Thursday, 16 August 2007
International Tax Agreements Amendment Bill (No. 2) 2007
I will—if the government members give me that opportunity. Thank you very much to the departmental staff. I know they are very hard workers. As I have said in this place many times, it is always a pleasure to speak on these bills. This is the second international tax agreement bill for the year. Labor is happy to support this bill, because it is a bill about getting some good business done. The bill gives force of law to a renegotiated tax treaty with Finland by inserting the text of the treaty signed in November 2006 into the International Tax Agreements Act 1953, which is a prerequisite for the treaty’s entry into force.
The bill updates the tax treaty with Finland to help increase trade and investment between Australia and Finland and provides for greater cooperation between tax authorities to prevent fiscal evasion and tax avoidance. The Finnish tax treaty replaces the existing treaty with Finland signed in 1984. The new tax treaty is largely based on the current OECD model and the United Nations Model Double Taxation Convention between Developed and Developing Countries.
The key changes in the new treaty include reductions in the royalty, interest and dividend withholding rates; improved integrity measures; and the allocation of capital gains taxing rights over property. In relation to royalties, the bill reduces the maximum royalty withholding tax rates from 10 per cent to five per cent and updates the definition of royalties. In relation to interest income, the bill reduces the interest withholding tax from 10 per cent to zero where interest is paid to a financial institution or body performing governmental functions. Tax can be paid on interest in the country of residence and the country of source of the interest. In relation to the dividends themselves, the bill reduces dividends withholding tax from 15 per cent to zero for intercorporate dividends on non-portfolio holdings of more than 80 per cent, subject to certain conditions, and five per cent dividend withholding tax for other intercorporate non-portfolio holdings. A maximum 15 per cent withholding tax applies to all other dividends.
The bill allocates taxing rights between Australia and Finland to prevent tax discrimination against Australian nationals and businesses operating in Finland and vice versa. Business profits are generally to be 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. These rules also apply to business trusts.
Profits derived from the operation of ships and aircraft in international traffic are generally to be taxed only in the country of residence of the operator. Profits of associated enterprises may be taxed on the basis of dealings at arm’s length. Income, profits or gains from the alienation of real 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 shares or other interests in land rich entities, all other capital gains will be taxable only in the country of residence.
Income from employment 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. Directors’ remuneration may be taxed in the country in which the company of which the person is a director is resident for tax purposes. Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed.
Pensions and annuities are taxed only in the country of residence of the recipient, other than government service or social security pensions paid to an individual who is a citizen or national of the paying country. In these latter cases, the paying country may also tax the payment, with the country of residence of the recipient providing double tax relief. Income from government service will generally be taxed only in the country that pays the remuneration. Payments made from abroad to visiting students and business apprentices for the purposes of their maintenance, training or education will be exempt from tax in the country visited.
Other income not dealt with by other articles derived by a resident of one country from sources in the other country may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief. Source rules in this agreement prescribe for domestic law and treaty purposes that the source of income, profits or gains derived by a resident of one country may be taxed in the other country.
Double taxation relief for income which, under this agreement, may be taxed by both countries is required to be provided by the country of which the taxpayer is a resident under the terms of this agreement as follows: in Australia, by allowing a credit for the Finnish tax against Australian tax payable on income derived by a resident of Australia from sources in Finland; and in Finland, by allowing a deduction against Finnish tax for the Australian tax paid on income derived by a resident of Finland from sources in Australia. However, dividends paid by a company that is an Australian resident to a company that is a Finnish resident and which controls at least 10 per cent of the voting power in the paying company will be exempt from Finnish tax.
In the case of Australia, effect will be given to the double tax relief obligations arising under this agreement by application of the general foreign tax credit provisions of Australia’s domestic law and of the relevant exemption provisions of that law, where applicable. The bill also introduces improved integrity measures. The new rules allow for the cross-border collection of tax debts and updated rules for the exchange of information on tax matters.
To conclude on this most interesting and vital of bills—to ensure that between our two nations the proper tax arrangements, liabilities and due responsibilities of residents of both countries are met—the bill will align tax agreements with modern business practices, the respective tax systems and modern tax treaty practice; all of which are good things. Modernising the tax treaty with Finland should help increase trade and investment between Australia and Finland and provide for greater cooperation between tax authorities to prevent fiscal evasion and tax avoidance. As such, Labor lends its support to this bill and will allow its passage.