House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Dawkins, M.P.)

C. Main Features of the New DTAs

Under the terms of the DTAs with Indonesia, Vietnam and Spain:

Income from real property may be taxed in full by the country in which the property is situated. Income from real property includes natural resource royalties.

Business profits are to be generally 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 prescribed "permanent establishment" in the other country, in which case that other country may tax the profits.

Profits from international operations of ships and aircraft may be taxed only in the country of residence of the operator.

Dividends, interest and royalties may generally be taxed in both countries, but there are limits on the tax that the source country may charge on dividends, interest and royalties flowing to residents of the other country. These limits are, in the case of the DTA with Indonesia, 15 per cent for dividends and 10 per cent or 15 per cent for royalties and 10 per cent for interest. In the case of the DTA with Vietnam, the limits are, in Australia, 15 per cent and in Vietnam, 10 per cent for dividends and in both countries, 10 per cent for interest and royalties. In the case of the DTA with Spain, the limits are 15 per cent for dividends and 10 per cent for interest and royalties.

Income, profits or gains from the alienation of 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, remuneration derived by a resident of one country in respect of professional services rendered in the other country may, where derived through a fixed base of the person concerned in that country, be taxed in the latter country.

Income from dependent personal services that is, employee's remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited.

Government service remuneration paid by one country will generally be taxed only in that country. However, the remuneration may be taxed in the other country in certain circumstances where the government services are rendered in that other country.

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

Income derived by entertainers (other than income derived from activities which are substantially supported by public funding in the case of the Indonesian and Spanish DTAs) may generally be taxed by the country in which the activities are performed.

Pensions and annuities (including government service pensions in the case of the Indonesian and Vietnamese DTAs) may generally be taxed only in the country of residence of the recipient. The Indonesian DTA provides that the source country may tax pensions but at a rate not greater than 15 per cent. The Spanish DTA, however, provides for government service pensions to be generally taxed only by the country for which the services were rendered.

Income of visiting students will be exempt from tax in the country visited so far as concerns payments made from abroad for the purposes of their maintenance or education.

Income of visiting professors and teachers under the DTA with Indonesia, derived during a visit to the other country of up to two years duration for the sole purpose of teaching or carrying out advance study or research at an educational institution will normally be taxed only in the country of residence of the recipient.

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

Exchange of information and consultation between the relevant taxation authorities is authorised by the respective DTAs.

Dual residents (i.e., persons (including companies) who are residents of both Australia and the other country according to the domestic law of each country) are, in accordance with specified criteria, to be treated for the purposes of the agreement, as being residents of only one country.

Source rules are prescribed in each agreement to the effect that income, profits or gains derived by a resident of one country which, under provisions of the agreement may be taxed in the other country, shall be treated as being sourced in the latter country.

Double taxation relief for income taxable by both countries is to be provided by the country of residence under each agreement as follows:-

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in Australia , by allowing a credit for the Indonesian or Vietnamese or Spanish tax against Australian tax payable on income derived by a resident of Australia from sources in the other country. In the case of certain dividend payments from a company resident in the other country to a related Australian resident company, the Indonesian, Vietnamese or Spanish tax to be credited by Australia includes the "underlying" tax paid in respect of the profits out of which the dividend is paid.

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tax sparing is to be provided by Australia in relation to income derived by a resident of Australia from Vietnam which has benefited from specified development incentives provided by Vietnam. Australia will provide a credit against the Australian tax payable in respect of that income for the Vietnamese tax forgone under those development incentives as if that tax had been paid.

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in Indonesia , under the terms of that particular DTA, Indonesia will generally allow a credit against Indonesian tax for the Australian tax (including Fringe Benefits Tax) paid on income, profits or gains derived by residents of Indonesia from sources in Australia.

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in Vietnam , under the terms of that particular DTA, Vietnam will generally allow a credit against Vietnamese tax for Australian tax paid on income, profits or gains derived by residents of Vietnam from sources in Australia.

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in Spain , under the terms of that particular DTA, Spain will allow a deduction against Spanish tax for Australian tax paid on income or gains derived by residents of Spain from sources in Australia. In the case of certain dividend payments from an Australian resident company to a Spanish resident company, the deduction allowed by Spain will include that part of the tax effectively paid by the Australian company in respect of the profits out of which the dividend is paid.