House of Representatives

Income Tax (International Agreements) Amendment Bill 1984

Income Tax (International Agreements) Amendment Act 1984

Second Reading Speech

Minister for Housing and Construction and the Minister assisting the Treasurer, the Hon. Chris Hurford, M.P.

This Bill will amend the taxation law in relation to Australia's international taxation agreements in several respects.

First, it will make clear Australia's right to tax distributions by Australian business trusts to residents of countries with which Australia has concluded a comprehensive taxation agreement.

The Government's intention to clarify the operation of our taxation agreements in this area was announced on 19 August 1984.

Secondly, it will give the force of law in Australia to a protocol signed on 20 March 1984 to amend the existing taxation agreement with Belgium, and to a comprehensive taxation agreement with Malta that was signed on 9 May 1984.

Details of the protocol and the agreement were announced when each was signed, and copies of both were made available to the public at that time.

The Bill will also make minor technical changes to the law. I turn now to detailed comment on the main features of the Bill.

Foreign beneficiaries

This measure is in response to a technical argument to the effect that Australia would be unable to tax distributions of business profits derived in Australia by a trust where those distributions are made to a beneficiary (or unit holder in the case of a unit trust) being an enterprise resident in an agreement partner country. It is claimed that, since the trust does not represent a permanent establishment of the beneficiary in Australia, the business profits article in our taxation agreements would operate to shield the beneficiary from a liability to tax in this country.

The Commissioner of Taxation has advised the proponents of that argument that he does not accept their view and would contest any such cases coming to his attention.

However, if a court were to uphold the argument, Australia's taxation agreements would have a completely unintended effect that could lead to substantial revenue losses.

Against this background the Government decided that, to guard against potential revenue losses, legislative action consistent with Australia's domestic tax policy and with what was clearly intended when our taxation agreements were Negotiated was needed to put beyond doubt Australia's right to tax distributions of the business profits in question.

To that end, the provisions of this Bill will amend the present Australian domestic law so that a beneficiary or unit holder resident in a taxation agreement partner country who is entitled to a share of trust income derived from business operations carried on in Australia, will be deemed to be carrying on the business of the trustee through a permanent establishment situated in Australia. This will ensure that, in accordance with the rules contained in the business profits article of our various taxation agreements, the non- resident will be subject to Australian income tax on that share of business income.

This clarifying measure will apply to distributions of business profits to which a beneficiary overseas became entitled after 19 August 1984, the day on which the Treasurer announced - after all of our agreement partners had been informed - the Government's intention to legislate in the manner outlined.

The Belgium protocol

The protocol with Belgium will amend the existing agreement with that country to take account of three developments in the taxation field in Australia since the agreement was signed in 1977.

The first two amendments will fully preserve Australia's right to apply its revised transfer pricing provisions to our own resident enterprises, and specifically recognise the "branch profits tax" provided for in our domestic law.

The third change is necessary to overcome certain technical deficiencies in the definition of the term "royalties" contained in the existing agreement. That definition applies to "payments" for the right to use property, but does not Cover amounts that, instead of being paid, are merely credited.

A further deficiency in the definition occurs in relation to arrangements under which, instead of agreeing in the normal way to a formal grant of the exclusive right to use industrial property, the parties agree that the owner receive Consideration for not granting the rights to anyone else.

The new definition of the term "royalties" to be inserted in the existing agreement by the amending protocol will rectify these shortcomings.

These changes will bring the agreement with Belgium into line with Australia's other recently negotiated agreements and with Australia's current tax treaty practice.

The Maltese agreement

I now turn to the comprehensive agreement that deals with all forms of income flowing between Australia and Malta.

In general, comprehensive taxation agreements have two primary objects - the elimination of international double taxation and the prevention of fiscal evasion. The first of these objects is achieved by the contracting countries agreeing to allocate taxing rights between them. There are various ways by which this is done, depending upon the nature of the income.

For example, some classes of income will be taxed only in the country of residence while others will be taxed only in the country of source.

A third category is comprised of income which May be taxed in both countries, with the country of source generally agreeing to limit its tax, and the country of residence of the taxpayer agreeing to allow a credit against its tax on Such income for the tax paid in the other country.

The agreement with Malta accords in all essential respects with the position that Australian governments have taken over the years in relation to comprehensive taxation agreements.

It provides for the country of source to limit its tax on dividends. For its part, Australia will reduce the rate of withholding tax on dividends flowing to Malta from the normal 30 per cent rate to the 15 per cent rate specified in the Agreement.

In the case of Malta, the agreement provides that the maltese tax payable by Australian residents on the gross amount of the dividends received from a maltese company is not to exceed the company tax chargeable on the profits out of which the dividends are paid. This reflects the maltese system of taxing company profits and dividends whereby the income tax on company profits distributed as dividends is treated, in effect, as tax paid by shareholders on the dividends.

The agreement also provides for the country of source to limit its tax on the gross amount of interest and royalties flowing to residents of the other country. The limit is 15 per cent for interest and 10 per cent for royalties.

As the rate of withholding tax on interest under Australia's domestic law is 10 per cent, this will not be affected by the limit on the source country tax provided for in the agreement.

In Australia, royalties paid to non-residents are taxed by the ordinary assessment basis on the net amount, after deduction of expenses and, accordingly, the limit specified by the agreement by reference to gross royalties will not affect the amount of Australian tax on royalties unless the tax which would otherwise be assessed on the net royalties is greater than 10 per cent of the gross amount of the royalties paid to maltese residents.

Malta may, however, in some cases, in accordance with its industry incentive legislation, wholly or partially exempt from maltese tax certain dividend, interest and royalty payments made to Australian residents.

If nothing were done to avoid the situation, the tax so forgone by Malta would simply result in a corresponding reduction in the credit to be allowed by Australia against its tax on the relevant dividend, interest and royalty payments. In other words, the Australian revenue would pick up the tax forgone by Malta, thus nullifying the incentive.

To avoid that result, provision is made in the agreement for Australia, as a "tax sparing" measure, to allow a credit against its tax for tax forgone by Malta under agreed maltese incentive legislation, as if notional tax equal to 15 per cent of the gross dividend income and 10 per cent of the gross interest and royalty income had been paid to Malta.

The agreement contains measures for the formal relief of double taxation of income that May be taxed in both countries, with the country of residence of the taxpayer affording the necessary relief by the allowance of a credit against its tax for tax paid to the country of source.

So far as Australian residents in receipt of income from sources in Malta are concerned, income in respect of which a limit is imposed by the agreement on Maltese tax - dividends, interest and royalties - will generally be taxed here with credit being allowed for the maltese tax.

However, because of the general rebate on inter-company distributions, there is effectively no tax on dividends received from foreign sources by Australian resident companies.

The Bill does not disturb the position that other income that is taxed in the country of source is exempt from Australian tax.

So far as the object of preventing fiscal evasion is concerned, provision is made in the agreement for the exchange of information and for consultation between the tax administrations of the two countries.

Apart from the provisions I have mentioned, the agreement also contains usual provisions of a kind common to taxation agreements relating to the taxation of business profits, professional services, employees, public entertainers, Students, pensioners and so on.

The protocol and agreement contained in this Bill cannot enter into force until all necessary Constitutional processes are completed both by Australia and the other partner country. For Australia, this Bill will, when assented to, complete the processes required of us.

Neither the maltese agreement nor the Belgium protocol is expected to have any significant net effect on revenue.

A memorandum containing more detailed explanations of technical aspects of the Bill and of the protocol and agreement is being circulated to Honourable Members.

I commend the Bill to the House.