CHAIR —Welcome. Although the committee does not require you to give evidence under oath, I should advise you that the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House and the Senate. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Do any of you wish to make some introductory remarks before we proceed to questions?

Mrs Pickering —Yes, I would like to, if I may. I have some general comments about double tax agreements. The purpose of double tax agreements is to prevent double taxation and to prevent fiscal evasion. The main way in which double taxation is prevented is by distributing taxing rights between the treaty partner countries. Generally that means that there is an agreement to reduce source country taxation and there is a reciprocal agreement that the residence country would relieve any double taxation that occurs, where both countries are permitted to tax under the treaty. The agreement is also intended to assist in preventing fiscal evasion, and exchange of information is the main way in which that is done.

The wider function that tax treaties are intended to perform is to facilitate trade and investment and movement of technology and personnel between the two countries. It is in this context that the protocol to the US agreement was negotiated. We already have in existence a treaty with the US which was negotiated in the seventies and was signed in about 1982. So we were looking at a renegotiated treaty which would reflect some of the changes that have taken place in the last couple of decades. They reflect things like changes to the economic environment, such as the fact that Australians are now investing much more freely abroad, and also changes in the tax system, such as the introduction of the capital gains tax.

The protocol that we have negotiated is unique in some ways in Australia's treaty practice. In many ways it is a sea change in that it much more clearly reflects the balance of investment both inwards and outwards—we now have much more outward investment than we did at the time the previous treaty was negotiated. We see this as a major step in facilitating a competitive and modern tax treaty network for businesses located in Australia who are operating abroad. We expect that it will significantly assist trade and investment flows between the two countries.

The main aspect of the US protocol is the reduction in rates of withholding tax, particularly in relation to US dividend withholding tax—that has long been a rub for Australian businesses who found that that was a significant impost on their business and a blocker to their repatriation of profits. Australian businesses considered that they were disadvantaged against businesses from other countries which had negotiated significantly lower dividend withholding tax rates. You will also see in the agreement reduced withholding tax on royalties and reduced withholding tax on interest paid to certain sectors.

Another key driver for this renegotiation was to ensure that we had protected Australia's capital gains tax and also to make sure that, where Australia does impose its capital gains tax, that tax is relieved in the US. That is certainly something that we have achieved in this protocol. We have also introduced some new rules that remove double taxation of capital gains in the case of departing residents and make sure that the foreign tax credit rules operate effectively for them.

There is a significant cost to this protocol, which is estimated to be around $190 million per annum. However, we see the main beneficiaries of the agreement as being Australian businesses, which, as I mentioned before, will be able to access some of these new competitive arrangements. Also, there will be an economic benefit to Australia by allowing freer investment into Australia by US businesses and to allow Australia to invest more freely overseas. Those kinds of benefits are very difficult to quantify, but we believe that, overall, the cost to revenue is outweighed by the cost to the economy.

CHAIR —Just picking up on that point, with a net yearly loss of revenue in the order of $A190 million, which is obviously substantial—I appreciate that it is difficult to quantify the benefits as they have been set out in the regulation impact statement—has any economic modelling been undertaken to quantify the expected benefits, particularly the offsetting revenue benefits that are set out in the regulation impact statement?

Mr Bryant —We did try to quantify some of the other benefits. It is very difficult, though, to try to make assumptions about what likely behaviours are going to be in response to the changes. It is much easier to quantify what the behaviours are going to be in relation to, say, reductions in rates of withholding tax on the revenue because that is a more direct impact. While we are able to more precisely determine what the revenue impact is from the reduction in withholding taxes, we can point to some qualitative benefits of why it is going to be important to businesses to reduce these rates of withholding tax. First of all, as Ariane mentioned, it will allow Australian businesses to compete on a more even footing with businesses from other countries that operate in the US. Most of those countries have rates of withholding tax of about five per cent in their agreements, and we have a 15 per cent rate.

CHAIR —What will ours be under this?

