Supplementary Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon J. Dawkins M.P.)Royalty Withholding Tax
Explanation of the proposed amendment
Australia's Double Tax Agreements (DTAs) provide different treatment for royalties paid to non-residents who have a permanent establishment (for example, a branch) or fixed base in Australia and those non-residents who do not have a permanent presence in Australia.
Where the royalties are effectively connected with an Australian permanent establishment or fixed base, the royalties are taxed under the provisions of the "business profits" article or "independent personal services" article of the DTA and not the royalties article. They are subject to tax at the normal income tax rates and do not qualify for the withholding tax limitation (generally 10%) set out in the royalties article.
A possible interpretation of the proposed new withholding tax regime is that although the royalties are taxable as business profits or personal services they do not form part of assessable income and, therefore, cannot be taxable in the normal way by assessment. Concern has also been expressed that because the withholding tax limitation will not apply they would be taxable at the non-DTA rate of 30%.
An amendment to section 17A of the Income Tax (International Agreements) Act 1953 will make it clear that royalties paid to a non-resident of a treaty country carrying on business through a permanent establishment in Australia are not subject to withholding tax. In order to assist in the precise drafting of the provision it was necessary to mention a particular agreement. The Chinese agreement was chosen at random and the reference to that agreement has no other consequences [Amendment 3] .