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Taxation of foreign source income

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As I indicated in the May Economic Statement this year, the Government is concerned at the use being made by some taxpayers of certain low-tax foreign jurisdictions, notably tax havens, to minimise tax. The May Statement contained proposals designed to protect the Australian revenue base

from this erosion. The Government is keen to have the necessary provisions legislated as soon as is practicable. But the Government is also concerned that before the measures are made effective there be full consultation with those who stand to be affected by the proposals.

As part of the May Economic Statement, the Government issued a consultative document canvassing possible changes to the taxation of foreign source income. Interested parties were invited to make submissions on the proposed changes and more than forty groups and individuals did so. The Government has found the consultative process thus far to be of considerable use.

Consideration of the submissions received is now almost complete and early in the new year the Government will determine its response to the issues raised. At that time, I propose to announce the broad outline of the Government's

final decisions and will be seeking to release draft legislation around May 1989. Further comment will be invited at that time on technical aspects of the implementation of

the policy embodied in that draft legislation.

At the time of the May Economic Statement, it was hoped that the measures could be implemented with effect from the 1989-90 income year. This has proved to be optimistic, however, particularly for early balancing companies (whose

1989-90 income year could have started as early as 1 December 1988) and having regard to the further technical consultations now proposed. In order to permit adequate consultation and to minimise complex transitional provisions, the measures will now not take effect until the 1990-91 income year. In the interim, the foreign tax credit system will continue to operate in its present form.


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One effect of delaying the implementation of the proposed changes for a year is to extend the period in which tax sparing will be provided in relation to dividend and branch income derived from developing countries in the Asia/Pacific

region. As announced in the May Economic Statement, such tax sparing will be calculated on the basis of the direct credit method by which the Australian company retains the full benefit of the foreign tax forgone. The specific incentives

for which tax sparing will be provided will be considered by the Government when it determines its final position on the consultative document proposals. I expect to be able to make an announcement on the details of tax sparing early in the new year and to table the necessary regulations in the Autumn


Contact officers are Philip Anderson (Treasury, 63 3752) and Peter Blackwood (ATO, 75 1205).

CANBERRA 21 December 1988