Introduction
Thank you Justice Hill. Thank you also to the President of the International Fiscal Association, Jerome Libin, and your Committee for inviting me here to officially open the 57th Congress of the International Fiscal Association.
On behalf of the Australian Government I welcome you. It is wonderful to see so many international guests participating in the Congress and I hope they will also be able to enjoy our Sydney hospitality.
This Congress provides an opportunity for tax experts from many backgrounds to reflect on some important themes in tax reform - especially cross-border taxation issues.
While Australia regularly participates in various inter-governmental tax forums, we value the work of the International Fiscal Association, which uniquely brings together high level representatives from both the public and private sectors.
Australia has an open economy, with significant outbound and inbound capital flows. Our tax policies need to support our economic competitiveness in an international context and I can assure you the Congress discussions and deliberations will be closely monitored in Australia.
The OECD has also noted that one of the key economic reforms in Australia has been the reform of the tax system. I would like to briefly sketch the Australian tax reform context for our many international guests.
The Australian Government is proud of Australia’s achievements in tax reform. We have introduced the most far-reaching and dramatic tax reform ever attempted in Australia's history. We took on the challenge of reforming Australia’s indirect tax base, personal tax and business taxation. And we are currently putting in place new international tax arrangements.
Australia and tax reform
The globalisation of economic activity has been an important catalyst for these reforms as is the need to ensure we remain internationally competitive.
Overall, Australia is now regarded as a relatively low taxing country. OECD data on total tax revenue as a percentage of GDP, including social security taxes, indicates that in 2000 Australia was the sixth lowest of 30 OECD countries.
However, when comparing our levels of taxation with other countries it should be remembered that Australia, unlike many countries, does not impose state or local income taxes nor does it have compulsory employee social security contributions.
When you take into account all relevant items in the tax base by adjusting for these differences, Australia’s top marginal rate of personal income tax is also comparable to other OECD countries.
Other features of the Australian tax landscape also influence our approach to tax reforms.
Australia has a population of almost 20 million (0.3 per cent of the world's total) and an economy that is about 1 per cent of the global economy.
Many countries within our region have tax regimes with relatively low tax rates.
Constitutionally, our States and Territories have limited taxing powers and are prohibited from levying excise. They do not impose income taxes. This means large fiscal transfers from the Commonwealth to the States and Territories are necessary.
Australia has no estate, inheritance or gift taxes.
Australia does not have a dedicated social security tax. We do however have a means tested "safety net" public pension scheme funded from general revenue.
A New Tax System
In the year 2000 Australia’s indirect tax base was transformed by the introduction of a goods and services tax (GST) at the rate of 10 percent. This measure allowed the Government to significantly reduce personal tax rates.
As the Government pays all GST revenues to the States and Territories, they have been provided with a robust tax base for many years to come. With the introduction of the GST, the Government abolished a large number of inefficient taxes, particularly the wholesale sales tax and financial institution duties.
The GST also contributed to making Australia more competitive within the global economy. Whereas the previous sales tax system had a cascading effect on investment and exports, under the GST exports and investment spending are substantially exempted from indirect taxation. These were very positive changes for both international export and investment transactions.
Business Tax Reform
The centrepiece of business tax reforms was the significant reduction in company tax rates. This was achieved by a two-step reduction in the rate from 36 percent to a more competitive 30 percent.
Tax rate reductions were funded by complementary measures that broadened the business income tax base, reducing undesirable distortions. One such measure was the removal of accelerated depreciation and the general alignment of depreciation rates with the income producing life of assets. Another reform involved extending the thin capitalisation rules by applying them to total debt and to Australian multinationals.
Other changes to improve the efficiency of the business tax system included a simplified tax system for small business, simplified dividend imputation arrangements and the introduction of a consolidation regime for wholly owned company groups.
Recent venture capital reforms have also been designed to provide an internationally competitive framework to encourage more foreign investment and expertise in Australian business.
International Taxation
In the 2003 Budget, following extensive consultation conducted by the Board of Taxation (the Government’s standing tax advisory committee), the Government announced the outcome of a review of international taxation arrangements. That announcement foreshadowed over 30 individual initiatives, but the key changes include:
- simplifying the application of the controlled foreign company rules for Australian companies operating in countries where tax arrangements are comparable to Australia's and easing these rules for certain services provided in international markets;
- exempting Australian companies from capital gains tax for the sale of non-portfolio interests in foreign subsidiaries and extending the existing tax exemption for foreign non-portfolio dividends and certain branch profits; and
- better targeting Australia’s foreign investment fund rules to reduce compliance costs for Australia’s managed funds and superannuation funds.
These changes will help Australian companies compete abroad and encourage foreign companies to establish regional headquarters in Australia. The Australian Treasury is currently consulting with the business community on the design of laws to give effect to these measures.
Treaties
As part of this review the Government also decided that Australia should move towards a more residence-based tax treaty policy, broadly consistent with the direction agreed in the recent Protocol to our tax treaty with the United States.
Earlier this month Australia signed a new tax treaty with the United Kingdom, demonstrating our commitment to modernising Australia’s tax treaty network. The new treaty will substantially reduce withholding taxes on certain dividend, interest and royalty payments in line with outcomes achieved with the United States.
The treaty also provides certainty for business on capital gains taxation and emerging treaty issues such as dual listed companies and employee share options. The new treaty also delivers on the Australian Government’s decision to agree to non-discrimination articles in tax treaties.
Cross-border shareholder taxation
Another issue considered in the review of international taxation was whether Australia’s imputation system makes it difficult for Australia’s companies to fund offshore expansion.
Under Australia’s imputation system, shareholders receive a credit for the Australian company tax they pay. They do not receive a credit for foreign taxes paid on foreign source income.
It is argued that this may discourage Australian companies from earning income abroad and increase the cost of capital for Australian companies expanding offshore.
The Board of Taxation made recommendations addressing this issue. It noted that these recommendations reflected an “on balance” judgement and that there could also be negative effects from implementing these proposals. After carefully considering the arguments, the Government did not believe it appropriate to implement the Board’s proposals on this issue at this time.
I note this, and other issues relating to cross-border dividends are one of the main themes of the Congress.
Senate opposition to reforms
The Australian Government remains committed to maintaining the momentum of tax reform and building on reforms already in place.
However, a key determinant of the Government’s success in doing this will be largely influenced by Australia’s federal political structure which involves two houses of parliament – the House of Representatives and the Senate
The role of the Senate, in particular, is the subject of ongoing debate concerning the extent to which it is acting as a house of obstruction rather than as a house of review.
Many of the Government’s key structural reform initiatives I have just outlined, including the introduction of the New Tax System, have been either delayed, revised or obstructed by the Senate.
Most recently the Labor Party in the Senate has indicated its opposition to the proposed international tax reforms previously outlined.
As such, the ongoing role of the Senate will be a key factor in Australia’s ability to continue the pace and scale of structural reforms necessary to ensure Australia remains one of the fastest growing economies in the OECD.
Conclusion
Finally, I know the Sydney Organising Committee has worked hard in organising the Congress and in providing a stimulating scientific programme and one that will tease out some of the technical challenges that faces anyone charged with the fascinating task of tax design.
I am sure the Congress will be a success and wish you an enjoyable visit in
Sydney.