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Submission to Review of Business Taxation
Telstra Corporation Ltd welcomes the opportunity to provide a submission in relation to the November 1998 Discussion Paper, Establishing Objectives, Principles and Processes ("the First Discussion Paper").
Telstra supports the importance of all three national objectives, being optimising economic growth, ensuring equity and facilitating simplification, as well as the supporting principles advocated in the First Discussion Paper.
Optimising Economic Growth
Telstra believes that optimising economic growth should be the most significant aim of a taxation system. While Telstra believes as a general proposition that the taxation system should not unduly interfere with commercial forces within the market, we nevertheless believe that the use of taxation incentives are a necessary tool to ensure that Australian businesses are encouraged to continually invest in and use the latest technologies and to develop leading edge technology within Australia.
Providing a favourable environment for the use, development, marketing and export of new and leading edge technology is implicit in optimising, and sustaining, economic growth. Only by utilising and developing the most advanced technology (both tangible and intangible) can Australian industry optimise economic growth and be internationally competitive.
As we move into the twenty first century the continuing growth and advancements in the information technology and telecommunication ("IT&T") industry will be a prime factor in Australia’s continuing economic success and expanding Australia’s international competitiveness.
Accelerated depreciation provides an important contribution to stimulating investment in new technologies. This incentive allows Telstra to invest in new technology that places Telstra, and therefore all Australian’s (businesses and individuals), at the leading edge of world technology. The continuing development of Telstra’s highly sophisticated infrastructure also enables Telstra to expand and export telecommunication products and services in the Asian Pacific region. Any decision to withdraw this concession could impact on Telstra’s ability to continue to invest in leading edge network assets at such a pace. Given the speed of technological change, such a negative impact may lead to lost opportunities to deliver new technologies to the marketplace and would constrain economic growth within Australia.
Research and development
Telstra also regards the R&D tax incentive as an extremely important part of the Government’s industry policy that has had a very beneficial effect on the amount of industrial R&D performed in this country since it was introduced. Telstra gains directly from the incentive because of our large R&D program. The incentive encourages and enables Telstra to develop new and enhanced leading edge products and services within Australia, which are used in our networks and by our customers for the benefit of the Australian economy. Many of these products and services, are also marketed by Telstra overseas, licenced to overseas telecommunication companies and utilised in overseas telecommunication networks being developed by Telstra eg in India, Vietnam etc.
Telstra also benefits indirectly from the availability of the R&D concession to our suppliers. Such suppliers, who are generally worldwide organisations, may have increased their R&D in Australia because of this tax incentive. By encouraging multinational companies onshore, the capacity for such companies to work closely with domestic users is enhanced. This is reflected in their capacity to deliver a more closely tailored product which directly responds to Telstra’s needs. For example, Telstra has recently contracted for the development of a network planning tool, in Australia, by a non resident company. This project (with a development cost of $26M) may not have been undertaken within Australia but for the availability of the tax incentive. The availability of the incentive ensures that such technology is owned in Australia and developed by Australians, all of which generates economic growth and employment in Australia and increases Australia’s technical competence in global markets.
Telstra considers that a system which enables a company to determine which R&D it will undertake with the minimum of bureaucracy produces far more efficient R&D undertakings than the granting of controlled Government grants influenced by bureaucratic discretions. Procedures for allocating grants are invariably administratively slow and do not respond to real time market needs. The entity concerned is far better positioned to determine the need for particular R&D to be undertaken based on its own intimate understanding of its business needs.
A company’s R&D expenditure like all other variable company expenditure, is highly discretionary and can be wound back considerably or moved off-shore in response to unfavourable circumstances within Australia. The effect of such a decision could have dire consequences for the Australian economy.
In summary, Telstra believes that incentives such as accelerated depreciation and R&D are an essential means of promoting the use and development of leading edge technology within Australian businesses. Any direct loss to the revenue from providing such incentives is only transitory and is far outweighed by the net revenue benefits from the economic growth created by such incentives.
A fundamental principle of taxation is that it should provide for competitive neutrality with regard to investment decisions. There are a number of elements to this principle:
·it should result in equal treatment between competing enterprises in the same industry;
·it should provide for competitive treatment between enterprises in different countries who are nevertheless competing; and
·it should provide for equal treatment between enterprises who are bidding for the same pool of scarce resources.
