Addressing profit shifting through the artificial loading of debt in Australia

EXECUTIVE SUMMARY

The 2013-14 Budget introduced measures which will further erode the international competitiveness of Australia’s business taxation system, add yet another layer of complexity and introduce further uncertainty. The package of changes to the thin capitalisation and debt deduction rules, announced without prior consultation, will have a number of unintended consequences which in turn will impair investment and economic growth.

Australia’s business tax system must strike a balance between effectively protecting the corporate tax base and encouraging investment. Tax policy responses to protect the corporate tax base from profit shifting should be carefully targeted in this context.

The changes outlined in the Budget reverse key design features of Australia’s business tax law dating back to the 1999 Review of Business Taxation which modernised and simplified the business tax system with the aim of removing barriers to investment and improve the competitiveness of Australia’s tax system. No fundamental design flaws in the tax system have been identified to warrant the significant structural changes proposed in the Budget. Indeed, similar proposals to change Australia’s thin capitalisation regime were considered and expressly rejected by the Business Tax Working Group in late 2012.

The proposed changes undermine what has been a deliberate policy objective to establish Australia as an investment hub, impair Australia’s ability to attract capital for resource projects, impede Australian-based companies from expanding overseas and add to concerns about tax stability thereby harming Australia’s reputation as an attractive place to invest.

Download complete article