House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

MAIN FEATURES

Protocol with Singapore

The protocol to the comprehensive taxation agreement with Singapore makes a number of amendments to the existing agreement signed in 1969.

The protocol terminates, with effect in respect of relevant dividends paid after 11 March 1988, a provision of the existing comprehensive agreement under which Australia is required to provide a rebate of tax for dividends paid to an Australian company by a Singapore company in which the Australian company has a 10 per cent or greater interest. Foreign tax credit relief will apply in Australia in relation to such dividends derived after 11 March 1988 in accordance with the general foreign tax credit provisions of the Australian law.

This result is achieved under the protocol by replacement of the article of the existing agreement which provides for the country of residence of the recipient of income to relieve the incidence of double taxation with respect to income which, under the agreement, may be taxed by both countries. Under the replacement article, where the recipient of such income is an Australian resident, tax credit relief is to be provided by Australia in accordance with Australia's general foreign tax credit system.

That replacement article also provides for Australia to give " tax sparing" credit relief for Singapore tax forgone under certain development incentives currently provided by Singapore. Australia will provide such relief by treating as paid for foreign tax credit purposes the Singapore tax forgone. An exchange of Notes which took place at the time the protocol was signed will extend to 30 June 1987 the operation of tax sparing provisions of the existing comprehensive agreement (which generally ceased to apply from 30 June 1984). From 1 July 1987, the tax sparing provisions of the replacement "credit relief"' article contained in the protocol will apply.

Other amendments to the existing comprehensive agreement with Singapore made by the protocol update it in line with Australia's current domestic law and tax treaty practice. Apart from some changes of a technical nature, those other amendments are effected by new or substitute articles relating to:

•

the meaning of a "permanent establishment" - a substitute article (which is related to the practical application of the "'business profits" article) broadly parallels the comparable article in Australia's more recently concluded comprehensive tax treaties;

•

taxing rights over business profits - a substitute and modified article preserves the basic rule that the profits of an enterprise of one country shall be taxable only in that country, except for profits attributable to a business carried on in the other country through a permanent establishment therein;

•

international dealings between associated enterprises - a substitute article is designed to facilitate the application of current anti-avoidance provisions of each country's law in appropriate cases;

•

the taxation of income from real property, including income arising in respect of the exploitation of natural resources - a substitute article preserves and clarifies source country taxing rights in respect of such income;

•

the taxation of royalties - the definition of "royalties" is amended to broadly update it in line with the definition contained in Australia's current tax law and modern tax treaties;

•

the treatment of "shipping and airline profits" \-a substitute article allocates taxing rights with respect to profits from the operation of ships or aircraft in international traffic solely to the country of residence of the shipping or airline operator, whereas the article it replaces allowed some "source country" taxing rights in the case of international shipping profits. (The substitute article also clarifies that interest earned on funds held in connection with the international operation of ships or aircraft is to be treated as profits derived from such operations.);

•

income or gains from the alienation of property \-a new article contains specific taxing rules in relation to income or gains arising from the alienation of real property, certain business assets and some shares; it also provides for capital gains arising from the alienation of other property to be taxed in accordance with the domestic law of each country;

•

the source of income - a substitute article contains a general source rule for profits, income or gains that are derived by a resident of one country and are taxable by the other country; and

•

income not expressly covered - a new "sweep-up" article for such income provides for it to be taxable according to the taxation laws of the respective countries.;

The protocol will enter into force when the Australian and Singapore Governments exchange Notes through the diplomatic channel notifying each other that the processes necessary to give the protocol the force of law in the respective countries have been finalised. That notification can be given, in the case of Australia, following the passage of this Bill. On entry into force of the protocol, it will thereafter have effect:

(a)

with respect to interest declared by the substitute "shipping and airline profits"' article to be treated as profits from international shipping or airline operations - for the 1983/84 income year and subsequent income years in the case of Australia, and for any year of assessment beginning on or after 1 January 1984 in the case of Singapore; and

(b)

in any other case, with respect to income derived in the 1987/88 and subsequent income year in the case of Australia, and for any year of assessment beginning on or after 1 January 1988 in the case of Singapore.

