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Wednesday, 23 April 1969

Senator ANDERSON (New South Wales) (Minister for Supply) - I move:

That the Bill he now read a secondtime.

The purpose of this bill is to give the force of law in Australia to two comprehensive double taxation agreements - with Singapore and Japan - and a limited double taxation agreement with France. These agreements were signed in February and March of this year. They will not enter into force, however, until Australia and the other countries concerned have completed the formal procedures outlined in the agreements themselves.

The general objectives of comprehensive double taxation agreements are, I think, quite well known and I do not propose to make a lengthy analysis of them in this speech. It is sufficient,I think, for me to say that in its negotiations for agreements Australia aims for tax arrangements which, on acceptable terms, smooth the way for investment and trade between it and the other country. The Government believes that each of the two comprehensive agreements covered by this bill constitute arrangements of this kind.

In most respects, the comprehensive agreements with Singapore and Japan follow closely the new agreement with the United Kingdom that Parliament approved last year. The limited agreement with

France refers only to the taxation of profits from the operation of aircraft in international traffic. It is convenient, to clear the decks, to deal with this short agreement first.

The French agreement provides that each country is to exempt from its tax profits derived by the other country's international airline from international traffic. To put it in another way, each country will have the sole right to tax profits derived by its own international airline from international traffic. Comparable provisions are included in all of our comprehensive double taxation agreements. This agreement will enter into force when each country has advised the other that it has taken all steps necessary to give it the force of law in its territory. It will then be deemed to have had effect as from the 1966-67 income year in Australia, and from 1967 or accounting periods ending in 1967 in France.

I turn now to the comprehensive agreements with Singapore and Japan. Both agreements provide for Australia to reduce its tax on dividends flowing to the other country from 30% to 15% of the amount of the dividends. This is in line with all our comprehensive double taxation agreements. On dividends flowing from Japan to Australia, Japanese tax - at present 20% - is to be reduced to 15%. Dividends paid by Singapore companies do not at present effectively bear tax in Singapore in addition to the tax on company profits out of which the dividends are paid. The Singapore agreement provides, however, that if Singapore should in the future impose a separate tax on dividends, the rate of tax on dividends flowing to Australia is not to exceed 15%.

The reduced rates of taxI have mentioned will not apply to dividends forming part of the proceeds of a business carried on by a resident of one of the countries in the other country. In such cases the country in which the business is carried on will tax the dividends by ordinary assessment processes.

Both agreements impose a limit of 10% on the tax that each country may levy on interest flowing to the other country. This will not involve any reduction in Australian tax but Singapore tax and Japanese tax will be reduced from 40% and 20% respectively. As with dividends, these reduced rates do not apply to interest forming part of the profits of a permanent establishment in the country of source. At present, royalties flowing from Australia to Singapore and Japan are taxed in Australia at general rates of tax on the net amount of the royalties. Royalties flowing to Australia from Singapore and Japan are taxed in those countries at 40% and 20% respectively. Under the agreements, each country is to limit its tax on royalties flowing to the other to 10% of the gross amount of the royalties. The Singapore and Japanese agreements, like all of our other double taxation agreements, provide that each country has the sole right to tax profits derived by its own international airline from international traffic. The position is the same in relation to shipping profits under the Japanese agreement. Under the Singapore agreement, however, the country of shipment retains the right to tax the other country's shipowners on profits from the international carriage of passengers, cargo or mail, but must reduce the tax that would otherwise be payable by one-half. Both agreements provide that, in general, business profits derived by a resident of one country from sources in the other will be taxed in the other country only if they are derived through a permanent establishment - broadly speeking, a branch - in that country. This is the basis universally adopted in double taxation agreements.

There are also other provisions commonly found in double taxation agreements, concerning visiting businessmen, public entertainers, students and pensioners. The salary of a visiting businessman who is an employee or director will generally not be taxed in the country visited unless his visit exceeds 183 days in a year of income. On the other hand, income derived by a public entertainer, or by an enterprise providing the services of public entertainers, may be taxed in the country visited whatever the duration of the visit. Government remuneration will generally be taxed by the government paying the remuneration while pensions, apart from government, pensions, will generally be taxed only by the country in which the pensioner resides. To relieve double taxation in cases where, in accordance with the agreements, both countries tax the same income, there are the customary provisions for the country of residence to give credit against its tax in respect of the tax paid in the other country. The Bill provides that interest and royalties derived by residents of Australia from Singapore or Japan and subject to tax of only 10% in those countries will, like interest and royalties derived from the United Kingdom and subject to only 10% United Kingdom tax, be taxed in Australia with credit for the foreign tax.

In addition to the usual credit provisions, the Singapore agreement contains two provisions that are unique in Australia's double taxation agreements. These are related to Singapore's economic incentives legislation. Under this legislation the Singapore tax on income from investment in Singapore, or from the supply of industrial know-how to Singapore enterprises, by persons not resident in Singapore may he reduced or remitted in full. Singapore fell some concern that these incentives would bc wholly nullified if Australia retained taxing rights over the income, because Australian tax would be increased correspondingly to the reduction in Singapore tax. As to investment by an Australian company through a subsidiary company established in Singapore, what Singapore feared could not in practice happen. This is because the Singapore profits of the subsidiary would not he subject to Australian lax and. when remitted to the Australian parent .as dividends would be free of Australian tax by virtue of the rebate of tax on dividends from any source that is. under our general income tax law. allowed to Australian resident companies. Nevertheless, to make this position quite clear it. was decided to include in thu agreement a provision that an Australian company owning at least 10% of a Singapore company will continue, during the life of the agreement, to receive the rebate of tax on dividends our tax law provides.

The second of the special provisions relates to interest and industrial royalties received by Australian residents from Singapore. The Singapore economic incentives also apply to income of this kind and. in the absence of provision in the agreement to the contrary, the remission of Singapore tax would have resulted in an equivalent increase in Australian T:ix. To avoid thus nullifying the incentives, sought to be provided bv Singapore, but in a way wholly fair to the Australian revenue, the agreement provides that Australia is to treat interest and royalties received by Australian residents from Singapore free of Singapore tax as if they were net amounts after payment of the Singapore tax remitted. la practice, this will mean that Australian tax will be imposed on the income received from Singapore as increased by the Singapore tax deemed to have been paid, and credit will be allowed against the Australian tax payable for the notional Singapore tax.

If this Bill is approved the Singapore agreement will enter into force and will have effect, broadly, from 1st July 1969 in

Australia and from 1st January 1969 in Singapore. A formal exchange of instruments of ratification will be required to bring the Japanese agreement into force but it is anticipated that this will be completed in time for that agreement to have effect in Australia and Japan respectively from the same dales as the Singapore agreement.

More detailed explanations of technical aspects of the Bill and of the agreements are contained in an explanatory memorandum being made available to honourable senators and I do not propose to speak at greater length about them at this stage. I commend the Bill to the Senate.

Debate (on motion by Senator Wilkinson) adjourned.

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