House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Rt. Hon. William McMahon).

AGREEMENT WITH SINGAPORE.

Introductory Note

The agreement is generally similar to the agreements completed with the United Kingdom, the United States, Canada and New Zealand and to the later agreement with Japan.

The arrangements which it embodies for the relief of double taxation of income flowing between the two countries are consistent with those adopted in the other agreements. The agreement specifies that certain classes of income are to be taxed only in the country of residence of the recipient and that other classes of income are to be taxed in the country of origin, with the country of residence, if it also taxes the income, allowing a credit in respect of tax paid in the other country. In the latter case, the tax of the country of origin on certain income is limited by the terms of the agreement.

Briefly stated, the following classes of income are to be subject to tax only in the country of residence of the recipient -

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business profits not attributable to a permanent establishment in the country of origin (articles 4 and 5);

•

airline profits derived from operations in international traffic (article 7);

•

remuneration or other income derived by an individual for personal (including professional) services, unless the services are performed or exercised in the other country and the person exercised in the other country and the person deriving the income is in that other country for more than half the taxation year (articles 11 and 12);

•

pensions (other than Government pensions ) and purchased annuities (article 13);

•

remuneration of Government employees (article 14);

•

payments for the maintenance, education or training of visiting students and trainees (article 15).

The country of origin will retain taxing rights in respect of international shipping profits but will reduce its tax on such profits by one-half (article 7).

Other income in respect of which the tax of the country of origin is limited by the agreement comprises -

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dividends - limit of 15 per cent (article 8);

•

interest - limit of 10 per cent (article 9);

•

royalties - limit of 10 per cent (article 10).

Singapore does not at present levy a separate tax on dividends (the Singapore tax on company profits being treated by Singapore law as tax on dividends paid out of those profits) but the agreement provides that the 15 per cent limit will apply to any tax on dividends which might subsequently be introduced in Singapore. In the absence of a separate Singapore tax on dividends, the method of taxation in Australia of Singapore dividends will remain unchanged - an Australian resident will continue to be taxed on the amount of dividends actually received and there will be no Singapore tax on the dividends for which Australia is to give credit. Tax at the rate of 15 per cent will be withheld from dividends paid by Australian companies to residents of Singapore, with credit being allowed by Singapore for Australian tax.

Australian parent companies are, by the rebate on inter-company dividends provided in section 46 of the Income Tax Assessment Act, effectively freed from Australian tax on dividends derived from Singapore subsidiary companies. The agreement ensures that this rebate will continue to apply for the duration of the agreement where the Australian investment in a Singapore company is by way of a 10 per cent or greater holding by an Australian company (article 18(2.)).

A feature peculiar to this agreement is that a credit for Singapore tax will also be allowed to an Australian resident in receipt of interest or royalties where relief from payment of the Singapore tax of 10 per cent has been granted under 'economic incentive' provisions of Singapore legislation. The agreement provides, in effect, that where Singapore forgoes its tax of 10 per cent the Australian resident will be taxed on the actual amount of the interest or royalties received by him, increased by the amount of the Singapore tax forgone. Credit will be allowed in Australia for that tax as though it had been paid (article 18(3.)).

Explanatory notes on each article of the agreement are given in the following paragraphs -

Notes on Articles

Article 1: Taxes the subject of the agreement.

This article lists the existing taxes to which the agreement applies. These are the Commonwealth income tax (including withholding tax) and the Singapore income tax. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may be imposed by either Government in the future in addition to, or in place of, the existing taxes.

Article 2: Definitions.

Paragraph 1 of this article defines a number of terms used in the agreement. Definitions of other terms are to be found in the articles to which the terms relate.

Definitions in paragraph 1 of article 2 calling for comment are -

'Australia': In common with Australia's other double taxation agreements, this term is defined as including Australian external territories. It also includes areas of the Australian continental shelf specified in the Petroleum (Submerged Lands) Act which, by section 6AA of the Income Tax Assessment Act, are to be treated in relation to petroleum exploration and exploitation as if they were part of Australia.

