On Sunday 28 July 2002 in Malaysia, the Minister for Trade, the Hon. Mark Vaile, MP and Malaysia's Minister for International Trade and Industry, Datuk Seri Rafidah Aziz signed a Second Protocol and an associated exchange of letters amending the 1980 Double Taxation Agreement (DTA) between Australia and Malaysia for the avoidance of double taxation and the prevention of fiscal evasion.
Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, said the changes would further assist the developing trade and investment flows between the two countries.
"The exclusion from treaty benefits of persons who benefit from the preferential tax treatment under Malaysia's offshore business activity regime is an important benefit for Australia in protecting our tax base from abuse," Senator Coonan said.
"The extension of the operation of the tax sparing provisions in the current DTA to 30 June 2003 will clarify Australian businesses' entitlement to the specified Malaysian tax incentives."
The Second Protocol will also update the DTA to reflect Australia's current tax treaty policies and practice in a number of areas, reflecting the Government's commitment to modernising Australia's tax treaty network. Attachment A provides further details of the Second Protocol and the associated exchange of letters.
Legislation will be required for Australia to fulfil its obligations under the Second Protocol and a Bill for that purpose will be introduced into Parliament as soon as possible. The Second Protocol and the associated exchange of letters will enter into force when the Australian and Malaysian governments exchange diplomatic notes advising that the constitutional processes required for entry into force have been completed.
Copies of the Second Protocol are available on the Australian Taxation Office's (ATO's) internet site at: http://www.ato.gov.au under "What's New in ATOassist".
The Second Protocol and the associated exchange of letters will amend the DTA in a number of important respects.
The DTA was signed in 1980. Tax sparing arrangements under the original provisions of the DTA expired on 30 June 1984. The arrangements were later extended for 3 years from 1 July 1984 to 30 June 1987 through an Exchange of Letters and again for another 5 years from 1 July 1987 to 30 June 1992 by a First Protocol amending the DTA signed on 2 August 1999.
Tax sparing refers to the situation where tax forgone (e.g. in the form of tax holidays or tax reductions) by a foreign country on the income of an Australian resident taxpayer is deemed to have been paid (ie. the tax foregone is credited as if actually paid, under Australia's foreign tax credit system). The typical circumstances in which this arrangement operates is where tax incentives are offered by developing nations seeking to attract foreign investment. The rationale for tax sparing is that, without special provisions which recognise such incentives, they would be negated to the extent that the tax forgone by the source country would be collected by Australia.
The Second Protocol will update the tax sparing provisions in the DTA to reflect changes to the Malaysian tax incentives legislation and also extend the operation of the tax sparing provisions to 30 June 2003, at which time they will permanently expire.
The Second Protocol and the associated exchange of letters will exclude from receiving treaty benefits, persons who benefit from the preferential tax treatment under the Labuan offshore business activity regime, and other substantially similar regimes.
The Second Protocol will also update the DTA to reflect Australia's current tax law and treaty policies and practice in relation to a number of existing Articles, including those dealing with Associated Enterprises, Dividends, Royalties and Other Income.
The Second Protocol and the associated exchange of letters will enter into force when the Australian and Malaysian governments exchange diplomatic notes, advising that the internal processes required for entry into force have been completed.
In Australia, the process involves the Second Protocol and the associated exchange of letters along with a National Interest Analysis being tabled in the Parliament for consideration 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 possible.
Upon entry into force, the Second Protocol will have effect in Australia in relation to the tax sparing provisions for any year of income beginning on or after 1 July 1992. In all other cases the Second Protocol and the associated exchange of letters will have effect in Australia for any year of income beginning on or after 1 July in the calendar year next following that in which it enters into force.
The Second Protocol will have effect in Malaysia in relation to the tax sparing provisions for any year of assessment beginning on or after 1 January 1993. In all other cases the Second Protocol and the associated exchange of letters will have effect in Malaysia for any year of assessment beginning on or after 1 January in the calendar year next following that in which it enters into force.