House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 3 - The Second Protocol with Belgium

Outline of chapter

3.1 This Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953). This chapter explains the rules that apply in the Second Protocol amending the Agreement between Australia and the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income signed at Canberra on 13 October 1977 as amended by the Protocol signed at Canberra on 20 March 1984 (Second Protocol), which amends the existing tax treaty with Belgium - the Agreement between Australia and the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income signed at Canberra on 13 October 1977 as amended by the Protocol signed at Canberra on 20 March 1984 (existing Belgian Agreement).

Context of amendments

3.2 The Second Protocol was signed in Paris on 24 June 2009.

3.3 The Second Protocol was negotiated in the context of recent international progress in improving tax transparency and exchange of taxpayer information between countries, and the withdrawal by Belgium of its reservation to Article 26 ( Exchange of Information ) of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital (OECD Model).

3.4 Once in force, the Second Protocol will replace the Exchange of Information Article in the existing Belgian Agreement with a new Article that meets the international standards set by the OECD Model.

Summary of new law

3.5 The main changes to the Exchange of Information Article of the existing Belgian Agreement (as revised by the Second Protocol) are as follows:

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neither tax administration can refuse to provide information solely because they do not have a domestic interest in such information, or because the information is held by a bank or similar institution;

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the Article now expands the scope of the Exchange of Information Article, as it will now allow tax administrations to request taxpayer information with regard to all federal taxes and not just taxes to which the existing Belgian Agreement applies; and

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the Article also provides that information received by a tax authority may be used for other purposes when the laws of both countries permit this and the tax authority supplying the information authorises such use.

[Article I, paragraph 1 of new Article 26]

Comparison of key features of new law and current law

Detailed explanation of new law

Article I

Substitutes new Article 26 (Exchange of Information) into the Agreement

3.6 The Second Protocol aligns the information exchange provisions to the current OECD standard by replacing Article 26 ( Exchange of Information ) of the existing Belgian Agreement. The new Article 26 continues to provide for the exchange of tax information by the tax administrations of the two countries, but differs from the previous approach in the following ways:

•

the scope is expanded to a wider ranges of taxes;

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the new provision clarifies that the Commissioner of Taxation (Commissioner) is obliged to obtain information for Belgian tax authorities regardless of whether Australia has a domestic tax interest in the information sought or whether the information concerns a resident of either country;

•

bank secrecy laws do not limit the exchange of information; and

•

information received by a tax authority may be used for other purposes when the laws of both countries permit this and the tax authority supplying the information authorises such use.

Foreseeably relevant information

3.7 Article 26 authorises and limits the exchange of information by the two competent authorities to information foreseeably relevant to the administration or enforcement of the relevant taxes. The exchange of information is not restricted by Article 1 ( Personal Scope ) of the existing Belgian Agreement, and may therefore cover persons who are not residents of Australia or Belgium.

3.8 The standard of foreseeable relevance is intended to ensure that information may be exchanged to the widest possible extent. However, a competent authority is not entitled to request information from the other country which is unlikely to be relevant to the tax affairs of a taxpayer, or to the administration and enforcement of tax laws. [Article I, paragraph 1 of new Article 26]

3.9 The change in wording from 'necessary' used in the previous version of the Article to a 'foreseeably relevant' standard reflects the wording in Article 26 ( Exchange of Information ) of the OECD Model and no difference in effect is intended.

Taxes to which this Article applies

3.10 Under the corresponding Article in the existing Belgian Agreement, the information that could be requested and obtained between the two countries was limited to information in relation to taxes to which that Agreement applied (generally income taxes).

3.11 Under the new Article 26, the range of taxes for which information may be exchanged has been expanded. The Australian competent authority can now request and obtain information concerning all federal taxes from the Belgian competent authority. This means, for example, that information concerning Australian indirect taxes (for example, the goods and services tax (GST)) may be requested and obtained from Belgium. [Article I, paragraph 1 of new Article 26]

3.12 Similarly, in the case of Belgium, the Belgian competent authority can now request and obtain information concerning all federal taxes from the Australian competent authority.

