Explanatory Memorandum(Circulated by authority of the Minister for Primary Industries and Energy, the Hon. John Kerin, MP)
The Petroleum (Australia-Indonesia Zone of Cooperation) Bill 1990 (the Treaty Bill) gives effect to the Treaty Between Australia and the Republic of Indonesia on the a Zone of Cooperation between the Indonesian Province of East Timor and Northern Australia, which was signed by the Minister for Foreign Affairs and Trade Senator the Honourable Gareth Evans QC on behalf of Australia on 11 December 1989. The Treaty provides a framework for the exploration for and exploitation of petroleum resources in the Zone of Cooperation by Australia and the Republic of Indonesia.
2. Article 3 of the Treaty provides that control of the joint Australian/Indonesian development of Area A will be exercised by a Ministerial Council and a Joint Authority. The Ministerial Council will normally consist of those Ministers who are responsible for administering the laws of their respective Contracting States relating to petroleum exploration and exploitation. The Ministerial Council will have overall responsibility for petroleum operations in Area A. It will take all the major decisions, such as approving production sharing contracts, and will control the activities of the Joint Authority.
3. The Joint Authority will be responsible for the day-to-day management of petroleum operations in Area A including the release of exploration acreage, entering into production sharing contracts, approving seismic surveys and the drilling of wells, agreeing project developments, exercising control over the safety and environmental aspects of petroleum operations and distributing to each country their 50 per cent share of the proceeds of the Authority's share of petroleum production from production sharing contracts .
4. The Treaty Bill enables Australia to fulfil its obligation under the Treaty and in particular, gives effect to Article 3 of the Treaty by enabling the Ministerial Council and the Joint Authority to exercise certain rights and responsibilities of Australia in relation to the exploration for and exploitation of petroleum resources in Area A of the Zone of Cooperation. The Bill also clarifies the status of the Joint Authority.
5 . The Bill gives effect to Articles 32 and 33 of the Petroleum Mining Code (Annex B) by making it an offence for persons not to obtain approval from the Joint Authority before engaging in prospecting for petroleum in Area A, and before engaging in petroleum operations including prospecting. Powers are given to inspectors appointed by the Joint Authority to ensure that contractors conduct petroleum operations in a manner consistent with the Petroleum Mining Code and production sharing contract conditions.
6. In relation to civil claims, the Bill gives effect to Article 28 by providing for Northern Territory law to be applied to claims dealt with in that Article. In relation to matters not dealt with in Article 28, courts will continue to exercise jurisdiction and apply relevant law in accordance with the normal private international law rules.
7. The Taxation Code for the Avoidance of Double Taxation in Respect of Activities Connected with Area A of the Zone of Cooperation (Taxation Code) which forms part of the principal Zone of Cooperation Treaty (Annex D) is designed to avoid double taxation of income arising out of exploration for and exploitation of petroleum in Area A and to prevent fiscal evasion of taxes covered by the Taxation Code. Double taxation is avoided in this Treaty by allocating taxing rights between the contracting countries in relation to certain categories of income and by setting out how relief from double taxation is to be provided where other income may be taxed by both countries. The associated procedural and definitional provisions have generally been modelled on equivalent provisions common to both Contracting States' comprehensive double taxation agreements.
8. Article 29 of the Treaty and the Taxation Code (Annex D) provides the underlying framework for the imposition of taxes in Area A. In essence, Area A is to be treated as part of both Contracting States and double taxation is to be avoided in accordance with the provisions of the Taxation Code. Further, paragraph (3) of Article 29 is intended, inter alia, to prevent the application of Australia's petroleum resource rent tax in respect of projects in Area A.
9. In addition, Article 10 of the Treaty provides for exemption from income tax in both Australia and Indonesia of the Joint Authority. The official remuneration of its officers is exempt from tax other than in their state of residence.
10. The principal features of the Taxation Code are as follows:
- Companies are to be taxed in each Contracting State on 50% of their Area A profits and correspondingly, only 50% of their Area A losses are to be allowed for the purposes of the loss carry forward/transfer provisions of the income tax law of each Contracting State (Article 4(1));
- Capital gains/losses that accrue to companies in respect of property situated in Area A are to be reduced by 50% (Article 8(2));
- Individuals resident in either Contracting State are to be taxed on Area A source income and capital gains generally only in the Contracting State of residence (Articles 4(2), 8(1), 9(1), 10(1) and 11(1));
- Individuals resident in third countries are to be taxed on Area A source income (and interest and royalties to which Articles 6 and 7 apply respectively) in both Contracting States but subject to a 50% rebate of the tax payable on such income and, in the case of capital gains/losses, such gains/losses are to be reduced by 50% (Articles 4(3), 6(4), 7(4), 8(2), 9(2), 10(2) and 11(2));
- Dividends paid wholly or partly out of profits derived from sources in Area A, flowing from a company resident in one Contracting State to a person resident in the other Contracting State are to be taxed only in that other Contracting State (Article 5);
- Interest flowing from an Area A Contractor to a resident of a Contracting State may be taxed in the other Contracting State but only up to 10% of the gross amount of the interest and such interest shall be deemed to have its source in that second mentioned Contracting State for foreign tax credit purposes in the first mentioned Contracting State (Article 6);
- Royalties flowing from an Area A Contractor to a resident of a Contracting State may be taxed in the other Contracting State but only up to 10% of the gross amount of the royalties and such royalties shall be deemed to have their source in that second mentioned Contracting State for foreign tax credit purposes in the first mentioned Contracting State (Article 7);
- The taxable value of fringe benefits paid to individuals resident in third countries in respect of Area A employment is to be reduced by 50% (Article 12); and
- Goods entering Area A from places outside of either Contracting state are to be taxable, in the case of Australia, only if and when such goods are permanently transferred to another part of Australia (Article 13).
