House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

General outline and financial impact

Significant global entity

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to include a standard and centralised set of concepts that can be used to determine whether an entity is a 'significant global entity'.

The concept of a 'significant global entity' is used in all three measures in this Bill as part of the 'combating multinational tax avoidance' package announced in the 2015-16 Budget.

Date of effect: These amendments commence at Royal Assent.

Proposal announced: These amendments will introduce a central concept that is used in each of the measures in the 'combating multinational tax avoidance' package that was announced on 12 May 2015 as part of the 2015-16 Budget.

Financial impact: Nil.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.38 to 2.42.

Compliance cost impact: Nil. This Schedule introduces a new concept into the tax law. Any compliance costs associated with the measures that use this new concept are articulated in the other Chapters of the Explanatory Memorandum.

Multinational anti-avoidance law

Schedule 2 to this Bill amends the anti-avoidance provisions in the Income Tax Assessment Act 1936 to introduce the multinational anti-avoidance law.

The multinational anti-avoidance law is designed to counter the erosion of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid the attribution of business profits to Australia through a taxable presence in Australia.

Date of effect: This measure applies on or after 1 January 2016 in connection with a scheme, whether or not the scheme was entered into, or was commenced to be carried out, before that day.

However, the measure does not apply in relation to tax benefits that a taxpayer derives before 1 January 2016.

Proposal announced: This measure was announced by the Treasurer on 11 May 2015 and formed part of the 'combating multinational tax avoidance' package in the 2015-16 Budget.

Financial impact: This measure has these revenue implications:

* unquantifiable

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.120 to 3.124.

Compliance cost impact: This measure has a compliance cost impact of $9.2 million each year. This cost has been fully offset within the portfolio.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure has a compliance cost impact of $9.2 million each year. This cost has been fully offset within the portfolio.

Main points:

•

Multinational tax avoidance undermines the integrity of international and domestic tax systems.

•

The multinational anti-avoidance law will prevent multinationals who sell to Australian customers from using artificial arrangements in order to avoid paying tax in Australia.

•

This will make Australia's tax system less vulnerable to multinational tax avoidance, increasing confidence in the integrity of the system.

•

Taxpayers with structures at risk of falling within the scope of the new law are likely to seek advice on its potential application and, if at risk of being caught, may reassess the tax consequences of their existing structure or restructure their operations to remove the artificiality. There may be substantial upfront compliance costs associated with such activities.

-

The multinational anti-avoidance law is targeted at 30 large multinational companies, though up to 100 companies may need to review their arrangements to make sure they comply with the new law.

•

Any multinationals that are found to be avoiding Australian tax under the new law will have to pay back the tax they owe (plus interest) and face penalties of up to 100 per cent of the tax owed. This result is appropriate given the tax avoidance purpose of their actions.

Stronger penalties to combat tax avoidance and profit shifting

Schedule 3 to this Bill amends the Taxation Administration Act 1953 to double the penalties imposed on significant global entities that enter into tax avoidance or profit shifting schemes. The amendments will not apply to taxpayers that adopt a tax position that is reasonably arguable.

Date of effect: This measure applies to scheme benefits that an entity gets in relation to an income year commencing on or after 1 July 2015 (regardless of when the scheme was entered into or carried out).

Proposal announced: This measure was announced by the Treasurer on 11 May 2015 and formed part of the 'combating multinational tax avoidance' package in the 2015-16 Budget.

Financial impact: This measure has these revenue implications:

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 4, paragraphs 4.18 to 4.21.

Compliance cost impact: This measure does not have a compliance cost impact.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure does not have a compliance cost impact.

Main points:

•

Substantially increasing the penalties for large companies will ensure a better balance between the financial consequences of tax avoidance and the potential gains for multinational companies.

•

Given the consequences of non-compliance will be higher, some companies may take conservative tax positions. As a result, there may be an increase in primary tax compliance.

•

An increase in the penalties for large companies may also increase community confidence in the tax system, countering the perception that small and medium enterprises shoulder an unfair burden.

•

There are no direct regulatory costs for business as the primary tax obligations will not change.

Country-by-Country reporting

Schedule 4 to this Bill implements Action 13 of the G20 and Organisation for Economic Co-operation and Development's Action Plan on Base Erosion and Profit Shifting, which concerns transfer pricing documentation and Country-by-Country reporting, into Australian domestic law.

Date of effect: Schedule 4 to this Bill applies to income years commencing on or after 1 January 2016.

Proposal announced: This measure was announced by the Treasurer on 11 May 2015 and formed part of the 'combating multinational tax avoidance' package in the 2015-16 Budget.

Financial impact: This measure has these revenue implications:

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 5, paragraphs 5.40 to 5.43.

Compliance cost impact: This measure has a compliance cost impact of $14.05 million each year. This cost has been fully offset within the portfolio.

Summary of regulation impact statement

Regulation impact on business

Impact:

This measure has a compliance cost impact of $14.05 million each year. This cost has been fully offset within the portfolio.

Main points:

•

Information asymmetries between taxpayers and tax authorities can make it difficult for tax authorities to enforce laws designed to prevent tax avoidance and profit shifting, such as transfer pricing rules.

•

To address this, the Organisation for Economic Cooperation and Development has developed new transfer pricing documentation standards (referred to as Country-by-Country reporting).

•

Country-by-Country reporting will provide the Australian Taxation Office (ATO) with a global picture of how multinationals operate. This will allow the ATO to better assess transfer pricing risks and allocate audit resources more efficiently.

•

More effective administrative scrutiny may prompt multinationals to take less aggressive tax positions.

•

Australia's support for OECD's Country-by-Country reporting initiative will encourage other countries to adopt the new reporting requirements maximising the benefits of a more transparent international tax system.

•

Compiling and reporting the information required will require upfront system changes and ongoing resources. However, this would be limited to between 800 and 1,200 multinationals, including 30 to 50 Australian-headquartered taxpayers.

•

The affected taxpayers are quite sophisticated and the majority of information required to be completed in the reports will be relatively simple to extract once appropriate systems are in place.