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Tuesday, 24 November 1959

Mr SPEAKER - It would be in order.

Sir Wilfrid Kent Hughes - Does the British taxpayer pay from his income at home and his income abroad the full British tax, and then deduct what has been deducted abroad?

Mr CREAN - There is in the United Kingdom a fairly complicated system. I think that if afterwards you will do as I have done, and consult the article in the London " Times ", you will find the example well illustrated there. They have a system of what they call " grossing up ", where they presume that if £1 of dividend from Australia pays the Australian tax of 7s. 6d. in the £1, the £1 that the British investor gets is really only 12s. 6d. They add 7s. 6d. back and then allow the concession off that. In fact, honorable members may have seen a very patriotic example the other day of one company trying to have the same amount grossed up twice. Fortunately, the company lost in the court. That is the kind of complication that can enter into these apparently simple matters.

I suggest that any one who has endeavoured to wade through this document on the double taxation agreement, which is intended to be a simplified document, may not have been aware - as I was not aware until I made some inquiries - what the position would be. We are told in the measure that the withholding tax is going to be 6s. in the £1 except in relation to countries covered by the double taxation agreement. The countries covered by that agreement are the United Kingdom, the United States of America and Canada. If you exempt those three countries from the provision, then to whom is the provision going to apply? We have very little direct investment in this country from any countries other than the United Kingdom, Canada and the United States of America. As I shall show in a moment, the real effect of this seems to me that it is now apparently recognized that the individual shareholder in Great Britain, as distinct from the company shareholder in Great Britain, is at a distinct disadvantage by reason of the double tax agreement as it operates between Australia and the United Kingdom compared to the way it operates between Australia and the United States. When honorable members consider the examples that I will give in a moment, I believe they will agree that it is time Australia had a second look at these double-tax agreements, because their implications have not been realized.

Under the double-tax agreement operating at present between Australia and the United Kingdom, a company in Great Britain holding shares in an Australian company pays no tax on dividends derived from that company. An individual shareholder in an Australian company, who is resident in Great Britain, pays tax on his dividends at half the rate that an Australian resident would pay. The effect of the legislation now before us is this: If we establish a rate of 6s. in the £1 applicable to everybody in Australia, the United Kingdom shareholder will pay only half that rate. His maximum rate of tax in the future will be 3s. in the £1. I have no doubt that there are some individuals resident in the United Kingdom who receive incomes of £50,000 or £60,000 directly from Australia. With our maximum rate of income tax at 13s. 4d. in the £1, such persons would pay 6s. 8d. in the £1 under the present arrangement. It would be a distinct advantage to them to choose the withholding tax basis and gain 3s. 8d. in the £1 thereby. This is apparently the kind of computation that has been worked out by the financial pundits in London as showing the effects of the proposition before us.

By contrast, the double-tax agreement operating between Australia and the United States of America provides that a resident of the United States holding shares in an Australian company shall pay Australian income tax on dividends received from that company at a maximum rate of 3s. in the £1. This applies whether the shareholder is an individual or a company. Under the old arrangement the American company investor in Australia was not so advantageously placed as the United Kingdom company investor in Australia. The individual investor in America could, in some circumstances, be better off than his counterpart in the United Kingdom, but in a number of instances he would be worse off. His comparative position depended on the total amount of income that he received. There is no doubt, however, that there are institutional investors and others in the United Kingdom who Will be at a distinct advantage after the passage of this legislation, taking into account the rate of tax payable in their own country.

I do not think that these are circumstances that should be permitted to arise by a government of this country, simply because it wishes to encourage foreign investment. Foreign investment should at least stand on its own feet and should be directed to a particular field. Here we have, as it were, a kind of induced investment. You do not get people to invest directly in some industry that needs development; you induce them, by means of a tax concession, to invest in oldestablished industries, and then the extra capital on the exchange is regarded by the government as being available for the development of this country.

When we look at the other country with which Australia's relations are important, we can see more clearly the kind of thing that has been happening, because I think that in many respects the American investor has been in a somewhat better position under the double-tax agreement over the last two or three years than the United Kingdom investor. Again I am indebted for some of my information to a publication of the United States Government. It is entitled, " Survey of Current Business ". I refer to the issue of August, 1959, and to an article headed, "Capital Flow to Foreign Countries Slackens ". It contains quite an extensive analysis of foreign investment - and, of course, Australia is a foreign country from the point of view of the United States. Apparently in the last year under consideration, 1958, American investments in other parts of the world slackened off, but mainly because there was less investment in petroleum, and apparently one of the reasons tor this was that the Americans had already bought up most of the good petrol concessions in which they were interested, and they do not have to invest quite as much. But another significant trend is shown in the increase in the amount of American investment in two other fields, both of which are significant from Australia's point of view. One is the field of manufacturing, and the other the field of trade and distribution. This significant passage appears on page 27 of the publication I have mentioned -

The flow of investment to expand trade and distribution facilities abroad rose moderately in 1958. A need for improved access to expanding foreign markets was probably a factor in the growth of this type of investment by United States companies in many countries.

