Opportunities for increased trade and investment flows between Australia and the United Kingdom (UK) and between Australia and the Russian Federation will be improved as a result of the entry into force of the Australia-United Kingdom and the Australia-Russia tax treaties.
Both the Australia-UK and the Australia-Russia tax treaties entered into force on 17 December 2003. This followed an exchange of notes through diplomatic channels indicating that the necessary procedures to give each treaty the force of law had been completed in each country.
The Australia-UK tax treaty
The new Australia-UK tax treaty will modernise Australia’s tax arrangements with the UK by replacing the existing agreement, which has not been modified since 1980. The treaty underlines the critical importance to Australia of the United Kingdom as a trading and investment partner and entry point into Europe.
This is a significant step in facilitating a competitive and modern tax treaty network for Australia. A modernised Australia-UK treaty is important for future economic relations between Australia and the UK reflecting the international economic significance of the UK and the magnitude of our investment and trade relationships.
This further demonstrates the Government’s commitment to updating ageing treaties with major trading partners as recommended by the Ralph Report.
The UK treaty was signed in Canberra on 21 August 2003. Details of the treaty were made public at the time and legislation providing for the treaty to be given the force of law in Australia - the International Tax Agreements Amendment Act (No. 123) 2003 – received Royal Assent on 5 December 2003.
The Australia-Russia tax treaty
The Australia-Russia tax treaty should promote an expansion of the economic relationship between Australia and Russia. In particular, the new tax treaty will assist in the development of Australia’s trade and investment links with Russia. The treaty reduces double taxation by allocating taxing rights between Australia and Russia in respect of all forms of income flows between the two countries. The basis of allocating these rights is substantially similar to that adopted in Australia’s other modern tax treaties.
The treaty was signed in Canberra on 7 September 2000. Details of the treaty were made public at the time and legislation providing for the treaty to be given the force of law in Australia - the International Tax Agreements Amendment Act (No. 1) 2002 – received Royal Assent on 3 July 2002.
The Australia-Russia treaty will first have effect in Australia for all Australian taxes covered by the treaty, in relation to income or profits of years of income beginning on or after 1 July 2004. In the case of Russia, the treaty will have effect for taxable years and periods beginning on or after 1 January 2004.
Combating fiscal evasion and protecting Australia’s tax revenue
The integrity of the tax system will be enhanced, and government revenues will be protected, through the strengthened framework for the exchange of information between revenue authorities and for establishment of a mechanism for settling jurisdictional disputes under both treaties.
In the case of the Australia-Russia treaty, Australian revenue will be protected under the treaty from inappropriate claims for treaty benefits by persons enjoying tax privileges under preferential tax regimes which shelter income from taxation. Article 23 (Limitation of Benefits) will operate to deny treaty benefits for highly mobile income where the relevant income or profits are preferentially taxed and information concerning that income is not readily exchanged.
Both treaties achieve a balance of outcomes that will provide Australia with a competitive tax framework for international trade and investment, while ensuring the Australian revenue base is sustainable and suitably protected. The treaties ensure Australia can effectively apply its taxing rights in respect of Australian sourced business profits, the exploitation of its natural resources and the sale of significant Australian assets.
Formal notification of the entry into force of both treaties will be published in the Gazette as soon as practicable. Copies of the treaties are available on the Department of Treasury’s internet site (http://www.treasury.gov.au) at “Taxation”.
Further details of the treaties are provided in the Attachment.
ATTACHMENT
Main features of the Australia-UK treaty
Reductions in interest withholding tax will reduce the borrowing costs for Australian companies in the UK. Generally, nil interest withholding tax is payable where interest is paid to a financial institution or a government body exercising governmental functions. The new treaty will also remove obstacles for Australian banks seeking to lend offshore thereby improving Australia’s standing as a global financial centre.
Reductions in dividend withholding tax will help Australia to attract and retain UK foreign direct investment. The new treaty exempts from withholding tax dividends paid to a publicly listed company which controls 80 per cent or more of the voting power in the company paying the dividend, a 5 per cent withholding tax rate applies to dividends paid to other companies with voting power of 10 per cent or greater in the dividend paying company, and a 15 per cent withholding tax rate applies for all other dividends.
The reduction in the rate of royalty withholding tax from 10 per cent to 5 per cent will improve Australian access to UK intellectual property. The reduction will also positively affect Australian companies receiving royalties from the export of Australian-owned technology.
The treaty also contains other features which are in line with Australia’s current tax law and treaty policies and practice. They include provisions which are designed to remove uncertainty for business by clearly allocating taxing rights between the two jurisdictions, and to protect taxpayers from discrimination and give them rights of appeal against such discrimination.
The new UK treaty will have effect for Australian and UK withholding taxes in relation to dividends, interest and royalties on or after 1 July 2004. The dates of effect for Australian fringe benefits tax and income tax are respectively 1 April 2004 and 1 July 2004.
Main Features of the Australia-Russia treaty
The treaty will reduce the withholding tax rates applicable to dividend and royalty flows between Australia and Russia. This will benefit Australia through reductions in the level of Russian tax on payments flowing back to Australia.
The 15 percent withholding tax rate that applies to dividends under the treaty is lowered to 5 per cent if the following conditions are met:
- the dividends have been fully taxed at the corporate level and the dividend recipient is a company that holds directly at least 10 per cent of the capital of the company paying the dividend;
- the resident of the other State has invested a minimum of $A 700,000 dollars or the Russian rouble equivalent in the company; and
- where the dividends are paid by a company that is resident in Russia, the dividends must be exempt from Australian tax.
A royalty withholding tax rate limit of 10 per cent of the gross amount of royalties will generally apply for both countries. The treaty is one of the first of Australia’s new tax treaties to include spectrum licences in the definition of royalties, as announced in the Treasurer’s Press Release No. 26 of 1998.
The possibility of double taxation of capital gains is reduced under the treaty by the inclusion of an Alienation of Property Article. This Article also includes a provision that deals with the indirect alienation of real property following the Federal Court’s decision in the Lamesa Holdings BV case.