The Senate

Second Reading Speech

by the Minister for Finance, Senator the Hon. Dame Margaret Guilfoyle, D.B.E.

This Bill will provide legislative authority for the entry into force of comprehensive Double Taxation Agreements with Malaysia and Sweden.

The Agreements, which were signed on 20 August 1980 and 14 January 1981 respectively, deal with all substantial forms of income flowing between Australia and the other two countries.

Neither of the Agreements can enter into force until all necessary constitutional processes are completed both by Australia and the other country. For Australia, this Bill will, when assented to, complete the processes required of us.

Double Taxation Agreements have two principal functions - the elimination of international double taxation and the prevention of fiscal evasion.

The former involves the apportionment, by one means or another, of the relevant taxation revenue between the contracting countries.

There are various ways of doing this.

For example, some income is taxed only in the country of residence while other income is taxed only in the country where it has its source.

The country of source may agree to limit its tax on some items of income and, where it is agreed that both countries may tax particular income, the country of residence of the taxpayer agrees to allow relief against its tax in recognition of the payment of tax to the other country.

Such taxation revenue as is forgone by one country or the other has to be seen in the light of the favourable impact that these agreements have on trade and investment flows, and on the improvement of more general relationships between countries.

And it is often overlooked that, where a country in which income originates agrees to reduce its rate of tax on income, the taxpayer's country of residence will also be levying tax on the income with credit for the reduced tax of the country of origin.

Each of the new Agreements accords in essential respects with the position that Australian Governments have taken over the years in relation to Double Taxation Agreements.

Both of the new comprehensive Agreements provide for the country of source to limit its withholding tax on dividends.

Under both Agreements, Australia is to reduce its withholding tax on dividends flowing to the other country from 30 per cent to 15 per cent of the amount of the dividends.

In converse circumstances, Sweden will reduce its rate of dividend withholding tax from 30 per cent to 15 per cent while Malaysia, which does not at present impose a tax on dividends paid to residents of Australia in addition to the Malaysian tax on company profits out of which the dividends are paid, agrees that if it should subsequently impose a tax on dividends it will be limited to 15 per cent in the case of dividends paid to Australian residents.

Both Agreements specify a limit on each country's tax on interest and royalties paid to residents of the other.

Under the Malaysian Agreement the general limit is to be 15 per cent for both interest and royalties. This is the rate at which, under Malaysian law, withholding tax is payable on interest and royalties paid to non-residents. However, as an incentive measure, Malaysia will exempt from tax interest on approved loans or long-term loans, and "approved industrial royalties", as defined in the relevant Malaysian incentives legislation, paid from Malaysia to Australian residents.

Australia's withholding tax rate on interest is 10 per cent and will not, therefore, be affected by these arrangements. We do not have a withholding rate for royalties paid overseas. These are taxed on the ordinary assessment basis. The limit on the tax on royalties will only affect Australian tax on royalties paid to Malaysia where our tax on the ordinary assessment basis on the profit element in the royalties would have been greater than 15 per cent of the gross royalties.

If nothing were done to avoid the situation, the action of Malaysia in providing an "incentive" exemption from its tax on certain interest and royalties would simply result in Australia not having to give credit for Malaysian tax against its tax on the relevant interest and royalties. In other words, Australia would pick up the tax forgone by Malaysia, thus nullifying the incentive. To avoid that result, Australia, as a "tax sparing" measure, is to tax Australian recipients of the relevant interest and royalties, and allow credit against its tax, as if Malaysian tax of 10 per cent of the interest or royalties had been paid.

These special arrangements are appropriate in an Agreement with a developing country, such as Malaysia, in a sector of the world in which Australia has vital interests of more than one kind.

The rules under the Swedish Agreement are more conventional. The tax of the country of source is to be limited to 10 per cent for both interest and royalties. This will not affect Australia's tax on interest flowing to Sweden nor, since Sweden does not tax interest paid to non-residents unless the interest is classified as business income, will it affect Sweden's tax on interest flowing to Australia. However, were Sweden to tax such income in the future the limit of 10 per cent would apply. As in Australia, royalties are taxed in Sweden on an assessment basis, so that the limit on the tax on royalties under the Agreeement will only affect Australian tax on royalties paid to Sweden, or Sweden's tax on royalties paid to Australia, where tax on the ordinary assessment basis on the profit element in the royalties would have been greater than the agreed limit.

Both Agreements contain measures for the formal relief of double taxation of income that may be taxed by both countries. The country of residence of the taxpayer is obliged to provide the necessary relief.

So far as Australian residents are concerned, income in respect of which a limit is imposed by the Agreements on the tax of the country of source - dividends, interest and royalties - will be taxed here with credit being allowed for the tax of the country of source, apart from dividends received from abroad by Australian companies, which are effectively tax-free here. Other income that is taxed in full in the country of source will be exempt from our tax.

A memorandum containing more detailed explanations of technical aspects of the Bill and of the Agreements is being made available to Honourable Senators.

I commend the Bill to the Senate.