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Budget 2013: Protecting the Corporate Tax base from erosion and loopholes

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The Gillard Government today announced it would accept a series of recommendations from the Treasury designed to ensure Australia's corporate tax system remains fair, competitive and sustainable by closing unfair business tax loopholes.

Protecting the integrity of our corporate tax system will ensure a stable source of revenue to fund vital investments in our economy and community, underpinning a stronger, smarter and fairer Australia.

The aggressive tax practices of some multinational and other large companies is an increasing focus of many G20 countries. Businesses that aggressively exploit tax loopholes gain an unfair advantage over their competitors. If a few large companies use loopholes to avoid paying their fair share of tax, a greater taxation burden is placed on other taxpayers, like small and medium businesses and individual taxpayers.

The Commissioner of Taxation has identified a range of aggressive tax minimisation strategies, currently being exploited to take advantage of design flaws, vulnerabilities and unexpected interactions in Australia's corporate tax laws.

Some of these loopholes emerged from Howard Government reforms following the Review of Business Tax (the Ralph Review) in 1999 and the Review of International Taxation Arrangements in 2006.

After receiving advice from the Treasury, the Government has conducted targeted consultation with industry on a package of reforms to existing tax laws to close loopholes and protect the corporate tax base.

The changes we announce today total more than $4 billion over the forward estimates period and include:

 addressing aggressive tax structures that

seek to shift profits by artificially loading debt into Australia;

 improving the integrity of our foreign

resident capital gains tax regime and addressing the low levels of voluntary compliance with the regime;

 closing loopholes in the Offshore Banking

Unit regime to prevent banks shifting profits from domestic banking activities to the Offshore Banking Unit (while continuing to allow genuine offshore banking activities);

 better targeting resource sector concessions

to support genuine exploration, by excluding purchases of mining rights and information;

 closing loopholes in the consolidation of

business entities regime following recommendations from the Board of Taxation; and

 improving the efficiency and integrity of the

tax system by preventing sophisticated investors from engaging in dividend washing.

Further details of each of these measures can be found in the press release of 14 May 2013 issued by the Assistant Treasurer.

In addition, the Government will provide $109.1 million over four years to the ATO for additional resources for compliance activity focussed on business restructuring practices, including marketing hubs that facilitate profit shifting.

It is the responsibility of Government to respond quickly and decisively to close tax loopholes. In line with past practice, a number of these

measures will take effect from tonight to ensure there are no further opportunities to take advantage of the loopholes.

Other changes announced today will require taxpayers to rearrange their affairs in order to meet the new requirements, including the tighter rules that will apply to debt deductions (commencing 1 July 2014) the tighter rules for the Offshore Banking Unit regime and the rules to prevent 'dividend washing' (1 July 2013).

In addition to the estimated $4 billion this package of reforms is expected to generate over the forward estimates, these changes will also protect significant additional revenue at risk.

As well as taking immediate action to address specific weaknesses in the tax law, the Government has identified some areas of the tax law that require closer examination and consultation.

The Board of Taxation will undertake two reviews.

 The first review will examine the arm's

length debt test as it applies to the thin capitalisation rules to make it easier to comply with and administer, and to clarify in what circumstances the test should apply.

 The second review will combine a post-implementation review of the debt and equity rules with a review of whether there can be improved arrangements within the Australian tax system to address any inconsistencies between Australia's and other jurisdictions' debt and equity rules that could give rise to tax arbitrage opportunities.

The terms of reference for these reviews will be released in coming weeks.

The Government is tonight releasing two Board of Taxation Reports into the Consolidation regime. A detailed response has been released by the Assistant Treasurer.

The Government will remove a number of tax advantages that are available to foreign-owned multiple entry consolidated groups, but not available to Australian-owned consolidated groups. Atripartite review team of the Treasury, ATO and private tax practitioners will report to Government on the best way to remove these advantages.

The changes announced today have been made following targeted consultation with business. The Government will arrange further roundtable consultation meetings to allow business leaders to contribute directly to the effective implementation of the announced changes. Additional information on the consultation process can be found in the press release of 14 May 2013 issued by the Assistant Treasurer.

The reforms we are announcing today build on the Government's recent initiatives to improve the integrity and sustainability of the tax system, and our corporate income tax base, through important reforms to the general anti-avoidance rules (Part IVA) and the transfer pricing rules.

This is consistent with the OECD's approach in its work on base erosion and profit shifting, and the Australian Government's leading role in the G20's multilateral action to address base erosion and profit shifting to ensure international tax standards keep pace with the changing nature of global commerce.

Last month I met with the United Kingdom's Chancellor-of-the-Exchequer, George Osborne and several other finance ministers in Washington to discuss how the G20 can provide the political will to address tax base erosion and profit shifting.

The Government will release a Treasury Scoping Paper in June to examine the risks to the sustainability of Australia's corporate tax base from base erosion and profit shifting.

14 May 2013