Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017 - Commentary on Ministerial and Other Responses [2017] AUSStaCSBSD 92 (22 March 2017)

• Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017
• Review rights 76
• Retrospective application79

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Treasury Laws Amendment (Combating Multinational Tax Avoidance) Bill 2017

Purpose	This bill seeks to amend various taxation Acts to: • introduce a new diverted profits tax; • increase the administrative penalties that can be applied by the Commissioner of Taxation to significant global entities; • update the reference to Organisation for Economic Cooperation and Development (OECD) transfer pricing guidelines in Australia's transfer pricing rules to include the 2016 OECD amendments to the guidelines
Portfolio	Treasury
Introduced	House of Representatives on 9 February 2017
Bill status	Before House of Representatives
Scrutiny principle	Standing Order 24(1)(a)

2.288 The committee dealt with this bill in Scrutiny Digest No. 2 of 2017. The Treasurer responded to the committee's comments in a letter dated 6 March 2017. Set out below are extracts from the committee's initial scrutiny of the bill and the Treasurer's response followed by the committee's comments on the response. A copy of the letter is at Appendix 1.

Review rights ^[76]

Initial scrutiny – extract

2.289 Item 1 of Schedule 1 proposes to exclude merits review before the Administrative Appeals Tribunal (AAT) of decisions made by the Commissioner of Taxation in assessing diverted profits tax (DPT). Item 44 of Schedule 1 proposes to insert a new Part into the Taxation Administration Act 1953 (TA Act) that sets out that an entity subject to an assessment of DPT can appeal to the Federal Court regarding the assessment.

2.290 The explanatory memorandum explains that the combined effect of these proposed amendments is that in relation to DPT assessments any taxation objection must be an appeal to the Federal Court and not to the AAT.^[77] However, in general, taxation legislation provides for its own comprehensive scheme of review of taxation assessments, enabling taxpayers to object to an assessment by way of an appeal to the AAT or the Federal Court.^[78] The general position is that taxpayers may elect whether to pursue their appeal in the AAT or the Federal Court.

2.291 The explanatory materials do not indicate why the taxpayer may not, as is usually the case, elect to take their objection to the AAT.

2.292 The committee seeks the Treasurer's explanation as to why merits review before the AAT is excluded in relation to diverted profits tax assessments and whether the inability to seek review in the AAT may, in any way, change the nature of the substantive outcome or the remedy for a taxpayer who succeeds in proceedings under Part IVC of the TA Act objecting to an assessment.

Minister's response

2.293 The Treasurer advised:

The exclusion from merits review before the AAT in relation to diverted profits tax assessments
The Committee is concerned that items 1 and 44 of Schedule 1 of the Bill have the combined effect of requiring a taxation objection against a diverted profits tax assessment to be an appeal to the Federal Court rather than to the AAT.
The Administrative Decisions (Judicial Review) Act 1977 (the ADJR Act) does not apply to decisions relating to taxation assessments. Item 1 of Schedule 1 will add decisions made under Part 3-30 of the Taxation Administration Act 1953 (TA Act) (inserted by item 44 of Schedule 1 of the Bill) to the classes of decisions to which the ADJR Act does not apply. This ensures that the judicial review processes available for assessments of diverted profits tax are set out in the TA Act, consistent with the approach that generally applies to the review of taxation assessments.
The provisions inserted by item 44 of Schedule 1 provide applicants with an appropriate avenue to object to a diverted profits tax assessment by appealing to the Federal Court (and effectively prevent merits review before the AAT). This is appropriate because arrangements affected by the diverted profit tax are of a very complex nature and taxpayers who enter into such arrangements are large multinational entities. Therefore, it is more appropriate for the review of diverted profits tax assessments to be undertaken by the Federal Court (rather than the AAT). This is not expected to change the nature of the substantive outcome or the remedy for a taxpayer who succeeds in proceedings under Part IVC of the TA Act objecting to an assessment in any way.

Committee comment

2.294 The committee thanks the Minister for this response. The committee notes the Minister's advice that it is more appropriate that appeals regarding diverted profits tax assessments go to the Federal Court than the AAT as the affected arrangements are very complex and the taxpayers who enter into these arrangements are large multinational entities. The committee also notes that generally taxpayers can choose whether to appeal to the AAT or Federal Court and notes the Minister's advice that exclusion of appeals to the AAT is not expected to change the nature of the substantive outcome or the remedy available to a taxpayer.

