Bills Digest no. 160 2008–09
International Tax Agreements Amendment Bill (No.1)
2009
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
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Date introduced: 19 March 2009
House: House of Representatives
Portfolio: Treasury
Commencement:
Royal
Assent
Links: The
relevant links to the Bill, Explanatory Memorandum and
second reading speech can be accessed via BillsNet, which is at
http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
To amend the International
Tax Agreements Act 1953 (the Tax Agreements Act) to
incorporate into Australian law two tax agreements with each of the
British Virgin Islands and the Isle of Man.
Both the British Virgin Islands and the Isle of Man were once
identified by the OECD as having the characteristics of tax
havens.[1]
One characteristic of tax havens is their secrecy with regard to
income that might otherwise be assessable in other countries. The
main way that this problem is being dealt with by other countries
is through bi-lateral agreements for the sharing of tax
information.
Australia has recently entered such Tax Information Exchange
Agreements with the British Virgin Islands and the Isle of Man. To
give legal effect to these agreements, no new legislation is
required. These agreements are not the subject of this Bill.
Rather, this Bill gives legal effect to two other agreements that
Australia with these two countries. These latter agreements which
are in the nature of double tax agreements do require legislation
in order to be incorporated in Australian law. The agreements
incorporated into the Tax Agreements Act by this Bill set out some
rules for determining which country will have taxing rights over
certain income of a limited class of individuals who have relevant
connections with both countries.
The fact that that Allocation of Taxing Rights Agreements need
to be given effect by legislation may give the impression that they
are the more important of the two. From Australia s perspective,
however, Tax Information Sharing Agreements have primacy. The
Allocation of Taxing Rights Agreements the subject of this Bill are
offered by Australia to these other countries as part of a package
of benefits to encourage them to conclude a Tax Information
Exchange Agreement.[2] Although not directly the subject of this Bill, the Tax
Information Exchange Agreements are given some attention in this
digest in order to establish the context for the operation of the
Allocation of Taxing Rights Agreements that are the subject of this
Bill.
Income earned in tax havens does not have some special status in
the laws of other countries such as Australia. Such income is
generally assessable in the same way as other income.
There is no philosopher s stone that, through
alchemy, transforms Australian or foreign source income derived by
an Australian resident into non-taxable income in Australia by the
mere transmission through, or concealment in, a tax haven.[3]
The features that gives tax havens that status are principally
their low tax rates and secrecy. Information about income earned in
those countries simply does not come to the attention of taxing
authorities in other countries unless it is volunteered. Such
countries tend to offer or be perceived to offer themselves as
places where non-residents can escape tax in their country of
residence.
The OECD says that tax havens:
- erode the tax bases of other countries
- increase the complexity of the tax systems of other
countries
- put greater burdens and costs on tax administration as well as
on compliant taxpayers
- reduce taxpayer confidence in the integrity and fairness of the
tax system, and in government in general, and
- distort financial and real investment flows.[4]
In 1996, OECD Ministers requested that the OECD develop measures
to counter the use of tax havens, amongst other harmful tax
practices , because of the effects that they have on the erosion of
the tax base of other countries, amongst other reasons.[5] The G7 Heads of State
endorsed that request at their 1996 summit.[6] This began the OECD s ongoing project
to identify and eliminate harmful tax practices.
The 1998 OECD report
that resulted from that request identified some of the features of
tax havens.[7] These
included low or no effective tax rates, lack of transparency in the
way a tax regime works and a lack of effective exchange of
information with other countries.[8] The OECD undertook at that stage to develop a list
of tax havens within one year.[9] The result of that work was a report
published in 2000 which included both the British Virgin Islands
and the Isle of Man in a list of countries that met the OECD s
criteria for tax havens.[10]
By 2004, however, most of the countries identified as meeting
the tax haven criteria including the British Virgin Islands and the
Isle of Man had committed to principles of transparency and the
effective exchange of information. This step stopped them being
branded uncooperative according to the processes established under
the OECD s program.[11] The Isle of Man committed to these principles on
13
December 2000[12] and the British Virgin Islands on 2 February
2002,[13] in
each case by a formal letter of commitment as required by the OECD.
A list of countries that have committed to improving transparency
and establishing effective exchange of information in tax matters
is listed on the
OECD website.
