The Tax Institute welcomes the opportunity to make a submission to the Treasury in relation to the Global agreement on corporate taxation: Addressing the tax challenges arising from the digitalisation of the economy Consultation Paper (the Consultation Paper).
In the development of this submission, we have closely consulted with our National Large Business and International Technical Committee to prepare a considered response that represents the views of the broader membership of The Tax Institute.
The two-pillar approach (Pillar One and Pillar Two) announced as part of the Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) by the Organisation for Economic Co-operation and Development (OECD) represents a fundamental shift in the way large businesses and multinational corporations (MNEs) will be required to report and pay their taxation obligations. The adoption of Pillar One and Pillar Two will present many compliance challenges and practical difficulties for affected businesses. The challenges stem from the fundamental changes in the nature of an MNE’s taxation obligations and the significant increase in associated reporting requirements. It is important to ensure that Australia’s implementation and administration of the Inclusive Framework recognises and, where possible, mitigates these excessive burdens.
It is also important to ensure that Australia’s implementation of the Inclusive Framework and Global Anti-Base Erosion Model Rules (the Model Rules) are not prematurely introduced. There are several outstanding issues and interactional concerns that require revised guidance from the OECD. These include, but are not limited to, the interaction between Pillar Two and core accounting and taxation principles, the need for safe harbours, and simplified compliance approaches to reduce the compliance burden on taxpayers. If the Inclusive Framework and Model Rules are adopted in Australia before these issues are addressed, it is likely that any enacting legislation will need to be frequently amended. Frequent changes to the rules will significantly and inequitably increase the compliance pressures on businesses.
The Tax Institute recommends that the adoption of the Inclusive Framework and Model Rules should remain consistent with the OECD’s intended outcome and the approach adopted by Australia’s major trading partners. We note that several key jurisdictions such as the European Union (EU) and United States of America (US) have expressed continued concerns regarding the uncertainty on how Pillar One and Pillar Two will be implemented. If the rules are applied inconsistently between jurisdictions, businesses will struggle to meet the differing compliance and reporting requirement. This represents an unfair outcome as, in our view, the adoption of the Inclusive Framework and Model Rules is unlikely to raise significant revenue for Australia. The increase in compliance costs for businesses is likely to notably outweigh the potential revenue collected, resulting in an inequitable outcome and potentially disincentivise Australian headquartered MNEs and overseas businesses operating in Australia. To ensure a consistent implementation of Pillar One and Pillar Two, we consider that Australia should work with key overseas jurisdictions to resolve outstanding issues and confirm a mutually agreed implementation approach.