Explanatory MemorandumCirculated By the Authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP
Malaysian protocol (No. 3)
Outline of chapter
6.1 This Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the Third Protocol amending the Agreement between the Government of Australia and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income as amended by the First Protocol of 2 August 1999 and the Second Protocol of 28 July 2002 (Malaysian protocol No. 3), which amends the existing tax treaty with Malaysia (as amended by the Malaysian protocol (No. 1) and the Malaysian protocol (No. 2) (the existing Malaysian agreement). Subsection 3AAA(1) of the Agreements Act 1953 will define the Malaysian protocol (No. 3) and subsection 5(1) will give it the force of law in Australia.
Context of amendments
6.2 The Malaysian protocol (No. 3) was signed in Canberra on 24 February 2010.
6.3 The Malaysian protocol (No. 3) was negotiated in the context of recent international progress in improving tax transparency and exchange of taxpayer information between countries.
6.4 Once in force, the Malaysian protocol (No. 3) will replace the Exchange of Information (EOI) Article in the existing Malaysian agreement with a new Article that meets the international standard on tax information exchange developed by the Organisation for Economic Co-operation and Development (OECD).
Summary of new law
6.5 The main changes to the EOI Article of the existing Malaysian agreement (as revised by the Malaysian protocol (No. 3)) are as follows:
- neither tax administration can refuse to provide information solely because it does not have a domestic interest in such information, or because the information is held by a bank or similar institution [New Article 25, paragraphs 4 and 5] ;
- the Article now expands the scope of the EOI Article, as it will now allow tax administrations to request taxpayer information with regard to all federal taxes and not just taxes to which the treaty applies [New Article 25, paragraph 1] ; and
- the Article also provides that information received by a tax authority may be used for other purposes when the laws of both countries permit this and where the tax authority supplying the information authorises such use [New Article 25, paragraph 2] .
Comparison of key features of new law and current law
|New law||Current law|
|The Malaysian protocol (No. 3) closely aligns Article 25
(Exchange of Information)
to the current OECD standard. The effect of the change is to expand the range of taxes to which the Article applies and to clarify that neither bank secrecy laws nor any requirement of a domestic tax law interest in the information limits the exchange of information.
The new rules also provide that information received may be used for non-tax purposes when the laws of both countries permit this and the supplying authority authorises such use.
|The existing rules apply to a narrower range of taxes and do not require the exchange of information that is not obtainable by the tax administration under domestic law.
The information received can only be used for tax purposes
The Malaysian protocol (No. 3)
6.6 A full transcript of the Malaysian protocol (No. 3) and detailed explanation follows:
'THIRD PROTOCOL AMENDING THE AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF MALAYSIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AS AMENDED BY THE FIRST PROTOCOL OF 2 AUGUST 1999 AND THE SECOND PROTOCOL OF 28 JULY 2002
The Government of Australia
The Government of Malaysia
DESIRING to amend the Agreement between the Government of Australia and the Government of Malaysia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income done at Canberra on 20 August 1980 (as amended by the first Protocol to that Agreement, done at Sydney on 2 August 1999 and the second Protocol to that Agreement, done at Genting Highlands on 28 July 2002), in this Protocol (hereinafter referred to as "the Agreement, as amended"),
Have agreed as follows:
Article 25 of the Agreement, as amended, is deleted and substituted with the following:
EXCHANGE OF INFORMATION
1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to the Agreement. The exchange of information is not restricted by Articles 1 and 2.
2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorises such use.
3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:
- to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
- to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
- to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy ( ordre public ).
4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.
5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person."
This Protocol, which shall form an integral part of the Agreement, as amended, shall enter into force on the last of the dates on which the Contracting States exchange notes through the diplomatic channel notifying each other that the last of such things has been done as is necessary to give this Protocol the force of law in Australia and in Malaysia respectively, and thereupon this Protocol shall have effect.
IN WITNESS whereof the undersigned, being duly authorised, have signed this Protocol.
Done in duplicate in the English and Malay languages at Canberra,
this twenty-fourth day of February two thousand and ten, both texts being equally authentic.
FOR THE GOVERNMENT AUSTRALIA: FOR THE GOVERNMENT OF MALAYSIA Hon Nicholas Sherry HE Dato' Salman Ahmad Assistant Treasurer High Commissioner of Malaysia
Detailed explanation of the Malaysian protocol (No. 3)
Substitutes new Article 25 (Exchange of Information) into the existing Malaysian agreement
6.7 This protocol aligns the information exchange provisions to the current OECD standard by replacing Article 25 ( Exchange of Information ) of the existing Malaysian agreement. The new Article 25 continues to provide for the exchange of tax information by the tax administrations of the two countries, but differs from the previous approach in the following ways:
- the scope is expanded to a wider ranges of taxes;
- the new provision clarifies that the Commissioner of Taxation (Commissioner) is obliged to obtain information for Malaysian tax authorities regardless of whether Australia has a domestic tax interest in the information sought or whether the information concerns a resident of either country;
- bank secrecy laws do not limit the exchange of information; and
- information received by a tax authority may be used for other purposes when the laws of both countries permit this and where the tax authority supplying the information authorises such use.
