House of Representatives

New International Tax Arrangements (Foreign-owned Branches and Other Measures) Bill 2005

Second Reading Speech

Mr Brough (Longman - Minister for Revenue and Assistant Treasurer)

I move:

That this bill be now read a second time.

This bill contains further reforms intended to modernise Australia's international tax regime, following the government's review of international taxation arrangements.

Schedule 1 to this bill amends the income tax law to allow dividends received by Australian branches of non-residents to be taxed by assessment instead of by withholding. In addition, non-residents with Australian branches will get franking credits when they receive franked dividends.

Taxing these branches by assessment instead of through withholding will mean Australian branches and subsidiaries of non-residents are treated similarly for income tax purposes when they receive dividends. This change is consistent with a general trend toward the separate entity treatment of branches for tax purposes.

Schedule 2 contains minor amendments to the controlled foreign companies rules.

These amendments address potentially inappropriate consequences that could occur following the listing of a country for the purposes of the controlled foreign companies rules. These amendments provide the ground work for the future listing of further countries.

Also, the amendments ensure that Australia's capital gains tax rules do not overextend their reach when controlled foreign companies' assets are sold. This reduces compliance costs associated with the controlled foreign companies rules when Australian residents buy or restructure foreign companies.

Schedule 3 gives Australian branches of foreign non-bank financial institutions separate entity treatment for income tax purposes-that is, they will be treated more like foreign-owned subsidiaries. This treatment is already given to Australian branches of foreign banks.

Extending the separate entity treatment to include foreign financial institution branches will ensure that the Australian tax system does not discriminate, on the basis of ownership and entity structure, between different financial institutions providing similar financial services in Australia.

Together with the changes contained in schedule 1, this schedule aims to improve competition in the financial services sector, provide for a more neutral tax treatment of branches and subsidiaries, and reduce compliance costs in certain cases.

Schedule 4 will prevent double taxation and non-taxation of employee shares and rights where individuals move between countries. This will be achieved by more closely aligning Australia's domestic income tax law with the OECD model tax convention.

The treatment of employee share or right income creates difficulties when employees move between countries, because the income may relate to employment over a long period. Where the employment is in more than one country, dividing the taxing rights between countries becomes complicated.

These amendments move towards the OECD approach by making the treatment of cross-border employee shares and rights clearer. This will facilitate application of the OECD model in double tax agreements. It will also help individuals who work in more than one country to calculate with certainty the Australian tax liability related to their employee shares or rights.

Finally, this bill corrects an error in the application of some amendments contained in a previous instalment of reforms.

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

I commend this bill and present the explanatory memorandum.

Debate (on motion by Ms George) adjourned.