Explanatory Memorandum(Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)
General outline and financial impact
This Bill amends the International Tax Agreements Act 1953 (Agreements Act) to give the force of law in Australia to the Agreement between the Government of Australia and the Government of Finland for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion , and its associated Protocol, (together referred to as 'this Agreement' for the purposes of this general outline) which was signed in Melbourne on 20 November 2006.
This Agreement is Australia's second comprehensive tax treaty with Finland. It will modernise the tax relationship between the two countries and will serve to facilitate trade and investment between Australia and Finland. This Agreement will replace the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and its associated Protocol which were both signed in Canberra on 12 September 1984, and the Protocol to Amend the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income which was signed in Canberra on 5 November 1997 (together referred to as 'the existing Agreement' for the purpose of this general outline).
The existing Agreement contains most favoured nation (MFN) obligations which require the provision of similar taxation treatment in respect of interest and royalties to that provided by Australia to other countries, as well as the inclusion of a Non-Discrimination Article to protect taxpayers from tax discrimination. The obligation to negotiate was triggered by the entry into effect in 2003 of amendments to the treaty with the United States of America and the renegotiated United Kingdom of Great Britain and Northern Ireland treaty.
Persons who are residents of Australia and/or Finland and who derive income, profits or gains from Australia or Finland will be affected by this Bill.
The Agreements Act gives the force of law in Australia to Australia's tax treaties which appear as Schedules to that Act. The provisions of the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997) and the Fringe Benefits Tax Assessment Act 1986 are incorporated into and read as one with the Agreements Act. The provisions of the Agreements Act (including the terms of the tax treaties) take precedence over provisions of the:
- ITAA 1936 (other than section 160AO which determines maximum foreign tax credits and the general anti-avoidance rules under Part IVA);
- ITAA 1997; and
- Fringe Benefits Tax Assessment Act 1986 (other than section 67 which is an anti-avoidance rule).
The Agreements Act is amended to insert the text of this Agreement as a Schedule to that Act. Australia's tax treaties appear as Schedules to the above Act, which gives them the force of law.
From the date of Royal Assent.
This Agreement will enter into force 30 days after the date of the last notification by diplomatic notes that the domestic processes to give this Agreement the force of law in the respective countries have been completed. In Australia, enactment of this Bill giving the force of law to this Agreement is the prerequisite to such notification.
Once it enters into force this Agreement will apply as follows
Application in Australia
For withholding taxes, on income derived:
- on or after 1 January in the calendar year next following the date on which this Agreement enters into force.
For other Australian taxes, on income, profits or gains:
- any year of income beginning on or after 1 July in the calendar year next following the date on which this Agreement enters into force.
Application in Finland
For taxes on income withheld at source, on income derived:
- on or after 1 January in the calendar year next following the year in which this Agreement enters into force.
For other taxes on income, for taxes chargeable for:
- any tax year beginning on or after 1 January in the calendar year next following the year in which this Agreement enters into force.
Exchange of information application date
From the date of entry into force of this Agreement.
Assistance in the collection of taxes date of application
From the date agreed in an exchange of notes between Australia and Finland.
Treasury has estimated the impact of the first round effects on forward estimates as negligible.
No significant compliance costs will result from the entry into force of this Agreement.
Impact : Minimal.
Main points :
- This Agreement is expected to have an impact on Australian residents doing business with Finland and includes Australian investors, banks, suppliers of technology, consultants, exporters, Australian employees working in Finland, and Australian residents receiving pensions from Finland. This Agreement will also impact on the Australian Government and the Australian Taxation Office (ATO).
- While source country tax on interest will generally continue to be limited to 10 per cent, there will be no withholding tax charged on interest derived by a financial institution that is resident in the other country, or on interest derived by a government body or central bank of the other country. No tax is payable on dividends in the source country where the dividend recipient is a company that holds directly at least 80 per cent of the voting power of the company paying the dividend, subject to certain conditions. A 5 per cent rate limit applies to other dividends where the dividend recipient is a company that holds directly at least 10 per cent of the voting power of the company paying the dividend. A 15 per cent limitation applies to other dividends. These limits apply to both franked and unfranked dividends. The general limit for royalties will be reduced from 10 per cent to 5 per cent.
- This Agreement will assist the bilateral relationship by updating an important treaty in the network of commercial treaties between the countries and provides for greater cooperation between tax authorities to prevent fiscal evasion and tax avoidance.
Treasury has estimated the impact of the first round effects on forward estimates as negligible. No material costs to taxpayers have been identified as likely to arise from this Agreement but there is likely to be a small, unquantifiable administration cost. It is expected that overall, this Agreement will produce a positive economic outcome for Australia.