Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Peter Costello, M.P.)
General outline and financial impact
The Bill will amend the International Tax Agreements Act 1953 (the "Agreements Act") to give the force of law in Australia to an Exchange of Notes. These Notes amend the comprehensive double taxation agreement with Vietnam for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, which was signed in 1992 (the "1992 Vietnamese Agreement"). The Notes are concerned with the implementation of the tax sparing provisions of the 1992 Vietnamese Agreement.
The Bill will also make a minor amendment to the text of Article 9.3 of the 1992 Vietnamese Agreement correcting a typographical error.
Taxpayers who are residents of Australia for the purposes of the 1992 Vietnamese Agreement and who derive income, profits or gains from Vietnam that have been "tax spared" under one or more of the provisions of Vietnam's tax laws specified in the Exchange of Notes.
The Bill will make the following changes to the Agreements Act:
- it will insert in subsection 3(1) the definition of the Vietnamese notes .
- it will insert new section 11ZCA which will give the force of law in Australia to the Vietnamese notes and permit amendment of assessments for the purposes of those notes.
- it will add the text of the Notes as Schedule 38A.
- it will amend Article 9.3 to correct a minor typographical error in the principal Agreement.
The Notes will enter into force on the latest date on which the Governments of Australia and Vietnam exchange further diplomatic notes formally advising each other that all the requirements necessary to give the Notes the force of law in the respective countries have been finalised. In the case of Australia, those requirements will include the enactment of these amendments.
Amendments effected by the Bill will commence on the day on which the Bill receives the Royal Assent.
Amendments to the 1992 Vietnamese Agreement will have effect in respect of Australian tax in relation to income, profits or gains of the year of income that began on 1July1993 and of subsequent years of income.
It is not possible to quantify with precision the tax forgone by the Australian Revenue in providing tax sparing credits for the Vietnamese tax incentives. Much depends on the amount of the income subject to tax sparing, the amount of the reduction or exemption applied to the particular income, the nature of the investment income, the legal structures used by Australian residents to make these investments and the ability of Australian taxpayers to utilise the tax spared foreign tax credits. Subject to these qualifications, an annual cost to Revenue of around $10 - 15 million is estimated.
Note also that if proposals to list Vietnam for dividend repatriation purposes from 1July1997 (as foreshadowed in the Government's Information Paper concerning proposed changes to the taxation of foreign source income) are adopted, the direct cost of tax sparing will be significantly reduced.
No significant additional compliance costs will result from the entry into force of the Notes.