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Thursday, 14 October 1999
Page: 11579

Mr KELVIN THOMSON (11:02 AM) —The International Tax Agreements Amendment Bill 1999 proposes to enact new double taxation agreements with South Africa, the Slovak Republic and Argentina. In addition, it also proposes to enact a protocol—that is, an amendment—to the existing double taxation agreement with Malaysia. These are generally consistent but do have some differing provisions because of the specific domestic tax arrangements of some jurisdictions.

As most people would be aware, double taxation agreements exist to clarify taxing rights between jurisdictions for income derived in one jurisdiction by a resident of another jurisdiction. They attempt to ensure an equitable distribution of taxing rights between jurisdictions and to avoid double taxation. The purpose of that, of course, is to encourage trade and investment between entities of those different jurisdictions.

Australia has a large network of double taxation agreements, mainly because Labor, in government, significantly expanded the network of the double taxation agreements that Australia is party to. We did this to create a better environment for Australian businesses to operate internationally and to encourage productive investment in Australia. This approach has been built upon by the current government, to its credit, and these latest agreements are the results of the continuation of Labor's successful policies.

Australia's double taxation agreements are all broadly similar in their design, based generally on the OECD model convention, but they also reflect the particular economic circumstances of Australia—namely being a large capital importer—and the domestic tax rules of the other jurisdiction on some occasions. For example, the taxation of some annuities under the South African double taxation agreement differs from the normal agreements Australia is a party to because of the specific treatment of this income under South African tax law. Similarly, the withholding tax limits for interest, royalties and dividends under the Argentinean double taxation agreement vary from the normal practice, as does the inclusion of specific branch profits tax provisions.

These variations reflect the reality of negotiations with differing tax jurisdictions, and Labor does not oppose them. However, Labor does oppose what we see as continuing sloth by the government on two fronts concerning our international agreements network. The first of these is putting Australian firms on a level playing field where they invest overseas compared to the generous deal that Australia gives foreign investors here. Secondly, we express concern about the disgraceful negligence concerning international tax avoidance through the use of these treaties, which the current government is simply acquiescing in.

Let me turn to the first of these situations—the unfairness of the current dividend withholding tax arrangements. The recent Ralph committee final report covered this issue at pages 677 and 678. The recommendation is:

That in negotiating Double Taxation Agreements, Australia endeavour to reduce dividend withholding tax rates on non-portfolio investment.

Non-portfolio investments are those where the investment represents 10 per cent or more of a business. So Mr Ralph has recommended to the government that it undertake specific action concerning double taxation agreements to overcome situations where Australia is more generous to foreign investors than that foreign nation is to Australian shareholders, an entirely reasonable proposition in our view. As Mr Ralph notes at page 678:

Since 1994 Australia has sought lower foreign DWT rates on non-portfolio dividends . . .

So Labor started to address this problem back in 1994. The treaties before us today do deal with this issue because they are following the policy established by Labor. For example, proposed article 10(2)(A) of the South African agreement does get fair treatment for Australian shareholders with investments in South Africa. That is because the government is following Labor's policy lead. But the real issue, the important aspect of this anomaly, is that the nations with whom Australia has its largest investments—the United Kingdom and the United States—continue to be areas of difficulty.

Although the United Kingdom have not fixed this problem through the double taxation agreement, they have addressed it through domestic law, so at least at the moment we do not have that problem occurring in Britain. But it is still happening in the United States. In the US, the current double taxation agreement arrangements allow what I think is an unfair situation whereby a 15 per cent dividend withholding tax is imposed on Australian businesses remitting dividends from taxed profits from America. By comparison, Australia does not levy such a withholding tax on US investors out of taxed profits from Australia.

What is the government doing about this anomaly? Regrettably, it is completely silent on the matter. This is an example of where Australia's economic interests are being damaged by the poor international relations conducted by the Howard government. If we had a bit more clout in Washington, we would perhaps be making some progress in renegotiating this treaty. Unfortunately, the Prime Minister is held in such low regard by the President that this counts against us in these types of negotiations. Furthermore, the Treasurer's introduction to the United States—where he inappropriately blabbed about his meeting with the Chairman of the Federal Reserve—also diminished our credibility in the United States with key economic policy makers.

Mr Martin interjecting

Mr KELVIN THOMSON —Indeed. The second problem I want to turn to is that the government has not legislated to close what is an enormous loophole under Australia's double taxation agreement arrangements which has arisen because of the decision in the Lamesa Holdings case in 1997. This decision means that foreigners can make tax-free capital gains on holdings of Australian land and mining ventures through utilising a simple chain of companies. There has been no legislation, despite the fact the Treasurer issued a press release promising to do something about the loophole on 27 April last year—that is, more than 18 months ago. I have with me the Treasurer's press release which pointed out that the government would amend the International Tax Agreements Act to address this loophole. In fact, we have seen no action whatsoever.

The background to this is that the Lamesa decision was handed down by the full Federal Court on 20 August 1997. It dismissed an appeal by the tax office concerning a significant loophole in Australia's ability to tax gains arising from Australian real property, including mining rights. The court held that the existing double taxation agreements—which give Australia the exclusive right to tax profits arising from the alienation of real property situated in Australia, including shares in companies that hold interests in real property—did not apply in the situation where multiple layers of subsidiaries are interposed between the non-resident holding company and the Australian real property. The disposal of the interest in the Australian asset was accomplished indirectly through selling one of the interposed companies rather than the asset itself.

The effect of that decision, if left unaddressed as the government has done, is to make the avoidance of tax on gains made by non-residents through holding Australian real property simple. All real property assets held by non-residents could be restructured into a multiple interposed structure, and a significant Australian tax base would then be at risk. This gives prospective capital gains benefits of an extraordinary character to non-residents compared to what is available to Australian residents.

Somewhat belatedly, the Treasurer issued press release No. 39 on 27 April 1998, which announced that, from that time, indirect alienations of Australian real property, as occurred in Lamesa, would be subject to Australian tax. This was justified, quite correctly, as being a move to shore up Australia's existing taxation rights rather than a new tax base.

The result was announced to be achieved by Australia unilaterally amending its internation al tax legislation in respect of all double taxation agreements rather than individually renegotiating each double taxation agreement. We consider this response is the only feasible one in order to protect the revenue, but the government have not done it. It has been over 18 months and they have not taken action to address the situation where non-residents have access to tax-free capital gains while Australian residents do not. In speaking to this legislation, we express our concern about the government's inaction in this area and call on them to address this loophole as soon as possible.

As I indicated at the outset, the double taxation agreements we are dealing with here—the South African one, the Slovak Republic one and the Argentinean one, as well as the amendment to our existing double taxation agreement with Malaysia—are all propositions which we are happy to support. As a result, we are not opposing this legislation.