The Senate

Income Tax (International Agreements) Amendment Bill (No. 2) 1981

Income Tax (International Agreements) Amendment Act (No. 2) 1981

Second Reading Speech

by the Minister for Finance, Senator the Hon. Dame Margaret Guilfoyle, D.B.E.

This Bill will provide legislative authority for the entry into force of a comprehensive Double Taxation Agreement with Denmark which was signed in Canberra on 1 April 1981.

The Agreement deals with all substantial forms of income flowing between Australia and Denmark and is the second such arrangement that Australia has entered into with a Scandinavian country.

When it is assented to, this Bill will complete the processes needed for the Agreement to be given the force of law in Australia. Denmark has already completed the processes necessary there.

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

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

There are various ways of doing this.

For example, some types of income are, by agreement, taxed only in the country of residence and others only in the country in which the income has its source.

The country of source may agree to limit its tax on some items of income and where, under an agreement, income may be taxed in the country of source and also in the country of residence of the recipient, the country of residence agrees to allow relief against its tax in recognition of the payment of tax to the country of source.

The Agreement with Denmark accords in all essential respects with the position that Australian Governments have taken over the years in relation to double taxation agreements.

It provides for the country of source to limit its tax on dividends, interest and royalties.

Australia and Denmark will each reduce the withholding tax on dividends flowing to the other country from 30 per cent to 15 per cent of the gross amount of the dividends.

The tax of the country of source on interest or royalties flowing to residents of the other country is to be limited to 10 per cent.

Australia's rate of withholding tax on interest is 10 per cent and this will not be affected by the Agreement. However, we do not have a withholding tax for royalties paid overseas. These are taxed on the ordinary assessment basis. The limit on the tax on royalties will, therefore, only affect Australian tax on royalties paid to Denmark where tax on the ordinary assessment basis on the profit element in the royalties is greater than 10 per cent of the gross royalties.

The tax limit applying to interest and royalties will not affect income of those kinds derived by residents of Australia from Denmark while, as is the case at present, Denmark does not impose a general tax on interest and royalties paid to non-residents. However, if Denmark should impose tax on such income in the future the limit will, of course, apply.

A significant effect of the agreement concerns Australian resident individual shareholders who are beneficially entitled to dividends from companies resident in Denmark. It is provided that these shareholders are to receive the benefit of a credit from the Danish Government equivalent to one to which individual Danish shareholders are entitled.

Within Denmark it is broadly the situation that part of the tax paid by a Danish company is treated as taxable income of a Danish shareholder who receives dividends from the company and a credit for this amount is then allowed against the tax that the shareholder is liable to pay.

In defined circumstances Australian individual shareholders in Danish companies will, under the agreement, be entitled to a similar credit. This will mean that an Australian shareholder entitled to the credit will receive a payment from the Danish government.

For Australian tax purposes, the sum of the dividend and the credit will be treated as a dividend and credit will be allowed up to the amount of the Australian tax thereon for the 15 per cent Danish tax.

The Agreement contains measures for the formal relief of double taxation of income that may be taxed in both countries. The country of residence of the taxpayer is obliged to provide the necessary relief.

So far as Australian residents in receipt of income from sources in Denmark are concerned, income in respect of which a limit is imposed by the agreement on Danish tax will be taxed here with credit being allowed for the Danish tax. However, dividends received from Denmark by Australian companies, which are effectively tax-free in Australia, will remain tax-free here. Some income that is taxed in full in Denmark will be exempt from tax in Australia.

The Agreement also contains provisions for exchange of information and consultation between the tax administrations of the two countries to assist in preventing evasion of tax.

A memorandum containing more detailed explanations of technical aspects of the Bill and of the agreement is being made available to Honourable Senators.

I commend the Bill to the Senate.