Treasurer Peter Costello and Finance Minister Koji Omi confirmed at their meeting today that Australia and Japan had reached an agreement in principle on a new income tax treaty to replace the existing Agreement between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed on 20 March, 1969. Both countries have had series of negotiations since January 2007, having recognized that the existing treaty might no longer adequately reflect the current economic relationship between the two countries.
The proposed new treaty, based on the OECD Model Tax Convention, will comprehensively revise the existing Agreement and substantially reduce the withholding taxes imposed on dividends, interest and royalties paid between the two countries. In particular, it will eliminate withholding taxes on certain inter-company dividends, and certain interest.
This will provide long term benefits for business, making it cheaper for Australian and Japanese business enterprises to obtain intellectual property, equity and finance for expansion.
These measures stipulated in the proposed new treaty are expected to enhance the already robust investment relationship between Australia and Japan and facilitate trade and investment flows between the two countries, while minimizing opportunities for tax avoidance.
After the governments of the two countries have completed the necessary procedures, the proposed new treaty will be signed and become ready for submission to the respective parliaments. The new treaty will enter into force after it has been approved by the respective parliaments and an official exchange of notes has taken place.
Appendix – technical changes in the proposed treaty –
The proposed new treaty is a comprehensive taxation convention and contains provisions for the avoidance of double taxation and the prevention of fiscal evasion in relation to income flowing between Australia and Japan.
It replaces the existing Australia-Japan taxation Agreement (signed in 1969).
The main points are as follow:
1. Reducing withholding taxes imposed on dividends, interest and royalties
|
|
Existing Treaty |
New Convention |
|
|
Dividends |
Inter-company |
15% |
Exempt for ownership interests of at least 80% or greater 5% for at least 10% but less than 80% ownership |
|
Others |
15% |
10%* |
|
|
Interest |
10% |
Exempt (financial institutions, governmental institutions) 10% (Others) |
|
|
Royalties |
10% |
5% |
|
* 15% shall be applied to distributions from Real Estate Investment Trusts (REITs) and dividends which are paid by a Japanese company which is entitled to a deduction for dividends paid to its beneficiaries in computing its taxable income in Japan.
2. Introducing measures for the avoidance of abuse
1) Introduction of ‘Limitation on Benefits’ clauses.
2) Reservation of source country taxation rights over income with respect to a ‘Tokumei-Kumiai’ contract.
3. Others
1) Limitation of Transfer Pricing review periods.
2) Prescribed time frames for the creation of a permanent establishment where an enterprise is engaged in the exploration for or exploitation of natural resources.
3) Introduction of ‘Income from Real Property’ and ‘Alienation of Property’ clauses, and update of ‘Exchange of Information’ clauses in line with the latest OECD model convention.