The Assistant Treasurer, Chris Bowen MP, today provided an update on submissions received as part of the Government’s review of Australia’s tax treaty negotiation policy and program announced by Mr Bowen on 25 January 2008.
“I am pleased to announce that the review was well received by industry, professional associations and the public,” Mr Bowen said.
“I would like to thank everyone for their time and effort in contributing to the consultation process. I would also like to thank the members of the Tax Treaties Advisory Panel for their continuing involvement.
“Taking stock of Australia’s tax treaty program and policy framework allows Australia to ensure a vibrant treaty network that remains responsive to the needs of Australian business.
“Submissions presented a range of suggestions to improve Australia’s treaty policy and provided recommendations for the treaty program. Submissions called on the Government to prioritise negotiating tax treaties with emerging economies in our region and countries with which Australia has most favoured nation (MFN) obligations.”
Community input will feed into the Government’s broad review of its tax treaty policy and program. The key themes to emerge from the submissions are summarised in the Attachment.
The Government is currently considering the community’s response and will advise the outcomes of the review as soon as practicable.
26 June 2008
Attachment
Key Themes of Submissions
Submissions strongly supported the general approaches taken in Australia’s recent tax treaties. Submissions noted the importance of tax treaties in enabling Australians to participate effectively in the global economy and to ensure greater certainty and more efficient allocation of resources.
A number of key themes on Australia’s tax treaty program emerged from the consultation.
Priority for emerging economies, Asian region and MFN counties
The importance of Australia’s key investment partners and the emerging economies of China and India as priorities for the treaty program were noted in a number of submissions.
Submissions also promoted a modern treaty network with countries within our region to better position Australia as a regional headquarters for multinational companies. This included countries in the Asian region in addition to China and India including Singapore, Hong Kong, Indonesia, the Philippines, Malaysia, Thailand and countries that would position Australia as a regional headquarters for Unites States, United Kingdom and European multinational companies.
The value of proceeding with negotiations previously commenced, including with those countries with which Australia has ‘most favoured nation’ (MFN) obligations, was generally recognised. A MFN clause in a tax treaty obliges a country to renegotiate that treaty should they subsequently enter into a tax treaty with another country on more favourable terms. These countries include the Netherlands, the Republic of Korea, France, Italy, Switzerland, Austria, Mexico, Romania and Spain.
A more residence based approach
Submissions strongly endorsed the approach of adopting a more residence-based taxation treaty policy taken in Australia’s recent tax treaties. Some proposed that Australia move further away from tax treaties based on taxation of income at source, including by increasing the time period before which activities undertaken in a treaty partner country become a permanent establishment.
Lower dividend and royalty withholding tax rates
The Government was urged to continue to seek low royalty and dividend withholding tax rates, such as those negotiated in Australia’s 2008 treaty with Japan, in future treaties. The interest and dividend rate exemptions included in the Japan treaty were endorsed and some submissions suggested that these and other exemptions be included in treaties going forward.
Provisions to deal with Real Estate Investment Trusts (REITs)
Submissions proposed that tax treaties include a specific provision relating to withholding tax on distributions from REITs in future treaties, as in the Australia-Japan tax treaty. Consultation also proposed that the Government seek to achieve the same rates in future tax treaties as is proposed under the domestic law.
Treatment of capital gains
Submissions put forward that Australia should continue to align with the OECD position of exempting non-residents with portfolio interests in Australian entities from capital gains tax, for the benefit of Australians investing offshore.
Transfer pricing audits
It was suggested that Australia’s tax treaties should include time limits on when tax authorities can commence transfer pricing audits in future tax treaties, as is the case under the Japan tax treaty.
Arbitration clauses
Submissions proposed including arbitration clauses in future treaties, under which disputes that were not resolved under mutual agreement procedures within two years would be subject to mandatory arbitration. This could be limited to transfer pricing audits or extended to all treaty disputes.
Submissions also recommended that Australia seek to ensure that benefits under tax treaties be available as soon as possible after signature.