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See
below for changes introduced
in 2003 and 2004
The
tax regime for multinational
companies in Australia is
not very inviting, although
in 2002 the government began
an extensive review of the
country's international business
tax regime, which is widely
acknowledge to be sub-optimal.
However,
if a multinational corporation
(meaning, a company with subsidiaries
or affiliates in more than
just one or two countries)
needs to be based in Australia,
it can take advantage of certain
characteristics of the Australian
tax system.
Resident
companies pay tax on their
worldwide income and capital
gains (with certain categories
of income and capital gains
being exempted and with tax
credits being granted where
income and capital gains have
already been taxed in a foreign
jurisdiction).
A
company is resident in Australia
for tax purposes if:
-
It is incorporated in Australia
(irrespective of where central
management and control is
exercised). Once a company
has been incorporated in
Australia it can never lose
its Australian residence
for tax purposes.
-
Central management and control
is exercised in Australia
(irrespective of which country
the company was incorporated
in).
-
The company is neither incorporated
in Australia nor is its
central management and control
exercised there but carries
on business in Australia
and its voting control is
in the hands of resident
Australian shareholders.
Double
taxation of foreign income
for resident Australian companies
is avoided by the following
rules (but see changes put
forward by the
Ralph Report):
-
Income from subsidiaries
resident in "listed"
jurisdictions is exempt
from any further tax in
Australia, subject however
to Controlled Foreign Corporation
(CFC) rules. A listed jurisdiction
is a jurisdiction which
has a similar tax system
to Australia. Since the
income is exempt from further
tax in Australia no tax
credits can be claimed in
the jurisdiction even if
the tax paid abroad is higher
than what would have been
paid in Australia. For this
rule to apply to a subsidiary
the resident parent corporation
must control at least 10%
of the share capital.
- Income
from subsidiaries resident
in "unlisted"
jurisdictions is taxed a
second time in Australia
but a tax credit is given
for any tax already paid
in the foreign jurisdiction
whether it be corporate
income tax, capital gains
tax or withholding taxes.
An "unlisted"
jurisdiction is a jurisdiction
which does not have a similar
tax system to Australia
(e.g. low tax offshore jurisdictions).
For this rule to apply to
a subsidiary the resident
parent corporation must
control at least 10% of
its share capital.
-
Where income with a foreign
source has already been
taxed in a foreign country
and is to be taxed again
in Australia a tax credit
is granted to the resident
corporation for any taxes
paid in the foreign jurisdiction.
Tax credits are granted
under both the provisions
of double taxation treaties
and where there is no double
taxation treaty in place
under the provisions of
domestic legislation. They
cover corporate income tax,
capital gains taxes and
withholding taxes.
- If
the corporate income tax
payable in Australia is
less than the tax which
has already been paid in
a foreign jurisdiction the
balance of the tax credit
can be carried forward for
5 years or transferred to
other companies within a
group.
Withholding
taxes are imposed on outgoing
dividends, royalties and loan
interest payments. "Treaty
shopping" whereby a corporation
from a jurisdiction with which
Australia has a particularly
favorable double tax treaty
is interposed between the
Australian company and the
foreign investor is an absolute
necessity for a foreign investor
seeking to reduce Australian
withholding taxes on dividends
(from 30% to 15%) and on royalties
(from 30% to to 10%). It is
not possible to reduce the
withholding taxes on interest
payments through treaty shopping.
Unlike some other countries
there are currently no Australian
laws against treaty shopping.
3 rates of withholding taxes
are payable on dividends remitted
from a resident subsidiary
corporation to a non-resident
parent corporation namely:
- 30%
if the dividend is "unfranked"
(ie it is being paid out
of untaxed income) and the
parent corporation is resident
in a jurisdiction with which
Australia does not
have a double taxation treaty;
- 15%
if the dividend is "unfranked"
and the parent corporation
is resident in a jurisdiction
with which Australia does
have a double taxation treaty
- 0%
if the dividend is "franked"
irrespective of whether
or not the parent corporation
is or is not resident in
a jurisdiction with which
Australia has a double taxation
treaty.