'Profits of a Singapore enterprise' and 'profits of an Australian enterprise': Article 5 of the agreement provides for the taxation of business profits of an Australian or Singapore enterprise. These profits, which are described as 'industrial or commercial profits' in other agreements are to be taxed only in the country of residence, except where the profits are attributable to a permanent establishment (as defined in article 4) in the other country. The definition defines 'profits' for these purposes as meaning, broadly, business profits, as distinct from remuneration for personal services or investment income such as dividends, interest, royalties or rents. The term includes, however, dividends, interest or royalties that are effectively connected with a trade or business carried on through a permanent establishment.

Profits from the operation of ships or aircraft are excluded from the 'profits' to which article 5 relates as are certain payments (described in sub-paragraphs (v) and (vi) of the definition) which would otherwise be classed as 'royalties' and which would, as royalties, not generally come within the ambit of article 5.

Paragraph 2 of article 2 excludes from the terms 'Australian tax' and 'Singapore tax' amounts payable by way of interest of penalty, e.g. for late lodgment of a return or late payment of tax.

Paragraph 3 relates to provisions of the Singapore law which have no counterpart in Australian taxation law. A person resident in Singapore is taxed there on foreign-source income only if the income is remitted to or received in Singapore. Paragraph 3 will ensure that Australia is not to exempt or reduce its tax on income that, because it is not remitted to or received in Singapore by the Singapore resident who derives it, is not subject to Singapore tax.

Paragraph 4 of article 2 is a conventional provision which specifies that terms in the agreement that are not defined in the agreement are to have the meanings which they have under the respective taxation laws of Singapore and Australia.

Article 3: Residence.

The extent to which a double taxation agreement provides relief for a taxpayer is generally governed by his residential status. The income tax laws of both countries contain tests for determining whether a person is, for taxation purposes, a resident but those tests vary somewhat between each country and it is possible that in isolated cases each may regard a particular taxpayer as its own resident. Article 3 deals with these situations by specifying, for the purposes of the agreement, the circumstances in which a taxpayer (whether a company, an individual, or other entity) will be treated as being a resident of one country or the other. The article will, of course, apply also where a taxpayer is, under the respective taxation laws, a resident of only one of the two countries.

The relevant provisions are found in paragraphs 1 to 4 of article 3 which is modelled on article 3 of the Australia/United Kingdom double taxation agreement.

Article 4: Permanent establishment.

Application of various provisions of the agreement is dependent upon whether or not income of a taxpayer resident in one country is attributable to, or connected with, a trade or business carried on through a 'permanent establishment' in the other country. This article defines the term for purposes of the agreement and follows the corresponding definition in the new United Kingdom agreement.

The primary meaning of the defined term is stated in paragraph 1 as being a fixed place of trade or business in which the trade or business of the enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with giving examples of what constitutes a permanent establishment and defining the circumstances in which a resident of one country shall, or shall not, be deemed to have a permanent establishment in the other country.

Article 5: Business profits.

This article governs the taxing of 'profits' (as defined in article 2) derived by a resident of one country from sources in the other country.

The taxing of these profits depends on whether profits of a person resident in one country relate to a 'permanent establishment' in the other country. If they do not the profits will be taxed only in the country of residence of the taxpayer. If, however, the resident of one country carries on trade or business through a permanent establishment (as defined in article 4) in the other country, the country in which the permanent establishment is situated may tax profits attributable to that establishment.

A Singapore resident who is taxed in Australia on profits attributable to a permanent establishment in Australia will be entitled to a credit for Australian tax under article 18 against any Singapore tax on that income. In the case of an Australian resident, profits (other than any dividend component of the profits) attributable to a permanent establishment in Singapore and subject to tax in that country will qualify for exemption from Australian tax under section 23(q) of the Income Tax Assessment Act.

Article 5 is on all fours with corresponding articles in Australia's other double taxation agreements. As with those agreements, the article specifies an arm's length basis for ascertaining the amount of profits attributable to a permanent establishment.

The article preserves the application of the special provisions of the Australian income tax law relating to film businesses controlled abroad and insurance with non-residents of Australia.