Parts of the current taxation system may challenge this principle. Telstra, like many businesses, relies heavily on the use of wasting intangible assets to operate its business. Many reports commissioned by the Federal Government over recent years (such as The Global Information ‘The Way Ahead’, The Goldsworthy Report) have overwhelmingly acknowledged that Australia’s future lies in the continuing development and use of intellectual property in business. However, the current taxation system provides virtually no taxation relief for the use of many wasting intangible assets in business. Such an imbalance between the tax relief provided for tangible and intangible assets used in business creates an artificial bias towards investments in tangible assets. Further, such an investment bias is not necessarily in the best interests of economic growth for Australia and inhibits Australian businesses ability to compete with many competitors who reside in countries that have tax systems which treat investments in tangible and intangible assets in a similar manner.
The Australian taxation system’s lack of tax neutrality has, on occasions, seriously undermined Telstra’s international competitiveness. Most notably in the area of acquisition of spectrum licences (an area where the tax inequity had to be redressed by specific amendments to the tax system to ensure Telstra’s was placed on a "level playing field" with our international competitors). Prior to the amendments, Telstra was in a position, because of the tax system, of being seriously disadvantaged in competing with international competitors for a spectrum licence in its own country. Most of the carriers Telstra was competing against for the licences resided in countries that had taxation systems which provided wide ranging taxation relief for wasting intangible assets.
The lack of equity in the treatment of intangible assets as compared to tangible assets has also come to the fore in the tax treatment of an Indefeasible Rights of Use ("IRU"). Under these arrangements Telstra may, due to the global structure of the telecommunication industry, acquire a fixed term intangible right to use a tangible asset owned by other international carriers. Again, Telstra is competing in the highly competitive and rapidly expanding international telecommunication industry with competitors from countries providing tax relief for such wasting intangible assets. Given the current tax treatment of money outlaid for these rights, which are an essential asset in operating our business, Telstra’s international competitiveness is hampered.
It must be stressed that a tax system that provided tax relief for wasting intangible assets would not provide international advantages to Australian businesses that operate in the global market, it would merely put such businesses on an even footing with their international competitors.
Telstra welcomes the recognition of the distortion caused by "blackhole expenditure".
As a principle of horizontal equity the taxation treatment of all losses and outgoings should equally be afforded some economically worthwhile tax relief. Examples of blackhole expenditure incurred by Telstra include expenditure on capital projects that are cancelled prior to completion and payments made to terminate leases. Such investment decisions are made on commercial efficiency grounds, yet the lack of tax relief for making such decisions undermines the commerciality of the decision and can lead to inappropriate investment decisions being made.
In summary, Telstra believes that the basis of any reform to the taxation system must address the issue of international competitive neutrality.
Telstra agrees that the cornerstone of an effective tax system demands simplicity in compliance with tax laws. A system that requires a business to incur prohibitive time and expenditure in complying with the laws unduly distracts the business resources away from the business’s core activities.
The relatively simple task of hiring labour to perform duties within a business is an example of an unnecessary complexity within the tax system. Due to differing definitions of employee and contractors between various State legislation and Federal legislation which require the withholding of tax from payments made for labour hire, ie Pay As You Earn (PAYE), Pay Roll Tax (PRT), Prescribed Payments System (PPS) and Reportable Payments System (RPS), the seemingly simple task of determining whether the labour hired is a contractor or an employee is a compliance nightmare that undermines a businesses view of the tax system.
A more recent example of legislation that has been introduced into Parliament without any apparent regard to the compliance ramifications is the A New Taxation System (Fringe Benefits Reporting) Bill 1998. This Bill illustrates the careful weighting that should be given to each of the 3 National Objectives set out in the First Discussion Paper. The Bill is directed at improving equitable outcomes for a number of taxation and social security measures. However, the lead time for the operation of the legislation and the systems requirements required to implement the requirements of the Bill place an onerous drain on Australian businesses limited financial and human resources.
We would be pleased to arrange a meeting with our technical personnel to elaborate on any of the matters raised in this submission if the Committee considers that such a meeting would be beneficial. If you have any queries or you wish to arrange a meeting to discuss the above you should contact John Burke on (03) 9634 2862 or (02) 9298 4851 or David Mouritz on (03) 9634 8605.