The effective exchange of tax information:
enables governments to ensure that their own
tax laws are being complied with, particularly where cross-border
transactions are involved
Exchange of information between tax authorities
is widely recognised as an effective means of deterring and
discovering non-compliance in cross-border transactions. Both the
OECD and United Nations model tax conventions include a provision
that permits tax authorities to exchange information.
where effective exchange of information is
present, a country s ability to enforce its own tax rules is
enhanced.[14]
The way in which a country s commitment to transparency and the
effective exchange of information is manifested is in the signing
of Tax Information Exchange Agreements. The Australian Taxation
Office describes Tax Information Exchange Agreements as:
an important tool in Australia s efforts to
combat offshore tax evasion. The agreements will provide for the
effective exchange of information between Australia and its Tax
Information Exchange Agreement partners, promote fairness and
enhance Australia s ability to administer and enforce its domestic
tax laws[15]
Australia has now signed Taxation Information Exchange
Agreements with five countries formerly identified by the OECD as
having tax haven characteristics. They are; Bermuda (on 15 November
2005), Antigua and Barbuda (on 1 February 2007), Netherlands
Antilles (on 1 March 2007), the British Virgin Islands (on 28
October 2008) and the Isle of Man (on 29 January 2009).
As tax revenues decline due to the effects of the global
financial crisis, there has been even greater political interest in
dealing with international tax evasion, including tax havens. As
the OECD records in its recent 2009 report Overview of
the OECD s Work on countering International Tax
Evasion:
In July 2008, the G8 Heads of State and
government urged all countries that have not yet fully
implemented the OECD standards of transparency and effective
exchange of information in tax matters to do so without further
delay, and encourage the OECD to strengthen its work on tax evasion
and report back in 2010 . Similarly, the action plan issued by
the G20 following its meeting in November 2008 recognised the
importance of the OECD work in this area and urged that failures to
implement the standards should be vigorously addressed .[16]
A measure of the heightened efforts being made in relation to
tax havens is the high number of information exchange agreements
that have recently been signed or announced. Since November 2008,
almost 30 agreements have been signed or announced around the
world.
Australia recently signed two agreements with each of the
British Virgin Islands and the Isle of Man. The British Virgin
Islands is a self governing crown colony of the United Kingdom
located in the north-eastern Caribbean Sea. The Isle of Man is a
self-governing dependent territory of the British Crown, located in
the Irish Sea.
These are the full titles of the two agreements with British
Virgin Islands:
- Agreement between the Government of Australia and the
Government of the British Virgin Islands for the Exchange of
Information Relating to Taxes signed in London on 27 October
2008 (called The Exchange of Information Agreement or TIEA in this
digest)
- Agreement between the Government of Australia and the
Government of the British Virgin Islands for the Allocation of
Taxing Rights with Respect to Certain Income of Individuals
signed in London on 27 October 2008 (called the Allocation of
Taxing Rights Agreement )
These are the full titles of the two agreements with the Isle of
Man:
- Agreement between the Government of Australia and the
Government of the Isle of Man on the Exchange of Information with
Respect to Taxes signed in London on 29 January 2009
- Agreement between the Government of Australia and the
Government of the Isle of Man for the Allocation of Taxing Rights
with Respect to Certain Income of Individuals and to Establish a
Mutual Agreement Procedure in Respect of Transfer Pricing
Adjustments signed in London on 29 January 2009
For both of these countries, the first agreement concerns the
exchange of information relating to income and taxes (Tax
Information Exchange Agreements). These agreements are intended to
assist in uncovering income from countries that were once (at
least) identified as tax havens. No further legislation or
regulation is required in order to implement these
Agreements.[17]
Australia is able to fulfil its obligations under these agreements
under an existing provision of the legislation: Section 23 of the
Tax Agreements Act enables some of the Commissioner s existing
powers like information gathering powers to be used for the purpose
of meeting Australia s obligations under an international taxation
agreement such as this.
The other kind of agreement deals with the allocation of taxing
rights between Australia and the other country ( Allocation of
Taxing Rights Agreements ). These are of a similar nature to the
better known double tax agreements , an expression that tends to be
used for agreements with major trading partners that have
comparable tax systems. Neither the British Virgin Islands nor the
Isle of Man have comparable tax systems.
These Allocation of Taxing Rights Agreements set out rules for
determining which country is entitled to tax certain income of
certain individuals who may have relevant connections with both
countries. For instance, under British Virgin Islands agreement,
certain Government employees of the British Virgin Islands working
in Australia will not be taxed in Australia. In the absence of this
agreement, it is possible that at least some of these people would
be subject to tax in Australia. Because this second kind of
agreement may be at odds with Australian tax legislation, it must
be given effect by formally incorporating the agreement into
Australian tax legislation and giving it priority over that
law.
