Bills Digest No. 148 2001-02
International Tax Agreements Amendment Bill (No. 1)
2002
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) 2002
Date Introduced: 21 March 2002
House: House of Representatives
Portfolio: Treasury
Commencement: Royal Assent. The various
measures have effect from differing dates often depending on when
certain conditions are met. Refer to the brief description of the
agreements in the background section of this Digest for further
information.
Purpose
To incorporate
into Australian law:
-
- an agreement made with the Russian Federation aimed to avoid
double taxation, and
-
- the recent protocol made with the United States amending the
1982 Australia/United States Double Taxation Agreement.
Australia has agreements with a number of
countries, known as Double Tax Agreements, aimed to prevent the
double taxation of income where income is received by a resident of
one country from activities in the other country. The agreement
also aims to help minimise tax avoidance and evasion. The
agreements deal with income from a number of specific sources, such
as business income, dividends, interest and royalties. The
agreements provide for the taxation treatment which is to apply,
particularly which country may tax various categories of income and
limitations of the amount that may be taxed. Subsection 4(2) of the
Income Tax (International 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 an agreement.
Agreements 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 agreements with over 41
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
-
- the United States of America, and
-
- New Zealand.
The aims of Double Tax Agreements are to
prevent:
-
- the double taxation of income received in one country that is a
party to an agreement by a resident of the other country that is a
party to an agreement. This is achieved by the separation of taxing
powers between the parties and, in certain circumstances, the
giving of credits for the payment of tax in the other country,
and
-
- tax evasion or avoidance by international tax arrangements.
This is aimed to be achieved by the transfer of information between
the taxation authorities of the countries that are parties to an
agreement.
Agreements tend to have standardised rules for
the taxation of various categories of income depending on its
source and the place of residence of the person deriving the
income, although different limits and variations to the standard
rules apply for the various countries. Broadly, income from certain
categories is reserved for taxation in the country of residence of
the taxpayer while income from other sources may be taxed in its
country of source, usually to a maximum percentage of the income
(the most important categories covered by the later rule are
dividends, royalties and interest). Where the country of residence
also taxes these classes of income, it is required to allow a
credit for the tax paid in the country of source. Agreements may
also have general catch all provisions designed to preserve the
operation of Australia tax rules unless specifically excluded by
the agreement.
The Bill reintroduces the provisions contained
in the International Tax Agreements Amendment Bill 2001 which were
intended to give effect to the Russian Double Taxation Agreement.
That Bill lapsed when Parliament was prorogued with the calling of
the 2001 Federal election.
The Russian Double Taxation Agreement falls
within the category of a standard double tax agreement in the
matters subject to the agreement and the taxing arrangements
between the countries.
The agreement was signed on 7 September 2000 and
will enter into force after notice has been given that the parties
have completed the processes necessary to give effect to the
incorporation of the agreement in their domestic law (including,
for Australia, the passage of this Bill).
In Australia: 1 July in the calendar year
following the year in which the Agreement enters into force.
In Russia: 1 January of the calendar year
following the year in which the Agreement enters into force.
The current taxation agreement with the United
States was signed on 6 August 1982 and had effect from 1 December
1983.
The proposed Protocol would update that
agreement in a number of important respects. Subject to certain
exceptions, dividends, interest and royalties will generally remain
taxable in both countries, but with changed limits on the tax that
the source country may charge on residents of the other country who
are beneficially entitled to the income.
Under the current Double Tax Agreement with the
US, subsidiaries of Australian companies that are resident in the
US pay 15 per cent withholding tax to the US Government on
dividends.(1)
This withholding tax on dividends received media
attention last year following the decision of manufacturer James
Hardie Industries to move its headquarters to Amsterdam. It was
reported that James Hardie management cited the tax penalty it was
suffering from having most of its earnings in the US and most of
its shareholders in Australia as the reason for the
move(2). The Double Tax Agreement between Australia and
the US meant James Hardie had to pay US company tax on its earnings
plus an extra 15 per cent on money it repatriated to its Australian
investors. As media reports indicated, this tax burden could be
significantly reduced by the company moving its headquarters to a
country with a more favourable tax treaty with the
US.(3)
The Protocol can be seen as an attempt to
address the issue of taxation of dividends for Australian companies
that have subsidiaries in the US. Under the Protocol, US
subsidiaries with more than 80 per cent ownership from an
Australian parent company will pay no withholding tax on the US
dividends. Subsidiaries with less than 80 per cent holding from a
single Australian owner will face a 5 per cent dividend withholding
tax. This reduced rate will not apply to dividends derived from
certain substantial holdings in US Regulated Investment Companies
or Real Estate Investment Trusts.(4)
The current Double Tax Agreement, allows both
countries to tax royalty flows but limits the tax of the country of
source to 10 per cent of the royalties paid to residents of the
other country.
