Mr HUSIC (Chifley—Government Whip) (18:47): There were a number of things in that contribution, but it basically boiled down to this: in the course of over 20 minutes, the greatest weight was placed on the issue of retrospectivity, and the other issue was—you would almost believe that this has been an alien concept—tackling business profit shifting or transfer pricing. The reality is that it is something that, in 1982, then Treasurer and later Prime Minister John Howard was trying to deal with. Governments have been dealing with the concept itself. On the international level, guidelines established by the OECD to deal with this issue have been present for many years. On top of that, there is the issue of retrospectivity. If those opposite were on this side of the House and there were a threat or an issue potentially affecting taxation revenue, they would be here basically lecturing us and saying that protecting government revenue is the most important thing and that every effort should be made to deal with it. What we have had is basically a railing against retrospectivity but not necessarily against the concept per se, because transfer pricing has been dealt with in one way, shape or form for decades.
I want to remark on something else. The shadow Treasurer referred to the American Chamber of Commerce in Australia. In fact, transfer pricing has attracted the attention of the Obama administration in the US as well, as far back as 2009. In particular, in my contribution on this issue I want to touch on a sector that I have a particular interest in, the tech sector, looking at transfer pricing amongst multinational technology companies. I refer to an article written by Julian Lee in the Sydney Morning Herald back in 2009, when the issue of the profits of, for example, companies such as Google and Yahoo was in the frame. For example, Google was billing out of Ireland; eBay was billing out of Switzerland; Yahoo’s search marketing was billing out of Ireland, as was Facebook; and Microsoft was using an Irish subsidiary. The way in which they transfer price was attracting the attention of the US administration. In fact, US President Barack Obama was calling back in May of 2009 for an end to transfer pricing and had set a target as to when that would be dealt with. That was the US administration. The American Chamber of Commerce in Australia was quoted here today, but the US administration is taking this issue seriously.
The Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 is an important bill. Many would not appreciate that from reading the title of the bill, but it deals with an emerging reality potentially affecting revenues raised by governments here and the world over. It is not a new concept, as I have said, but acknowledging it and dealing with it becomes more important, particularly as the reach of the internet spreads, opening up business opportunity and acknowledging what almost seems to be the dissolution of borders as businesses are able to reach and operate across all corners of the globe. As the Assistant Treasurer indicated in his second reading speech, transfer pricing rules are critical to the integrity of the taxation system.
This bill will help ensure that the Australian operations of a multinational group pay their fair share of taxation, because trade within multinational groups is a big deal. In fact, in 2009 cross-border trade within multinational groups was valued as $270 billion. To put that into perspective, that is about half of Australia’s total trade flows. Our transfer pricing rules govern the prices at which related entities—companies within large multinational groups, for example, in different countries—buy and sell the goods and services to each other. These rules aim to clamp down on profit shifting where, for example, artificially excessive fees are levied for services rendered between entities, ultimately aiding in the transfer of money from one company to another within a group but with the ambition to reduce tax liability within Australia. Last November, as has already been referenced, the government launched a review of our transfer pricing rules, indicating that we would move to end the uncertainty around whether or not transfer pricing rules contained in our tax treaties could apply independently of unilateral rules in division 13 of the Income Tax Assessment Act 1936. That is what this bill in part deals with. As the Assistant Treasurer told the House, the OECD work that covers this area reflects the best international thinking on transfer pricing and shaped pricing regimes across the world. Guidelines used across regimes and observed by multinational enterprises themselves also ensure there is a clear legal pathway to the use of the OECD guidance. While the issue of transfer pricing has been around for a while it has become more complex, particularly when you consider how it operates in the case of tech companies.
When you step back and look at the overall issue, you will see the online economy itself is ‘the biggest regulatory challenge in a generation’. That was not my observation but the words of ACCC Chairman Rod Sims, made following the decision of the ACCC to investigate arrangements by local retailers to deter overseas counterparts or wholesalers selling the same goods online at cheaper prices. While I can certainly appreciate the motivation of local retailers engaging in this, the corrosive nature of this practice is designed to weaken competition and work against consumer interests. It also betrays a double standard insofar as retailers are preventing the consumer from doing what they do themselves—that is, search for a preferred supplier at a cost commercially attractive to the retailer. If local consumers feel they are being disadvantaged or being denied an advantage accessed by companies then that is going to draw ire and understandably so. It is this sentiment which propelled a case for an investigation into price discrimination as it affects the IT sector.
I wholeheartedly welcome Minister Conroy’s decision to establish the pricing discrimination inquiry to be held by the House of Representatives Standing Committee on Infrastructure and Communications. I mention the committee’s work because of its relevance to the legislation currently being considered by the House. In particular, the inquiry will look at pricing differentials as they exist and will also look at the pricing frameworks employed by major tech companies. I imagine through the inquiry it will be determined what impact transfer pricing has on the way these companies do business here in Australia. It is obvious that transfer pricing will be easier to identify in the pricing of physical product—in this case, hardware. But, with the transformative impact of technology, physical product morphs into something that is digital—in this case, software. Regulators and governments know that this intangible presents a massive challenge to global taxation regimes.
