This opinion article by Jennifer Westacott, Chief Executive of the Business Council of Australia, was published in The Australian Financial Review on 20 February 2015 under the title ‘Corporate tax requires a global approach in digital new age’.
The Senate Inquiry into Corporate Tax Avoidance and Minimisation is a welcome opportunity for considered and informed discussion about the performance of our corporate tax system.
It is crucial that commentary is evidence-based. It would be disappointing if the inquiry conflates issues and undermines the community's confidence in the integrity of the system and the Australian business community more generally.
The Business Council of Australia's submission is built on four core principles:
● Businesses must accept their obligations to pay tax and be transparent in their tax arrangements. Where companies do not adhere to the law, authorities should act.
● Where companies act beyond accepted community norms, governments need to respond, but changes must be carefully considered to avoid unduly deterring investment, reducing our competitiveness or creating unnecessarily complex tax arrangements.
● Australia's company tax arrangements must support investment, growth and jobs in an increasingly competitive and dynamic global environment.
● Global tax issues require global solutions.
There are two broad issues to be considered. The first is how multinational corporations are taxed around the world. The second, related but distinct, issue is the robustness of Australia's company tax laws.
There are legitimate questions about how well long-standing international tax conventions are performing in the face of increasing globalisation and digitisation. Company taxes traditionally are paid where profits are sourced. But disaggregated global supply chains and the growth of 'intangibles' in production, particularly intellectual property, have made it much harder to measure profits and determine where they come from.
This is why the G20 has commissioned the OECD to act as the prime multilateral forum for progressing tax integrity reforms through the Base Erosion and Profit Shifting Action Plan (BEPS). The plan focuses on a range of issues including transfer pricing, the digital economy, treaty abuse and the definition of permanent establishment.
Success of the BEPS process is of great importance. A multilateral solution will be vital to avoid countries going it alone with 'beggar thy neighbour' responses that could result in double taxation, much higher compliance costs and the undermining of legitimate commercial arrangements. Such outcomes would be to the detriment of global investment, trade, jobs and growth, and especially harmful for Australia as a medium-sized open economy heavily dependent on trade and foreign investment.
On the issue of domestic tax compliance and our corporate tax rates, Australia has some of the toughest tax integrity measures in the world, which together with high levels of compliance and enforcement, contribute to large corporate tax revenues. Company tax receipts are expected to be around $70 billion this year.
Within the OECD, Australia's corporate tax revenues as a share of GDP are second only to Norway. The priority for governments is to maintain the integrity and transparency of the system while supporting Australia's economic competitiveness.
Successive governments, with bipartisan support, have sought to maintain this integrity by continually adjusting transfer pricing rules, the foreign source income anti-tax-deferral regime, general anti-avoidance rules and thin capitalisation rules. Changes to the transfer pricing and thin capitalisation laws make these regimes arguably the most robust in the world.
The government's upcoming tax white paper provides an opportunity to ensure our tax system retains its integrity while supporting investment, growth and jobs.
The mobility of capital, and competition for it, has increased. Countries have responded with more competitive tax regimes to attract investment.
The United Kingdom, Japan and Spain will all lower their corporate tax rates this year to boost investment and growth.
There is now hard-won bipartisan support for lowering Australia's company tax rate, which is among the highest in the OECD.
The Business Council is acutely aware that the community must have confidence in the integrity of the corporate tax system if it is to support broader tax reform.
This is why a careful and well-informed debate is now a national imperative.