Mr Bryant —It will be nil if it is a subsidiary of an Australian public company or a maximum of five per cent if there is a 10 per cent or greater interest in a US company, which we refer to as a direct investment. That puts Australian companies on a more level footing with their competitors from other countries when operating in the US, which obviously is a very important market. Businesses for many years urged that the rate be reduced to allow them the same opportunities as those other countries. A review of business taxation was conducted a few years ago by John Ralph. It recommended that we endeavour to get those rates of withholding tax down, so that indicates the importance of doing that. It is difficult to work out exactly what is the return to Australian revenue or to the Australian community as a whole as a result of our businesses having greater access to the US market.

Other benefits can flow in terms of revenue. For instance, on repatriation of dividends from the US there would be no US tax paid. At the moment it is 15 per cent. We would exempt the dividends coming back. That would allow the Australian companies to use that capital here in Australia. They could distribute it to Australian residents or they could send it back offshore. It is difficult to make assumptions about what they are going to do. If we were to base the assumption on it going to be distributed to shareholders, we would say that under our imputation system we would tax the shareholders on the distributions because they would be paid from profits that have not been taxed in Australia. So we would claw back in Australia some of the tax from the withholding tax savings. If the capital were used here in Australia, there would be economic activity that would result in employment. That economic activity is acknowledged as being beneficial but it is very difficult to put a figure on just what the returns would be from that.

CHAIR —Are you able to assess the amount of money you are talking about in this regard? What pool of funds are you talking about?

Mr Bryant —It becomes far too difficult to do that because of not knowing just what the responses are going to be. We could put out a figure based upon everything going to shareholders—

CHAIR —Even before they make a decision as to what to do with it? What amount of money are we talking about?

Mr Bryant —You would have to make assumptions about how much is likely to be repatriated from the US in any given year, and there are other benefits as well. For instance, under the capital gains rules, even if the profits are not brought back from the US the markets are going to reflect that there is going to be less dividend withholding tax paid on distributions, which will result in an increased value of shares in Australian companies, and when there is a turnover of those shares there will be some capital gains tax benefits. We cannot establish precisely enough what those amounts are going to be to be able to meaningfully say what the amount would be like.

CHAIR —I take it that you have not done any economic modelling because it has too many imponderables.

Mr Bryant —We have consulted our revenue area in the Australian Taxation Office. We also have an area with some economists that do this type of thing. We have also consulted Treasury to try to get as much information as we could on what the impacts would be, but it is very difficult to quantify those things. We were unable to come up with a model that would give us those figures. My understanding is that many other countries have the same problem when trying to quantify the impacts of tax treaties and are not able to give a precise figure on what the impact is going to be.

CHAIR —Are you able to work out the impact on US tax revenues as a result of the protocol?

Mr Bryant —We have not attempted to do that.

Mrs Pickering —They will clearly be affected by the fact that for dividend withholding tax particularly they do impose the 15 per cent withholding tax that they are currently entitled to under the treaty. So with the new protocol they will be reducing that withholding tax.

CHAIR —But we cannot assess by how much?

Mrs Pickering —We cannot assess by how much.

CHAIR —Is it necessary to take this further action? Why can't we just rely on the existing tax treaty?

Mrs Pickering —We could, if we wanted to, just rely on the existing tax treaty and to a large extent the double taxation and the fiscal evasion would be dealt with under the existing treaty. However, this treaty in particular has been cited as one that is causing problems for Australian businesses particularly because of the dividend withholding tax issue.

CHAIR —That is the high US rate of dividend withholding tax?

Mrs Pickering —Yes, that is right. There is also the issue for us that the existing treaty does not deal with capital gains tax. It is our belief that we are nevertheless able to impose our capital gains tax because it is not dealt with by the treaty, so we would continue to impose our domestic capital gains tax regime. But that is an issue that is likely to be challenged in court. We would certainly have a good deal of revenue at risk if we had an adverse decision against us on that issue. So for us it is important that we clarify our taxing right and protect our taxing right. For taxpayers in particular it is also important that they are able to obtain credit for that tax in the US.

Mr WILKIE —We know we are losing $190 million, but we have no idea of what the potential benefit is going to be. I cannot understand why we are even entertaining it, given that we have no solid data to base our decision on. Who is putting forward that we should go ahead with this treaty? Has it come from the US or Australia?

