Opportunities for increased trade and investment flows between the United States and Australia will be improved as a result of amendments to the Double Tax Treaty between the two countries.
I am pleased to announce that on Monday 12 May at 3:30pm Washington Time (5:30am Tuesday 13 May Australian Eastern Standard Time) Australia and the United States exchanged instruments of ratification for the Protocol amending the Australia-United States Double Tax Convention, bringing the Protocol into force. The Protocol, which was signed in Canberra in September 2001, amends the existing tax treaty between Australia and the United States, which dates back to 1982.
This Protocol reflects the close economic relations between Australia and the United States and will significantly assist trade and investment flows between the two countries.
The Protocol will remove withholding tax on certain dividends, enabling major Australian public companies to bring profits made by their US subsidiaries back to Australia without any further tax being payable. This zero per cent withholding tax on dividends will provide a benefit to the majority of Australian corporate groups with US operations.
Dividends derived by companies from other direct investment (where the shareholding is 10 per cent or more) will now be subject to 5 per cent withholding tax (compared with the current 15 per cent). The new rules will apply to franked and unfranked dividends.
Proposed exemptions from withholding tax for interest paid to financial institutions and governmental bodies will improve Australia's standing as a financial centre. The reduction in withholding tax on royalties from 10 to 5 per cent will reduce business costs for technology and intellectual property. The Protocol will also explicitly protect Australia's rights to tax capital gains.
Other changes include an updated list of taxes covered and a new provision dealing with interposed trusts in relation to permanent establishments. The Attachment provides further details of the Protocol.
Date of Effect
- For withholding taxes, the protocol will have effect in relation to payments made on or after 1 July 2003.
- For other taxes covered, the protocol will have effect in respect of income, profits or gains of years of income beginning on or after 1 July 2004.
ATTACHMENT
The Protocol will amend the existing double tax convention in a number of important respects.
Subject to the exceptions outlined below, dividends, interest and royalties will generally remain taxable in both countries, but with limits on the tax that the source country may charge residents of the other country who are beneficially entitled to the income.
Dividends
The Protocol provides for a number of broad exceptions to the current limit of 15 percent on dividends. No tax will be chargeable in the source country on dividends where a beneficially entitled company resident in the other country holds 80 per cent or more of the voting power of the company paying the dividends and satisfies public listing requirements in the Limitation on Benefits Article.
A limit of 5 per cent will apply for other company shareholdings of 10 per cent or greater.
These limits will apply to both franked and unfranked dividends.
No limit will apply to the tax that can be charged by the United States on dividends paid on certain substantial holdings of Australian residents in United States real estate investment trusts (REITs). In practical terms this means that tax on these dividends will increase from 15 per cent to the current United States domestic law rate of 30 per cent. The 15 per cent rate will be retained for REIT investments made by certain listed Australian property trusts subject to the underlying ownership requirements not exceeding certain levels. Existing investments in REITs by listed Australian property trusts acquired before 26 March 2001 will be protected from the increased rate.
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 government body of the other country (including a body exercising governmental functions or a bank performing central banking functions); or
- a financial institution resident in the other country (subject to certain safeguards).
Rules consistent with United States tax treaty policy and practice will allow:
- interest calculated by reference to the profits of the payer to be taxed at a higher 15 per cent rate (ie, at the same rate that generally applies to dividends); and
- tax to be charged on notional intra-entity interest payments between a branch and its head office.
Royalties
The limit on source country taxation of royalties will be reduced from 10 to 5 per cent.
In addition, amounts derived from equipment leasing (including container leasing) will be excluded from the royalty definition. Exclusive residence country taxation will apply to amounts derived from the leasing of containers used for international transport. Amounts derived from other types of equipment leasing will be treated as business profits.
A comprehensive Alienation of Property Article consistent with Australia's current treaty practice will apply (including a source country sweep-up provision that allows the source country to tax capital gains not otherwise dealt with). New rules will remove double taxation of capital gains in the case of departing residents and ensure that foreign tax credit rules operate effectively for them.
The Protocol will update the existing Convention in various 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, a revised article on shipping and air transport and a revised article on other income.