Use of exchanged information

3.13 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted in a manner which is consistent with the approach taken in the OECD Model. However, the final sentence of this paragraph permits the information to be used for other purposes when the laws of both countries permit this and the tax authority supplying the information authorises such use. [Article I, paragraph 2 of new Article 26]

3.14 Any information received by a country must be treated as secret in the same manner as information obtained under the domestic law of that country, and can only be disclosed to the persons identified in paragraph 2 of the Article. [Article I, paragraph 2 of new Article 26]

No domestic tax interest required

3.15 When requested, a country is required to obtain information under the new Article in the same manner as if it were administering its domestic tax system, notwithstanding that the country may not require the information for its own purposes. Australia would recognise this obligation to obtain relevant information for treaty partner countries, even in the absence of an explicit provision to this effect. [Article I, paragraph 4 of new Article 26]

Limitations

3.16 The country requested to provide information under the new Article 26 is not obliged to do so where:

•

it would be required to carry out administrative measures at variance with the law and administrative practice of either Australia or Belgium; or

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such information is not obtainable under the domestic law or in the normal course of administration.

[Article I, subparagraphs 3(a) and (b) of new Article 26]

3.17 Also, in no case is the country receiving the request obliged to supply information under new Article 26 that would:

•

disclose any trade, business, industrial, commercial or professional secret or trade process; or

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be contrary to public policy.

[Article I, subparagraph 3(c) of new Article 26]

Information held by institutions such as banks, other financial institutions, trusts, foundations and nominees

3.18 Paragraph 5 ensures that paragraph 3 of the new Article 26 cannot be used to prevent the supply of information solely because the information is held by institutions such as banks, other financial institutions, trusts, foundations and nominees.

3.19 The final sentence in paragraph 5 ensures that, to the extent that it may be necessary in order to obtain information from such persons or institutions for the purposes of exchange of information under the new Article 26, the tax administration of the requested country will have the power to require the disclosure of information and to conduct investigations notwithstanding the country's domestic tax laws. This additional sentence is intended to overcome limitations imposed under Belgian internal law on the ability of the Belgian tax administration to obtain information, especially information from banks and other financial institutions for the purposes of the taxation of their clients. [Article I, paragraph 5 of new Article 26]

3.20 The final sentence in paragraph 5 of the new Article 26 will not have any practical application for Australia, since Australian domestic tax law already permits the Commissioner to obtain information from banks and financial institutions in order to meet obligations under Exchange of Information Articles in tax treaties or Tax Information Exchange Agreements.

Information that exists prior to the entry into force of the Second Protocol

3.21 The Article will apply to the exchange of information made after the entry into force of the Second Protocol with respect to tax events occurring on or after the dates specified in Article II, including where the relevant information existed prior to the entry into force of the Second Protocol.

Article II

Date of entry into force of the Second Protocol

3.22 Article II provides for the entry into force of the Second Protocol. The Second Protocol will enter into force on the last date on which diplomatic notes are exchanged notifying that the domestic processes to give the Second Protocol the force of law in the respective countries has been completed. In Australia, enactment of the legislation giving the force of law in Australia to the Second Protocol, along with tabling of the Second Protocol in Parliament, are prerequisites to the exchange of diplomatic notes. [Article II]

3.23 New Article 26 will apply to taxes imposed at source on income derived on or after 1 January 2010, and to income tax imposed in respect of taxable periods beginning on or after that date. Thus, for example, the new Article 26 will apply with respect to Australian withholding taxes on income derived from 1 January 2010, and for other Australian income tax, with respect to tax on income derived during the year of income commencing 1 July 2010 and subsequent years. For other taxes, such as Australia's GST and fringe benefits tax, the new Article will apply in respect of taxable events occurring from 1 January 2010. [Article II, subparagraphs 1a) to c)]

3.24 The new Article 26 will apply with respect to criminal tax matters from the date of entry into force of the Second Protocol. It applies to requests for exchange of information in respect of federal taxes of both Australia and Belgium received on or after that date. [Article II, paragraph 2]

3.25 The information to be exchanged in relation to criminal tax matters may relate to the income tax affairs of a taxpayer in a taxable period (for example, a year of income) that predates the entry into force of the Second Protocol. [Article II, paragraph 2]

Article III

Second Protocol part of the existing tax treaty

3.26 Article III provides that the Second Protocol shall form an integral part of the existing Belgian Agreement and will remain in force and apply as long as the existing Belgian Agreement is in force and applicable. [Article III]