Article 6: Associated companies.

This article is supplementary to the provisions of article 5, which sets out the basis upon which profits are to be attributed to a permanent establishment. The main purpose of article 6 is to enable an allocation of profits between inter-connected companies in Australia and Singapore.

Broadly, the article provides for allocation of profits between associated companies where the commercial or financial arrangements that apply differ from those that might be expected to exist between independent companies. The basis of allocation is fixed by having regard to the profits which the company concerned might have been expected to derive if it had been an independent company dealing at arm's length with its associate.

Article 7: Shipping and aircraft profits.

This article specifies that profits from the operation of aircraft in international traffic will be subject to tax only in the country of residence of the operator.

On the other hand, the country from which income from freights etc. is derived in the course of international shipping traffic by a resident of the other country will retain taxing rights as to the income. At present, the tax imposed on such income in Australia and Singapore is limited, broadly, to five per cent of the gross receipts from the carriage of passengers, livestock, mails or goods shipped in Australia or Singapore respectively. The agreement requires, however, that the tax of the country of shipment be reduced by one-half.

Both airline and shipping profits derived from voyages or operations confined solely to places in one country will remain subject to the tax normally imposed on the profits in that country. This will mean, for example, that a Singapore resident shipowner would not be entitled to any relief from Australian tax in respect of income from shipments from a place in Australia to another place in Australia or its territories, including the Territory of Papua-New Guinea.

Article 8: Dividends.

The broad scheme of this article is to limit to 15 per cent of the gross amount of dividends the tax (other than tax on the profits out of which the dividends are paid) imposed by the country of source on dividends payable to shareholders resident in the other country.

Paragraph 1 specifies the 15 per cent limit in respect of dividends paid by an Australian company to a Singapore resident. The paragraph will operate to reduce the withholding tax on dividends payable by a company that is a resident of Australia to a shareholder resident in Singapore from 30 per cent to 15 per cent. This is the rate at which tax is withheld by an Australian company from dividends payable to residents of the United Kingdom, the United States, Canada and New Zealand in accordance with the double taxation agreements effected with those countries.

Paragraphs 2, 3, and 4 deal with the taxation by Singapore of dividends paid to residents of Australia. At present, a Singapore company is taxed in Singapore at the rate of 40 per cent and this is also the rate of tax on dividends received by non-residents of Singapore. Under the Singapore taxation system the company tax on the profits out of which dividends are paid by a Singapore company is treated as meeting the Singapore tax on the dividends and this means that an Australian resident is not called on to pay any Singapore tax on the dividends he receives from a Singapore company. This is also the position as regards dividends paid by a Malaysian company out of profits earned in Singapore in respect of which, under arrangements between Singapore and Malaysia, Singapore has taxing rights.

Paragraph 2 sets out the general rule that the position just outlined is to continue while Singapore retains its present taxing system, i.e., Australian residents are to be effectively exempt from tax on Singapore dividends. Paragraph 3, however, will permit Singapore to collect an appropriate amount of tax on dividends paid to Australian residents where, due to an upwards change in the company rate, the non-resident rate on dividends has failed temporarily to coincide with the company rate.

Paragraph 4 deals with the possible future introduction by Singapore of a tax on dividends that is distinct from the company tax on the profits out of which the dividends are paid. In this event the Singapore tax on dividends derived by an Australian resident is to be limited to 15 per cent of the dividends.

Paragraph 5 specifies that the 15 per cent tax limit will not apply to dividends where, broadly, the shareholder has a permanent establishment in the country from which the dividends are paid and the shareholding giving rise to the dividends is effectively connected with a trade or business carried on through that permanent establishment. Such dividends come within the definition in article 2 of 'profits of a Singapore enterprise' or 'profits of an Australian enterprise' and fall to be taxed in accordance with article 5.

Paragraph 6 of article 8 is a conventional provision which ensures, broadly, that one country will not tax dividends paid by a company resident in the other country if the person deriving the dividend is not a resident of the first country.

Article 9: Interest.