Withholding
tax is also zero on dividends
paid out of income received
from a 'listed' jurisdiction
(see above).
Withholding
tax stands at 10% on the interest
on loans irrespective of the
residence of the recipients.
Double taxation treaties have
no effect on
the rate of withholding tax.
On
outgoing royalties the withholding
tax rate stands at 30% unless
the recipient is resident
in a jurisdiction with which
Australia has a double taxation
treaty in which case the withholding
tax rate may be reduced to
as low as 10% as in the case
of the tax treaty signed with
the Netherlands Antilles.
The
Foreign Dividend Account Exemption:
Dividends received by
an Australian company from
a foreign company may be put
into a special segregated
account known as the "foreign
dividend account" and
any dividend paid out of this
"Foreign Dividend Account
to a non resident is exempt
from withholding tax. The
purpose of this provision
is to take away an impediment
under which multinational
companies were deterred from
transferring income through
Australia. The Australian
company must hold at least
10% of the foreign company's
shares, and there are some
further technical conditions.
Thin
Capitalisation Rules: New
legislation which came into
effect in 2001 introduced
'thin capitalisation' rules
for Australian business, ie
putting limits on the amount
of interest that can be deducted
for tax purposes if a firm
finances itself predominantly
by loan capital, something
that was a common practice
for foreign companies wanting
to extract returns from their
Australian subsidiaries without
incurring withholding tax
on dividends.
2002 Review Of International
Tax Regime Responding
to a barrage of pre-election
criticism, the newly re-elected
right-wing Australian government
began an extensive review
of business taxation in 2002.
The
Government had been shocked
when James Hardie Industries,
a major building materials
group, announced in July,
2001 that it would shift its
base to the Netherlands in
order to minimise tax charges.
The widely diversified group
has substantial international
income flows.
"Higher
rates of foreign tax are imposed
on our foreign income when
it is repatriated to Australia
to pay dividends to shareholders.
Under the current structure,
this problem will increase
as international demand for
our products grows,"
said Peter Macdonald, chief
executive.
The
group said that adopting the
new structure - which will
also involve a secondary listing
on the New York Stock Exchange
- would nearly halve its average
tax rate to about 30%.
Australian
Assistant Treasurer, Senator
Helen Coonan announced in
May 2002that the Federal government
planned to provide tax relief
for companies looking to demerge,
as long as they fitted certain
criteria. In order to claim
capital gains tax relief during
the demerger process, the
underlying ownership of the
company must not change, but
the demerging entity must
divest at least 80% of its
ownership interests in a subsidiary.
The
proposals became effective
in October, and Andrew Binns,
Tax Partner with Ernst &
Young Australia praised them,
saying that: 'As companies
get to understand it more,
they will come to see it as
allowing them to restructure
in a way that makes them more
valuable to shareholders.'
Mr
Binns also argued that the
move towards tax-free demergers
is likely to provide a boost
to the country's investment
climate:
'The
government is trying to encourage
people to invest and take
long-term views in the market,'
he explained.'To have a tax
cost, just because a company
restructures to make it more
efficient, is an impediment
to that sort of activity.'
Restructuring
companies will no longer suffer
capital gains tax penalties,
while shareholders will also
benefit through the deferral
of capital gains tax and relief
of tax on deemed dividends.
"Business
has reacted positively to
the Government's demerger
legislation and several large
Australian companies have
been keenly awaiting the passage
of this Bill," said Senator
Helen Coonan, Minister for
Revenue and the Assistant
Treasurer. "Tax relief
for demergers will increase
efficiency by allowing greater
flexibility in restructuring
businesses, providing an overall
benefit to the economy."
Mayne,
CSR, Coles Myer and Orica
were some of the companies
which were expected to proceed
with restructuring plans to
take advantage of the new
legislation.