11. The Taxation Code also provides for the exchange of information and for consultation between the taxation authorities of the Contracting States.
12. It is intended that Part 3 of the Petroleum (Australia-Indonesia Zone of Cooperation) Bill 1990, Taxation Provisions, will, under the Administrative Arrangements Orders, be administered by the Treasurer.
13. The Petroleum (Australia-Indonesia Zone of Cooperation) (Consequential Provisions) Bill 1990 (the Consequential Provisions Bill) gives effect to provisions contained in certain Articles of the Treaty relating to criminal jurisdiction, customs, employment regulation, migration, quarantine, Income Tax and Fringe Benefits Tax.
14. The Consequential Provisions Bill amends the:
- Crimes at Sea Act 1979;
- Customs Act 1901;
- Fringe Benefits Tax Assessment Act 1986;
- Income Tax Assessment Act 1936;
- Industrial Relations Act 1988;
- Migration Act 1958;
- Petroleum (Submerged Lands) Act 1967; and
- Quarantine Act 1908.
15. The Crimes at Sea Act provides a regime for ascertaining the criminal law which is to be applied to an offence at sea committed in various circumstances. The amendments to the Crimes at Sea Act create a specific regime for the application of criminal law in Area A. This gives effect to Article 27 of the Treaty.
16. Subject to the continued application of the law of the "flag state" where relevant, in relation to acts or omissions connected with petroleum exploration and exploitation in Area A, citizens and permanent residents of Australia and Indonesia are subject respectively, to the criminal law of Australia and Indonesia. Nationals of a third state are subject to the criminal law of both Australia and Indonesia, with provision for consultation to determine which law is to be applied in any particular case.
17. Part 3 of this Bill effects three substantive amendments to the Customs Act 1901 as follows:
- a definitional amendment to provide that resources installations attached to the seabed in Area A of the Zone of Cooperation are, after the commencement of this Bill, to be regarded as not attached to the Australian seabed (clause 8)
- a control over the direct movement of persons and or goods between resources installations in Area A of the Zone of Cooperation and external places other than Indonesia (clause 9); and
- an exemption from customs import or export duty for goods taken out of or brought into Australia, for the purpose of being taken to Area A, and used for a purpose related to petroleum operations; goods brought into Australia from Area A, however, for the purpose of being entered for home consumption are to be subject to customs import duty in the normal way (clause 10).
18. This Bill amends the Fringe Benefits Tax Assessment Act 1986 to ensure that the general anti-avoidance provisions of the fringe benefits tax legislation are not diminished in any way by anything contained in the Treaty including the Taxation Code (Annex D of the Treaty).
19. This Bill amends the Income Tax Assessment Act 1936 to ensure that the general anti-avoidance provisions of the income tax legislation are not diminished in any way by anything contained in the Treaty including the Taxation Code (Annex D of the Treaty).
20. The amendment of the Industrial Relations Act enables employment contracts and collective agreements entered into by employers and employees in Area A of the Zone of Cooperation under Article 24(2) of the Treaty, to specify the Australian Industrial Relations Commission as the applicable mechanism for settlement of disputes which cannot be settled by negotiation.
21. The amendments of the Migration Act give effect to Article 23(1) of the Treaty which permits Australia to apply its migration laws to persons travelling to and from Area A. The Bill amends the Migration Act 1958 to provide that entry to Australia from a resources installation will be subject to the Migration Act. The Bill further amends the Migration Act to provide for regulations which may prescribe which persons arriving at or departing from a resources installation in Area A shall be taken to be leaving or entering Australia for the purposes of the Migration Act. Under the Migration Act as amended, the foregoing regulations may be expressed to apply to all or some of the resources installations in Area A. Otherwise, Area A shall be outside Australia for the purposes of the Migration Act.
22. Article 2 of the Treaty provides the basis on which exploration for and exploitation of petroleum resources are to be conducted. Area A is the area of joint development where the control of petroleum operations will be exercised by a Ministerial Council and a Joint Authority on behalf of Australia and the Republic of Indonesia. Area B is the area of sole Australian jurisdiction, and Area C is the area of sole Indonesian jurisdiction.
23. Accordingly, consistent with Article 2, the amendments of the Petroleum (Submerged Lands) Act alter the definition of "adjacent area" in which the Act applies. Redefinition and renewal provisions are provided for those parts of permits extending outside Area A.
24. The amendments of the Quarantine Act 1908 give effect to the Quarantine provisions of Article 23 of the Treaty. The Quarantine Act is amended to exclude Area A of the Zone of Cooperation from the operation of the Act. Regulations may be made under the Act, however, to apply the Act, parts of the Act, either subject to modifications or not, to or in relation to, all or specified resource installations attached to the seabed in Area A.