This article limits to 10 per cent of the gross amount of the interest the tax Australia and Singapore may, in general, charge on interest derived by a resident of the other country. Paragraph 1 applies to Australian tax - which in any event is at the rate of 10 per cent - while paragraph 2 limits the tax Singapore may charge on interest derived by Australian residents.

At present, interest derived from sources in Singapore by a resident of Australia is normally subject to Singapore tax at the rate of 40 per cent and is exempted from tax in Australia by section 23(q) of the Income Tax Assessment Act. As explained earlier in this memorandum, however, interest derived by a resident of Australia which is subject to reduced Singapore tax in accordance with paragraph 2 will be subject to tax in Australia and a credit will be allowed for the reduced Singapore tax.

Paragraph 3 of the article specifies that the 10 per cent limit will not apply to interest where the person deriving the interest has a permanent establishment in the country in which the interest arises and the indebtedness giving rise to the interest is effectively connected with a trade or business carried on through that permanent establishment. Article 5 applies to this category of interest.

Paragraph 4 will restrict the application of paragraphs 1 and 2 to interest which would have been agreed upon by persons at arm's length in cases where, because of a special relationship between the persons associated with the loan transaction, the amount of interest paid is excessive. Paragraph 5 defines the term 'interest' for the purposes of the article.

Article 10: Royalties.

The purpose of this article is to limit to 10 per cent of the gross royalties the tax Australia and Singapore may charge on royalties derived by a resident of the other country. The Australian tax which paragraph 1 limits is currently imposed at ordinary general rates of tax on the gross royalties as reduced by allowable deductions, while paragraph 2 - which applies to Singapore tax - is set in the context of a present general rate of 40 per cent on royalties received by non-residents of Singapore.

Paragraph 3 defines the term 'royalties' for the purposes of the article in a way that gives it a somewhat more restricted meaning than the term has for the general purposes of the Income Tax Assessment Act. Under the article 'royalties' means, in general, industrial royalties (including various 'know-how' payments) but does not include literary and artistic copyright, film and related royalties, or royalties or other payments in respect of the operation of mines or quarries or of the exploitation of natural resources. The tax in the country of source on the payments which are not treated as 'royalties' will not, of course, be limited to 10 per cent.

As in the case of interest, royalties (as defined in paragraph 3) derived by a resident of Australia from sources in Singapore which are subject to reduced Singapore tax in accordance with the article, will be subject to tax in Australia and a credit will be allowed for the reduced Singapore tax.

As in the case of dividends and interest, it is specified in paragraph 4 that the limitation of tax in the country of origin is not to apply to royalties effectively connected with a permanent establishment in that country. Paragraph 5 provides that the 10 per cent limitation will apply to royalties (as defined) flowing between persons not at arm's length only to the extent that the royalties paid do not exceed the amount that would have been paid in the absence of a special relationship between the parties.

Article 11: Income from personal services.

Under paragraph 1 of this article, remuneration or other income derived by a resident of one country from personal (including professional) services which are performed or exercised in the other country, are deemed to have a source in, and (subject to later articles - particularly article 12) may be taxed in, that other country. Otherwise, the income is to be taxed only in the country of residence of the recipient.

The provisions of articles 11 and 12 are specified in paragraph 2 as applying to a company director's remuneration as if it was in respect of personal services. The paragraph further provides that director's fees and similar payments derived by a resident of one country as a director of a company resident in the other country shall be deemed to be derived in respect of personal services performed in that other country.

Paragraph 3 is designed to ensure that income from an employment exercised on ships or aircraft in international traffic will be subject to tax only in the country of residence of the employee.

Article 12: Income from short term visits and Income of public entertainers.

Paragraph 1 of this article qualifies article 11 by exempting from tax in the country in which personal services are performed or exercised, income derived by a resident of the other country in respect of such personal services where the services are performed or exercised for or on behalf of a resident of that other country. The exemption applies if the recipient is present in the first-mentioned country during not more than one-half of the taxation year and the remuneration is not deductible in determining the profits of a permanent establishment in that country.