Australia is one of such countries. Why there should be any need for American investment at all in the field of trade and distribution is rather beyond most of us here. I would suggest that there may be, merely on a know-how basis, some advantage in the field of manufacturing, but when we consider the kind of thing that has been happening, I think it is time we began to ask ourselves some serious questions. One of them, which I hope will be considered by the proposed committee on taxation, is: What is the effect on the control of Australian industry of the double-tax agreements? On pages 30 and 31 of the publication I have just mentioned there are some quite extensive statistics. They are certainly more extensive than any I have seen in Australia on this subject, the main reason for their absence in this country being a lack of statistical information from the United Kingdom with regard to Australian investment. In any case, the United States Department of Commerce endeavours to keep track of the amount of American investment in other countries, and also of the effect of foreign investment in the United States. I suggest that we shall have to begin to collate similar information in Australia.

In 1950 the total amount of American investment in Australia, according to this publication, was 201,000,000 dollars. In 1952, two years later, it had risen to 310,000,000 dollars. In 1955 it was 498,000,000 dollars. In 1956 it had increased to 552,000,000 dollars. In 1957 it was 601,000,000 dollars and in 1958 it had risen to 673,000,000 dollars. It is significant to note that of the increase of 49,000,000 dollars between 1956 and 1957, only 2,000,000 dollars was new capital, the other 47,000,000 dollars being undistributed subsidiary earnings. Of the increase of 72,000,000 dollars from 1957 to 1958, only 17,000,000 dollars was new capital in the year, while the other 55,000,000 dollars - about three out of every four dollars of the increase - was undistributed profits ploughed back. That has increased American equity in Australian undertakings. Apparently, there have been phases in American investment. In certain years, American investors were prepared to plough back profits rather than pay dividends. At the time the double tax agreement was talked about, and when it was obvious that it was about to become law, there was a decline in the payment of dividends because some advantage was lost if they were paid before the agreement became effective. But since the agreement has operated, the tendency has been, apparently, for not very much new investment to be made, for dividends to be paid and for anything added to the equity in undertakings to come out of undistributed profits which had accumulaed here at the expense of the Australian consumers.

The same kind of thing in the strategic significance of these movements can be seen in the statistics published from time to time by our Department of Trade. I quote from the most recent issue of " Developments in Australian Manufacturing Industry 1958- 1959 ", made available within the last few days. It shows that the new capital expenditure in manufacturing industries expected for 1958-59 was £201,000,000, of which £83,000,000 would be in the field of engineering and vehicles and £26,000,000 in the field of chemicals and oil refining. The document added -

It is estimated that over one-third of expenditure in 1958-59 on the projects scheduled was made oy firms linked financially with overseas companies.

That indicates that overseas capital investment has an important effect on the economic life of a community. The October, 1 959. issue of the " Survey of Current Business ", at page 20, contains a table showing the plant and equipment expenditures abroad by United States companies in 1957 and 1958. In 1957, American companies operating in Australia invested in plant and equipment 64,000,000 dollars or about £28,000,000, and in 1958, 62,000,000 dollars or about £27,000,000. Of course, we are not told how much of that investment came from within Australia, but the suggestion is that most of it came from outside. At least, it adds to the equity and control by outside companies in strategic Australian industries. The investment of American companies in plant and equipment was a significant part of the total investment in manufacturing industries of £201,000,000.

Another matter of concern is the rate of return that is apparently obtained by some of these American companies operating in Australia. The table on page 31 of the August, 1959, issue of the " Survey of Current Business" shows that in 1957 the total investment in Australia by American firms, including original capital outflow and profits ploughed back, aggregated 601,000,000 dollars, of which 302,000,000 dollars, or a little over half, was in the field of manufacturing. In 1958, the total had increased to 673,000,000 dollars, and 55,000,000 dollars of the increase of 72,000,000 dollars came from profits ploughed back and only 17,000,000 dollars from new capital. The manufacturing component had risen to 354,000,000 dollars, an increase of 52,000,000 dollars in one year in the one field. The other significant feature is that the total earnings of American companies in Australia in 1958 were 94,000,000 dollars, of which 67,000,000 dollars came from the manufacturing field. Although only half of the total investment is in the manufacturing field, two-thirds of the total profits came from that field.

