Bills Digest No. 182  1999-2000International Tax Agreements Amendment Bill (No.1) 2000


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

International Tax Agreements Amendment Bill (No.1) 2000

Date Introduced: 6 April 2000

House: House of Representatives

Portfolio: Treasury

Commencement: On Royal Assent

Purpose

To:

  • incorporate an agreement to eliminate double taxation made with Romania into the International Tax Agreements Act 1953; and
  • amend a similar existing agreement with Finland via a new protocol so as to provide a reciprocal exception from withholding tax for full franked company dividend payments.

Background

Double Taxation Agreements

Australia has bilateral agreements with a number of countries, known as Double Taxation Agreements (DTAs), aimed to prevent the double taxation of income.(1) The DTAs deal with income from a number of specific sources, such as business income, dividends, interest and royalties.

According to the Explanatory Memorandum to the International Tax Agreements Amendment Bill (No.1) 2000:

Relief from double taxation is desirable because of the harmful effects double taxation can have on the expansion of trade and the movement of capital and people between countries. (2)

Australia's DTAs provide for the taxation treatment which is to apply to certain situations where income is received by a resident of one of the parties to the DTA from activities in the other parties territory. In particular, they generally specify which country may tax various categories of income and limitations of the amount that may be taxed. Subsection 4(2) of the International Tax Agreements Act 1953 provides that agreements are, in most cases, to overrule provisions of the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997, although a specific Australian law can overrule a DTA.

DTAs have a common format but differ to reflect the various tax rules applying in the countries with which Australia has an agreement. Australia currently has DTAs with over 40 countries, including:

  • China, Japan, Korea, Malaysia and Indonesia
  • Singapore, Thailand, India and Vietnam
  • most Western and Southern European and Scandinavian countries
  • Hungary and Poland
  • Ireland and the United Kingdom
  • South Africa
  • the United States of America, and
  • New Zealand.

Besides seeking to eliminate double taxation, the DTAs aim to combat evasion or avoidance by international tax arrangements. This is done through:

  • providing for the allocation of profits between related commercial parties on an arm's length basis,
  • generally preserving the application of domestic law rules that are designed to address transfer pricing and other international avoidance practices, and
  • providing for exchanges of information between the respective tax authorities.

The Romanian DTA is modelled on other recent comprehensive double taxation agreements reached with other countries. According to the Explanatory Memorandum, the primary objective is of this DTA is

to promote closer economic cooperation between Australia and other countries by eliminating possible barriers to trade and investment...The DTA will also establish greater legal and fiscal certainty within which cross-border trade and investment can be carried on and promoted. (3)

The DTA is likely to have most impact on Australian residents with business, investment or employment interests (including persons working as consultants) in Romania. Specific features of the DTA are listed on pages 9-11 of the Explanatory Memorandum. The DTA will come into operation when Australia and Romania have exchanged diplomatic notes to the effect that they have given the force of law to the agreement under their respective legislation systems.

The protocol modifying the existing DTA with Finland is likely to have most impact on Australian residents with business or investment interests in Finland. The primary objective of the DTA as contained in the Explanatory Memorandum essentially restates its main aspect, ie

[to] ensure reciprocal exemption from dividend withholding tax (DWT) of dividends paid out of fully taxed company profits to a resident of the other country and to update the existing DTA in a number of respects. (4)

Specific features of the modifications are listed on pages 51-52 of the Explanatory Memorandum. The DTA will come into operation 30 days after Australia and Finland have exchanged diplomatic notes to the effect that they have given the force of law to the agreement under their respective legislation systems.

Australian Romanian commercial relations(5)

Romania is Australia's largest export market in Central Europe and has been so for some years. Merchandise exports during 1999, mainly iron ore and coking coal, were valued at $75 million. Imports to Australia amounted to $8 million. In July 1999, an Australian Consulate-General was established in Bucharest to facilitate expanded commercial links and the development of bilateral contacts generally.