Under the Protocol the limit on source country
taxation of royalties will be reduced from 10 to 5 per cent.
According to media reports this is a necessary concession to the US
in return for the changes in dividend withholding
tax.(5)
In addition, payments for the use of industrial,
commercial or scientific equipment will cease to be treated as
royalties for the purposes of the Agreement.
Article 11 of the Double Tax Agreement provides
for interest income to be taxed by both countries but requires the
country of source to generally limit its tax to 10 per cent where a
resident of the other country is beneficially entitled to the
interest.
Under the Protocol, source country tax on
interest will continue to be limited to 10 per cent. However, no
tax will be charged in the source country on interest derived
by:
-
- a government body of the other country; or
-
- a financial institution resident in the other country.
The Protocol also:
-
- contains new rules to remove double taxation of capital gains
in the case of departing residents
-
- contains a comprehensive Alienation of Property Articles
consistent with Australia's current treaty practice
-
- amends the Shipping and Air Transport Article
-
- amends Article 2 in order to update the list of taxes covered
by the Convention
-
- insert a new Limitation on Benefits Article to prevent 'treaty
shopping'.
Date of entry into force
The Protocol was signed on 27 September 2001 and
will enter into force when instruments of ratification have been
exchanged between Australia and the United States.
Date of effect
The provisions relating to withholding tax on
dividends, interest and royalties, will take effect from either 1
July 2003 or one month after the Protocol comes into force, (which
ever is the later). For other Australian tax, the Protocol will
have effect from 1 July in the calendar year following the year in
which the Protocol enters into force.
Yearly revenue cost of $190
million.(6)
Item 1 inserts the term "the
Russian 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 11ZK into the International Tax Agreements Act
1953 to make it clear that the Double Taxation Agreement will
have the force of law.
Item 3 inserts the text of the
Double Taxation Agreement into the International Tax Agreements
Act 1953 by adding a new Schedule 46 to that
Act.
Schedule 2 - Protocol to the Convention with the United
States
Item 1 amends the term 'the
United States convention' 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
United States 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 6AA into the International Tax Agreements Act
1953 to make it clear that the Protocol will have the force of
law.
Items 4-5 makes consequential
amendments to section 17A following changes to the treatment of
equipment royalties paid to US residents arising from the
Protocol(7) to exclude domestic law royalty payments
from the scope of the royalty withholding tax provisions in tax
treaties in cases where the payments are not treated as royalties
under the Royalties Article of a tax treaty.
Item 6 inserts the text of the
Protocol into the International Tax Agreements Act 1953 by
adding a new Schedule 2A to that Act.
-
- There is considerable variation in dividend withholding taxes
negotiated in the various Double Tax Agreements. For example the
South African treaty rate is zero, the Czech Republic is 5 per
cent, the Taiwan rate is 10 per cent and the current US rate is 15
per cent.
- The Canberra Times on 26 July 2001 reported that this
would reduce the tax bill by $30 million. 'Business urges tax
overhaul' A similar report in: 'Hardie leads way in tax shift
offshore', Australian Financial Review, 25 July 2001.
- According to the terms of the US/Netherlands Double Taxation
Treaty, US subsidiaries of Hardie would pay only 5 per cent
withholding tax on dividends to the US Government.
- These will either be taxed at the standard treaty rate of 15
per cent or according to the US domestic law rate which is
currently 30 per cent for companies.
- 'Costello blames US for dual tax stand-off',
Australian, 26 July 2001.
- Explanatory Memorandum, p. 9.
- See above at p. 4.
Mary Anne Neilsen
24 May 2002
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 2002
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Published by the Department of the Parliamentary Library,
2002.
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