Australia and Japan have signed a new tax treaty to replace the existing treaty which was signed in 1969. The new treaty was signed by the Minister for Foreign Affairs, the Hon Stephen Smith MP and the Japanese Minister for Foreign Affairs, Masahiko Koumura in Tokyo overnight.
Japan has been Australia's largest export market for 40 years. Bilateral trade in 2006 totalled around $A55 billion, with the balance of trade in Australia's favour.
Japan is Australia's third largest investor, with an investment stock of $A51 billion as at the end of 2006. Japanese direct investment continues to play a key role in the development of many of the export industries that have driven Australia's export performance. Further, Australia is now one of the largest recipients of offshore investment by Japanese mutual funds. Japan is also the fourth largest destination of Australian investment abroad.
The new treaty underlines the modern and sophisticated bilateral ties between Japan and Australia. It will enhance our important investment relationship, further assisting trade and investment flows, while reflecting current tax treaty policies and practices of the two countries.
In particular, it will substantially reduce withholding tax on certain dividend, interest and royalty payments. These changes reduce the cost to Australian businesses of accessing intellectual property, equity and finance for expansion. In turn, the new treaty reduces obstacles inhibiting further corporate expansion into Japan.
The new treaty will broadly update taxation arrangements between Australia and Japan. This includes broadly aligning capital gains tax treatment with Organisation for Economic Cooperation and Development (OECD) practice and providing for improved integrity measures.
Responding to requests from both Australian and Japanese businesses, the new treaty will streamline taxation arrangements between Australia and Japan to the benefit of both economies.
The new treaty will enter into force 30 days after both countries advise that they have completed their domestic requirements. Legislation for this purpose will be introduced in the Australian Parliament as soon as practicable.
Copies of the new treaty are available on the Treasury's website http://www.treasury.gov.au.
1 February 2008
Media Contact:
James Cullen (Mr Bowen's Office) - 0409 719 879
Andrew Depster (Mr Smith's Office) - 0407 435 157
Appendix 1 -Technical Changes To The Treaty
The new treaty is a comprehensive taxation convention and contains provisions for the avoidance of double taxation and the prevention of fiscal evasion in relation to income flowing between Australia and Japan.
The new treaty replaces the existing Australia-Japan taxation agreement which entered into force in 1970.
The new treaty provides that dividends, interest and royalties paid from one country (the source country) to a person who is a resident in the other country will generally remain taxable in both countries, but with limits on the tax that the source country may charge on residents of the other country.
Dividends
The existing treaty includes a 15 per cent rate limit for all dividends.
Under the new treaty, no tax will be chargeable on intercorporate 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 on 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.
The new treaty contains a 15 per cent rate limit on:
- distributions from Australian Real Estate Investment Trusts; and
- dividends which are paid by a Japanese company which is entitled to a deduction for dividends paid to its beneficiaries in computing its taxable income in Japan where more than 50 per cent of that company's assets consist of real property in Japan.
A general limit of 10 per cent will apply for all other dividends.
Interest
Source country tax on interest will continue to be limited to 10 per cent. However, no tax will be chargeable in the source country on interest derived by:
- a financial institution resident in the other country;
- a body performing governmental functions (including central banks); or
- the Australian Export Finance and Insurance Corporation, any public authority that manages the investments of Australia's Future Fund, the Japan Bank for International Cooperation and Nippon Export and Investment Insurance.
The exemptions are subject to certain safeguards.
Royalties
The general limit for royalties will be reduced from 10 to 5 per cent. The new treaty also provides that amounts derived from equipment leasing (including certain container leasing) will be excluded from the royalty definition. Such amounts would either be treated as profits from international transport operations or as business profits.
Other features
In modernising the tax treaty arrangements in line with Australia's current tax law and treaty policies and practice, the new treaty contains:
- an expanded list of taxes covered;
- a refined definition of 'permanent establishment' including prescribed time limits for the creation of a permanent establishment where an enterprise is engaged in the exploration for, or exploitation of natural resources;
- comprehensive alienation of property provisions which broadly align the capital gains tax treatment with the OECD's practice while preserving Australia's taxing rights over Australian assets with a physical connection with Australia, such as mining rights and other interests related to Australian real property;
- improved integrity measures to provide for more effective exchange of information on a broader range of taxes, including goods and services tax;
- provision for income and gains derived by a sleeping partner in a Japanese Tokumei Kumiai arrangement to be taxed in the country where the income arises;
- a time limit of seven years for the commencement of transfer pricing audits, with no limit in the case of fraud or evasion;
- new rules to prevent tax discrimination against nationals and Australian businesses operating in Japan and vice versa; and
- a comprehensive Limitation on Benefits article to prevent abuse of the treaty.
The new treaty will enter into force 30 days after the Australian and Japanese Governments exchange diplomatic notes advising that the constitutional processes required for entry into force have been completed.
In Australia, this process involves tabling the new treaty and a National Interest Analysis in the Parliament for review by the Joint Standing Committee on Treaties. Legislation will also be required to complete the necessary procedures for entry into force, and a Bill for that purpose will be introduced into Parliament as soon as practicable.
Upon entry into force, the new treaty will have effect according to the tenor of the entry into force provisions.