House of Representatives

Second Reading Speech

by the Minister for Housing and Construction and Minister Assisting the Treasurer, the Hon. Chris Hurford, M.P.

This Bill will provide legislative authority for the entry into force of new comprehensive double taxation agreements with Ireland, the Republic of Italy, the Republic of Korea and the Kingdom of Norway. A revised comprehensive double taxation agreement with the United States of America is another important element of the Bill which also includes a limited airline profits agreement with the Republic of India.

The agreements were all signed between May 1982 and May of this year. Details of the agreements were announced when the agreements were signed, and copies of them were made available to the public at that time.

The comprehensive agreements deal with all forms of income flowing between Australia and the other countries concerned. As implied in the title, the airline profits agreement with India is restricted to the taxation of profits derived from international air transport.

Australia and India are to exempt from their respective income taxes profits derived from such transport by the other country's international airline.

The practical effect of the agreement is that Australia will have the sole right to tax Indian source profits from the international airline operations of QANTAS and India will have the same right with respect to Australian source profits from international operations of Air India.

Although this agreement with India is restricted to international airline profits, India is included in the current negotiating program for comprehensive double taxation agreements and negotiations for such an agreement will be commenced at the earliest mutually convenient time.

I now turn to the comprehensive agreements contained in this Bill.

In general, comprehensive double taxation agreements have two primary objects - the elimination of international double taxation and the prevention of fiscal evasion.

The first of these objects is achieved by the contracting countries agreeing to the allocation of taxing rights between them.

There are various ways by which this is done, depending upon the nature of the income involved.

For example, some types of income will be taxed only in the country of residence while other income may be taxed only in the country in which it has its source.

A third category is comprised of income which may be taxed in both countries, with the country of source generally agreeing to limit its tax, and the country of residence of the taxpayer agreeing to allow a credit against its tax on such income for the tax paid in the other country.

The comprehensive agreements contained in this Bill accord in all essential respects with the position that Australian governments have taken over the years in relation to double taxation agreements.

The agreements provide for the country of source to limit its tax on dividends, interest and royalties.

Generally, the country of source is to limit its tax to 15 per cent of the gross income concerned in the case of dividends and 10 per cent for both interest and royalties flowing to the other country.

In the agreement with Korea, the limit is 15 per cent for dividends, interest and royalties.

For its part, Australia will reduce the rate of withholding tax on dividends flowing to the other country from the normal 30 per cent rate to the 15 per cent rate specified in the particular agreement.

As the rate of withholding tax on interest under Australia's domestic law is 10 per cent, this will not be affected by the limits on source country tax on interest provided for in these agreements.

In Australia, royalties paid to non-residents are taxed by the ordinary assessment basis on the net amount, after deduction of expenses and, accordingly, the limits specified by the agreements by reference to gross royalties will not affect the amount of Australian tax on royalties unless the tax which would otherwise be assessed on the net royalties is greater than the limit expressed in the agreements.

For its part, each of the other countries will reciprocally apply a 15 per cent rate on dividends flowing to Australia and 10 per cent in the case of interest and royalties, except of course that the Korean rate on interest and royalties will be 15 per cent.

Korea may, however, in some cases, in accordance with its industry incentive legislation, wholly or partially exempt from Korean tax certain interest and royalty payments made to Australian residents.

If nothing were done to avoid the situation, the tax so forgone by Korea would simply result in a corresponding reduction in the credit to be allowed by Australia against its tax on the relevant interest and royalty payments.

In other words, the Australian revenue would pick up the tax forgone by Korea, thus nullifying the incentive.

To avoid that result, provision is made in the agreement for Australia, as a "tax sparing" measure, to allow a credit against its tax for tax forgone by Korea under agreed Korean incentive legislation, as if notional tax equal to 10 per cent of the interest or royalty income had been paid to the Republic of Korea.

The comprehensive agreements contain measures for the formal relief of double taxation of income that may be taxed in both countries, with the country of residence of the taxpayer affording the necessary relief by the allowance of a credit against its tax for tax paid to the country of source.

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 generally be taxed here with credit being allowed for the tax of the country of source.

However, because of the general rebate on inter-company distributions, there is effectively no tax on dividends received from foreign sources by Australian resident companies.

The Bill does not disturb the position that other income that is taxed in full in the country of source is exempt from Australian tax.

So far as the object of preventing fiscal evasion is concerned, provisions are made in each agreement for the exchange of information and for consultation between the tax administrations of the contracting countries.

Apart from the provisions I have mentioned, the agreements also contain usual provisions of a kind common to double taxation agreements relating to the taxation of business profits, professional services, employees, public entertainers, students, pensioners and so on.

The comprehensive agreements with Ireland, Italy, Korea and Norway are all important additions to Australia's growing network of such agreements.

Apart from achieving the primary objects of avoiding double taxation and assisting in the prevention of fiscal evasion, the agreements are an expression of accord between our governments and reflect the many ties that Australia has with these countries.

In that and other respects the revised agreement with the United States is particularly significant. It replaces an existing agreement which was signed in 1953 and had become very much out of date.

The existing agreement became inadequate in a number of respects over the years, largely as a result of amendments to the taxation laws of Australia and the United States and, also, of the ever increasing complexities of international commercial transactions.

The revised agreement with the United States, as mentioned earlier, accords in all essential respects with Australia's double taxation agreement policies.

It improves our position in dealing with visiting entertainers.

It introduces articles providing for source country tax of no more than 10 per cent of gross payments in respect of interest and royalties. The old agreement had no interest article, and only a very limited royalties provision. The 10 per cent limit contrasts, I note, with the United States domestic rate of 30 per cent that has applied until now. The new agreement does contain an article entitled "non-discrimination" which is not to be found in any of our other agreements.

This article, which will not be given the force of law in Australia by this Bill, expresses each country's best intention that, in enacting taxation measures, it will not treat citizens or residents of the other country, and enterprises or companies owned wholly or partly by them, in a less favourable way than it treats its own citizens or residents, enterprises or companies.

An important feature of this non-discrimination article is that it will not affect, in any way, the operation of existing provisions of the Australian income tax law, or any similar provisions enacted since signature of the agreement on 6 August 1982, or provisions designed to prevent avoidance or evasion of taxes.

Beyond that, the non-discrimination article does no more than call for consultation between the governments of both countries when any taxation measure is considered to be contrary to the principles of the article. It will not be able to be called in aid by a taxpayer in an objection against a taxation assessment.

The agreements contained in this Bill cannot enter into force until all necessary constitutional processes are completed both by Australia and the other countries.

For Australia, this Bill will, when assented to, complete the processes required of us.

A memorandum containing more detailed explanations of technical aspects of the Bill and of the agreements will be made available to honourable members.

I commend the Bill to the House.