House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 3

Regulation impact statement for the British Virgin Islands Agreement and the Isle of Man Agreement

Policy objective

The BVI Agreement

3.1 The objective of the Agreement between the Government of Australia and the Government of the British Virgin Islands for the Allocation of Taxing Rights with Respect to Certain Income of Individuals (BVI Agreement) is to promote closer economic and administrative cooperation between Australia and the British Virgin Islands (BVI), by reducing some of the taxation barriers to trade and investment between the two countries.

3.2 The BVI Agreement was signed in conjunction with the Agreement for the Exchange of Information Relating to Taxes between Australia and the BVI, which will promote greater cooperation between the taxation authorities of the two countries to prevent tax avoidance and evasion.

The IoM Agreement

3.3 The objective of the Agreement between the Government of Australia and the Government of the Isle of Man for the Allocation of Taxing Rights with Respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments (IoM Agreement) is to promote closer economic and administrative cooperation between Australia and the Isle of Man (IoM), by reducing some of the taxation barriers to trade and investment between the two countries.

3.4 The IoM Agreement was signed in conjunction with the Agreement for the Exchange of Information with Respect to Taxes between Australia and the IoM, which will promote greater cooperation between the taxation authorities of the two countries to prevent tax avoidance and evasion.

Implementation options

3.5 The internationally accepted approach to meeting the policy objectives specified above is to conclude a bilateral tax agreement.

Assessment of impacts

Impact group identification

The BVI Agreement

3.6 The BVI Agreement is likely to have an impact on:

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individuals providing services to an Australian government (including a state or local government) in the BVI;

•

Australian students and business apprentices temporarily residing in the BVI for education or training purposes;

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the Australian Government, and

•

the Australian Taxation Office (ATO).

The IoM Agreement

3.7 The IoM Agreement is likely to have an impact on:

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recipients of Australian source pensions or retirement annuities who reside in the IoM;

•

individuals providing services to an Australian government (including a state or local government) in the IoM;

•

Australian students and business apprentices temporarily residing in the IoM for education or training purposes;

•

Australian entities that wish to contest a transfer pricing adjustment made by the IoM tax authority;

•

the Australian Government; and

•

the ATO.

Analysis of costs/benefits

Assessment of costs

Revenue costs

3.8 The impact of the BVI Agreement and the IoM Agreement on the forward estimates has been estimated as negligible.

Administration costs

3.9 The administrative impacts on the ATO from the changes made by any new bilateral tax agreements (including tax treaties) are considered to be low. General enquiries may arise and some formal interpretive advice, such as private binding rulings, may be required concerning the application of the agreement. ATO staff, taxpayers and tax professionals will need to be made aware of the entry into force of the BVI Agreement and the IoM Agreement. Therefore a number of ATO information products will need to be updated. This is normal in the context of any new tax treaty or bilateral agreement.

3.10 The cost of negotiation and enactment of the BVI Agreement and the IoM Agreement is minimal and has mostly been borne by the Treasury and the ATO. There will be an unquantified but small cost in terms of parliamentary time and drafting resources in enacting the proposed new arrangements.

Taxpayer costs

3.11 No material additional costs to taxpayers have been identified as likely to arise from the BVI Agreement or the IoM Agreement. These agreements are expected to simplify the taxation obligations of the entities that fall within their scope.

Other costs

3.12 The BVI Agreement and the IoM Agreement would constrain government policy flexibility in relation to the taxation of BVI and IoM individuals. However, as the provisions of the BVI Agreement and the IoM Agreement are consistent with the Government's general tax treaty policy, and are based on broad and generally accepted taxation principles, the impact of such a loss of flexibility would be minimal. Ultimately, the BVI Agreement and the IoM Agreement could be terminated if they were found to contravene government policy but such termination is rare in international treaty practice and would likely be resisted by those individuals who will benefit from these Agreements.

Consultation

3.13 The negotiation of the BVI Agreement and the IoM Agreement was not conducted in the public domain and, consequently, no public consultation was undertaken. They were negotiated in conjunction with the negotiation of the Agreement for the Exchange of Information Relating to Taxes (in the case of the BVI), and the Agreement for the Exchange of Information with Respect to Taxes (in the case of the IoM), which were also conducted outside the public domain.

3.14 The State and Territory Governments have been consulted through the Commonwealth-State/Territory Standing Committee on Treaties. Information on the negotiation of the BVI Agreement and the IoM Agreement was included in the six-monthly schedule of treaties to state and territory representatives.

3.15 The proposed BVI Agreement and IoM Agreement have also been considered by the Commonwealth Joint Standing Committee on Treaties, which provides for public consultation in its hearings.

Conclusion and recommended option

3.16 The proposed BVI Agreement and IoM Agreement are consistent with the Government's tax treaty policy and is the only option available to implement the policy objective stated above.