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Tuesday, 16 September 2003
Page: 20171


Mr COX (5:12 PM) —The International Tax Agreements Amendment Bill 2003 is intended to give the force of law to two new double tax agreements: one between Australia and Mexico and the other between Australia and the United Kingdom. The UK treaty was tabled on 9 September and should, under the arrangements introduced with much fanfare by the Howard government in 1996, remain on the table for at least 15 sitting days of both houses—until 3 November—while the treaties committee examines whether it is in the national interest. It is worth recalling precisely what the foreign minister had to say on 2 May 1996, when he announced reform of the treaty-making process:

It gives me particular pleasure that my first statement to this House as Minister for Foreign Affairs should be to inform the parliament of the government's action to reform the treaty-making process. This reform is long overdue, and the actions taken and proposals to be submitted to the parliament are intended to implement the policy commitments announced by the coalition during the election campaign.

The changes will provide proper and effective procedures enabling parliament to scrutinise intended treaty action. Importantly, they will also overcome what this government considers to have been a democratic deficit in the way treaty-making has been carried out in the past. The measures will ensure that state and territory governments are effectively involved in the treaty-making process through the establishment of a Treaties Council. They will also ensure that every Australian individual and interest group with a concern about treaty issues has the opportunity to make that concern known. Consultation will be the key word, and the government will not act to ratify a treaty unless it is able to assure itself that the treaty action proposed is supported by national interest considerations.

In considering policy options, the government has taken careful account of national and international considerations. Among the latter, it is vital to note that trade flows, environmental concerns, human rights, to name only a few of an increasing array of such issues, can only be effectively managed and handled through international agreement. This means that treaties, the fundamental instruments of international law, are an increasingly important component of contemporary international relations and of Australia's own legal development. Accordingly, the treaty-making system must be reformed and updated so as to reflect this growing importance and influence on our domestic system in a way which will provide greater accountability to the treaty-making process.

This, for Australia, means that we must have an efficient domestic methodology for assessing the way proposed treaties meet our own national concerns. Parliament should be in a position to examine the considerations which are weighed by the government when it determines the need for Australia to take binding treaty action.

On the processes, he said,

Treaties will be tabled in parliament at least 15 sitting days before the government takes binding action. This means that treaties will be tabled after the treaty has been signed for Australia, but before action is taken which would bind Australia under international law—

and—

Treaties will be tabled in the parliament with a national interest analysis. This will facilitate parliamentary and community scrutiny of treaties, and demonstrate the reasons for the government's decision that Australia should enter into legally binding obligations under the treaty. The analysis will be designed to meet the need identified both by the Senate committee and the states and territories in 1995, namely that no treaty should be ratified without an analysis of the impact the treaty would have on Australia.

In concluding he said:

I am proud to say that the reforms give Australians unparalleled access to the work of governments in the making of new international laws. I firmly believe that the impact of international laws in the domestic context make it imperative that we continue to improve that transparency and recognise the fundamental right of people to scrutinise the way international law is made.

The government foreshadowed these reforms in both its foreign policy and law and justice policy statements.

It is a measure of this government's growing arrogance that it feels free in relation to this bill to break its election promise and flout the procedures that are the essence of the government's 1996 reforms. Only when the treaties committee has reported should the government be attempting to ratify these agreements. However, we find that, only two sitting days after tabling, we had a bill in the House for ratification and a government proceeding with haste to bring on the debate. I cannot say that this is without precedent because it has too frequently been the case that, when the government has found it expedient or has believed a treaty would be either controversial or useful for some political purpose, it has attempted to shortcut what is already a very short treaties committee process.

In the last parliament, my friend the former member for Wentworth, Andrew Thomson, was chair of the treaties committee. I can well remember his incredulity and exasperation when the Minister for Foreign Affairs and, if I recall correctly, the Attorney-General attempted to pre-empt his committee on extremely sensitive treaty matters—which, from memory, concerned the International Criminal Court. I suspect that the former Member for Wentworth's lack of easy cooperation with the government's desire for expedition on some politically sensitive matters might have been influential in terms of the amount of support he got in his preselection from very senior members of his party. Ah, well—Mr Thomson, his diligence and his conscience are no longer here to bother them. The member for Curtin now chairs the treaties committee; perhaps she will stand up for full and proper process too. To assist her, I will now move the second reading amendment standing in my name. I move:

That all words after “That” be omitted with a view to substituting the following words:

“whilst not declining to give the Bill a second reading, the House:

(1) condemns the Howard Government for breaching the requirements it set for parl-iamentary scrutiny of treat-ies, in particular by proceeding with this bill without allowing 15 sitting days of both houses after tabling these agreements on 9 September 2003, so that the Treaties Committee can taken evidence and report; and

(2) calls on the Government to defer a vote on this Bill in the House until 3 November when the Treaties Committee is due to report”.

