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Executive summary

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Corporate income tax is an important part of Australia's tax base. This means that Australia has a strong interest in monitoring and, where necessary acting on, developments that pose a risk to the sustainability of its corporate tax base.

In December 2012 the Assistant Treasurer asked the Treasury to examine the risks to the sustainability of Australia's corporate tax base from the way current international tax rules are able to be used to minimise or escape taxation.

In February 2013, an OECD report Addressing Base Erosion and Profit Shifting concluded that the corporate tax bases of national governments were at serious risk of erosion reflecting, among other things, that 'current international tax standards may not have kept pace with changes in global business practices' and 'the tax practices of some multinational companies' (OECD, 2013, pp. 6-7).

In May 2013, Treasury released an Issues Paper for public consultation outlining the challenges that changes in the global economy pose to the international tax system. The paper sought views on the extent and nature of these challenges for Australia.

The purpose of this Scoping Paper is to set out the Treasury's assessment of the risks facing Australia's corporate tax system, analyse a broad range of possible policy options to address these risks; and make findings and recommendations. It is also intended that the paper serve as a platform to promote further public discussion and engagement on these issues.

The Scoping Paper first sets out a framework to analyse the risks to the sustainability of Australia's corporate tax base. The framework is used to assess business taxation in general and what should fall within Australia's jurisdiction to tax.

The framework is generally found to work well, but in relation to the digital economy Australia may not be best served by relying solely on the traditional concepts of source, residence and permanent establishment.

The Scoping Paper briefly summarises the history of company income tax in Australia, including the evolution of Australia's international tax policy settings and how this compares with international trends.

In order to assess the extent of risk to Australia's corporate tax base — and the possible policy responses to mitigate these risks — the Scoping Paper examines the underlying sources of risk to Australia's tax base. It finds that many of the underlying drivers of risk reflect deeply entrenched features of Australia's corporate tax system and economic and policy developments beyond Australia's borders and/or control.

It then examines the level of risk to Australia's corporate tax base from several perspectives: the extent to which Australia's corporate tax base is currently being affected by base erosion and profit shifting; the extent of the risk that has been identified internationally; and how the risks to Australia's corporate tax base may be changing over time by assessing trends in the underlying sources of risks.

The Scoping Paper notes the view in submissions on the Issues Paper that there was relatively little evidence of widespread erosion of Australia's corporate tax base at present from tax minimisation activity by multinational enterprises. While data limitations make it difficult to be definitive, this reflects, amongst other things, actions by successive governments to ensure the integrity of Australia's tax laws, the relative effectiveness of the ATO in enforcing corporate tax law, and the good compliance behaviour of companies.

Nevertheless it finds that the failure of international tax rules to keep pace with changes in the global business environment poses a significant risk to Australia's corporate tax base over time if it is not addressed.

In particular, the Scoping Paper notes that there is general agreement that the rise of the digital economy and the increased importance of intangibles present challenges to the corporate tax bases of countries generally, including Australia.

More broadly, erosion of corporate tax bases raises important global issues and addressing these issues is beyond the ability of any one country acting alone. It is therefore important that Australia's interests are prosecuted through multilateral forums.

The Scoping Paper recommends that the focus of Australia's policy response to the risk of corporate tax base erosion be in shaping and leading efforts to improve multilateral reform, with domestic action primarily focused on identifying and taking action against emerging risks that are identified where such action can be taken within existing international frameworks — such as the measures announced in the 2013-14 Budget to protect the integrity of the corporate tax base.

The proposed joint OECD and G20 project to implement a 15 point Action Plan represents an opportunity to make significant progress in modernising global multilateral tax arrangements.

As G20 chair in 2014, Australia can play a prominent role in determining and driving this reform agenda.