House of Representatives

Income Tax (International Agreements) Amendment Bill 1976

Income Tax (International Agreements) Amendment Act 1976

Second Reading Speech

by the Treasurer, the Hon. Phillip Lynch, M.P.

This Bill will provide legislative authority for the entry into force of comprehensive double taxation agreements with the Netherlands and France.

The agreements were signed recently and deal with all substantial forms of income flowing between Australia and the other two countries.

Neither of the agreements can enter into force until all necessary constitutional processes are completed both by Australia and the other country.

For Australia, this Bill will, when assented to, complete the processes required of us.

Double taxation agreements have two principal functions - the elimination of international double taxation and the prevention of fiscal evasion.

The former involves the apportionment by one means or another of the relevant taxation revenue between the contracting countries.

There are various means of achieving this apportionment.

Some income is taxed only in the country of residence; other income is taxed only in the country where it has its source.

The country of source may agree to limit its tax on some items of income and, where both countries do tax particular income, the home country of the taxpayer allows a credit against its own tax for the amount that is paid to the other country.

Such revenue sacrifices as one country or the other makes are to be seen in the light of the favourable impact that these agreements have on trade and investment flows, and on the improvement of more general relationships between countries.

And, it is often overlooked that, where a country in which income originates does reduce its rate of tax on an item of income, the home country will also be levying tax on the income.

Each of the new agreements is along the lines of Australia's modern agreements, that is, those negotiated or re-negotiated since 1967.

The previous Government had agreed to the substance of the new agreements, and I think that only a brief description of their principal features is required from me in this introductory speech.

Under both agreements, Australia is to reduce its withholding tax on dividends flowing to the other country, from 30 per cent to 15 per cent of the amount of the dividends.

In converse circumstances, the Netherlands and France are to reduce their rates of dividend withholding tax - currently 25 per cent in both countries - to 15 per cent.

I mention that profits out of which dividends are distributed by Australian companies to foreign shareholders bear the company tax rate of 42.5 per cent, so that, with withholding tax at the rate of 15 per cent, the total Australian tax on each $100 of distributed profit is $51.12.

That is a not unreasonable contribution to Australian revenue by shareholders living in the other countries.

Both agreements specify a limit of 10 per cent on each country's tax on interest and royalties flowing to the other.

For Australia, this will mean no reduction in our interest withholding tax which is charged at a rate of 10 per cent by our taxation law.

For royalties flowing to the Netherlands and France, our tax will be limited to 10 per cent of gross payments, instead of tax at general rates on net royalties.

France will reduce its withholding taxes on interest and royalties, normally 25 per cent and approximately 19 per cent respectively, to 10 per cent.

The Netherlands does not generally tax interest and royalties paid to residents of other countries but the limit of 10 per cent would apply if it taxed such income in the future.

Both agreements contain measures for the formal relief of double taxation of income that would otherwise be taxed by both countries.

In such cases the country of residence of the taxpayer is obliged to provide the necessary relief.

Generally, income which may be taxed in full in the country of source will be exempt from tax by the country of residence while, in the case of income that is taxed at reduced rates in the country of source - dividends, interest and royalties - the country of residence will tax the income and allow credit for the tax of the country of source.

A unique feature of the French agreement, which relates to the French system of taxing company profits and dividends, is worthy of note.

Under this provision, the French Government will in specified circumstances make a payment to Australian shareholders in French companies of an amount equal to a special tax credit normally payable only to residents of France.

These payments will be treated in Australia as dividend income and included in the assessable income of the recipient accordingly.

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

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.