The entry into force provisions of the protocol are subject, however, to a "saving" provision which preserves the application of the articles of the existing comprehensive agreement for stipulated periods where those articles would afford greater relief to a taxpayer than the existing agreement as amended by the protocol. This saving provision preserves the application in Australia of the inter-corporate dividend rebate provisions of the existing agreement in respect of dividends paid before 12 March 1988 by a Singapore company to a related Australian company. It will also preserve the application of other relevant provisions of the existing agreement in respect of income of any year of income beginning before the date on which the protocol enters into force.

Protocol with France

The protocol to the comprehensive double taxation agreement with France amends the existing agreement (signed in 1976) in a number of respects relating to the prevention of double taxation and the removal of possible avenues of tax avoidance.

One of the amendments is designed to ensure that remuneration derived by professors or teachers temporarily visiting one of the countries for teaching or conducting research will be exempt from tax in the country visited but remain subject to tax in the country of residence.

Another amendment ensures that each country may apply its domestic law provisions directed against international profit shifting arrangements in appropriate cases.

Another measure adjusts the definition of "royalties" for the purposes of the agreement to bring it into line with the relevant definitions in Australia's income tax law and modern comprehensive taxation agreements.

Under a further measure, the source (paying) country is given the sole right to tax government service pensions paid to a resident of the other country. However, a government service pension will be taxed only in the country of residence of the pension recipient where that person is a citizen or national of that country. Other pensions will remain taxable only in the country of residence of the recipient.

As a related measure, the "Pensions and Annuities" article is being amended to ensure that contributions to a recognised foreign superannuation or pension fund qualify as an "undeducted purchase price" offset against pension income.

The protocol also amends the existing agreement to:

•

update the "Income from Real Property" article, (including the definition of "real property") in line with current tax treaty policy and practice, in order to ensure, amongst other things, full source country taxing rights in respect of royalties and other income arising from the exploitation of natural resources;

•

allow for the imposition of a branch profits tax in certain circumstances; and

•

make other technical amendments, including an update of the definition of the term "France".;

The protocol also incorporates a "most favoured nation" article to the effect that if Australia subsequently agrees with another OECD member country to a lesser rate of tax on dividends, interest or royalties than is specified in the existing agreement with France, or to the inclusion of a "Non-Discrimination" article, Australia will negotiate with France with a view to providing the same treatment for France as provided to that other OECD member country.

The protocol will enter into force when Australia and France have notified each other of completion of the procedures necessary under their respective laws for its entry into force.

As announced at the time of signature of the protocol, the provisions concerning the taxation of pension income will have effect, following entry into force of the protocol, in relation to pensions derived on or after 1 July 1987. The adjustment by the protocol of the definition of "royalties" will have effect in relation to relevant income derived after the date the protocol was signed (19 June 1989). The other changes made by the protocol to the existing comprehensive taxation agreement with France will have effect in respect of income of any year of income (in Australia) and any assessment year (in France) beginning on or after the date the protocol was signed.

Comprehensive taxation agreements with Papua New Guinea and Thailand

The comprehensive agreements between Australia and Papua New Guinea (PNG) and Australia and Thailand are designed to avoid double taxation of income flowing between Australia and the respective treaty partners and to prevent fiscal evasion of taxes covered by the agreements. Double taxation is avoided under the comprehensive agreements by allocating taxing rights between the contracting countries in relation to certain categories of income and by setting out how relief from double taxation is to be provided where other income may be taxed by both countries. The basis provided by each agreement for allocating taxing rights and providing double taxation relief is substantially similar to that adopted in Australia's other modern comprehensive double taxation agreements.

The agreements provide that certain categories of income are to be taxed as follows:

•

Income from real property (which includes natural resources royalties) is taxable in full by the country in which the property is situated.

•

Business profits are to be taxed only in the country of residence of the recipient unless they are derived by a resident of one country through a branch or other "permanent establishment" in the other country, in which case that other country may tax the profits.

•

Profits from international operations of ships and aircraft will be taxed only in the country of residence of the operator except that, in the case of the Thailand agreement, shipping profits may be taxed by both countries with the source country reducing its tax on those profits by one half.

•

Dividends, interest and royalties may be taxed in the country of source, but there are general limits on the tax that country may charge on such income flowing to residents of the other country.

•

Income or gains from the alienation of real property may be taxed in full by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and some shares, capital gains are to be taxed in accordance with the domestic law of each country.

