BCA Chief Executive Jennifer Westacott discusses the base erosion and profit shifting agenda and the need for tax reform to help drive competitiveness at a workshop hosted by the BCA and Clayton Utz in Canberra.
Thank you all for attending this important workshop that will continue to progress our thinking on base erosion and profit shifting.
In particular, I’d like to acknowledge Niv Tadmore and Clayton Utz.
I also wish to acknowledge our international participants today.
The Business Council is pleased to see that the success of the May workshop has led to this important follow up.
I understand the workshop has been replicated in the UK and US.
The engagement from large business, the Treasury and the ATO is so important throughout this process.
The OECD’s September deliverables included the digital economy, hybrids, treaty abuse and transfer pricing, but the BEPS process still has a long way to go.
This is a tremendous piece of global public policy. Engagement and consultation is critical.
A global mindset
Digital technology and increased interconnectedness in the global economy has had a profound impact on our lives and the way we do business.
There has been a growing importance of different types of assets, such as intangibles. This gives rise to a legitimate discussion worth having about what to tax and where – but let’s do it together rather than going it alone.
Almost everything now is tradeable – goods, services, skills and labour.
This has led to supply chains disaggregating across the globe.
To put this into perspective, over 70 per cent of global trade today is in intermediate goods, services and capital goods.
Businesses are operating, generating profits and paying tax in countries right around the world.
The Business Council has called for a global mindset from Australian businesses to capture these opportunities, specialise within supply chains and access new markets.
In an increasingly competitive business environment, taxation arrangements influence where we work and invest.
This doesn’t just apply to Australian companies looking to invest overseas, but also those looking to invest in Australia.
International tax laws should not be an obstacle in the unstoppable evolution of the global economy.
They should not be so excessive or complex such that they hinder trade, investment and innovation.
Rather they should be modernised to ensure they remain fit for purpose in achieving their dual objectives of revenue raising, and incentivising growth and investment.
This is the context in which we should consider both BEPS and tax reform.
Base erosion and profit shifting
This brings me to today’s workshop.
Budgets around the world have faced growing pressures in recent years.
Governments have been forced to prioritise spending and adjust the expectations of their citizens.
Their eyes have also turned towards tax, with some arguing for BEPS as a solution.
Instead, the debate about BEPS should be part of an overarching discussion about tax law in the modern global economy.
As I said in May, we need to take a step back here and align the problem with a fit-for purpose solution.
Australia has an important role to play here, but no one country can address the issues on their own.
It is a real concern that if the global community does not see something positive come from the BEPS project, countries may choose to go it alone and splinter international taxation norms.
Business will not shy away from challenging issues, but any debate must be sensible, well informed and rely on facts and evidence.
Not doing so undermines the community’s confidence in the integrity of our tax system and distorts the debate.
The Tax Justice Network’s recent report comes to mind as a risk to setting the tax reform debate back with its flawed analysis.
Of course, businesses have to accept their obligations when it comes to paying tax and being transparent.
But we should also acknowledge the contribution made by business.
More than $70 billion of company tax is expected to be collected this year.
Our corporate tax take as a share of tax revenue is the second highest in the OECD.
Twelve companies in Australia pay one third of all company tax.
Our tax integrity rules are some of the most stringent in the developed world. The ATO is well-resourced, and maintains a sophisticated and active approach to corporate compliance.
This is why a workshop like this is so important – we must be absolutely clear about our starting position and absolutely aware of the consequences of any changes.
Which is an appropriate time to turn to the domestic tax reform process.
The Business Council launched a discussion paper in September to build a shared understanding of why tax reform matters.
The tax and federation white papers are the means through which we can work towards a tax system and a federation that better support our nation’s future prosperity.
As I mentioned earlier, competition from global markets is increasing along with the mobility of capital and labour. Tax will influence decisions about where to work and invest.
So not only do we need a tax system that raises enough revenue, but it must also offer the right incentives to work and invest in this competitive global environment.
The tax and transfer system also needs to maintain a strong level of equity and the appropriate incentives for participation.
The OECD’s work on BEPS has been important and influential.
But in listening to the OECD on BEPS, it is important to hear the message in the context of its overall advice on tax reform and its role in economic growth.
This is about getting a better tax mix between direct and indirect taxes to better encourage investment, innovation and entrepreneurialism – key drivers of growth.
Competition in global corporate tax rates has intensified. Japan and Spain recently announced corporate tax cuts to boost investment and growth.
If we look back a decade, our corporate tax rate of 30 per cent was a little above the averages of the OECD and our competitors in the Asia-Pacific region – which were about 29 and 28 per cent, respectively.
Since then, these averages have fallen around 5 percentage points while we have stood still.
As it happened, while this trend was unfolding we were experiencing a once-in-a-lifetime resources boom.
The flow of foreign direct investment into Australia was the 14th highest in the world before the boom. It peaked at 6th in 2011 and has since slipped to 8th.
The question is - where will the next wave of investment come from? Will it come from the resources sector or will it flow from a revival of the non-resources sector?
Tax is of course one important part of the investment equation and part of a long-term signal. And we know that tax is vital in terms of lifting productivity.
This is the context in which we need to think about how our corporate tax system sits in a world of increasingly mobile capital and intense pressure from other countries.
Not only is international competition an issue, but there are also intergenerational pressures, bracket creep, equity concerns and the narrowness and erosion of a number of tax bases to consider.
It ultimately comes down to a matter of what sort of economic activity or bases do we want to tax?
There is no quick fix and reform will have to be comprehensive to address these issues. All options must be on the table.
Any debate will need to face up to choices and the consequences of those choices. We also need to consider the consequences of no change.
The issues are complex and will require balance and tradeoffs.
For example, our tax and transfer system is highly targeted by trading away a degree of simplicity.
The same can be said of other features of our tax system where complexity has been introduced to address issues such as efficiency and integrity. The BEPS debate touches on this.
I hope this workshop helps to highlight the importance of getting the facts on the table, taking a broad rather than a narrow view of what’s needed to realise national objectives, and understanding the consequences of the different choices we have.
Thank you again to Clayton Utz for hosting this event.
I wish you all the best with your deliberations over the next two days.