Pleased
as it may have been by some
signs of progress, Australian
business interests were far
from happy, and in October
the Business Council of Australia
(BCA) and Corporate Tax Association
(CTA) suggested several reforms
for the Howard government
to consider during its review
of Australia's international
tax regime.
BCA
Chief Executive, Katie Lahey
explained that: 'Simply put,
our international tax systems
are inadequate for a modern
economy. The review provides
a very timely opportunity
to remove obstacles, reduce
complexity and enhance the
competitiveness of Australia's
international tax law.
Among
other topics, the submission
addressed issues such as dividend
imputation, controlled foreign
company rules, tax treaties,
conduit income, residency,
foreign investment fund rules,
and expatriate taxation.
CTA
Executive Director, Frank
Drenth announced that the
submission sought especially
to address the bias against
Australian companies which
invest offshore:
'That
bias manifests itself through
the way our system double
taxes taxed foreign earnings
when they are distributed
to Australian shareholders
- mums, dads, super funds
- as unfranked dividends,'
he told reporters, adding
that foreign source income
rules also need addressing,
as they are currently too
broad.
'At
the moment, it's a bit like
fishing with dynamite - you
get a lot of fish, but you
get a lot of other things
that you don't necessarily
want,' the CTA chief observed.
Less
positive news for international
businesses came in December,
2002, when the NSW Supreme
Court ruled against US-based
Unisys Corporation, which
had claimed that it was not
obliged to pay withholding
tax on royalties received
through a licensing partnership
with Unisys Australia, arguing
that any royalty payments
from the Unisys licensing
partnership (ULP) arose as
a result of the ULP's US business
activities.
'The
Court was told that Unisys
Corporation sub-leased rooms
to the partnership in the
US and the only functions
carried out in these rooms
were the filing and retrieval
of the partnership's records
(approximately 100-200 pages
of information),' the ATO
statement explained. Justice
Gzell supported the ATO's
challenge, explaining that
although the rooms leased
to the partnership in the
US were at the disposal of
the ULP, they could not be
said to be the place 'at or
through which' the partnership
carried on its business.
'The
storage and retrieval of documents
could hardly constitute the
carrying on of Unisys licensing
partnership's business,' he
ruled, ordering the corporation
to pay both the royalty withholding
tax for which it is liable
in Australia and the ATO's
costs.
The
government took further steps
towards improving the international
taxation regime for businesses
in December, 2003, introducing
measures which took effect
from July, 2004, relaxing
Controlled Foreign Company
(CFC) rules as they apply
to countries possessing broadly
similar taxation regimes (BELCs),
such as the US, the UK, Germany,
France, Canada, Japan and
New Zealand, in effect exempting
income derived from outside
such countries but passing
through them (and therefore
taxed in them).
"Once
the package is complete",
said Ernst and Young, "Australian
multinationals doing business
in these major commercial
centres will no longer need
to be overly concerned with
measures that are aimed at
tax haven operations. The
Government has clearly recognised
the fact that business takes
place in these countries for
commercial rather than tax
related reasons."
However, CFC rules will continue
to apply to income derived
through a trust or arising
under the Foreign Investment
Fund (FIF) measures, even
if derived through CFCs resident
in such comparable tax countries."
The new legislation also allows
fund managers to invest up
to 10% of their fund in foreign
passive investments before
FIF rules apply, and will
also relieve complying superannuation
funds from the FIF measures.
The proposed amendments also
provide a withholding tax
exemption on widely distributed
debentures issued to non-residents
if those debentures are issued
by public unit trusts.
Legislation
introduced to the Australian
parliament in April, 2004,
simplified the taxation system
for companies with offshore
earnings by ensuring that
they only pay a single layer
of tax, according to the government.