Paragraph 2 ensures that the exemption in paragraph 1 does not apply to income derived by visiting public entertainers.

Paragraph 3 applies to profits derived by an enterprise of one country from the provision of the services of public entertainers in the other country. These profits are generally to be taxed in the country where the services are performed except that if the enterprise providing the services is substantially supported from the public funds of its government (as defined in paragraph 4) the profits will be exempt from tax in the country of source.

Article 13: Pensions and annuities.

This article is designed to ensure that pensions and purchased annuities derived by a resident of one country from sources within the other country may be subject to tax only in the country of residence of the recipient. The right of the country of source to tax pensions paid to residents of the other country will, however, be preserved in the case of a government pension paid in respect of services rendered in the discharge of governmental functions, i.e., to pensions paid to former civil or public servants. A civil service pension paid by the Government of Singapore to a resident of Australia will, if the pension is taxed by Singapore, qualify for exemption from Australian tax under section 23(q) of the Income Tax Assessment Act.

Article 14: Governmental remuneration.

This article provides for the reciprocal exemption from tax by Singapore and Australia respectively of remuneration derived by Australian and Singapore government employees for services rendered to their respective Governments. The exemption conferred by the article will not apply where the services are rendered in connection with a trade or business carried on by a Government for purposes of profit.

Article 15: Visiting students and trainees.

Under this article, each country will exempt from its tax payments received from abroad by a student or trainee for his maintenance, education or training, if the student or trainee is present in the country solely for the purpose of his education or training and is, at the time, or was immediately before visiting that country, a resident of the other country.

Article 16: Income of dual residents.

This article relates to individuals and companies that are residents both of Australia and Singapore under the general income tax laws of both countries.

The residential status of such a person for the purposes of the agreement is established by application of the rules set out in article 3 and article 16 reserves to the country to which the person's residence is allotted the sole right to tax income from sources in that country or from a third country.

Article 17: Source of income.

It is important for the application of the agreement that the source of income is clearly established. Article 17 defines the source of various classes of income for the purposes of the agreement and obviates difficulties which might arise should each country, by application of the source rules applicable under its domestic law, claim to be the source of that income. Source rules in relation to some classes of income are contained in other provisions of the agreement.

Very broadly, under article 17 -

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dividends have a source where the paying company is resident;

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shipping profits have a source in the country in which passengers, goods etc. are embarked;

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income from insurance and film businesses have a source according to the law of the country which taxes this income under special provisions;

•

Government pensions have a source in the country of the paying Government;

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interest has a source in the country in which is situated the business against the profits of which the interest is charged;

•

royalties have a source where the knowledge, right etc. giving rise to the royalties is used.

Article 18: Relief from double taxation.

This article provides, broadly, for the relief of double taxation on a credit basis where income that is derived by a resident of one country from sources in the other country is taxed in both countries.

As outlined earlier in this memorandum, some income flowing between the two countries may be taxed only in the country of residence of the recipient in which case there is no need to give further relief. Other income may be taxed in the country of source and if the country of residence also taxes this article requires the country of residence to relieve the ensuing double taxation by crediting the tax of the country of source against the tax imposed by the country of residence. This method of relieving double taxation is common to Australia's other double taxation agreements.

Paragraph 1 of the article requires Australia to allow a credit for Singapore tax against its own tax on income derived by a resident of Australia from sources in Singapore. Australia is not obliged to give credit, in respect of dividends, for the Singapore company tax on the profits out of which dividends are paid and this will mean that while Singapore's taxing system stays as it is, there will be no credit in Australia in relation to dividends from Singapore.

Under the paragraph Australia does not, of course, have any obligation to give credit for Singapore tax in cases where the income is exempt from Australian tax under section 23(q) of the Income Tax Assessment Act. However, as explained at page 4 of this memorandum it is proposed that section 23(q) should not apply to interest or royalties in respect of which, under articles 9 and 10 of the agreement, Singapore tax is limited to 10 per cent. Paragraph 1 of article 18 will ensure that a credit for the reduced Singapore tax will be allowed against Australian tax imposed on income of that nature.

