INTERNATIONAL TAX AGREEMENTS AMENDMENT BILL (No. 2) 2008

This bill gives the force of law to a new tax Protocol with South Africa. The new Protocol, which will modernise and enhance the bilateral tax arrangements between Australia and South Africa, was signed in Pretoria on 31 March 2008. The Protocol amends the existing tax treaty between Australia and South Africa signed in 1999. This bill will amend the text of the existing South African tax treaty in the International Tax Agreements Act 1953.

The Protocol was prompted by the need to meet Australia’s most favoured nation obligation in the existing tax treaty and the proposed changes to South Africa’s domestic law taxation of corporate profits.

Tax treaties facilitate trade and investment by minimising tax barriers between treaty partner countries, by relieving double taxation, preventing tax discrimination, and providing certainty with respect to tax treatment of cross-border income flows thereby reducing compliance burdens on taxpayers.

Tax discrimination under other countries’ tax systems can be a significant barrier to outbound Australian investment. The Protocol inserts a non-discrimination article, which addresses our most favoured nation obligation and prevents discriminatory tax practices between the countries.

Australia’s and South Africa’s bilateral economic and trade relations continue to grow. South Africa is Australia’s largest and most dynamic market in Africa, and South African investment dominates investment from the African continent into Australia.

Accordingly, the Protocol updates the taxation arrangements between Australia and South Africa to enhance Australia’s relationship with South Africa. The Protocol reduces barriers to bilateral trade and investment by lowering withholding tax rates on interest and royalties.

The Protocol also amends the withholding tax rates applying to dividends. The new Article provides a 5 per cent rate for all non-portfolio inter-corporate dividends, and a 15 per cent rate for all other dividends. These changes align with OECD norms and reflect South Africa’s changes to its domestic law system of taxing corporate profits. Australian non-portfolio investment in South Africa will generally benefit from reduced total South African tax on corporate profits as a result of these changes.

In responding to the needs of both Australian and South African business and in ensuring protection of Australia’s revenue base, the new Protocol also includes a number of other key changes.

• It updates capital gains tax treatment so that it aligns more closely with the OECD, to assist trade and investment flows between the countries;
• It modernises the exchange of information provisions to conform with current OECD standards, allowing the tax administrations of both countries to share tax information; and
• It also introduces integrity measures which provide for cross-border collection of tax debts.

The new Protocol will enter into force once both countries have advised that they have completed their domestic requirements which, in the case of Australia, includes enactment of this bill.

The treaty has been considered by the Joint Standing Committee on Treaties, which has recommended that binding treaty action be taken.

Full details of the amendments brought forward in this bill are contained in the explanatory memorandum.