House of Representatives

International Tax Agreements Amendment Bill (No. 1) 2007

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

General outline and financial impact

What will this Bill do?

This Bill amends the International Tax Agreements Act 1953 to give the force of law in Australia to the following tax treaties:

·
The Convention between the Government of Australia and the Government of the French Republic 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 'the France Convention' for the purposes of this general outline) which was signed in Paris on 20 June 2006.
·
The Convention between Australia and the Kingdom of Norway for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion (referred to as 'the Norway Convention' for the purposes of this general outline) which was signed in Canberra on 8 August 2006.

The 2006 France Convention is Australia's second comprehensive tax treaty with France. The existing tax treaty, which was concluded in 1976 and partially revised by an amending Protocol in 1989, is not well aligned with modern business practices, the respective tax systems and modern tax treaty practice. The France Convention will also cover airline profits which are currently covered by the Agreement between the Government of Australia and the Government of the French Republic for the Avoidance of Double Taxation of Income Derived from International Air Transport (the Airline Profits Agreement) signed in 1969. The new France tax treaty will modernise the tax relationship between the two countries and will serve to facilitate trade and investment between Australia and France.

The 2006 Norway Convention is Australia's second comprehensive tax treaty with Norway. The existing tax treaty, which was concluded in 1982 is, like the existing tax treaty with France, and reflecting its age, not well aligned with modern business practices, the respective tax systems and modern tax treaty practice. The new Norway tax treaty will modernise the tax relationship between the two countries and will serve to facilitate trade and investment between Australia and Norway. Both the existing France and Norway treaties contained most favoured nation (MFN) obligations around providing similar taxation treatment in respect of dividends, interest and royalties to that provided by Australia to other countries. The obligation to negotiate was triggered by the entry into effect in 2003 of amendments to the treaty with the United States (US) and the renegotiated United Kingdom (UK) treaty.

Who will be affected by this Bill?

Persons who are residents of Australia and/or France or Norway and who derive income, profits or gains from Australia or France or Norway will be affected by this Bill.

How is the legislation structured?

The International Tax Agreements Act 1953 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 International Tax Agreements Act 1953 . The provisions of this 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).

In what way does this Bill change the International Tax Agreements Act 1953 ?

The International Tax Agreements Act 1953 is amended to insert the text of the France Convention and the Norway Convention as Schedules to that Act. Australia's tax treaties (with the exception of the Timor Sea Treaty which incorporates provisions for the avoidance of double taxation between Australia and Timor Leste) appear as Schedules to the above Act, which gives them the force of law.

When will these changes take place?

From the date of Royal Assent.

When will the Conventions enter into force, and from what date will the Conventions have effect?

The 2006 France Convention

The France Convention will enter into force on the first day of the second month following the date of last notification by diplomatic notes that the domestic processes to give the Convention the force of law in the respective countries has been completed. In Australia, enactment of this Bill giving the force of law to the Convention is the prerequisite to such notification.

Once it enters into force the Convention will apply as follows

Application in Australia

For withholding taxes on income derived:

·
on or after 1 January next following the date on which the treaty enters into force.

For other Australian taxes on income, profits or gains:

·
the Australian year of income beginning on or after 1 July in the calendar year next following the date on which the treaty enters into force.

Application in France

For taxes on income withheld at source:

·
the calendar year following the calendar year in which the treaty enters into force.

For taxes on income not withheld at source:

·
any calendar year or accounting period beginning after the calendar year in which the treaty enters into force.

For other taxes, for taxation where the taxable event occurs:

·
after the calendar year in which the treaty enters into force.

Exchange of information application date

From the date of entry into force of the treaty.

Assistance in recovery date of application

From the date agreed in an exchange of notes between Australia and France.

The 2006 Norway Convention

The Norway Convention will enter into force on the last date of notification by diplomatic notes that the domestic processes to give the Convention the force of law in the respective countries has been completed.