I now want to discuss the content of these two treaties—at least as far as is possible, given the speed with which they have been brought on for debate. Australia has had a double tax agreement with the UK since 1967. It was partly revised by an amending protocol in 1980. The agreement intended to be ratified by this bill was concluded on 21 August 2003 and replaces the existing agreements.

This is an important treaty because of the strength of investment and trade flows between the two countries and the substantial changes to the taxation system over the last 23 years. At 30 June 2002, the stock of UK investment in Australia was $224 billion, compared with $242 billion sourced from the USA. Of that $224 billion, $49 billion is foreign direct investment, $137 billion is portfolio investment and $38 billion is other investment liabilities. The stock of Australian investment in the UK is $71 billion compared with $194 billion in the USA. The $71 billion is comprised of $28 billion of foreign direct investment, $17 billion of portfolio investment and $25 billion of other assets. Total Australia-UK trade flows exceeded $18.7 billion in 2002, comprising merchandise exports to the UK of $5.6 billion, merchandise imports by Australia of $5.8 billion, services exports to the UK of $3.6 billion, and services imports from the UK of $3.7 billion.

Having not been updated since 1980, the existing agreement is not well aligned with modern business practices, the respective tax systems or modern tax treaty arrangements. The new treaty explicitly covers, for the first time, a number of taxes that have been introduced since the 1980 protocol was negotiated, and deals with a number of issues that have arisen in each country since then.

It is worth noting that, despite the UK having the VAT and Australia having recently introduced a GST, they are not covered by the treaty. The reason for this is that double tax agreements do not cover indirect taxes. Capital gains tax was introduced in September 1985. The tax commissioner's view has been that because the treaty did not cover capital gains tax Australian law would apply, and he issued rulings to reinforce that. The ATO believes that some businesses intended to challenge the assertion of that taxing right. The treaty explicitly confirms Australia's right to tax capital gains. This is an integrity measure. Fringe benefits tax was another of Labor's 1985 tax reforms. The UK also taxes fringe benefits. The new treaty explicitly removes the potential for double taxation of fringe benefits.

There are now three dual listed companies for which the UK treaty is particularly relevant: BHP Billiton, Rio Tinto and Brambles GKN. One of the conditions placed on the BHP Billiton dual listing under the Foreign Acquisitions and Takeovers Act required board meetings to be held in Australia. The company was concerned that this requirement could trigger a change of residency event under the relevant test, with the possibility of liability for exit taxes from the UK. While rulings have been issued to allay those concerns, explicit treaty treatment of residency rules for DLCs will put the matter beyond doubt. The treaty also explicitly defines taxing rights in relation to petroleum resource rent tax and tolling arrangements for mineral processing.

The treaty uses arrangements for permanent establishments to tax both business trusts and spectrum licence fees as business profits. In the case of spectrum licence fees, one of the conditions of the government granting a licence to a foreign entity is that the entity have a permanent establishment. With respect to business trusts, non-resident beneficiaries will be deemed to have a permanent establishment so that they can be taxed in Australia. Treatment as business profits will also be applied to leasing. Previously, tax was applied to gross cost, adding substantially to the expense of leasing arrangements. Treating the payments for leases as business profits will apply tax to the net cost of leasing arrangements.

Employee share option schemes are treated as `other similar remuneration' under the article for income from employment. The agreement includes a formula for sharing the rights to tax employee share option schemes depending on the number of days of employment in each country where there is a change of residency between grant and vesting of the shares. Each country will then apply their own tax treatment of employee share option schemes on a pro rata basis.

The treaty introduces a number of new articles. Article 20 deals with income types taxed by both countries which are not explicitly dealt with in other articles—for example, eligible termination payments. Article 21 provides source rules for UK residents, treating any income as Australian income if under the treaty it will be taxed by Australia. Article 23 limits relief where the other country for any reason does not tax that income. For the first time a non-discrimination clause has been included to ensure nationals of each country are not treated worse in the other country than the nationals of that country. This clause is strictly defined in terms of nationality, not residence.

