House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Peter Costello, M.P.)

Introduction

What is the exchange of notes?

This Exchange of Notes, once in force, will amend the 1992 Vietnamese Agreement by specifying the Vietnamese tax incentives to be tax spared and including certain safeguards in relation to tax sparing credits.

Tax sparing

Subject to the Australian foreign tax credit rules, Article 23.1 of the 1992 Vietnamese Agreement generally allows Australian residents a credit for Vietnamese tax paid, against Australian tax payable in respect of their Vietnamese sourced income. Article 23.2 also provides for a credit of the "underlying" Vietnamese tax applicable to dividends paid by certain Vietnamese subsidiaries to the Australian parent.

"Tax sparing" describes the situation where Vietnam offers certain tax concessions to attract foreign investment.

Under the proposed tax sparing credit arrangements, for the purposes of allowing credit under Articles 23.1 and 23.2, an Australian investor taking advantage of specified Vietnamese tax concessions is deemed to have paid tax actually forgone by Vietnam in granting those tax concessions. (In the absence of tax sparing credits, the Vietnamese tax concessions granted to Australian residents could be negated by Australia's foreign tax credit rules, which would effectively "top up" Vietnamese taxes paid to the level of tax that would be payable on an equivalent amount of Australian domestic income.)

In the negotiations for the 1992 Vietnamese Agreement, Vietnam proposed the inclusion of tax sparing provisions but agreed to defer consideration of the incentives to be tax spared to later negotiations. Provision was made in Article 23 of the 1992 Vietnamese Agreement for Vietnamese tax incentives to be tax spared in a subsequent exchange of letters.

This Exchange of Notes identifies the tax incentives to be tax spared, as well as introducing some revenue safeguards.

How is the legislation structured?

The Exchange of Notes appears as Schedule 38A to the Agreements Act. Proposed subsection 11ZCA(1) of the Agreements Act will give the force of law in Australia to those Notes. By subsection 4(1) of the Agreements Act, the Income Tax Assessment Act 1936 (the "Assessment Act") is incorporated and read as one with the Agreements Act. In any cases of inconsistency, under Subsection 4(2) of the Agreements Act, the Agreements Act provisions (including the terms of these Notes) generally override Assessment Act provisions.

By proposed subsection 11ZCA(2) of the Agreements Act, the Commissioner of Taxation will have the power to amend an assessment made before the date the Vietnamese notes come into force in order to give effect to tax sparing provided under those notes.