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22 December 1998
Review of Business Taxation – Comments on Initial Discussion Paper
The Australian Petroleum Production and Exploration Association (APPEA) welcomes the opportunity to outline the petroleum exploration and production industry’s comments on the Review of Business Taxation discussion paper titled A Strong Foundation.
APPEA represents companies engaged in a range of activities associated with the exploration, development and production of the nation’s oil and gas resources. As part of these activities, the industry is a major contributor to government revenues through corporate taxation, and as such, considers itself as a significant stakeholder in the reform process.
Achieving Economic Growth
In APPEA’s view, the overarching objective of the review should be to create an environment that is conducive to increasing economic activity and therefore the overall contribution made by the business community to the Australian economy.
In achieving this objective, it must be recognised by all parties that tax policy is one element of the equation. The industry policy consequences of modifying the taxation framework must be carefully assessed, and in this context, other government agencies with industry policy interests must be fully engaged in the reform program. Specifically, they must be participants, not advisers.
The Principle of International Competitiveness
The increasing integration of Australia into the world economy dictates that the principle of international competitiveness is given a high priority in the design of the taxation system. The increasingly globalised nature of investment activity in a wide range of industries means that funds that are not employed in Australia are often redeployed to other countries.
The suggestion on page 25 of the Discussion Paper that competition amongst countries to attract investment through the use of taxation mechanisms is a wholly undesirable activity ignores the fact that taxation can be a very significant factor in investment decisions. Indeed, the fact that the destination of investments can be very strongly influenced by respective tax treatments highlights the dampening role that can be played by taxation instruments on achieving economic growth.
Tax Expenditures as Policy Tools
The issues raised on pages 22-23 of the Discussion Paper in relation to the use of taxation tools for industry policy purposes clearly ignores a range of other considerations. From the outset, the categorisation of such mechanisms as ‘tax concessions’ presupposes that there are not valid economic grounds for such treatments. For example, the differing depreciation provisions recognise that major tax induced distortions would be created through the application of simplistic criteria that do not respond to the inefficiencies of the nominal structure of the taxation system. Treating income in real terms and significant costs in nominal terms is simply unsustainable.
It is also worthwhile noting that in the case of the extractive industries, which are often conveniently singled out as one of the beneficiaries of alleged concessional treatment under the tax system, they are among the least protected sectors of the domestic economy. In this context, it would be more appropriate for the overall level of effective assistance to be highlighted rather than the use of selective and misleading measures.
In relation to the complexities that it is suggested may be associated with the use of such provisions, the significant benefits that are associated with their use and their impact on economic growth, equity and international competitiveness criteria need to be carefully assessed. APPEA’s strong view is that these benefits certainly justify their continued use.
The Tax Base
The question of what constitutes the appropriate tax base for business taxation purposes raises many complex issues. One proposal that has been canvassed is the use of a so called ‘comprehensive’ base. Such a system, while potentially attractive from a theoretical perspective, has significant practical difficulties that will need to be very carefully assessed before it could be considered as a realistic option.
At the present time, APPEA believes that a properly structured income based system is the more practical model. This avoids protracted and complex debates on the nature of alternative systems, and eliminates the need to reassess and/or renegotiate the existing array of taxation treaties.
It should be stated clearly that as a matter of principle, all costs incurred in generating taxable income should be deductible in determining a taxpayer’s taxable income.
The Objective of Simplicity
APPEA agrees that while it is desirable for simplicity to be recognised as an important element in the design of the business taxation system, we do not believe that it should be pursued at the expense of economic growth, equity and international competitiveness. It is also important to recognise that simplicity does not necessarily lead to certainty and clarity. Indeed, fewer words often lead to greater confusion and uncertainty.
Equality does not equate to equity
An underlying theme in the Discussion Paper seems to be suggesting that equality in treatment under the income tax laws somehow equates to equity. APPEA considers this to be a fundamentally flawed assumption that ignores the fact that not all activities in the economy are identical and that it is clearly appropriate that they be treated in different manners.
Real v’s Nominal Taxation
On a number of occasions, the Discussion Paper touches upon the question of the nature of the income tax base, and the resultant issue of real and nominal taxation. APPEA considers this to be a major issue in the tax reform process, as the failure to recognise the fundamentally different nature of economic activities will inevitably lead to sub-optimal outcomes on an economy wide level. For example, the fact that some activities are by their nature capital intensive while others are not demands responsive taxation settings.
Proposed Advisory Board
APPEA supports the concept of establishing an Advisory Board. Although the Board will not be responsible for policy development, for it to be successful, the Board must to be able to apply considerable influence over policy directions. To this end, the Board should be accountable to the Treasurer.
Membership of the Board should be drawn from both the private and public sectors. Private sector representation being sourced from both industry and the professions and public sector representation sourced from Treasury, the ATO, OPC and the Department of Industry, Science and Resources.
An independent Board should be an integral part of the reform process. Further examination is now required to establish an appropriate Charter within which such a Board should operate.
Legislative Reform Processes
APPEA endorses the comment in paragraph 4.44 of the Discussion Paper on the involvement of the private sector in the development of the business tax system. APPEA has had significant recent experience in working with Government departments and the ATO in a similar fashion to that contemplated in the Discussion Paper. This experience covers several areas including resolving matters of technical complexity, providing more certainty and in facilitating projects that will promote economic growth.
APPEA submits that the review needs to emphasise the role of Government in ensuring that inadequacies in the tax laws are recognised and given a high priority by Treasury, OPC and the ATO. Specifically, it is critical that acknowledged shortcomings in the tax system are promptly dealt with and not frustrated by an inability to be expeditiously considered by Parliament. It is APPEA’s view that technical corrections and adaptations to meet new business circumstances will continue to be required even from a system re-designed as contemplated by the Discussion Paper.
APPEA submits that the proposed Design Principles should include the Parliament’s responsibilities to ensure adequate and prompt attention to legislative changes in order to maintain a healthy and dynamic business tax system. This responsibility should be unambiguously supported by the Government.
Business Tax Simplification Strategy
One of the major flaws in the TLIP process was its failure to address policy issues. Simplification cannot proceed effectively without being integrated into the policy process. To this end, the 1997 Act has not achieved its objectives.
APPEA would support a Business Tax Simplification Strategy directed at ensuring a full rewrite of the existing tax legislation. In recognition of the shortcomings of the TLIP process, one option may be the repeal of the 1997 Act, leaving the 1936 Act to operate until such time as the full rewrite of the existing tax legislation is completed. In any event, the complexities associated with operating under multiple Acts must be recognised as a significant administrative issue.
Deferred Company Tax
The Deferred Company Tax ("DCT") regime will increase tax costs of Australian operations, substantially reducing the profitability of investing in Australia. A direct consequence of the DCT regime will be to make Australia a relatively less attractive place to invest. This proposal fails to recognise the importance of foreign investment to Australian economic growth and contradicts the Government's stated objective of creating a much more globally competitive economy.
APPEA would be pleased to further expand on any of the issues raised above.