The Senate

Taxation Laws Amendment (International Tax Agreements) Bill 1996

Second Reading Speech

I move that the bill be now read a second time.

The bill will provide legislative authority for the entry into effect of an agreement negotiated between the Australian Commerce and Industry Office (ACIO) and the Taipei Economic and Cultural Office (TECO) which was signed on 29 May 1996.

The bill will insert the text of the agreement into the International Tax Agreements Act 1953. The bill will also make consequential amendments to that act, the Income Tax Assessment Act 1936 and the Taxation (Interest on Overpayments and Early Payments) Act 1983. The consequential amendments to the International Tax Agreements Act 1953 will provide for certain source rules necessary in Australia for the operation of the agreement and for the amendment of previous assessments as a consequence of provisions of the agreement having, or being capable of having, retrospective effect.

The consequential amendments to the Income Tax Assessment Act 1936 and the Taxation (Interest on Overpayments and Early Payments) Act 1983 reflect the fact that the agreement is between trade offices and that, as such, the agreement would not fall within some of the current definitions of "agreement" and "double tax agreement" in those acts.

The Australian Government has decided to give effect to the undertakings made by the ACIO in the agreement and does so on the understanding that the TECO has received assurances from appropriate authorities of reciprocal tax treatment in Taiwan.

The agreement paves the way for greater business dealings between Australia and Taiwan. It will significantly enhance the development of our commercial relationship with Taiwan by providing more favourable tax conditions for Australian business operating in Taiwan and by freeing up prospects for investment in both directions.

Australia has a flourishing economic relationship with Taiwan. The Government is committed to encouraging this relationship to grow still stronger in the future. Taiwan is now our ninth largest trading partner and sixth largest export market. Over the five years to 1994/95, merchandise exports grew by 10.5 per cent per annum. Two-way trade totalled A$5.9 billion in 1995.

The effect of the undertakings in the agreement are that:

income flows between Australia and Taiwan will not be subject to double taxation;
taxing rights over various categories of income flows will be clarified; and
co-operation between the respective tax administrations will operate to prevent tax evasion.

The agreement will have effect in Australia and Taiwan from dates specified in the agreement.

Shipping and aircraft profits will be taxable solely in the territory in which the operator of the ships or aircraft is resident for tax purposes. This treatment will apply from 1 January 1991 being the date on which approaches were first made on taxing shipping and aircraft operations solely on a residence basis. Income of certain organisations promoting trade, investment and cultural exchanges between Australia and Taiwan will also be taxed solely in the territory whose interests the organisation promotes and this may be from a date earlier than the date of entry into effect of the agreement.

Interest at source will generally be taxed at 10 per cent. Royalties will generally be taxed at source at 12.5 per cent. Taxation of dividends at source will be effectively limited in Australia to 15 per cent on unfranked dividends (with Australia's domestic law dividend withholding tax exemption continuing for franked dividends). In Taiwan its tax will be limited to 10 per cent where the Australian company receiving the dividends holds at least 25 per cent of the capital of the company resident in Taiwan, and to 15 per cent in other cases.

However, as is customary in agreements of this type, the agreement does not require that the nominated limits apply to dividends, interest or royalties that are effectively connected with a permanent establishment or fixed base.

Capital gains are to be taxed in accordance with the domestic law of each territory but there will be special rules for gains made on the alienation of real property; assets used by permanent establishments; ships; aircraft and shares in companies used principally to hold real estate.

Business profits derived from one territory by an enterprise of the other territory will be subject to tax to the extent that they are attributable to a "permanent establishment" that the enterprise has in the territory in which the profits are sourced.

Other income that will be subject to full taxation at source will include income from employment (except in relation to visits of short duration) and income derived by entertainers and athletes.

Shipping and aircraft profits derived from international operations; pensions and annuities; and most independent services income will be taxable only in the territory in which the recipient is resident.

Income which under the agreement remains taxable in both territories will continue to be eligible for tax relief under the general foreign tax systems of the respective territories.

Under the terms of the agreement the competent authority for the exchange of information under the agreement and the institution of mutual agreement procedures in Australia is the Commissioner of Taxation, or an authorised representative of the Commissioner. In Taiwan the competent authority is the Director-General of the Department of Taxation, or an authorised representative.

The Government recognises that the Government of the People's Republic of China is the sole legal Government of China and acknowledges the position of the People's Republic of China that Taiwan is a province of China. The Government of Australia thus declares that its decision to implement the agreement providing for the Commissioner of Taxation to be the competent authority does not constitute, and should not be interpreted as constituting, an implied or express decision to recognise Taiwan. The Government further declares that any contact necessary betwenm the competent authorities for the implementation of the terms of the agreement is considered functional in nature and hence does not constitute, and should not be interpreted as constituting, an implied or express decision to conduct official contacts with Taiwan.

I should also note that it is the longstanding practice of the Australian Taxation Office that references in Australia's taxation laws to `country' and `foreign country' have been interpreted as applying to the territory in which the taxation laws administered by the taxation authorities, Taipei apply. The implementation of this agreement will not alter this interpretation.

I present the Explanatory Memorandum and commend the bill to the Senate.