2.295 The committee requests that the key information provided by the Minister be included in the explanatory memorandum, noting the importance of these documents as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).

2.296 In light of the information provided, the committee makes no further comment on this matter.

Retrospective application^[79]

Initial scrutiny – extract

2.297 Schedule 3 of the bill seeks to update Australia's transfer pricing rules to include updated OECD guidance materials. Item 4 provides that the amendments are applied to income years starting on or after 1 July 2016. The explanatory materials do not justify applying this retrospectively, except to note that the measure was announced on 3 May 2016 in the 2016-17 Budget.

2.298 In the context of tax law, reliance on ministerial announcements and the implicit requirement that persons arrange their affairs in accordance with such announcements, rather than in accordance with the law, tends to undermine the principle that the law is made by Parliament, not by the executive. Retrospective commencement, when too widely used or insufficiently justified, can work to diminish respect for the law and the underlying values of the rule of law.

2.299 However, in outlining scrutiny issues around this matter previously, the committee has been prepared to accept that some amendments may have some retrospective effect when the legislation is introduced if this has been limited to the introduction of a bill within six calendar months after the date of that announcement. In fact, where taxation amendments are not brought before the Parliament within six months of being announced the bill risks having the commencement date amended by resolution of the Senate (see Senate Resolution No. 44). In this case the amendments proposed by Schedule 3 were announced over six months prior to the bill's introduction.

2.300 The committee seeks the Treasurer's advice as to why the amendments are proposed to apply retrospectively to income years starting on or after 1 July 2016 and whether this will cause detriment to any taxpayer.

Minister's response

2.301 The Treasurer advised:

Timing of application of the update to Australia's transfer pricing rules
The Committee has noted that item 4 of Schedule 3 provides that the provisions in Schedule 3 of the Bill will apply to income years commencing on or after 1 July 2016.
The provisions in Schedule 3 will amend the Income Tax Assessment Act 1997 to update Australia's transfer pricing rules to include the OECD Base Erosion and Profit Shifting (BEPS) amendments to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines). Incorporation of the OECD Guidelines will provide taxpayers with greater clarity on how intellectual property and other intangibles should be priced, and ensure the transfer pricing analysis reflects the economic substance of the transaction rather than just the contractual form.
The measure applies from income years commencing on or after 1 July 2016 as it provides greater certainty to taxpayers in relation to the pricing of cross-border transactions and reinforces Australia's commitment to implementation of the BEPS measures. In this regard, since the release of the OECD BEPS recommendations in October 2015, taxpayers have been expecting the imminent implementation of the proposal. In February 2016, the Government conducted a public consultation process on the proposal. During that consultation the proposal received broad support.
Further, the measure will not have any practical impact until taxpayers lodge income tax returns for the 2016-17 income year. In this regard, the majority of affected taxpayers are large corporate entities that are not required to lodge income tax returns for the 2016-17 income year until early 2018 or later. A deferral on the application date may disadvantage taxpayers that have been preparing for the changes to keep pace with counterparties in other countries that have adopted the latest OECD Guidelines.

Committee comment

2.302 The committee thanks the Minister for this response. The committee notes the Minister's advice that the measure is intended to provide taxpayers with greater clarity on how intellectual property and other intangibles should be priced. The committee also notes the Minister's advice that the majority of affected taxpayers are large corporate entities and that the measure will not have any practical impact until taxpayers lodge income tax returns for the 2016-17 income years (which for such entities is not required until at least early 2018), and a deferral on the application date may disadvantage taxpayers that have been preparing for the change.

2.303 However, the committee notes that the Treasurer's response did not indicate whether the retrospective application of this measure will cause detriment to any taxpayer.

2.304 The committee requests that the key information provided by the Minister be included in the explanatory memorandum, noting the importance of these documents as a point of access to understanding the law and, if needed, as extrinsic material to assist with interpretation (see section 15AB of the Acts Interpretation Act 1901).

2.305 The committee draws its scrutiny concerns to the attention of Senators and leaves to the Senate as a whole the appropriateness of the retrospective application of the amendments in Schedule 3 of the bill.

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[76] Schedule 1, items 1 and 44.

[77] Explanatory memorandum, p. 58.

[78] This scheme is set out in Part IVC of the Taxation Administration Act 1953.

[79] Item 4, Schedule 3.