House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Main features

The main features of the comprehensive agreements are as follows:

•

Business profits, if they are derived by a resident of one country through a branch or other "permanent establishment" in the other country, may be taxed in the latter country; otherwise they are to be taxed only in the country of residence.

•

Dividends, interest and royalties may be subjected to tax in the country of source, but there are general limits on the tax that that country may charge on such income flowing to residents of the other country. These limits are 15 per cent for dividends and 10 per cent for interest and royalties, except for the agreement with Korea, where the source country's tax upon interest and royalties is limited to 15 per cent.

•

Income from real property is taxable in full in the country in which the property is situated.

•

Profits from international operations of ships and aircraft will be taxed only in the country of residence of the operator.

•

Income from independent personal services will be taxed only in the country of residence of the recipient unless the income is attributable to activities performed from a fixed base of the recipient in the other country, in which case the income may be taxed in the other country. Under the agreements with the United States and Norway, income from the performance of services in the country other than the country of residence may also be taxed in that other country if the recipient is present there for a period or periods exceeding 183 days in aggregate in a year of income (United States convention) or 183 days in aggregate over any two consecutive years of income (Norwegian agreement). However, because, under Norwegian law, income derived by a resident of Norway from the performance of independent personal services outside Norway may be exempt from Norwegian tax, the Norwegian agreement provides that, to the extent that such income is exempt from tax in the country of residence, it may be taxed in the other country.

•

Income from dependent personal services, that is, employees' remuneration, will generally be taxable in the country where the services are performed.

However, where the services are performed during a short visit to one country by a resident of the other country, and the remuneration is not an expense borne by a resident of, or a permanent establishment in, the country visited, the income will be exempt in the country visited. As in the case of income from independent personal services, the Norwegian agreement also provides that exemption of this income from tax in the country visited will only apply to the extent that the income is subject to tax in the country of residence of the recipient.

•

Government officials are to be taxed by their home country.

•

Directors' fees will generally be taxed in the country of residence of the paying company. In the case of the United States agreement, directors' fees are treated as income from dependent personal services.

•

Income derived by public entertainers from their activities as such are generally to be taxed by the country in which the activities are performed. In the case of the United States agreement, the income of a public entertainer from his activities as such will only be taxed in the country in which the activities are performed when the gross income, including expenses, exceeds ten thousand United States dollars (US$10,000) in the year of income.

•

Pensions and annuities will generally be taxed only in the country of residence of the recipient.

•

Remuneration derived by professors or teachers during visits of up to two years duration for the sole purpose of teaching or research will, under the agreements with Ireland, Italy and Korea, generally be taxed only in the country of residence. The United States and Norwegian agreements do not contain provisions dealing specifically with professors and teachers and such persons will be subject to tax in accordance with general provisions in those agreements covering income for services rendered.

•

Students resident in one country who are temporarily present in the other country solely for the purpose of their education will be exempt from tax in the country visited in respect of payments made from abroad for the purposes of their maintenance or education. In the case of Korea, these provisions also extend to trainees.

•

Dual residents (i.e. residents of both countries party to an agreement) are, in accordance with specified criteria, generally to be treated for the purposes of the relevant agreement as being residents of only one country. However, in the agreement with the United States dual resident companies are not considered to be residents of Australia or the United States, and the agreement does not apply to them.

•

Associated enterprises may be taxed on the basis of dealings at arm's length.

•

Income derived from offshore activities, i.e., those connected with the exploration or exploitation of the sea-bed and subsoil and their natural resources, including income from an employment connected with such activities, will, under a special article in the Norwegian agreement, generally be taxed by the country in whose offshore area the activities or employment giving rise to the income are performed, except in relation to activities or employment of short duration. General provisions in the other comprehensive agreements are to a broadly similar effect.

•

Capital represented by real property owned by an Australian resident and situated in Norway, and movable property which forms part of the business property of a permanent establishment or fixed base th at an Australian resident has in Norway, may be taxed in that country. As Australia does not impose any comparable taxes, the article has no application in this country.

•

A non-discrimination article, provisions comparable to which are not included in any of Australia's other double taxation agreements, has been included in the revised United States agreement. The article, which was included specifically at the request of the United States, will not be given the force of law in Australia, and will not be able to be called in aid by a taxpayer in an objection against a taxation assessment. It does, however, provide for consultation between the Governments of both countries where any taxation measures are considered to infringe the principles of the particular article. It expressses each country's best intentions that, in enacting taxation measures, it will not treat citizens or residents of the other country, and enterprises or companies wholly or partly owned by them, in a less favourable way than it treats its own citizens or residents, enterprises or companies. The article will not affect any existing Australian taxation law of any future law that is substantially similar in general purpose or intent to existing laws. Nor will it affect laws designed to prevent the avoidance or evasion of taxes.

•

Exchange of information and consultation between the taxation authorities of each country is authorised.

•

Double taxation relief to be allowed by the country of residence where it taxes income taxed in the other country will be:

-

in Australia, by allowance of a credit against Australian tax for the other country's tax on interest and royalties, where that tax is subject to a limit expressed in the relevant agreement, and on dividends received by individuals. Dividends received by Australian companies from the other countries concerned are effectively freed from Australian tax by the inter- corporate dividend rebate, and all other categories of income received by Australian residents from, and taxed in, those countries are exempt from Australian tax by the operation of provisions in Australian tax law;

In the case of Korea, Australia will also grant a "tax sparing" credit for Korean tax forgone under agreed incentive legislation of that country.

-

in the other countries concerned, generally by the allowance of a credit against the other country's tax for the Australian tax paid on income derived by residents of that country from sources in Australia.

Notes on the clauses of the Bill are given below and these are followed by explanations of the articles of the comprehensive agreements and the airline profits agreement with India.