actually owns that credit card.

CHAIR —The way it works is that you identify an Australian who is engaged in financial transactions involving the British Virgin Islands, and if these things cause you some concern about the possibility of tax evasion then you go off to the country and seek further information and detail. You cannot go off to the country and say, ‘Tell us about any Australians who are engaged in financial transactions in your country.’

Mr Allen —That is exactly right.

Mr BRIGGS —Are the agreements you have signed already working, in your view? Are they helping with tax evasion?

Mr Allen —Yes, two of the five agreements have entered into force; three of them are yet to enter into force. We have made exchange requests under both of those two, and we have got information back in accordance with the agreement which is helping current audits that we are doing.

CHAIR —Which are the two that are in force?

Mr Allen —Bermuda and the Netherlands Antilles.

CHAIR —Which are the three that you are working on?

Mr Allen —Antigua and Barbuda, the British Virgin Islands—as we are obviously talking about today—and the Isle of Man, which was only signed on 29 January 2009.

Mr BRIGGS —You mentioned you had hoped to do or are engaged in discussions on six more, which is 11 of the 35 all up—is that right? Is that a large part of the $28 billion in economic activity you mentioned earlier? Do the 11 countries cover a majority of that $28 billion?

Mr Allen —They would cover a large part. In particular, a lot of the dealings we are seeing dollar wise come through the Channel Islands, and that is mainly because that is where a lot of the UK banks have branches and subsidiaries set up, so they were a large focus for us. The Isle of Man, Jersey and Guernsey were all quite important ones for us to sign up. I will just clarify one thing: the 11 countries are those that we would hope to have signed up by the end of this calendar year. There are other countries that we are talking to and negotiating with.

Mr BRIGGS —So there are others, but presumably you do not want agreements with all 35—or do you?

Mr Allen —In the ideal world.

Mr Rawstron —Ideally you do, but only because of the cascade effect. You sign up with the Isle of Man—

Mr BRIGGS —And that puts it somewhere else.

Mr Rawstron —and funny money then goes to another jurisdiction. But realistically a number of the 35 will not sign agreements with Australia simply because there is no existing economic relationship and they do not see any reason why they should enter these agreements. Some actually want more extensive DTAs—double tax agreements—rather than just information exchange agreements as such.

Mr FORREST —Obviously there is significant investment from the Australian point of view in all of this. Would that match the expertise in these countries? For example, we would probably have to assist with getting up to speed with the technology and all the monitors. Could you just brief us on what it is costing us to get these things in play?

Mr Rawstron —Certainly the package of additional benefits, as we call it—that is, the benefits Australia offers beyond the tax information exchange agreement—includes technical assistance, so we are willing to provide some assistance to these countries to help them establish the processes they need to actually exchange information with Australia. That includes either sending technical experts to the country involved or bringing them out to Australia for short periods of time to train them. With that particular program, the amount of technical assistance we offer is not a significant amount of money—it is only just over $100,000 a year—but I do not know whether your question goes to the actual cost of us negotiating these agreements as well. It is true to say they are capacity constrained. These places do not have a lot of expertise.

Mr FORREST —I am wondering: what it is in it for the Virgin Islands; what do they get out of cooperating with us?

Mr Rawstron —The reputation issue is important for them. They do not want to be identified as a tax haven which is implicated in hiding fraudulent or criminal activity. Secondly, in some respects they can see the writing on the wall. The G20 is already working on the whole thing about the global financial crisis. One element of that is to what extent tax havens have played a role in creating a lack of transparency, particularly in the financial system, because trying to work out where the assets are and who owns what can be quite difficult if you have established intermediaries in these other countries where there is no prudential supervision or limited and we are not quite certain who owns what. They are a bit concerned about that. They are concerned about the OECD working on the project which has been going for many years. There is a new administration in the United States. The President previously supported the Stop Tax Haven Abuse Bill, which proposed quite significant action against tax havens, which were identified by the United States. They were a bit concerned about that as well.

Finally, there is an initiative by the German and French governments regarding tax havens. They have been particularly impacted upon by the scandals around Liechtenstein, where a number of taxpayers were able to use financial institutions to hide wealth and tax liability. They have been running a series of discussions about what can be done in the European context and more broadly globally.

I think there are a number of factors which these countries are weighing up. If we do not agree, what is the risk we are going to have countermeasures taken against us? Countries are talking about taking defensive measures, either ramping up, say, withholding taxes or denying deductibility for their own businesses investing in those countries. In the case of some of the European and some of the North American countries they have registration processes so you can actually operate your business in the United States if you have an activity in a tax haven. They have all those factors which are encouraging them to sign up, but the main one is reputation. They do not want to be labelled.

Mr FORREST —So we have a bit of leverage then. We are not getting ripped off.

CHAIR —The point I was going to make is that the second agreement that we are considering—this allocation of taxing rights regarding certain individuals—is said to be beneficial and an incentive for the British Virgin Islands to conclude the main agreement.

Mr FORREST —Article 11.1 reads:

Neither of the Contracting Parties shall apply prejudicial or restrictive measures based on harmful tax practices …

The agreement obliges both countries to agree on that, but what does it mean?

Mr Rawstron —Part of the commitment of both countries is that if they do the right thing by us, by entering into the agreement and putting in place the mechanisms to exchange information, we agree that we will not take further steps against them in terms of defensive measures—we will not take prejudicial measures against that country.

Mr FORREST —And they would be looking for that given what Obama has done in threatening them with a big stick.

Mr Rawstron —Certainly I think that issue has been discussed. In the earlier days when the whole harmful tax project started, it was part of the reputational thing—‘We want to be recognised as being good guys, but, by the way we also want to be assured that you’re not going to take action against us even though we have entered into these agreements.’

Mr FORREST —So it is more in reference to perhaps Australia taking the action. We would not imagine that they could do much to us—there is no reversal. I would not think that the Virgin Islands taking some sort of prejudicial action against us would have much impact.

Mr Rawstron —Most of these countries do not have much in the way of a tax system. They mainly have an indirect tax system; they do not have what we would consider a normal corporate tax base or necessarily an income tax base. Beyond being crude about it and booting an Australian operation out of their country, they do not necessarily have the mechanisms to take action, as I see it. It is not in their interests anyway; they want to attract business to their countries.

CHAIR —Thank you very much for coming along and giving evidence today.

Resolved (on motion by Mr Briggs):

That this committee authorises publication of the transcript of the evidence given before it at public hearing this day.

Committee adjourned at 11.20 am