Mrs Pickering —It was probably mainly driven by the business tax review and the recommendations of the Ralph committee, which was accepted by government, that we should be renegotiating our ageing treaties, particularly this one, to get the dividend withholding tax rates down.

Mr WILKIE —Do we know how many Australian businesses will be affected—in terms of investment in the US?

Mrs Pickering —My recollection is that it is about 70 Australian companies.

CHAIR —Have we consulted with those companies?

Mrs Pickering —Yes.

CHAIR —Is that set out somewhere?

Mr WILKIE —I have not seen it.

CHAIR —I was looking for where it had been set out that there was consultation with the businesses.

Mr WILKIE —Where I am coming from, I suppose, is that a limited number of Australian businesses are going to benefit and, of course, they are going to be happy because their bottom line is going to improve. However, if we are going to lose significant income—$190 million—then the people of Australia are actually subsidising those businesses. I cannot understand why we would do it unless we know we are going to be better off.

Mrs Pickering —When I refer to those 70 companies—and I am not sure exactly what the number is—those are the ones who will benefit principally from the reduced dividend withholding tax rates, but there are other benefits within the treaty; for example, the exemption of financial institutions from the interest withholding tax will reduce the cost of acquiring debt for Australian companies and reducing the royalty withholding tax will ensure that Australian companies have access to cheaper technology. The benefits are more widely spread than just those companies that will benefit from the dividend withholding tax. The Australian revenue, as we have mentioned, will benefit from ensuring that our capital gains tax regime is adequately protected, and that will be a benefit that will spread to everybody.

Mr ADAMS —You probably get that now.

Mrs Pickering —We get it at the moment, but there is a risk that we would not be able to continue to get it.

Mr ADAMS —So it could be more than $190 million? If we lose that court case on the capital gains tax, what is the loss to revenue then?

Mrs Pickering —Again, it is not something we can put a figure on, but we have seen live cases that have involved substantial amounts and some in excess of $190 million.

Mr ADAMS —So that is another $190 million?

Mrs Pickering —Mr Bryant, have I got the wrong figures?

Mr Bryant —I was about to say that it is not another $190 million. Those risks would continue if we were not to update the treaty. Our continuing exposure would be that these cases involving $190 million could be decided against us.

Mr ADAMS —Okay, so you are saying that this treaty does not have anything to do with the capital gains tax issue?

Mrs Pickering —Yes, it certainly does. It protects our taxing rights.

Mr ADAMS —I am sorry, I do not understand the evidence that you have given me, because Mr Bryant said that it did not and you are saying that it does. Can you clarify that for me?

Mrs Pickering —At the moment we have come across cases where we have been able to collect Australian tax, but there is a risk that, if a court decided against us on the capital gains tax issue to say that the existing treaty does cover capital gains and that under the existing treaty we are precluded from imposing our capital gains tax, we would have a significant risk of reduced revenue collections as a result. We do not have a case that has decided that at the moment.

Mr ADAMS —Are you sorting that out with this treaty?

Mrs Pickering —Yes.

Mr ADAMS —So, under this treaty, you will not have that problem?

Mrs Pickering —That is right.

Mr ADAMS —So that will disappear and we will still get revenue from the capital gains tax?

Mrs Pickering —Yes.

Mr WILKIE —I have a number of questions to do with investment in Australia by the US. We are already their second largest trading partner, and the United States has a significant commitment to Australia by way of investment. I cannot see how this agreement is going to increase that, given that not only do we have a low dollar but we also have very safe investment opportunities for the US. Obviously there will be a little extra money, but I cannot see that this agreement would encourage any further investment by the US in Australia. I can see Australian companies saying, `We won't invest in Australia; we'll invest offshore,' because of the tax advantage. Have we looked at any modelling? How can we say that the US will increase investment in Australia if we have not actually looked at those issues?

Mrs Pickering —I am not sure that you can say that there are tax advantages in investing in the US, because the US will tax the Australian investment in the US and we will also tax that investment in the US. If it is an Australian resident investing in the US, we will tax the investment.

