Publication date: 22 Apr 21 |
Source: THE TAX INSTITUTE
Senator Andrew Bragg gave the following speech to delegates at The Tax Institute's recent Financial Services Conference on 22 April 2021.
Good Morning, I’d like to talk to you today about how tax reform could play a role in Australia’s economic recovery from the COVID-19 pandemic with three specific proposals.
I believe there’s never been a better time to consider reform proposals that will allow banking and financial services to maintain and enhance competitiveness in the face of increasing competition from other jurisdictions.
Australia is entering a brave new world of regulatory competition.
Earlier this month, the Secretary of the US Treasury, Janet Yellen, gained international attention by calling for a global minimum tax to “stop the race to the bottom”.
What garnered less attention were her remarks immediately before that: “competitiveness is about more than how US-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crisis”.
As Chair of the Senate Select Committee on Australia as a Technology and Financial Centre, I can tell you the age of international competition is not over, it is simply entering a new phase of regulatory competition.
Australia cannot opt out of globalisation. It is critical that we policymakers engage directly with this new paradigm.
The stakes are high.
Australia is 8th in overall quality of life, 8th in individual freedom; 9th in the quality of our democracy; 11th for the rule of law; and 11th in transparency for our public institutions.
The Economist Intelligence Unit ranks Melbourne and Sydney as the 2nd and 3rd most liveable cities in the world.
Fifty per cent of Australians were either born overseas or had one parent who was, including me.
The vast majority of Australians believe that this percentage of immigration is a good thing, much to the disbelief of my European and North American counterparts.
But there is no guarantee that this will continue. After all, a little over a century ago, another commodities-rich southern-hemisphere country was the envy of the world and a mecca for immigrants: Argentina.
We all know how that ended.
As the world emerges from the COVID-19 pandemic, the process of reconstruction and reform will accelerate.
Unlike most countries, Australia has a huge head start.
We have the space and the capability to get ahead of other countries. We are one of only nine countries to have a AAA rating and a budget back in balance for the first time in a decade.
We cannot stand still.
To drive new Australian jobs and attract investment, last August I convened a taskforce of senior business leaders in financial services, fintech and technology, chaired by former Macquarie banker, Andrew Low.
The gender balanced panel consisted of senior people from Australian and Global organisations both large and small.
The problem that we saw was this: our tech and finance sectors, while sophisticated, are highly domestic and we needed to have a process to pull together the best ideas to advise Canberra.
The Taskforce drew upon its deep business expertise and global knowledge to offer tangible policy solutions which would allow Australia to compete effectively with Singapore, Tokyo and other centres for new investment.
By the end of 2020, the Australia as a Financial and Technology Centre Advisory Group (AFTCAG) I appointed had 15 priorities for tax and regulatory reform.
These priorities are practical measures for enhancing Australia’s international competitiveness.
Attracting international investment will require a framework which is serious about accommodating international investment, exports, and immigration.
Today I want to speak to three of those tax recommendations.
- The establishment of an incremental business activity rate (IBAR) regime;
- Taxation of entrepreneurs and founders on the basis of days-in-days-out, and;
- Eliminating interest withholding tax.
These are three simple ideas that would immediately bolster our competitive position. They are worthy of serious consideration.
Under the proposed Incremental Business Activity Regime, companies establishing a qualifying business in Australia would pay a concessional tax rate. In other words, a tax deal.
In the short term, IBAR would be a critical drawcard for potential foreign investors.
An internationally competitive rate of tax would cause major businesses and financial institutions to reconsider Australia as the best location for their regional headquarters.
The headline rate of corporate tax in Singapore is currently 16%, in Hong Kong it is 17.5% and in Taiwan it is 20%.
As you well know our current statutory corporate tax rate of 30% is well ahead of the OECD average, which is 23.51%.
By enticing foreign businesses to come into Australia, we can provide a springboard for those businesses to stay.
A temporary inducement to investment would provide these businesses with the pretext for a permanent relocation.
But in order to ensure that this relocation becomes permanent, we need to embrace a broader reform agenda.
If a tech or finance business relocates to Australia, they would be eligible to pay a concessional tax rate for the first seven years. The concessional tax rate would be the same rate in the company’s country of origin, subject to a floor of 12.5% or the OECD minimum tax rate should the OECD agree on one.
IBAR would be subject to a few fundamental guardrails: the application would extend only to additional income arising from the new business, would apply for a maximum period of seven years, and with additional qualifications set by the Treasurer.
We know that corporate relocation is a costly exercise.
This recommendation provides incentives by drawing down the additional costs of Australia’s comparatively high corporate tax rate.
The primary value of the IBAR regime is that it would allow Australia to leverage its substantial “non-tax” benefits to attract investment and employment.
2. Days-in-days-out tax
The current regime for the taxing of expatriates is ill-adapted to present realities.
Our tax system is inflexible when it comes to taxing income earned overseas.
Either the Australian government considers that you are a resident of this country or you aren’t.
In which case, either you are subject to Australian income tax in its entirety or you aren’t.
The system’s binary approach to tax residency does not reflect the realities of our globally connected world and highly mobile workforce.
Nor does it recognise the need to attract the best entrepreneurs and skilled talent to our shores.
The Low Report proposes introducing an element of flexibility into the tax system:
For senior staff and entrepreneurs who employ more than five people, a days-in-days-out system would provide an additional lure for attracting talent.
The principle is that Australian tax should be payable only on Australian-source employment income - this would bring Australia into alignment with the United Kingdom, Singapore, Thailand, Malaysia, and Hong Kong.
As it stands, establishing a global business out of Australia carries a tax penalty for key personnel who are relocating.
There is also a lack of certainty surrounding the distinction between residents and non-residents... as a consequence we find that some founders and executives avoid spending more than 90 days a year in Australia, to avoid the risk of being subject to double taxation.
This change would sharpen the effectiveness of the temporary tax resident rules, which were introduced in 2006.
3. Interest Withholding Tax
Finally, the Low Report recommended abolishing interest withholding tax paid between Australian and global financial institutions.
This recommendation echoes nearly every major review of the tax system conducted in Australia over the past two decades, most notably the Henry Tax Review and the Johnson Review, that:
- IWD is an inefficient tax with a significant distortionary impact.
- Given the cumulative effect of multiple tax treaties, it also raises very little revenue, whilst driving future revenue sources away.
- It’s a major hurdle for cross-border finance.
- In the 2010-11 Budget, the Federal Government committed to follow the recommendations of the Henry Tax Review by committing to the phased abolition of this tax. As it currently stands, the tax remains, putting Australia at a significant competitive disadvantage relative to Hong Kong, the United States and the United Kingdom, which have effectively nullified equivalent taxes due to a range of exemptions.
I had the abolition of IWT costed by the Parliamentary Budget Office which found that there would be a loss of revenue of over $1b but of course it didn’t look at the so called second round impacts which would bolster Australian revenue.
The one sided analysis of these type of proposals is damaging our competitiveness and really does demand comprehensive modelling that looks at the benefits of increased business activity.
As we head into a new era of regulatory competition, the challenge will be to create a framework which is responsive and flexible, but at the same time clear, transparent, and dependable.
The future may well depend more on the willingness of jurisdictions hungry for foreign capital to deploy flexible structures like an IBAR or a patent box, rather than cut headline tax rates. For the record, I would prefer we do both!
As Australia moves into this new world, the ideas I discussed today recognise this new reality and that we are ready to engage with it directly.