If total earnings of 67,000,000 dollars are related to total investments, original and ploughed back, of 354,000,000 dollars, we see that a pretty good rate of return has been obtained on both. Even after deducting an amount for taxation and for undistributed profits that are left here, 33,000,000 dollars were remitted in the field of manufacturing, which is a return, after the payment of expenses, in the region of 10 per cent, on all capital employed. It looks as though the American companies, like the British taxpayers, do not look at these propositions at all from the viewpoint of the welfare of the Australian economy; their concern is whether the investment will give them a net return of about 20 per cent. Occasionally, the interest of the investor and the general interest of the community may coincide, but that is not necessarily so. Not only do these overseas investors get a very good return, but, because of these doubletax agreements, we also give them concessions over and above those available to our own taxpayers. Why should a United Kingdom investor, investing in an established company such as Australian Paper Manufacturers Limited, get a return, after taking taxation in both countries into account, 50 per cent, better than does his Australian counterpart? How can this be said in any way to promote the good of the Australian economy? I think it is time that there was a re-appraisal of the whole position. The only thing I can agree with the Prime Minister upon is that it is fantastic, but I see this as being a little bit fatal as well as being a fantasy, if nothing is done to remedy it.

After imposing import restrictions, which in many ways stifle Australian industry, the Government has no objection to an overseas aircraft company investing in one or two aeroplanes that can wreck the whole of the Australian air transport industry. All that seems to concern the Government at the end of the year is whether, if our imports exceed our exports, the London funds are all right. The Government, after looking at the London funds, says that there must have been a net capital inflow of £100,000,000 or £200,000,000. But I suggest that we need a better barometer of capital inflow than the position of the London funds at the end of the year. There is need for something of the documentation and the serious approach of the United States Department of Commerce, which in many ways corresponds to our Department of Trade. The Government should look at how much of the income of Australian industry is owned by foreigners to-day, whether they be from the United States of America, Canada, the United Kingdom or Switzerland. I hope that honorable members, having listened to only a few of the statistics that I have given, will read the article to which I have referred. It is contained in the August. 1959, issue of the " Survey of Current Business ", which may be obtained from the Library. That article illustrates the impact of American economic policy on the destiny of Australia.

If American investors wanted to withdraw some of their profits from this country, or decided not to go ahead with certain undertakings, that would have disastrous effects on the Australian economy. At the moment it is ironical that apparently American investment is Australia is able to earn higher returns in some fields than it can in America because the effects of the recession have been felt in America. Apparently one of the reasons why there has been a decline in the amount of net return to the United States from the petroleum industry is because the Government of Venezuela jacked up and said: " This is our oil after all and we think you should pay a little more for it ". The Government of Venezuela placed a tax on the investing country and the net return to the investing country was not as good as formerly, but still good enough for the investing country not to want to repatriate its capital. We should do something similar. Why should the American investor in certain fields receive a better return than the local investor?

The article in the August, 1959. issue of " Survey of Current Business " states -

Although direct-investment earnings abroad were weak in some industries in 1958, on the whole they were stronger than domestic corporate profits. While manufacturing earnings abroad gained slightly, leading manufacturing corporations in the United States (excluding petroleum production and refining), reported a reduction of some 17 per cent.

They were worse off at home but better off in the rest of the world. The article continues -

Although the drop in petroleum earnings was about 20 per cent, in both domestic and foreign operations, the latter were severely affected by rising taxes.

That is, taxes in the countries that were being exploited. The article continues -

Mining earnings were down by over 20 per cent, both here and abroad, but trade and distribution earnings abroad increased substantially while they declined in the United States.

And finally, indicating what is happening in this country, the article states -

Earnings of direct investments in other industries held up well in 19S8. Manufacturing earnings increased slightly overall, as reductions in Canada and a number of Latin-American countries were more than matched by notable increases in Germany and Australia . . .

So Australia apparently was one of the good milking cows for manufacturing, trade and distribution. Australia was apparently a good proposition, and overseas companies have been aided by taxation concessions granted to them by this Government. I submit that the time has arrived when we should reconsider the operations of these agreements. There may have been some injustice to the United Kingdom investor by reason of his being worse off than American investors. At least that situation will be remedied, but all foreign investors are better off than they should be, and it is time that this matter was looked into.

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