The Assistant Treasurer Chris Bowen today announced that the government was inviting public comment and submissions on Australia's future tax treaty negotiation programme and policy.
Australia has negotiated comprehensive tax treaties with more than 40 other countries.
"The Government is committed to ensuring Australia's tax treaties remain relevant to evolving business directions," Mr Bowen said.
"In setting the future direction for Australia's tax treaties we are interested in hearing from the public on which countries Australia should be negotiating with and the key outcomes we should be seeking with those countries."
Public submissions are particularly invited on:
- the countries with which it may be desirable to negotiate or update a tax treaty
- the appropriateness of Australia's tax treaty policy and drafting approaches as reflected in recent treaties.
Australia's tax treaty with New Zealand
"Today, I am also calling for submissions that will contribute to the renegotiation of a tax treaty with one of our most important investment partners," Mr Bowen said.
"New Zealand is a country with which Australia shares an exceptionally close trade and investment relationship. Any changes made to streamline taxation arrangements through the renegotiation of the treaty will be to the benefit of both the Australian and New Zealand economies.
"The existing tax treaty with New Zealand, signed in 1995, is an important feature of the broader trans-Tasman market framework."
While changes were made to the treaty in 2005 to strengthen its integrity aspects, the provisions of the treaty of most interest to business and investors, including the rates of withholding tax applicable to dividends, interest and royalty payments, have remained unchanged.
"Consequently, the revision of Australia's tax treaty with New Zealand presents an important opportunity for interested parties to have their say on how tax treaty arrangements between the two countries should be updated to enhance the mutual conduct of business," Mr Bowen said.
Submissions on the New Zealand tax treaty and on Australia's tax treaty programme and should be made to the Treasury by 21 March 2008, either by email to: taxtreatiesunitconsultation@treasury.gov.au or addressed to:
Manager
Tax Treaties Unit
International Tax and Treaties Division
The Treasury
Langton Crescent
PARKES ACT 2600
The main features of Australia's recent tax treaty practice are summarised in the Attachment.
25 January 2008
Media Contact: James Cullen - 0409 719 879
Attachment
Tax treaties facilitate international investment by removing or reducing tax barriers to cross-border movement of people, capital or technology.
International taxation is based on the concepts of residency and source. Countries generally tax their residents on their worldwide income; countries also seek to tax non‑residents on the income that is earned (or sourced) within their borders.
Double taxation can therefore arise when the country of residence of a taxpayer and the country where the income is sourced seek to tax the same income. Consider the following example:
Company X which is a resident of Australia owns a factory in Country B. Australia will seek to tax Company X on its worldwide income, including the income from its factory in Country B. Country B will also seek to tax the income that is 'sourced' in its jurisdiction, including the income from the Company X factory.
In the absence of rules to relieve the resulting double taxation, international commerce would be seriously inhibited.
Tax treaties assist in resolving such issues by reducing or eliminating double taxation caused by the overlapping taxing jurisdictions, because treaty partners agree to limit or reduce taxing rights over various types of income. The respective countries also agree on methods of reducing double taxation where both countries have a right to tax.
In addition, tax treaties provide an agreed basis for determining whether the income returned or expenses claimed on related party dealings by members of a multinational group operating in both countries can be regarded as acceptable. Tax treaties are therefore an important tool in dealing with international profit shifting (also known as transfer pricing).
To prevent fiscal evasion, tax treaties include exchange of information provisions and may also provide for reciprocal assistance in collection of taxes. The two tax administrations may use the mutual agreement procedures available for treaties to develop a common interpretation and resolve differences of application of the tax treaty.
Existing treaty practice
Australia's broad approach has been to follow the OECD Model Tax Convention on Income and on Capital, with some variations. For example, Australia seeks to include a number of provisions intended to ensure that Australia's taxing rights over our natural resources are suitably protected. Australia also seeks to preserve the application of its anti-avoidance rules.
While the following represents a summary of Australia's recent treaty practice, the outcomes reached in each bilateral treaty are subject to negotiation with the particular treaty partner country.
Dividends
A source country exemption is provided for inter-corporate non-portfolio dividends where the recipient holds directly at least 80 per cent of the voting power of the company paying the dividend, subject to certain conditions.
A 5 per cent rate limit applies for all other non-portfolio inter-corporate dividends where the recipient holds directly at least 10 per cent of the voting power of the company paying the dividend.
A general rate limit of 15 per cent applies for all other dividends. However, it has been announced that a general rate limit of 10 per cent will apply in a revised tax treaty with Japan.
Interest
Source country tax on interest is limited to 10 per cent.
A source country exemption is provided for interest derived by:
- the Government or a political or administrative subdivision or local authority of, or a body exercising governmental functions in, or a bank performing central banking functions in, the other country; or
- a financial institution resident in the other country, subject to certain safeguards.
Royalties
Source country tax on royalties is limited to 5 per cent.
Transfer pricing
Both the Business Profits and Associated Enterprises Articles preserve the operation of the treaty countries' domestic anti-profit shifting (transfer pricing) rules but require that such domestic rules be applied, so far as is practicable, consistently with the arm's length principle.
Alienation of property (including capital gains)
Source country taxing rights over assets with a physical connection with a country, such as mining rights and other interests related to real property (including interests in land‑rich entities), are preserved.
Distributions from real estate investment trusts
It has been announced that in a revised treaty with Japan, Australia will limit its tax on Australian sourced distributions from real estate investment trusts to a rate of 15 per cent. In future treaties, consideration could be given to negotiating reciprocal withholding tax limit of 15 per cent on distributions received by Australians from comparable investment vehicles resident in the treaty partner country.
Permanent establishments (branches)
In order to preserve source country taxing rights over real property and natural resources, the definition of a permanent establishment applies to a wider range of activities (including supervisory and consultancy activities, natural resource activities, the operation of substantial equipment, and certain manufacturing and processing activities) and adopts shorter, specified time thresholds than the OECD Model. In addition, an anti-contract splitting clause is included to ensure that the specified time thresholds are not circumvented.
Ships and aircraft
While profits from the operation of ships and aircraft in international traffic are taxable only in the operator's country of residence, profits from the carriage of passengers and cargo solely within the other country, may also be taxed in that other country.
Pensions and annuities
Periodic pension and annuity payments are taxable only in the recipient's country of residence.
Other income
Income not specifically dealt with elsewhere in the treaty is taxable in the recipient's country of residence. However, the other country may also tax the income if it is sourced in that other country.
Source of income
Deemed source rules are included to ensure that a country can exercise the taxing rights allocated to it under the treaty and to ensure appropriate double tax relief by the other country.
Non-discrimination
Rules are included to prevent tax discrimination against nationals and businesses operating in the other country and vice versa. However, these rules do not apply to a number of specified measures which are generally intended to maintain the integrity of a country's tax system, or to Australia's research and development tax concessions.
Exchange of information
Recognising that effective tax information exchange is essential to the integrity of the international tax system, exchange of information is permitted over a broad range of taxes (including Australia's goods and services tax) and cannot be restricted by domestic bank secrecy rules.
Assistance in collection of taxes
Reciprocal assistance in collection of taxes is permitted over a broad range of tax debts.
Current drafting approach
The Australia-Finland tax treaty which was signed on 20 November 2006 (and which may be viewed on the Treasury website at http://www.treasury.gov.au) is indicative of Australia's most recent drafting approach.