House of Representatives

New International Tax Arrangements (Participation Exemption and Other Measures) Bill 2004

Second Reading Speech

Mr Ross Cameron  (Parramatta - Parliamentary Secretary to the Treasurer)

I move:

That this bill be now read a second time.

The bill I am introducing today contains three significant government reforms intended to modernise Australia's international tax regime following its review of those rules. It delivers the third instalment of international tax reforms, following closely the debate on a bill containing measures from that review targeted at the superannuation and funds management industries and the enactment of a new tax treaty with the United Kingdom.

This bill focuses on the offshore business operations of Australian companies, making those active business operations more competitive. It allows companies to disregard capital gains from the sale of shares in active foreign subsidiaries, extends the current exemption for foreign dividends and branch profits to all countries and gives companies more freedom on where to locate their intra-group service companies. The first two of these measures are commonly referred to as a participation exemption.

With these measures, Australian companies will be better able to compete for capital and will have more flexibility in using that capital. With over $160 billion invested in foreign operations by Australian companies, the productive use of that capital is of utmost importance to the wellbeing of all Australians.

Schedule 1 to the bill reduces the amount of the capital gain or capital loss that will be subject to Australia's capital gains tax rules where Australian companies (or Australian-controlled foreign companies) sell shares in a foreign company with an underlying active business. A calculation of the proportion of the foreign company's assets that are active assets will be required to determine by how much a capital gain or loss is reduced.

Reducing the taxable gain will also assist those companies to compete more effectively in offshore markets with foreign multinationals, particularly those companies based in countries providing similar capital gains tax relief. By reducing the tax implications from selling interests in foreign subsidiaries greater flexibility is provided for corporate restructuring decisions.

The measure also promotes tax neutrality by ensuring that similar tax consequences will result from the sale of substantial shareholdings in a foreign company as currently occur where the foreign company sells its active foreign business assets and distributes those profits as a dividend.

This measure will apply to disposals of shares in foreign companies occurring on or after today. Immediate commencement will ensure that taxpayer behaviour remains unaffected by the start date of the measure so that possible adverse revenue consequences are avoided.

Schedule 2 extends the current tax exemptions for foreign branch profits and non portfolio foreign dividends to all countries from 1 July 2004. The same amounts earned by Australian-controlled foreign companies, regardless of source, will no longer be taxable in Australia.

These amendments reduce compliance costs by removing the need for Australian companies to keep track of the sources of their foreign profits as they can now be distributed free of Australian company tax regardless of their country of origin or level of foreign tax. The amendments simplify the length and complexity of the foreign source income rules.

The classification of countries as either listed countries (the current list of the seven most comparably taxing countries) or unlisted countries (the rest of the world) also simplifies the application of the foreign source income rules and reduces the costs of compliance.

While section 404 of the Income Tax Assessment Act 1936 that deals with certain portfolio dividends has been retained, necessitating the retention of a second list of over 50 countries, the policy of continuing the operation of that provision will be further reviewed by government.

Schedule 3 reduces the scope of the `tainted services income' rules. These rules apply to the offshore subsidiaries and branches of an Australian parent company, with the result that the Australian parent can be taxed on income an offshore subsidiary or branch derives from providing services to Australian residents or non-resident associates.

The application of the attribution rules to services (for example, computing services) provided between offshore group companies has unnecessarily impeded the international competitiveness of Australian companies. This bill therefore generally excludes from the rules, services provided by an offshore subsidiary or branch to its non-resident associates, as from 1 July 2004. It also provides for a more consistent treatment of services provided to branches in Australia and offshore.

The measure will generally reduce compliance costs for Australian companies, and their offshore subsidiaries, joint-ventures and branches, where those offshore entities provide services to non-resident associates. It may completely remove a small number of offshore entities from the controlled foreign companies regime resulting in additional compliance cost savings.

The measures in this bill will directly assist Australian companies with foreign subsidiaries or branch operations by generally ensuring that they only pay one layer of (foreign) tax on the profits of those offshore operations as well as reducing compliance costs in many cases. As a general rule, profits from offshore active business operations will not be taxed in Australia. However, any passive or highly mobile income shifted to those offshore investments will continue to be taxed in Australia on an accruals basis.

In short, by boosting Australia's status as an attractive place from which to invest globally, this bill will make Australian companies internationally competitive, increasing employment both in Australia and overseas. The changes are not just relevant to big business with extensive offshore operations. They will also assist those emerging Australian businesses looking to expand offshore to take advantage of global opportunities.

Full details of the measures in this bill are contained in the explanatory memorandum.

I commend this bill and present the explanatory memorandum.