Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Peter Costello, M.P.)
General outline and financial impact
The Bill will amend the International Agreements Act 1953 (IntTAA) to give the force of law in Australia to an agreement between the Australian Commerce and Industry Office (ACIO) and the Taipei Economic and Cultural Office (TECO) concerning the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The agreement covers the various forms of income flows between Australia and Taiwan.
Any taxpayers who, for the purposes of the agreement, are residents of either Australia or Taiwan and who derive income, profits or gains from the other territory.
The Bill will make a number of changes to the IntTAA by inserting:
- in subsection 3(1) the definition of 'the Taipei agreement'.
- subsection 11ZF(1) which will give the force of law in Australia to the provisions of the Agreement between ACIO and TECO ('the Taipei agreement') according to their tenor.
- subsection 11ZF(2) which effectively provides that particular income, profits or gains which, under the agreement, may be taxed in Australia in the hands of a Taiwan resident, is deemed to have a source in Australia. This provision is designed to ensure that the right given by the agreement for Australia to tax that income is compatible with the domestic law rules with respect to taxation of non-residents and eliminates any possible conflict with the domestic law rules as to the source of income.
- subsection 11ZF(3) which will ensure that for the purposes of allowing a foreign tax credit under the provisions of the Income Tax Assessment Act 1936 (ITAA) and under Article 22 of the agreement that income, profits or gains that Taiwan may tax under the agreement in the hands of a resident of Australia is deemed to have a source in Taiwan.
- subsection 11ZF(4) which relates to the right given by paragraph 2 of Articles 11 and 12 of the agreement for each territory to tax outgoing interest and royalties, at a limited rate, and the related "source" rules contained in paragraph 5 of Articles 11 and 12. It will ensure that those provisions will not have the unintended effect of subjecting to Australian tax interest or royalties paid by an Australian resident to a Taiwan resident where the interest or royalties are an outgoing wholly incurred by the Australian resident in carrying on business through a permanent establishment outside both territories. Such interest or royalties would not be subject to tax under the provisions of the Australian income tax law (sections 128B and 6C of the ITAA).
- subsections 11ZF(5) and (6) which will allow the Commissioner to amend assessments to give effect respectively to the retrospective operation of Article 8 (Ships and Aircraft) of the agreement and the possible retrospective operation of paragraph 2 of the annex to the agreement.
- subsection 11ZF(7) which provides definitions of the terms 'Australian territory' and 'foreign territory' as used in the various subsections of proposed section 11ZF.
The Bill will also make consequential amendments to the ITAA and the Taxation (Interest on Overpayments and Early Payments) Act 1983 . These amendments reflect the fact that references in those acts to an agreement or to a double tax agreement are currently in terms of the agreement or double tax agreement being between Australia and another country. The agreement between ACIO and TECO does not satisfy this description and, accordingly, the references are being changed to accommodate that agreement.
The agreement will enter into effect on the latest date on which notes are exchanged between ACIO and TECO formally advising of the completion of all the requirements necessary to give the agreement effect in the domestic law of each of the territories to which the agreement applies.
Amendments effected by the Bill will commence on the day on which the Act receives the Royal Assent.
The agreement will have effect:
- in Australia , for withholding tax, in respect of income, profits or gains derived on or after the first day of the second month next following that in which the agreement enters into effect; and for other Australian taxes covered by the agreement, generally in respect of income, profits or gains of any year of income beginning on or after 1 July in the calendar year next following that in which the agreement enters into effect.
- in Taiwan , for withholding tax, in respect of income, profits or gains derived on or after the first day of the second month next following that in which the agreement enters into effect; and for other Taiwan taxes covered by the agreement, generally in respect of the year of income beginning on or after 1 January in the calendar year next following that in which the agreement enters into effect.
- in both territories , for tax in relation to profits from shipping and aircraft operations from 1January 1991; and in respect of income, profits or gains derived by an organisation carrying on activities promoting trade, investment and cultural exchanges between the territories from the dates specified in an exchange of letters by the competent authorities of the territories.
The operation of the agreement contained in this Bill is not expected to have a significant effect on revenue.