I was surprised when I witnessed a few weeks ago the emergence of an unlikely taxation advocate who argued that tech companies should be paying their way more. I am talking of course about the member for Wentworth—and I note his presence here today—who, in late May, demonstrated that not only is technology accelerating business processes but it is also helping speed up the pace of backflips. On Monday, 21 May he argued in the Financial Review that tech companies should be paying more tax. By Wednesday he was arguing that he was not arguing that. He said:
I am not proposing any specific change to the existing tax laws or flagging a shift in coalition policy.
By the time we advised that this bill on transfer pricing would be around to help, in part, buttress taxation revenues from the impact of pricing intangibles he had sniffed that that was not good enough, without spelling out what he would actually do, which I am surprised about because he has, in the past, been able to devise a range of alternative taxation measures. It got me thinking: what made the member for Wentworth rip open his shirt to reveal his inner taxation avenger? It is worth bearing in mind that his comments were in response to the claim that Google had paid $74,176 in tax on search engine and directory revenue, equating to around $1 billion. Google said it had paid $781,000 and their accounts, ending 31 December, suggested they had made a $3.9 million loss on revenue of $201 million. Again, on 21 May the member for Wentworth remarked:
Over time, the erosion of the tax base will become material. You’ve got X billion dollars of revenue being earned by Google paying very little tax in Australia.
So Google was placed right in the frame by the member for Wentworth. For a company to be singled out like that, to be put in the public space like that, attracting the ire of the member for Wentworth would have raised eyebrows. But it certainly did not with me because I recall some pretty sharp comments he directed towards Google back in September last year where he said:
Let me tell you who the conspirators are. They are the vendors, who want to sell lots of kit for the NBN. They’ll tell you privately they think it’s bonkers, but they want to sell the kit. There are the over-the-top people like Google and Yahoo and media companies …
He went on to say:
Google has got a massive interest in building these networks and that’s why they’re a supporter of the NBN … If I was to build a 10-lane freeway all around my country and only allowed the trucking companies to use it. Then all the trucking operators would say to me, Malcolm, you are a visionary.
What was their crime to make the member so animated? Google had the temerity to commission firms to establish the value of the internet to the Australian economy and community. They pointed out the bleeding obvious that investment in the NBN would ramp up the value of the net to the economy—outrageous. For the record and from my own perspective I have found Google’s commissioned research, conducted by Deloitte Access Economics and Boston Consulting, to be valuable. They are doing the right thing advancing the interests of their sector—one that is vital to our future economic prospects. It is worth pointing out to decision-makers and the general public the relative worth of other sectors drawing attention to themselves, such as mining. By the way, while the member did not acknowledge the ICT sector’s value, he was effusive about the mining sector. In May 2010, he said:
I could recite a longer list of statistics on the importance of the industry, but suffice it to say the resources sector is of absolutely vital importance to our economic security. And any major changes to the way in which it is taxed need to be examined and considered with that in mind.
So two years ago we needed to exercise due care when taxing a valuable sector of the economy but now that has gone out the window. After reading the spirited defence of the mining sector, I had the gall to suggest that maybe we could stand up for a sector that is doing a great deal for Australia and not undermine the work of the sector in rightly promoting its own benefit because we are seeing terrific investment by that sector in Australia.
I had the pleasure last week of attending the opening of the HP Aurora data centre at Eastern Creek, a $200 million investment in the region and in our nation’s ICT future, an investment that will facilitate the growth of cloud computing. That builds on investments by another firm, Macquarie Telecom, a local trailblazer which invested in its own data centre in Sydney and is a passionate advocate of cloud computing which is set within months to open another centre. These developments will help the construction and strengthening of our digital economy. It is the government’s aim that by 2020 our country will be among the world’s leading digital economies. Speaking favourably about the sector’s value in Australia does not mean I am not interested in exploring ways of ensuring that the tech sector pays its fair share of tax and that is what this legislation is aiming to do. I would actually argue that it is in their own interests too. For example, I do not think it is right that you operate a firm within the sector, be concerned about, for instance, skills shortages, expect government to play a part in addressing these shortages and then argue against moves to ensure the sector is paying its fair share of taxation. It is fair to point out that you cannot champion the phenomenally important investment in renewing this nation’s broadband infrastructure and then rail against moves to protect our revenue base that will, among other things, help fund this investment.
Government action that will in part address issues adversely affecting business operations and provide a beneficial operating environment obviously need to be funded. General revenue is absolutely critical, which is why this legislation of itself is critical. As much as transfer pricing will deal in part with some of these issues that emerge as a result of the internet opening up trade across borders, the other thing that will obviously need to occur in time is for the OECD to take a greater role in necessarily advancing or reviewing and further examining this area. As I indicated earlier in this contribution, there is interest within the US to deal with the issue of transfer pricing but particularly the way in which multinational companies are operating such that they would be perceived to not necessarily be paying their fair share in taxation.
As much as it has been around for many years, the area itself is exceptionally complex, but that does not necessarily mean it is something we can give up on. As the ACCC said, as much as this presents the biggest regulatory challenge of a generation, it is still something that will gain increasing interest as the years progress.