Mr WILKIE —One of the arguments is that there will be increased US investment in Australia if we go down this path.

Mrs Pickering —Yes, we would see this as attracting US investment, particularly as Australia is a financial centre because of the exemptions that are now incorporated into the withholding tax regime.

Mr Bryant —Two important objectives for us in updating the treaty were: firstly, to remove the risk of an adverse court decision on the capital gains tax, to protect our taxing rights; and, secondly, to provide Australian businesses with an opportunity to undertake activities in the US on a level playing field with companies from other countries. The benefit to Australia of that is that in many cases Australian businesses have exploited their opportunities here because they have certain know-how, expertise and products; if they saturate the local market, then it is a question of what do they then do with their investment. What they are good at is that particular activity. If you provide the opportunity for them to exploit that overseas, there are dividends in bringing their know-how and expertise to other locations. With the US being a big market, it is a very important thing for them to be able to do. What is the alternative for them? It is not necessarily true that they will invest in other Australian businesses. It is hard to tell what would happen; they might distribute it to shareholders. Who knows what they would do with their funds.

Mr WILKIE —I can appreciate the sentiment behind what you are saying, but we have no evidence to suggest that that is what is going to happen. However, we know that we are going to lose $190 million—that is where I am coming from.

Mr Bryant —That was one of the issues that we struggled with, as well. We also were uncomfortable that we cannot quantify these things, and we would like to be able to. Therefore, we have to be far more sure about what the knock-on benefits will be and whether they are, in magnitude, going to exceed the direct revenue costs. There are knock-on benefits to revenue, as I mentioned before, in terms of distributions to shareholders under the imputation system. They will not get their franked dividend exemptions, so we will be able to tax them on those distributions. There is a capital gains tax element, where we will get some knock-on benefits. Even less tax being paid on the amount will result in extra economic activity in Australia perhaps, and that could also return more revenue.

Mr WILKIE —The terms `perhaps', `maybe' and `we hope' concern me a little bit; it seems as though it is a bit of a gamble in some ways, and it would be nice to know how much we are gambling with. Obviously, it is not the full $190 million, but there is a risk.

Mr Bryant —With the capital gains tax issue, we have that risk anyway. We have not factored that into the costing, because we have assumed that we are going to continue to collect that. You would have to factor that into what you think the overall cost is going to be, as well as the dividends in terms of increased economic activity.

Mr WILKIE —If we are going to factor it in, how much is it? I just want to see the data in front of us so that we know exactly what we are dealing with—or some model, some estimates, best guesstimates, based on information you have before you.

Mr Bryant —We have done what we can to consult people who have the expertise in that area and have access to that type of data to see how much they can assist us with this. We have been able to get a lot of information on the direct revenue costs, and that is as a result of our efforts to get everything we can. It has not been possible to get firm figures on these knock-on benefits, these wider benefits, to the community, even though I can point to instances such as the Ralph review of business taxation, which said that it was a very important thing for Australia to do. It is a difficult position to be in, and that is why you have to be fairly sure that the benefits from those types of things are clearly going to outweigh the direct costs.

Mr ADAMS —So we are giving business a lot of opportunities to benefit, but we cannot qualify it in any way and we are costing the revenue $190 million. Is it a gamble? The Ralph committee may have said that it was some sort of a problem that business was not competing evenly in the United States with other countries, but I honestly would have expected some more data to say why this is a plus. It is hard to hit the button and cost us $190 million without knowing the pluses, which you really have not told us. Will the exemption of the US real estate investment trusts encourage those trusts to invest in Australia? I understand that there was a problem with the pension funds of America not investing in Australia because of something to do with our taxation regime. Does this sort that out?

Mrs Pickering —I think you are referring to a couple of issues. The real estate investment trust issue is one that we have dealt with in very close consultation with Australian businesses which invest in these real estate investment trusts. The issue there was that previously there was a limit of 15 per cent on US tax on those trusts.

Mr ADAMS —So there was only 15 per cent to pay in America, was there?