•

Income from professional services and other similar activities will generally be taxed only in the country of residence of the recipient.

However, the other country may also tax the income where it is attributable to activities performed from a fixed base of the recipient in the other country, or in certain other circumstances.

•

Income from dependent personal services, that is, employees' remuneration, may generally be taxable in the country where the services are performed.

However, the income will be exempt in the country visited where the services are performed by a resident of one country during a short visit to the other country, the employer is not a resident of the country visited and the remuneration is not deductible in determining taxable profits of a permanent establishment or fixed base which the employer has in the country visited.

•

Government officials will generally be taxed only in their home country.

•

Directors' fees and similar payments may be taxed in the country of residence of the paying company.

•

Income derived by public entertainers from their activities as such (other than, in the case of the Thailand agreement, where the activity is substantially funded by public funds of the country of residence of the entertainer) is to be taxed by the country in which the activities are performed.

•

Pensions will generally be taxed only in the country of residence of the recipient (except, in the case of the Thailand agreement, for certain government service pensions, which are to be taxed only in the country which pays the pensions).

•

Professors and teachers who are resident in Australia or Thailand and are visiting the other country for a period not exceeding two years solely for the purpose of teaching or research at an educational institution will generally be taxable only by their country of residence on remuneration derived for such teaching or research.

•

Students resident in one country who are temporarily present in the other country solely for the purpose of their education will be exempt from tax in the country visited in respect of payments made from abroad for the purposes of their maintenance or education.

•

Dual residents (i.e., residents of both countries according to the domestic taxation laws of the respective contracting countries) are, in accordance with specified criteria, to be treated for the purpose of each agreement as being residents of only one Country.

•

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

•

Double taxation relief is to be allowed by the country of residence of the recipient of income (including gains) which, under the agreement, may also be taxed in the other country, as follows:

-

in Australia, by allowance of a credit against Australian tax on such income for the tax paid in the other country. In the case of a dividend payment from a company resident in Papua New Guinea or Thailand to a related Australian resident company, the tax to be credited by Australia includes the "underlying" tax paid in respect of the profits out of which the dividend is paid.

The tax credit relief to be provided by Australia is to include "tax sparing" relief in relation to income derived from Papua New Guinea or Thailand by a resident of Australia which has benefited from certain development tax incentives of the other country. This "tax sparing" relief is to be provided by granting a credit against the Australian tax payable in respect of that income for the foreign tax forgone under those development incentives as if that tax had been paid. This tax sparing relief is to be provided under both agreements by the "direct credit" method, which means that the amount of income received will not be "grossed-up", for Australian assessment purposes, by the amount of foreign tax forgone before allowance of the tax credit.

-

in Papua New Guinea, generally by the allowance of a credit against PNG tax for the Australian tax paid on income (or gains) derived by residents of PNG from sources in Australia.

-

in Thailand, generally by the allowance of a credit against Thai tax for the Australian tax paid on income (or gains) derived by residents of Thailand from sources in Australia.

The agreements also provide for the exchange of information and for consultation between the taxation authorities of the respective countries.

Each agreement will enter into force when diplomatic Notes are exchanged notifying that the last of the constitutional processes necessary to give the agreement the force of law in the respective countries has been completed.

Upon entering into force, the agreement with Papua New Guinea will have effect in Australia for withholding tax purposes in respect of income derived on or after 1 July in the calendar year following that in which the agreement enters into force. For all other Australian taxes covered by the agreement, it will first have effect in respect of income of the income year beginning on 1 July in the calendar year after that in which the agreement enters into force.

The agreement with Papua New Guinea will have effect in that country for withholding tax purposes in respect of income derived on or after 1 January in the calendar year following that in which the agreement enters into force. For all other PNG taxes covered by the agreement, it will first have effect in respect of income of the income year beginning on 1 January in the calendar year after that in which the agreement enter into force.

The agreement with Thailand will have effect in Australia for withholding tax purposes in respect of income derived on or after 1 January in the calendar year following that in which the agreement enters into force. For other Australian taxes covered by the agreement, it will first have effect in respect of income of the income year beginning on 1 July in the calendar year after that in which the agreement enters into force.

In Thailand, that agreement will have effect for all Thai taxes (including tax withheld at source) in respect of income derived on or after 1 January in the calendar year next following that in which the Notes are exchanged to bring the agreement into force.