Much of Australia's trade stems from the use of Romania as a commercial hub, with Australian materials processed for re-export to other markets. There is some evident interest on the part of Australian companies in making greater use of Romania as a regional hub as well as cooperating with Romanian companies with a view to securing contracts associated with Balkan reconstruction. There is presently one large Australian investment in Romania, the Esmeralda gold extraction joint venture at Baia Mare. A cyanide spill from the Baia Mare tailings dam on 30 January 2000 resulted in contamination of the Tisza and Danube river systems.(6)

According to the 1996 census, there were almost 14,000 Romanian-born people living in Australia. Most of the community resides in Sydney and Melbourne.

Australian Finnish commercial relations(7)

Bilateral trade in 1998 totalled $882.9 million, with the balance of trade heavily in Finland's favour. Australia's exports to Finland in 1998 totalled $258.1 million, with our main exports being nickel ores (58%), other minerals and communications equipment. The high proportion of minerals in our export profile reflects the central role of Outokumpu Oy, a Finnish mining company in Australia which exports nickel ore and concentrates to smelters in Finland. Two Australian mining companies, Ashton and Western Mining, are also present in Finland. Australia's imports from Finland decreased by 9% to $624.8 million in 1998.

Finnish direct investment has grown significantly in recent years, from $17 million in 1996 to $52 million in 1997. Exports to Asia by Finnish companies based in Australia should also be factored in when considering the overall trade and investment relationship. Currently, 47 Finnish companies have their own representation in Australia, with 30 having subsidiaries of which 22 are in manufacturing, and a further 170 Finnish companies have agents in Australia. Prominent Finnish companies in Australia are Nokia, Outokumpu, Abloy, Tamrok, Kone, Valmet and Huhtamaki-Polarcup. There is significant potential for further Finnish investment in Australia, in particular in the forestry, paper and energy sectors. The original Finnish DTA was signed in September 1984.

There are approximately 17,000 Finns in Australia, of whom 9,800 were born in Finland, reflecting a wave of migration following the Second World War which has since slowed. Over 390 Australian citizens are registered as officially resident in Finland.

Main Provisions

Schedule 1 - Romanian Agreement

Item 1 inserts the term "the Romanian agreement' into the list of definitions contained in existing subsection 3(1) of the International Tax Agreements Act 1953.

Item 2 inserts a new section 11ZJ into the International Tax Agreements Act 1953 to make it clear that the DTA will have the force of law.

Item 3 inserts the text of the DTA into the International Tax Agreements Act 1953 by adding a new Schedule 45 to that Act.

Schedule 2 - Amending Protocol to the Finnish Agreement

Item 1 amends the term 'the Finnish agreement' currently in the list of definitions contained in existing subsection 3(1) of the International Tax Agreements Act 1953. The amended definition includes reference to the amending protocol.

Item 2 inserts the term 'the second Finnish protocol' into the list of definitions contained in existing subsection 3(1) of the International Tax Agreements Act 1953.

Item 3 inserts a new section 11PA into the International Tax Agreements Act 1953 to make it clear that the protocol will have the force of law.

Item 4 inserts the text of the protocol into the International Tax Agreements Act 1953 by adding a new Schedule 25A to that Act.

Endnotes

  1. Double taxation occurs when income earned by a taxpayer over a particular period of time is subject to comparable taxes under the taxation laws of 2 different countries.

  2. Explanatory Memorandum, p. 1.

  3. op cit., p. 6.

  4. op cit., p. 7.

    5 With the exception of the reference to the Baia Mare cyanide spill, the following information is from the Department of Foreign Affairs and Trade Romania Country Brief at http://www.dfat.gov.au/geo/romania/index.html#brief

  5. A copy of the United Nations report on the spill can be viewed or downloaded from http://www.unep.ch/roe/baiamare.htm

  6. The following information is from the Department of Foreign Affairs and Trade Finland Country Brief at http://www.dfat.gov.au/geo/finland/index.html#brief

Contact Officer and Copyright Details

Angus Martyn
7 June 2000
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 2000

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Published by the Department of the Parliamentary Library, 2000.

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