Mrs Pickering —Yes, for the distributions from those trusts. That will be dealt with under the new treaty, which allows the US to impose their domestic rate of tax on that. So it is actually an increase from the 15 per cent, but we have introduced certain safeguards to ensure that Australian listed property trusts are not disadvantaged by this. There is also grandfathering back to when we started negotiating to make sure that they are not adversely affected.

Mr ADAMS —So we reduce our tax while the US increase theirs; is that the proposition?

Mrs Pickering —It is not quite as simple as that. The real estate investment trusts are a particular form of investment where a group of investors—

Mr ADAMS —I understand what it is.

Mrs Pickering —The idea was that, instead of the US being limited to 15 per cent on that—which would be the dividend withholding tax rate—they are entitled to tax it as though it were a direct investment into real property, which would be taxed at their normal rates. This is something that we also feel very strongly about in Australia: to make sure that we maintain our taxing rights over real property.

Mr ADAMS —You did not quite answer me. We are talking about Australian capital investing in these real estate trusts in the United States. Is that what we are talking about in this area?

Mr Bryant —This provision relating to US real estate investment trusts is a provision that the US have insisted on in their recent treaties with other countries. It has become part of their treaty practice. It is an anti-avoidance rule. It applies where investors have a very significant holding in the real estate investment trust. The purpose of these trusts is to hold real property and the concern of the US is that, without an anti-avoidance rule, Australian residents could, for instance, have a captive real estate trust, use that to hold real property in the US, and then be taxed only on the real property income at a rate of 15 per cent. The US has a policy of taxing real property income at higher rates—30 per cent for real property income at the moment. So it is an anti-avoidance rule to stop these captive REITs from occurring. The common Australian investor will still be able to have access to them.

Mr ADAMS —I understand now. What about the American pension funds investing in Australia? I understand a reason they did not invest in Australia was because of a taxation level.

Mr Nagle —I understand that is an issue with investments particularly into venture capital, I think. That is a separable issue from the double tax—

Mr ADAMS —It does not touch that? It does not sort that out at all?

Mr Nagle —It is not affected at all. There will be separate arrangements to encourage investments by nontaxable entities into venture capital in Australia.

Mr ADAMS —I am still not very convinced about giving up about $190 million and the gains that we are making on this. You have tried you said, Mr Bryant, but you have not been able to come up with any figures at all.

Mr Bryant —We have done the analysis to show qualitatively what the impact should be based on certain behaviours. I would also like to point out that other countries face the exact problem with their treaties. They are not able to quantify these benefits. It is not a question of us being different; it is something that is a problem for everyone.

CHAIR —What other countries have got a similar arrangement with the US, with whom we are seeking to compete?

Mrs Pickering —Most of the European countries have a five per cent dividend withholding tax rate. Ours is actually the best that the US have ever agreed to. They have only ever agreed to a zero withholding tax rate with the UK.

CHAIR —So our zero to five per cent is the best you could get.

Mrs Pickering —Our zero to five per cent is their best position.

Mr ADAMS —These are based on investment flows et cetera. There is a lot of American money in England and, I guess, vice versa.

CHAIR —I am just a little concerned about the lack of evidence—and I appreciate the difficulties. In the assessment it does set out on a number of occasions the concerns that Australian companies have raised about the lack of competitiveness and the widespread business concerns arising from the application of Australia's capital gains tax. Throughout there are comments like `failure to deal with these issues would be a serious retrograde step' et cetera. What evidence have you based that on? Has that been via the Ralph review or are there separate analyses, case studies, commentaries and business statements that enable you to come to that conclusion?

Mrs Pickering —Apart from the Ralph review, we have also consulted widely with our business sector through our Tax Treaties Advisory Panel and through direct consultation. The message has been consistent that this is a major issue for Australian business that needs to be dealt with. There have been any number of press reports which have reported this concern as well. It certainly has been a consistent message that we have been receiving over the last five years probably.

CHAIR —So we have got about 70 publicly listed Australian companies with investments in the US and about 200 publicly listed US companies with investments in Australia.

Mrs Pickering —Yes.

Mr WILKIE —Do we know the value of those investments? For instance, 70 countries have X dollars invested in companies in the US, but the 200 US companies must have a dollar value invested in Australia.

