House of Representatives

Income Tax (International Agreements) Bill 1969

Income Tax (International Agreements) Act 1969

Notes for the Minister's Second Reading Speech

This Bill is a measure to give the force of law to agreements for the avoidance of double taxation on income flowing between Australia and three other countries. Two of the agreements - those with Singapore and Japan - are comprehensive. They deal with all substantial forms of income which may be subject to tax both in Australia and in the other countries. The third, which is with France, is limited to profits derived from international airline operations.

The Singapore agreement was signed on 11 February 1969, the Japanese agreement on 20 March 1969 and the limited agreement with France on 27 March 1969. The agreements will not have the force of law, however, until the necessary constitutional processes are completed both by Australia and the other countries.

Double taxation agreements have two principal functions. One is the elimination of double taxation and the other is the apportionment of the relevant taxation revenue between the contracting countries. It is this second function that causes most of the difficulties in negotiating a comprehensive agreement, particularly when there is not an equal flow of income between the two contracting countries. In such circumstances, a double taxation agreement can involve a greater surrender of tax revenue by one country than the other. Any apparent loss of tax revenue must, however, be weighed against the advantages that accrue from an agreement. For example, in the case of a capital-importing country, a double taxation agreement removes some of the impediments to foreign investment, and thus tends to increase the volume of capital inflow. This, in turn, has advantages not only in terms of fostering economic growth but also in terms of the tax revenues derived in due course from the expansion of the economy.

Our general aim, therefore, is to negotiate agreements which represent a satisfactory compromise as to each country's taxing rights and which, at the same time, will foster trade and investment between the two countries on terms acceptable to each. I am confident that this has been achieved in the two comprehensive agreements now under consideration.

The agreements with Singapore and Japan are in substance much the same as our new agreement with the United Kingdom which Parliament approved last year. I will now refer to the main points.

Under both agreements, Australia is to reduce its tax on dividends flowing to the other country from 30 per cent to 15 per cent of the amount of the dividends. However, where the dividends form part of the proceeds of a business being carried on here by a Japanese or Singapore enterprise, ordinary rates of tax will apply. In converse circumstances Japan is also to reduce its rate - currently 20 per cent - to 15 per cent. Singapore does not effectively impose a separate tax on dividends and the agreement provides that Australian residents are to continue to be free from Singapore tax on dividends, while that country's law remains in its present state. If Singapore does introduce a separate tax on dividends, it will be obliged to restrict the tax to no more than 15 per cent of dividends flowing to Australian residents.

I mention that profits out of which dividends are distributed by Australian public companies to foreign shareholders bear the company tax rate of 45 per cent, so that, with withholding tax at the rate of 15 per cent, the total Australian tax on each $100 of profit is $53.25. I suggest that this is a reasonable contribution to Australian revenue.

Both agreements also limit each country's tax on interest flowing to residents of the other country to 10 per cent of the interest, except where the interest constitutes business profits of a branch or other permanent establishment in the country of source. There will therefore be no reduction in the Australian withholding tax rate of 10 per cent. For Japan, there will be a reduction from 20 per cent and for Singapore from 40 per cent.

In general, royalties are to be treated in the same way as interest. For Australia this will mean that, instead of tax at general rates on net royalties flowing to Singapore or Japan, our tax will be limited to 10 per cent of gross royalties. For the other countries it will mean reductions of the same order as for interest.

As is the case with all our existing agreements, the Japanese agreement provides that the country of residence of the operator is to have sole taxing rights in respect of profits of airline or shipping companies from international traffic. Profits from the carriage of cargoes, mail or passengers from one place in a country for discharge at another place in that country will remain taxable in the country of shipment.

The Singapore agreement corresponds with the Japanese agreement as to airline profits. Each country is, however, to retain taxing rights on profits from international shipping traffic derived by residents of the other, but must reduce the tax normally payable by one-half. Shipments in a country for discharge in that country will not be regarded as international traffic.

Both agreements follow the customary arrangement that the business profits of an enterprise of one country may be taxed in the other if they are derived there through what is the broad equivalent of a branch - or, as it is invariably described in double taxation agreements, a 'permanent establishment'.

The two agreements contain provisions which will ensure that, where both countries tax the same income, the country in which the taxpayer resides is to give credit against its tax for the tax of the country of source. The credit will not, of course, exceed the tax of the country of residence. Provisions of the Bill will ensure that interest and royalties derived by Australian residents from Singapore and Japan, and which are subject to the tax limitation of 10 per cent in those countries, will be taxed in Australia with credit being allowed for the overseas tax.

I should mention that, in the case of Singapore, two special provisions have been made in the general area of credits. Singapore, as a developing country, has enacted economic incentive legislation, a feature of which is the remission of tax on income arising from foreign investment in, or the supply of industrial know-how to, Singapore enterprises.

As to direct investment by an Australian company in a Singapore undertaking, Singapore accepts that this would best be done by the Australian company establishing a subsidiary company in Singapore. The Singapore profits of such a company would not be subject to Australian tax under our general law, but Singapore was concerned that, when the profits were remitted to the Australian parent company by way of dividends, they might then be subject to Australian tax, so nullifying any remission of Singapore tax that had been made. This would not, in fact, occur in practice because Australian resident companies are, by virtue of the rebate of tax allowed on inter-company dividends, in general effectively free of tax on dividends received from another company - the dividends are not taxed until re-distributed to individual shareholders. Nevertheless it was decided to make it quite clear in the agreement that an Australian company owning at least 10 per cent of a Singapore company will continue, during the currency of the agreement, to receive the rebate of tax on dividends that the Australian taxation law provides.

The Singapore economic incentives also apply in respect of interest on foreign borrowings and industrial royalties payable overseas. In any case where, as to income of this kind received by an Australian resident from Singapore, Singapore remits the 10 per cent tax it is entitled to impose, the Australian resident will be treated for taxation purposes as having paid the tax. For assessment to Australian tax, the income received will be increased by the notional Singapore tax and credit allowed in respect of that tax. This will avoid the Singapore remission being nullified by lack of credit in Australia and at the same time provide a fair result for the Australian revenue.

Apart from the provisions I have mentioned, the two agreements contain the usual provisions - which are common to double taxation agreements - relating to the taxation of visiting businessmen and employees, public entertainers, students and pensioners.

In broad terms, the Singapore agreement will, if this Bill is approved, have effect in Australia from 1 July 1969 and in Singapore from 1 January 1969. A formal exchange of instruments of ratification will be necessary in relation to the Japanese agreement but it is expected that these formalities will be completed in time for the agreement to apply in Australia and Japan respectively from the same dates as the Singapore agreement.

The purpose of the limited agreement with France is to ensure that Australia and France each has the sole right to tax profits of its own international airline to the extent that they are attributable to international traffic. This basis also applies in relation to other countries with which we have comprehensive agreements and it does much to facilitate the financial arrangements of international airlines. The French agreement will, on entering into force, apply in Australia from, broadly, 1 July 1966 and in France from 1 January 1967. I might mention that the difference in dates of application as between Australia and the countries concerned is due to differences in tax years in the various countries.

A memorandum containing much more detailed explanations of technical aspects of the Bill and of the agreements is being made available to Honourable Members.

I commend the Bill to the House.