Once it enters into force the Convention will apply as follows

Application in Australia

For withholding taxes on income derived:

·
on or after 1 January next following the date on which the treaty enters into force.

For other Australian taxes on income, profits or gains:

·
the Australian year of income beginning on or after 1 July in the calendar year next following the date on which the treaty enters into force.

Application in Norway

For taxes on income withheld at source:

·
the calendar year following the calendar year in which the treaty enters into force.

Exchange of information application date

From the date of entry into force of the treaty.

Assistance in collection of taxes date of application

From the date agreed in an exchange of notes between Australia and France.

The financial impact of this Bill

The France Convention

The direct cost to revenue from the proposed tax treaty is estimated to be approximately A$10 million per annum. The estimated distribution of this first round cost in future years is shown in the table below:

2007-08 2008-09 2009-10 2010-11
-A$5m -A$10m -A$10m -A$10m

Treasury has not estimated the second round impact of the proposed tax treaty as Treasury does not quantify the second round impact of minor policy proposals as the benefits are generally too small to measure with any degree of certainty. However, it is expected that the Convention could lead to an increase in foreign investment in Australia and an increase in economic activity. The increase in economic activity is likely to lead to increases in other forms of tax collection. The second round effects could offset the direct costs to revenue.

The Norway Convention

Treasury has estimated the impact of the first round effects on forward estimates as unquantifiable but probably negligible.

Compliance costs

No significant compliance costs will result from the entry into force of the two Conventions.

Summary of regulation impact statements

The France Convention

Impact : Medium.

Main points:

·
The France Convention is expected to have an impact on Australian residents doing business with France and includes Australian investors, banks, suppliers of technology, consultants, exporters, Australian employees working in France, and Australian residents receiving pensions from France. The treaty will also impact on the Australian Government and the Australian Taxation Office (ATO).
·
While source country tax on interest will continue to be limited to 10 per cent, there will be no withholding tax charged on interest derived by a financial institution resident in the other country, or on interest derived by a government body of the other country. No tax is payable on dividends in the source country where the dividend is paid out of profits that have borne the normal rate of company tax (in Australia, where the dividend is franked). A 5 per cent rate limit applies to other dividends where, in the case of Australia, the dividend recipient is a company that holds directly at least 10 per cent of the voting power of the company paying the dividend, or, in the case of France, 10 per cent of the capital of the company paying the dividend. A 15 per cent limitation applies to other dividends. The 5 per cent and 15 per cent limits apply to both franked and unfranked dividends. The general limit for royalties will be reduced from 10 per cent to 5 per cent.
·
The revised tax treaty will assist the bilateral relationship by updating an important treaty in the network of commercial treaties between the countries, and by providing for greater cooperation between tax authorities to prevent fiscal evasion and tax avoidance.
·
The direct annual cost to revenue of the proposed treaty is estimated to be around A$10 million, which is likely to be offset by estimated second round revenue gains from increased investment, gross domestic product, and growth. No material costs to taxpayers have been identified as likely to arise from the proposed treaty but there is likely to be a small, unquantifiable administration cost. It is expected that overall, the new treaty will produce a positive economic outcome for Australia.

The Norway Convention

Impact : Medium.

Main points:

·
The Norway convention is expected to have an impact on Australian residents doing business with Norway and includes Australian investors, banks, suppliers of technology, consultants, exporters, Australian employees working in Norway, and Australian residents receiving pensions from Norway. The treaty will also impact on the Australian Government and the ATO.
·
While source country tax on interest will continue to be limited to 10 per cent, there will be no withholding tax charged on interest derived by a financial institution resident in the other country, or on interest derived by a government body 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.
·
The revised tax treaty 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 unquantifiable but probably negligible. No material costs to taxpayers have been identified as likely to arise from the proposed treaty but there is likely to be a small, unquantifiable administration cost. It is expected that overall, the new treaty will produce a positive economic outcome for Australia.


View full documentView full documentBack to top