Mr Bryant —That is in the NIA; I think we have $90 billion worth of direct investment in the US as the latest figure.

Mr WILKIE —They are the largest foreign investor in Australia with $215 billion as opposed to—

CHAIR —And $90 billion is direct investment.

Mr Bryant —That $90 billion is Australian investment in the US.

Mr WILKIE —Yes, but their figure is $215 billion invested in us, isn't it? That is what I was saying before; I cannot see how they are going to stop increasing their investment in Australia given that they already like to invest here anyway. I cannot see, therefore, how it is going to encourage Australians to go and invest over in the United States.

Mr Bryant —I think it will help with investment here in Australia but it is more about providing opportunities for Australians to access the US market. The $90 billion that is quoted there is direct investment of the type that would benefit from this lower dividend arrangement—it is a significant amount. The other thing to note is that we already exempt franked dividends paid to US residents. That means most dividends going out of Australian companies to US persons are already exempt whereas the US is getting 15 per cent from us.

Senator COONEY —Just going through paragraphs 9, 10, 11 and 12 of the national interest analysis, the last sentence of paragraph 9 says:

While these departures involve a reduction in revenue the benefits are widely spread around the economy, with the most direct benefits accruing to business.

We are very confident about that, and I think you have been answering questions about that. The second sentence of paragraph 10 says:

For many years, major Australian companies have raised concerns about the lack of competitiveness of Australia's tax treaty with the US, especially the high level of US DWT permitted under the Convention.

I suppose you have been asked about this, but have we got any letters of complaint from Australian companies? Unless you have given it already, do you have any material on that?

Mrs Pickering —We certainly do have representations from a number of Australian companies.

Senator COONEY —Could you give us some copies of those letters?

Mrs Pickering —Yes.

CHAIR —I guess what Senator Cooney is getting at is what has been frustrating the other members of the committee, and that is that we do not have any evidence on which to base an assessment of the benefits. If you have anything that would enable us to better understand the benefits in the face of the net yearly revenue loss of $190 million, providing it would be much appreciated.

Senator COONEY —Thank you, Chair. Paragraph 11 then goes on to say `indirect revenue benefits may arise from increased trade and investment between Australia and the US'. You have been using quite positive words until then and then paragraph 11 seems to introduce a bit of doubt about whether we will have increased trade and investment. You go on in the sentence to say that `the protocol will also improve arrangements for taxing gains accrued on assets'—that it will do this. Then in paragraph 12 you say that `it is difficult to determine the net benefit that would accrue from changes'. So whoever has done this has gone through the analysis and finished up in paragraph 12 by saying it is difficult to determine the net benefit from these changes. This gets back to what the chair was saying about a lack of evidence about what your real assessment of it all is.

To emphasise what I am saying, your next sentence says `estimates of the expected growth in trade and investment tend to be speculative'. So we have gone through the analysis and then we end up with a statement that this is all pretty speculative anyhow. You do not seem to have any evidence but could you get those letters at least so that the committee can get some idea of what the tax department is working on?

CHAIR —Or even the assessment upon which the Ralph committee based its recommendation.

Mr WILKIE —Is this only one of a raft of measures that investors have raised as a concern in relation to their investment potential in the US? Do they believe that removing this barrier would lead to greater investment or is there a whole raft of other things that they want in place as well that would need to occur for them to actually invest?

Mrs Pickering —This was certainly the one that they pushed very strongly as being a blocker particularly to investment into the US and repatriation of the profits back from the US.

Senator COONEY —I wonder why words like `speculative' and `may' are used.

Mr Bryant —I am probably guilty for using those words.

CHAIR —Did you write this?

Mr Bryant —It is about making the conditions right for these things to happen, but whether or not they happen I cannot guarantee. So I just wanted to say that from the analysis it would appear that these consequences would flow from taking this action, but I cannot guarantee it.

Mr ADAMS —So that the committee can give this a tick, could you provide to us some examples of what the following sentence means:

RWT on royalties will be reduced from 10 percent to 5 percent making the cost of US technology and know-how more affordable to Australian business.