Commenting on the New International
Tax Arrangements (Participation
Exemption and Other Measures)
Bill 2004, parliamentary secretary
to the Treasurer, Ross Cameron,
noted: "The measures in this
bill will directly assist
Australian companies with
foreign subsidiaries or branch
operations by generally ensuring
that they only pay one layer
of (foreign) tax on the profits
of those offshore operations
as well as reducing compliance
costs in many cases."
However, he added that “any
passive or highly mobile income
shifted to those offshore
investments will continue
to be taxed in Australia on
an accrual basis."
The government is hoping that
the changes in the tax law
will make Australian firms
more competitive overseas,
and Mr Cameron explained that
they are designed to help
small, as well as large firms.
"The
changes are not just relevant
to big business with extensive
offshore operations," he observed.
“They will also assist those
emerging Australian businesses
looking to expand offshore
to take advantage of global
opportunities."
Additionally, the new law
would allow firms to ignore
capital gains from the sale
of shares in a foreign subsidiary,
and would also expand the
application of foreign dividend
exemption to all nations.
In
September 2004 Australian
Treasurer Peter Costello indicated
that he wants to overhaul
the country’s international
taxation system to ease the
tax burden on firms operating
overseas. Costello revealed
that one of his top priorities
is to help firms that derive
much of their income overseas
and pay tax on it but do not
benefit from a domestic tax
credit. "I would like to improve
Australia's international
taxation arrangements so that
Australian companies can expand
in foreign jurisdictions,
while remaining domiciled
in Australia," Costello said.
"We want to promote Australia
as a place for regional headquarters
- for Australian companies
but also for foreign companies,"
he added.
Costello spoke as News Corp,
the largest firm listed on
the Australian Stock Exchange,
prepared to move its domicile
and primary listing to the
United States.
In
February 2006, a new study
was launched, examining Australia's
international competitiveness
in the area of tax.
Double
Taxation Treaties
Australia
has double tax treaties with
virtually all of its major
trading partners. At the time
of writing, these include:
Argentina, Austria, Belgium,
Canada, China, the Czech Republic,
Denmark, Fiji, Finland, France,
Germany, Hungary, India, Indonesia,
Ireland, Italy, Japan, Kirabati,
Korea, Malaysia, Malta, Mexico,
the Netherlands, New Zealand,
Norway, Papua New Guinea,
Philippines, Poland, Romania,
Singapore, Spain, Sweden,
Switzerland, Sri Lanka, Taipei,
Thailand, the United Kingdom,
the United States and Vietnam.
The majority of these follow
the OECD model treaty, and
in all of Australia's full
treaties, there is usually
a 'tie-breaker' clause to
deal with those who might
otherwise be treated as residents
of both Australia and the
treaty country.
In
November, 2005, New Zealand
and Australia signed a protocol
updating the 1995 double tax
agreement between the two
countries.
“Our
double tax agreement with
Australia is our most important
tax treaty, given the significance
of our economic relationship
and trans-Tasman investment,
so it is essential that it
is kept up to date,” New Zealand's
Revenue Minister Peter Dunne
stated on Tuesday.
Mr
Dunne went on to explain that:
"Whether we negotiate a completely
new double tax agreement between
the two countries is still
under review. It will depend
in part on whether New Zealand
is willing to lower the withholding
rates covered by the agreement,
a decision the government
expects to make next year."
"In
the meantime, the protocol
signed today makes urgent
administrative changes to
the agreement to ensure it
works to maximum benefit for
both parties."
“The
protocol updates the article
in the agreement governing
exchange of information and
inserts a new article to allow
assistance with tax collection.
These changes will assist
the extension of Australia’s
Wine Equalisation Tax Rebate
to New Zealand wine producers
who export to Australia."
“It
also ensures that Australia
does not lose priority over
New Zealand’s 28 other treaty
partners to negotiate lower
treaty withholding rates should
we decide to reduce them."
“The
amended agreement will be
given effect in both countries
once they have introduced
the necessary domestic legislation,
which in New Zealand’s case
will be an Order in Council,
probably early next year."
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