Foreseeably relevant information
6.8 Article 25 authorises and limits the exchange of information by the two competent authorities to information foreseeably relevant to the administration or enforcement of the relevant taxes. The exchange of information is not restricted by Article 1 ( Personal Scope ) of the existing agreement, and may therefore cover persons who are not residents of Australia or Malaysia.
6.9 The standard of foreseeable relevance is intended to ensure that information may be exchanged to the widest possible extent. However, competent authorities are not entitled to request information from the other country which is unlikely to be relevant to the tax affairs of a taxpayer, or to the administration and enforcement of tax laws. [New Article 25, paragraph 1]
6.10 The change in wording from 'necessary' used in the previous version of the Article to a 'foreseeably relevant' standard reflects the wording in Article 26 ( Exchange of Information ) of the OECD Model Tax Convention on Income and on Capital (OECD Model) and no difference in effect is intended.
Taxes to which this Article applies
6.11 Under the corresponding Article in the existing Malaysian agreement, the information that could be requested and obtained between the two countries was limited to information in relation to taxes to which that agreement applied (generally income taxes).
6.12 Under the new Article 25, the range of taxes for which information may be exchanged has been expanded. The Australian competent authority can now request and obtain information concerning all federal taxes from the Malaysian competent authority. This means, for example, that information concerning Australian indirect taxes (that is, the goods and services tax (GST)) may be requested and obtained from Malaysia. [New Article 25, paragraph 1]
6.13 Similarly, in the case of Malaysia, the Malaysian competent authority can now request and obtain information concerning all federal taxes from the Australian competent authority.
Use of exchanged information
6.14 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted in a manner which is consistent with the approach taken in the OECD Model. However, the final sentence of this paragraph permits the information to be used for other purposes when the laws of both countries permit this and the tax authority supplying the information authorises such use. [New Article 25, paragraph 2]
6.15 Any information received by a country must be treated as secret in the same manner as information obtained under the domestic law of that country, and can only be disclosed to the persons identified in paragraph 2 of the Article. [New Article 25, paragraph 2]
No domestic tax interest required
6.16 When requested, a country is required to obtain information under the new Article in the same manner as if it were administering its domestic tax system, notwithstanding that the country may not require the information for its own purposes. Australia would recognise this obligation to obtain relevant information for treaty partner countries, even in the absence of an explicit provision to this effect. [New Article 25, paragraph 4]
6.17 The country requested to provide information under this new Article 25 is not obliged to do so where:
- it would be required to carry out administrative measures at variance with the law and administrative practice of either Australia or Malaysia; or
- such information is not obtainable under the domestic law or in the normal course of administration.
[New Article 25, subparagraphs 3a) and b)]
6.18 Also, in no case is the country receiving the request obliged to supply information under new Article 25 that would:
- disclose any trade, business, industrial, commercial or professional secret or trade process; or
- be contrary to public policy.
[New Article 25, subparagraph 3c)]
Information held by banks, other financial institutions, trusts, foundations and nominees
6.19 Paragraph 5 ensures that paragraph 3 of new Article 25 cannot be used to prevent the supply of information solely because the information is held by banks, other financial institutions, trusts, foundations, nominees etc. The addition of this paragraph will not have any practical application for Australia, since Australian domestic tax law already permits the Commissioner to obtain information from banks and financial institutions in order to meet obligations under EOI Articles in tax treaties or Tax Information Exchange Agreements. [New Article 25, paragraph 5]
Information that exists prior to the entry into force of the Malaysian protocol (No. 3)
6.20 Once new Article 25 is effective, the competent authorities can exchange information that relates to transactions or events occurring prior to entry into force of the protocol. This approach conforms to the international practice contained in paragraph 10.3 of the OECD Commentary on Article 26 ( Exchange of Information ).
Date of entry into force of the Malaysian protocol (No. 3)
6.21 Article 2 provides that the Malaysian protocol (No. 3) shall form an integral part of the existing Malaysian agreement and for the entry into force of this protocol. The protocol will enter into force on the date of the last exchange of diplomatic notes notifying that the domestic processes to give the protocol the force of law in the respective countries has been completed. Once the protocol enters into force new Article 25 will have effect. In Australia, enactment of the legislation giving the force of law in Australia to the Malaysian protocol (No. 3), along with tabling of the protocol in Parliament, are prerequisites to the exchange of diplomatic notes. [Article 2 of the Malaysian protocol (No. 3)]