Mr Bryant —At the moment, Australian business under the treaty would be required to deduct 10 per cent withholding tax on royalties they paid to US residents. That is increasing the cost of know-how to those Australian businesses. If we reduce the rate of withholding tax to five per cent, there could be some reduction in the cost of that know-how to them, but it is difficult to say because it depends upon how it has been taxed in the US, what the profit margins are on it, so that might reduce US tax. It also depends upon how much of the benefit accrues to the person providing the royalty rather than to the Australian.

Mr ADAMS —When you say `know-how', do you mean intellectual property?

Mr Bryant —That is an example, yes.

Mr ADAMS —But it might be a straight investment where a person does not have any input into the actual business operation. Won't they still gain the benefit without the transfer of technology or intellectual property? We have no guarantee that we are growing our economy or gaining anything with this.

Mr Bryant —Under our domestic law, we normally seek to charge 30 per cent royalty withholding tax. So I guess that is an indication of our ideal position, that if there is something that is an input like that that we would like to charge 30 per cent withholding tax. Under our treaties, we generally reduce that to 10 per cent. I think that is in recognition that for Australia to get other objectives—if we want changes in the behaviour of another country in what they do to, say, withholding taxes—we have to give as well, in both countries' interests, so that there is a win-win. In this case, it is also a package and, to get what we want on other factors, we might have to look at the entire package to work out—

Mr ADAMS —Can you tell me where the term `withholding tax' comes from?

Mrs Pickering —It is where, instead of the person who is liable for the tax paying the tax, the person who is paying the tax to that person withholds it on behalf of the person to whom it is being paid. Further to your previous question about the benefits, it should also be borne in mind that, when we agree to reduce the treaty rates of withholding taxes on royalties, for example, it also means that the US are reducing their tax on that, which means that it would be easier for Australians to be able to exploit their intellectual property in the US as well—to ensure that they are subject to reduced withholding taxes over there.

CHAIR —Could I just wrap this up by saying that you would have gleaned from the concerns expressed in questions by committee members that we would like an evidence based case put to us in answer to the downside that will occur as a result of entry into this treaty—that is, the estimated loss of revenue of $A190 million per year—the elements that will be amended and a summary of the best evidence that you are able to come up with, whether it be from submissions to Ralph, submissions that you have received or any sort of analysis or economic modelling. I think that will go some way to alleviating the concerns of the committee. Would that be a project that you would agree to undertake.

Mrs Pickering —We can certainly do our best.

Mr WILKIE —If you can take a gamble, it would be good to see the form guide.

CHAIR —In regard to the timing of this, it says:

It is proposed that Australia provide the instrument of ratification before the end of 2002. If the Protocol enters into force during the 2002 calendar year, it will have effect for taxes in Australia from 1 July 2003.

We understand that DFAT wants action before the end of June, so it sounds like there is an imperative here to get this under way as soon as possible.

Mrs Pickering —Some of them we would be readily able to provide to you—the submissions to Ralph and so forth. As for the economic modelling—

CHAIR —I am just asking for whatever you are able to do. If you are not able to do it—and you have indicated the difficulties—just tell us that that is just impossible to do, it would be misleading or a nonsense for you to try and do that sort of economic modelling. But if there is anything evidence based to support the case for this treaty then we would appreciate receiving it.

Senator COONEY —This might be a bit difficult, but when you are doing that could you give a weighting to the different elements that you are relying on? In other words, what weight do you give the increase in trade against the weight you give to the loss of taxation, and the comity between the nations and all that sort of stuff? Would that be possible when you are doing what the chair asks you to do?

Mr ADAMS —Also for the increase in dividends—the shareholders in those Australian companies that are going to get a tax break.

CHAIR —Is it clear what we are seeking? Whether or not you can provide it is another question.

Mrs Pickering —Yes.

CHAIR —Thank you very much. Thank you for your attendance here today. We appreciate the time. Thank you for coming early as well. I think that just about puts us back on track, so I will move to the agreement with the Netherlands.

[11.33 a.m.]

Agreement with the Netherlands on Mutual Administrative Assistance for the Application of Customs Law and for the Prevention, Investigation and Combating of Customs Offences