House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Main Features

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Business profits, if they are derived by a resident of one country from a branch or other "permanent establishment" in the other country, may be taxed in the latter country, otherwise they are to be taxed only in the country of residence.

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Dividends, interest and royalties will be subject to tax in the country of source, but there is a general limit on the tax that that country may charge on such income flowing to residents of the other country. This limit, in the case of the Malaysian agreement, is 15 per cent for dividends, interest and royalties but these limits will not affect dividends derived by Australian residents from Malaysia, which are not subject to a separate tax on dividends in Malaysia. (Interest paid from Australia to persons resident in Malaysia will continue to attract withholding tax of 10 per cent.). In the agreement with Sweden the limits are 15 per cent for dividends and 10 per cent for interest and royalties.

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Income from real property is taxable in full in the country in which the land is situated.

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Profits from international operations of ships and aircraft will be taxed only in the country of residence of the operator.

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Income from personal services (Malaysia) will generally be taxable in the country where the services are performed. However, where the services are performed during a short visit to one country by a resident of the other country, and the remuneration is not an expense of a resident of, or a permanent establishment in, the country visited, the income will be taxed only in the country of residence of the recipient.

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Income from independent personal services (Sweden) will be taxed only in the country of residence of the recipient unless the income is attributable to a fixed base of the recipient in the other country.

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Income from dependent personal services (Sweden), i.e., employees' remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during a short visit to one country by a resident of the other country, and the remuneration is not an expense of a resident of, or a permanent establishment in, the country visited the income will be exempt in the country visited provided it is subject to tax in the country of residence of the recipient.

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Government officials are to be taxed by their home country.

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Directors' fees will generally be taxed in the country of residence of the paying company.

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Income derived by public entertainers from their activities as such are to be taxed by the country in which the activities take place.

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Pensions and annuities will generally be taxed only in the country of residence of the recipient.

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Remuneration derived by teachers and professors from teaching or research during visits of up to two years' duration will be exempt from tax in the country visited, provided it is subject to tax in the country of residence.

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A student resident in one country who is temporarily present in the other country solely for the purpose of receiving an education, or education or training in the case of Malaysia, will be exempt from tax in the country visited in respect of payments made from abroad for the purposes of his or her maintenance or education, or education or training in the case of Malaysia.

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Dual residents of both countries are, according to specified criteria, to be treated for the purposes of the agreement as being residents of only one country.

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Associated enterprises may be taxed on the basis of dealings at arm's length.

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Exchange of information and consultation between the taxation authorities of each country is authorised.

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Double taxation relief to be allowed by the country of residence in respect of income taxed in the other country will be:

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in Australia, (both agreements) by allowance of credit against Australian tax for the other country's tax on interest and royalties, where that tax is subject to a limit expressed in the relevant agreement, and on dividends received by individuals - dividends received by Australian companies from Malaysia and Sweden and all other categories of taxed income received by Australian residents from those countries being freed from Australian tax by Australian tax law;

Australia will also, in the case of Malaysia, grant a "tax sparing" credit for Malaysian tax forgone under incentive legislation.

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in Malaysia, broadly, by allowance of credit against Malaysian tax for the Australian tax on income derived by residents of Malaysia from sources in Australia;

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in Sweden, generally, by allowance of credit against Swedish tax for the Australian tax on dividends, interest and royalties and, while taking other income into account in determining the rate of Swedish tax on taxable income, by exempting that other income from Swedish tax. In the case of a Swedish company which owns shares in an Australian company other than a company that is largely an investment company, dividends paid to the Swedish company will be exempt from Swedish tax on the same basis as if the two companies had been residents of Sweden.

Notes on the clauses of the Bill are given below and these are followed by explanations of the articles of the agreements.