A new tax agreement designed to make it easier for Canadian and Australian companies to do businesses was signed in Canberra today, the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, said.
Senator Coonan signed the updated protocol together with the Canadian High Commissioner, His Excellency Mr Jean T. Fournier at a formal ceremony in Parliament House.
Senator Coonan said the Protocol substantially updated the 1980 Double Taxation Convention between Australia and Canada. The Convention has the dual role of establishing rules to prevent companies and citizens being doubly taxed, and also preventing tax evasion.
"Australia and Canada have a vibrant and diverse trade relationship that dates back more than 100 years. The new protocol aims to further stimulate this relationship by providing a modern, streamlined taxation system that encourages trade and investment between Australian and Canadian companies," Senator Coonan said.
"One of the most significant changes resulting from the Protocol will be the adoption of a split-rate dividend withholding tax provision. Under the new Protocol certain non-portfolio dividends will be taxed at a maximum rate of 5% as opposed to the current maximum rate of 15%."
"In addition, the Protocol reduces the maximum interest withholding tax rate applicable from 15% to 10% in both countries."
The Protocol is designed to help prevent the double taxation of capital gains and a new provision will help to avoid double taxation when a resident of one of the Contracting States departs to become a resident of the other. The Protocol will also substantially modify the treatment of individual's employment income, including deleting the outdated monetary limits, which have limited the usefulness of the provision in modern conditions.
The Attachment provides further details of the Protocol.
Canada is Australia's 16th largest trading partner (A$3.6 billion) and 16th largest market for exports. Australian investment in Canada is primarily in the mining, transportation and packaging industries.
Legislation will be introduced into Parliament as soon as possible to give effect to the new agreement. The Protocol will enter into force when the Australian and Canadian governments exchange diplomatic notes, advising that the constitutional processes required for entry into force have been completed.
The Protocol will then take effect in the domestic law of Australia and Canada at the times provided for in Article 17 of the Protocol and outlined in the Attachment.
Copies of the Protocol are available on the Australian Taxation Office's (ATO's)
internet site at: http://www.ato.gov.au/content.asp?doc=/content/businesses/18957.htm
ATTACHMENT
The Protocol will amend the existing Double Taxation Convention in a number of important respects.
Dividends, interest and royalties 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 who are beneficially entitled to the income.
The Protocol provides major exceptions to the current limit of 15% on dividend withholding tax, reducing the maximum rate further. In general, a limit of 5% will apply for other company shareholdings of 10% or greater, provided also in the cases of dividends flowing from Australia, that they are franked. The maximum rate of tax under a branch profits tax (only Canada currently has such a tax) has correspondingly been reduced from 15% to 5%. Canada excludes 'non-resident owned investment corporations' from the reduced 5% withholding tax rate, in line with Canadian treaty practice and its domestic taxation law. Source country tax on interest will now be limited to 10%, rather than the previous maximum of 15%.
The definition of royalties has been modified in conformity with current Australian tax treaty practice to expressly address technological advances in relation to satellite and cable broadcasting. The Protocol will also clarify the operation of the royalties provision in the case of use of software.
A comprehensive Alienation of Property Article consistent with Australia's current treaty practice will apply (including a 'sweep-up' provision that allows the source country to tax capital gains not otherwise dealt with). New rules will also help ensure that double taxation of capital gains is prevented in the case of residents departing from one of the countries to the other.
The Protocol will also substantially modify the treatment of employment income, including deleting the outdated monetary limits, which have limited the usefulness of the provision in modern conditions.
The Protocol will update the existing Convention in various other respects in line with Australia's current tax law and treaty policies and practice. Among these are a revised list of taxes covered by the Convention, a clause to provide that non-resident beneficiaries of a trust will be deemed to have a permanent establishment in Australia if the trust has a permanent establishment, and a revised article on shipping and air transport.
The Protocol will enter into force when the Australian and Canadian governments exchange diplomatic notes, advising that the internal processes required for entry into force have been completed.
In Australia, the process involves the Protocol and 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 Protocol will have domestic law effect in Australia for withholding tax purposes in relation to dividends, interest and royalties derived by a resident of on or after 1 January in the calendar year next following that in which it enters into force, and for other taxes in relation to income derived on or after 1 July in the calendar year next following that in which it enters into force.
The Protocol will generally have domestic law effect in Canada in respect of withholding tax from 1 January in the calendar year next following that in which it enters into force, and for other Canadian taxes chargeable for any tax year beginning on or after that date.