The new treaty also improves the provision for exchange of information. Under the new arrangement the UK does not have to have an interest in the information before providing it to Australia, as it did under the old treaty. This is an important anti-avoidance and anti-evasion measure. The treaty also provides general updating in line with changes to the OECD tax treaties model. However, this treaty is more than an update; it is the second major treaty—the first one being the US protocol—where there has been a distinct shift in emphasis away from source to residence as the basis for taxation. Because of its relatively heavy reliance on foreign capital, Australia's Treasury has over the years benefited more than its major taxing partner countries from interest, dividend and royalty withholding taxes. This is taxing at source. The maturing of the Australian economy and increased investment abroad has led to a shift in emphasis toward residence based taxation. This is a significant change, recommended by the Ralph Review of Business Taxation. The concept of residence based taxation is that Australians will be taxed at the same rate on their worldwide income—both domestic and foreign—subject to deductions for foreign taxes paid.

The new UK treaty extends the residence based approach set in the recent US protocol and the government intends to follow it with agreements based on the same principles with the Netherlands, France, Switzerland, Italy, Korea, Norway, Finland and Austria. The UK treaty makes significant reductions in source withholding taxes on a bilateral basis. It cuts interest withholding tax to a maximum of five per cent, royalty withholding tax to five per cent of the gross payment and tax on cross-border intercorporate dividends to five per cent or nil. This is the same treatment as provided by the US protocol. If these rates were higher, it would be likely to result in redirection of UK investment in Australia through the US.

The main argument for reducing dividend withholding tax is that higher rates make repatriation of profits difficult, making it harder to attract foreign investment. High royalty withholding taxes make it difficult to attract investment in R&D and make equipment and brands more expensive for Australian business because they have to pay a worldwide price from the owners plus a gross up for the royalty withholding tax. High-interest withholding taxes would exceed the lender's margin on a loan if it were not for the fact that the lender grosses up the interest payment to cover the withholding tax. Lower withholding taxes therefore mean a lower cost of capital for Australian business and more competition for Australian lenders.

That reduction in the cost of capital is expected to increase both investment and GDP, resulting in second-round revenue effects for Australia's Treasury. Treasury estimates the value of those second-round effects at $70 million per year. The first-round cost of reducing withholding taxes is significant: $90 million rising to $100 million a year, according to the explanatory memorandum. Labor will refer the bill to the Senate Economics Legislation Committee in an attempt to get a better understanding of the costs and benefits of the UK double tax agreement.

The Australia-Mexico double tax agreement completes Australia's tax treaty network with the North American free trade area. Negotiation of the Mexico tax treaty was an initiative of my old politics professor, Dr Blewett, who was trade minister in the previous Labor government during the early 1990s. Trade would have been an interesting change for him, after so many years as health minister.

The key objectives of the tax treaty with Mexico are facilitating trade and investment and protecting Australia's revenues. The stock of Australian investment in Mexico amount is about $A200 million. There is little investment from Mexico in Australia. In 2002 Australian exports to Mexico amounted to $A439 million in goods and $A15 million in services. Mexico exported to Australia $A514 million of merchandise and $A28 million of services. The treaty is significant because it is the last treaty negotiated before the US protocol. The Mexican treaty puts more emphasis on source taxation, consistent with the UN tax treaty model. It therefore contains higher limits on withholding taxes than either the US or UK agreements, but they are substantially lower than Mexico's royalty withholding tax of 35 per cent or its interest withholding taxes that range from 4.9 to 25 per cent. Mexico does not have a dividend withholding tax. The cost to Australian revenue of the Mexico tax agreement is minimal, estimated at $2 million a year in both the explanatory memorandum and in this year's budget. We look forward to considering the agreements when we get the report of the Joint Standing Committee on Treaties and examine the costs and benefits of the UK tax agreement, which is being examined by the Senate Economics Legislation Committee.


The DEPUTY SPEAKER (Mr Jenkins)—Is the amendment seconded?


Mr Murphy —I second the amendment and reserve my right to speak.


The DEPUTY SPEAKER —Before I call the honourable member for Moncrieff, it behoves me to seek the assistance of the honourable member for Mitchell in counselling his colleague the honourable member for Dobell about his standard of dress. I refer the honourable member to page 158 of House of Representatives Practice and I thank him for his cooperation at this stage.