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Income Tax (International Agreements) Amendment Bill 1992

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House: House of Representatives Portfolio: Treasury

Purpose To give legislative effect to agreements for the prevention of double taxation and tax avoidance with the Indonesia, Spain and Vietnam.

Background Australia has double taxation and tax avoidance agreements with a number of countries, including France, West Germany, New Zealand, the United States, China, Papua New Guinea and the United Kingdom. The agreements all have a common aim, the prevention of double taxation and tax avoidance, and this is reflected in the content of the agreements which are substantially similar. The agreements work by giving the country of residence the exclusive right to tax certain categories of income and allowing the remaining income to be taxed by the country where it was sourced. If the income is then taxed by the country of residence, it is to allow a credit for tax paid in the country of origin. Examples of categories reserved for tax by the country of residence include:

* industrial or commercial profits where the taxpayer has no permanent establishment in the country where the profits are earned;

* most pensions and purchased annuities;

* public servant's remuneration; and

* air transport profits.

A recent feature of many agreements is the inclusion of provisions to protect schemes designed to encourage investment in certain countries. These countries offer tax concessions or tax free treatment of profits where the body establishes a permanent operation in the country. As a result, where the body returns profits to Australia, the full profit will be included in taxable income and no credit, or a reduced credit, will be available for the tax paid in the country of source. This largely cancels out the benefit available for and reduces any incentive offered by the concessional tax treatment. To remove this effect, certain agreements contain a provision that the country of residence is to deem that the tax has actually been paid at the normal rate.

Main Provisions Clauses 5 and 7 will give the agreements with Indonesia, Spain and Vietnam force at Australian law. The text of the agreements is contained in the Schedules to this Bill and a brief description follows.

Indonesia, Spain and Vietnam The agreements with these three countries largely reflect current tax agreements entered into with other countries. For example, income from land will be taxable in the country where the land is situated, and business profits may only be taxed in the source country if the entity has a permanent establishment in the country. Dividends, interest and royalties may be taxed by either country but there are limits on the tax charged by the source country, while pensions will generally only be taxable in the country of residence. The measures to avoid double taxation will be based on each country allowing a credit for tax paid in the other country. Anti- avoidance measures will be concentrated on the exchange of information between tax officials in Australia and the country concerned. However, no country will be obliged to provide information that could not be obtained under the laws of the country to which the information is to be supplied or to disclose information that would be contrary to public policy. An agreement may be terminated, five years after it commences to operate, by giving one years notice.

Bills Digest Service 21 September 1992 Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1992.

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Published by the Department of the Parliamentary Library, 1992.