The Bill itself simply incorporates the Allocation of Taxing
Rights Agreements into the Tax Agreements Act, most of which
consists of annexed agreements that have been concluded with other
countries. The operative provisions of the Bill simply give effect
to the incorporation of the agreements into the Act. It is the
terms of the agreements that are incorporated by the Bill that are
the focus of the following explanation.
With one minor exception in relation to the Isle of Man, both
agreements allocate taxing rights between Australia and the two
other countries in order to prevent double taxation. The Isle of
Man agreement also establishes a mechanism to assist in the
resolution of disputes arising from transfer pricing adjustments
made to taxpayers income by the revenue authorities of Australia or
the Isle of Man.
The scope of people affected by both agreements is very limited.
Both agreements are concerned with government employees and
students. The Isle of Man agreement is also concerned with
retirees.
Articles 5 and 6 contain the main operative provisions of the
agreement.
Under Article 5 of the British Virgin Islands agreement, each
country has sole taxing rights over the salaries they pay to their
own employees working for their own government in the other
country. For instance, a British Virgin Islands resident who works
in Australia in a British Virgin Islands government office would
have their salary taxed by British Virgin Islands and not
Australia. That is, Australia forgoes its taxing rights over the
salaries of those British Virgin Islands government employees,
working in government services for non-commercial purposes, in
Australia.
Article 6 of the British Virgin Islands agreement obliges
Australia to not tax maintenance, education or training payments
received by British Virgin Islands students or business apprentices
who are temporarily studying in Australia if those payments are
made from outside Australia.
Articles 5, 6 and 7 are the main operative provisions of the
agreement.
Under Article 5, Australia must not tax pensions and retirement
annuities paid from Australia to residents of the Isle of Man if
that income is subject to tax in the Isle of Man. On the other
hand, Australia can tax pensions and retirement annuities paid from
the Isle of Man to residents of Australia.
Article 6 of the agreement has the same effect as Article 5 of
the British Virgin Islands agreement. That is, each country has
sole taxing rights over the salaries they pay to their own
employees working for their own government in the other country. An
Isle of Man resident who works in Australia in an Isle of Man
government office would have their salary taxed by the Isle of Man
and not Australia. That is, Australia forgoes its taxing rights
over the salaries of those Isle of Man government employees,
working in government services for non-commercial purposes, in
Australia.
Article 7 of the Isle of Man agreement has the same effect as
Article 6 of the British Virgin Islands agreement. That is, it
obliges Australia not to tax maintenance, education or training
payments received by Isle of Man students or business apprentices
who are temporarily studying in Australia if those payments are
made from outside Australia.
Article 8 is unique to the Isle of Man agreement. It obliges the
relevant agency in each country to try to resolve disputes arising
from transfer pricing adjustments made to taxpayer s income by the
revenue authorities of each country.
Committee consideration
The Bill has not been referred to any Committee. However,
according to usual practice, all four agreements have been
considered by the Joint Standing Committee on Treaties. The
Committee recommended that binding treaty action be taken.[18]
The Explanatory Memorandum says that the measure implemented by
this Bill will have negligible financial effect.
Item 3 inserts new sections
11ZM and 11ZN into the Tax Agreements Act to
provide that on the date that the agreements come into force, the
provisions of the agreements have the force of law in
Australia.
Item 4 of Schedule 1 to the Bill inserts, as
Schedules 48 and 49 to the Tax
Agreements Act, the agreements with the British Virgin Islands and
the Isle of Man respectively.
The Bill gives legislative force to two minor agreements with
the Isle of Man and the British Virgin Islands. On their terms,
these two agreements are of little significance to Australia. They
have been entered into by Australia in order to provide an
inducement to the other countries both of which have previously
been identified by the OECD as tax havens to enter into tax
information sharing agreements with Australia. These latter
agreements are intended to enable other countries to obtain
information about income earned in tax havens in a limited range of
circumstances. Tax information sharing agreements with both the
British Virgin Islands and the Isle of Man were signed on the same
day as the agreements that are the subject of this Bill.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2419.
[4]. OECD, The
OECD s Project on Harmful Tax Practices: the 2001 Progress
Report, published 2001, viewed 25 May 2009, http://www.oecd.org/dataoecd/60/5/2664450.pdf
[10]. OECD,
Towards Global Tax Co-operation, p. 17.
[18]. C Bowen,
Second reading speech: International Tax Agreements Amendment Bill
(No. 1) 2009, Federal Financial Relations Bill 2009 , House of
Representatives, Debates, 19 March 2009, pp. 3240 3241,
viewed 1 June 2009, http://www.aph.gov.au/hansard/reps/dailys/dr190309.pdf
Jonathan Chowns
4 June 2009
Bills Digest Service
Parliamentary Library
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