Paragraph 2 of article 18 is designed to ensure that the provisions of section 46 of the Income Tax Assessment Act, under which an Australian resident company is entitled to a rebate of the tax payable on dividends it receives from other companies, will endure for the duration of the agreement in respect of dividends derived from a Singapore company by an Australian resident company which owns at least 10 per cent of the paid- up share capital of the Singapore company. An Australian company will be assured, therefore, of continued freedom from Australian tax on dividends from a Singapore investment providing the 10 per cent holding specified in the article is maintained.

Paragraph 3 of article 18 has no counterpart in other double taxation agreements to which Australia is a party and is a provision of some significance. Australia will allow a credit for tax forgone by Singapore, in accordance with its economic incentive legislation, in respect of interest and royalties which would, under the agreement, otherwise be subject to reduced Singapore tax of 10 per cent.

Under Singapore's Economic Expansion Incentives (Relief from Income Tax) Act, 1967, Singapore authorities have power to reduce to nil the tax that would otherwise by payable by a non-resident of Singapore in respect of certain interest or royalties. If Singapore were, because of this legislation to refrain from collecting its tax on interest and royalties the income would be collected by Australia and this could nullify the incentive which Singapore sought to grant to the Australian taxpayer.

To meet this situation, paragraph 3 requires Australia to give credit for Singapore tax forgone as if the tax had been paid. In cases where, under its special legislation, Singapore wholly forgoes the tax of 10 per cent which it is entitled under the agreement to charge, the Australian resident deriving the interest or royalties will be taxed in Australia on the amount received as 'grossed-up' by the amount of tax forgone by Singapore. The resident will be treated as having paid the Singapore tax of 10 per cent and this amount will, under paragraph 1, be allowed as a credit against his Australian tax.

Paragraph 4 specifies that the arrangement contained in paragraph 3 will operate initially for a five year period but envisages that the two Governments may agree to extend it for a further period or periods.

Paragraph 5 of the article provides for the allowance by Singapore to its residents of a credit for Australian tax against Singapore tax levied on income derived from sources in Australia. In addition to giving credit for the Australian withholding tax on dividends Singapore is to allow a credit for the Australian company tax on the profits out of which the dividends are paid if the recipient company holds 10 per cent or more of the paid-up share capital in the Australian dividend-paying company.

Paragraph 6 relates to article 6 of the agreement which allows reconstruction, for income tax purposes, of accounts of associated companies. It ensures that double taxation relief is available in these cases.

Article 19: Exchange of information.

This article authorises the usual exchange of information between the taxation authorities of countries which are parties to a double taxation agreement.

The purposes for which information may be exchanged, the restrictions placed on that information and the persons to whom it may be disclosed are consistent with Australia's other double taxation agreements.

Article 20: Implementation of agreement.

One of the purposes of this article is to provide for the taxation authorities of both countries to consult with a view to reaching a satisfactory adjustment where a taxpayer is able to demonstrate that he has been, or is likely to be, subjected to double taxation contrary to the provisions of the agreement.

The other object of the article is to authorise consultation between the authorities for the purpose of implementing the agreement and assuring its consistent interpretation and application.

Article 21: Commencement.

This article provides for the coming into operation of the agreement.

The agreement is to come into force on the day on which both countries have completed all action necessary to give it the force of law in their respective territories. In the case of Singapore, a declaration by the Minister of Finance is required and, as the necessary declaration by the Minister was made on 11 February 1969 and published in the Singapore Government Gazette Subsidiary Legislation Supplement No. 10, the date of entry into force will be the day on which the present Bill receives the Royal Assent.

On Royal Assent being given to the Bill, the agreement will have effect as specified in the article. In Australia, the agreement will, broadly, have effect from 1 July 1969. As the income taken into account for a year of assessment in Singapore is generally the income of the preceding year, the agreement will, in general, have effect for purposes of Singapore tax as regards income derived on or after 1 January 1969.

Article 22: Termination.

This concluding article of the agreement states that the agreement shall continue in effect indefinitely but that it shall cease to be effective as specified in the article should either country give notice of termination.