Peter Costello

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Australia-United Kingdom Double Taxation Treaty

NO.073

AUSTRALIA-UNITED KINGDOM DOUBLE TAXATION TREATY

The Treasurer and the British High Commissioner today signed a new double tax treaty (the new Treaty) between Australia and the United Kingdom replacing the existing Agreement and amending Protocol signed in 1967 and 1980 respectively.

The new Treaty will substantially reduce the withholding tax on certain dividend, interest and royalty payments in line with outcomes achieved in the recent amending Protocol to the United States treaty. This will provide long term benefits for business, making it cheaper for Australian based business to obtain intellectual property, equity and finance for expansion. It will also remove obstacles currently inhibiting Australian corporate expansion offshore.

This reflects the close economic relations between Australia and the United Kingdom (UK). Australia's investment and trade relationship with the UK is the largest Australia has with any European country. Overall, the UK is Australia's second largest source of foreign investment, second largest destination for Australian investment abroad, third largest trading partner, and sixth largest merchandise trading partner.

This is a significant step in facilitating a competitive and modern tax treaty network for Australian companies. A modernised Australia-UK treaty is important for future economic relations given the international economic significance of the UK and the magnitude of Australia-UK investment and trade relationships.

This further demonstrates the Government's commitment to update aging treaties with major trading partners as recommended by the Ralph Report.

Benefits for Australia from reduced withholding tax on certain dividend, interest and royalty payments

  • Under current arrangements, the Interest Withholding Tax (IWT) charged on interest paid to foreign financial institutions is passed onto Australian borrowers making it more expensive to seek funds from offshore. The IWT changes in this treaty will reduce the cost of obtaining funds from UK financial institutions. The new Treaty will also remove obstacles for Australian banks seeking to lend offshore thereby improving Australia's standing as a global financial centre.

  • The reduction in the Royalty Withholding Tax (RWT) limit from 10 per cent to 5 per cent in the new Treaty will reduce the cost to those Australian businesses using intellectual property that is owned offshore. In many cases when intellectual property is licensed to Australian companies, the owner of the intellectual property will require the RWT to be met by the Australian licensee. The reductions of this tax will also make Australia a more attractive destination for overseas investment in research and development.

    Because RWT limits set in treaties are reciprocal, the new Treaty make it more attractive to promote Australian products offshore by reducing the rate of royalty withholding tax charged under the treaty. Currently Australian companies that earn royalties from the UK for rights to use Australian intellectual property such as Australian music, film and TV series or for the use of products that result from our research and development may have 10 percent of that payment withheld by the UK.

  • The Dividend Withholding Tax (DWT) changes will assist in ensuring that Australia remains an attractive destination Foreign Direct Investment (FDI). The DWT changes are expected to improve the flow of FDI from the UK to Australia. Currently UK subsidiaries operating in Australia must pay withholding tax of 15 percent on any unfranked dividends paid to the UK. This increases the cost of investing in Australia and may result in UK companies investing elsewhere. The changes in this treaty help ensure that Australia remains an attractive destination for UK investment.

The new Treaty is important to the many British businesses who have traditionally viewed Australia as an attractive base for regional operations. Around a third of all regional headquarters operations in Australia are European, and almost half of these are British. It is also important to over one thousand Australian companies active in the UK, with a large number of these using the UK as a base into Continental Europe.

The gateway relationship that the UK has with Europe and Australia has with Asia makes the new Treaty particularly important for Australia's economy. Updating this treaty is crucial given the international economic significance of the UK and the size of the Australia-UK investment and trade relationships. The treaty has clear benefits for those businesses seeking to expand in these economic regions.

Removing business uncertainty

The new Treaty will minimise a number of major disincentives to the expansion of international trade and investment between Australia and the UK by clearly allocating tax jurisdictions between partner countries.

Combating fiscal evasion and protecting Australia's tax revenue

The integrity of the tax system will be enhanced, and government revenues will be protected, through the strengthened framework for the exchange of information between revenue authorities and for establishment of a mechanism for settling jurisdictional disputes under the new Treaty.

The new Treaty achieves a balance of outcomes that will provide Australia with a competitive tax framework for international trade and investment, while ensuring the Australian revenue base is sustainable and suitably protected. The new Treaty ensures Australia can effectively apply its taxing rights in respect of Australian sourced business profits, the exploitation of its natural resources and the sale of significant Australian assets.

The new Treaty will enter into force when both countries advise that they have completed their domestic requirements. Legislation for this purpose will be introduced in the Australian Parliament as soon as practicable.

Copies of the new Treaty and an associated exchange of notes are available on the Treasury's website at: http://www.treasury.gov.au.

CANBERRA

21 August 2003

Contact: David Alexander
(02) 6277 7340

APPENDIX 1 - TECHNICAL CHANGES TO THE TREATY

The new Treaty is a comprehensive taxation convention and contains provisions for the avoidance of double taxation and the prevention of fiscal evasion in relation to income flowing between Australia and the United Kingdom (UK). The associated exchange of notes (the Notes) contain a number of operative provisions (as well as an explanatory clause) which apply to the new Treaty. These Notes (known as third person notes) were exchanged on signature of the new Treaty and enter into force at the same time as the Treaty.

The new Treaty and Notes replace the existing Australia-UK double taxation agreement (signed in 1967 and amended by Protocol in 1980).

The new Treaty provides that dividends, interest and royalties will generally remain taxable in both countries, but with limits on the tax that the source country may charge on residents of the other country who beneficially own the income. Subject to a number of broad exceptions outlined below, a general limit of 15 per cent continues to apply for dividends and 10 per cent for interest. The general limit for royalties will be reduced from 10 to 5 per cent.

Dividends

Under the new Treaty, no tax is payable on dividends in the source country where the dividend recipient is a company that holds directly at least 80 per cent of the voting power of the company paying the dividend, subject to certain conditions. A 5 per cent rate limit applies to dividends where the dividend recipient is a company that holds directly at least 10 per cent of the voting power of the company paying the dividend.

These limits will apply to both franked and unfranked dividends.

Interest

Source country tax on interest will continue to be limited to 10 per cent. However, no tax will be chargeable in the source country on interest derived by:

  • a government body of the other country (including a body exercising governmental functions or a bank performing central banking functions); or

  • a financial institution resident in the other country.

The beneficial rate limit and exemptions available are subject to certain safeguards.

Royalties

The general limit for royalties will be reduced from 10 to 5 per cent. The new Treaty also provides that amounts derived from equipment leasing (including certain container leasing) will be excluded from the royalty definition. Such amounts would either be treated as profits from international transport operations (for container leasing) or as business profits (for other types of equipment leasing). The Notes clarify that payments for the use of spectrum licences will be treated as business profits.

Other features

In modernising the double tax Treaty arrangements in line with Australia's current tax law and treaty policies and practice, the new Treaty and Notes contain:

  • a revised list of taxes covered;

  • a clause within the Residence Article to deem dual listed companies to be resident only in the country of incorporation (provided that they have their primary stock exchange listing in the same country);

  • revised Articles on Shipping and air transport, and Other income;

  • a new Fringe benefits Article ensuring fringe benefits are taxable only in the country with the sole or primary taxing right over that benefit where it is paid as ordinary employment income;

  • a clause specifically addressing the treatment of benefits arising from certain employee share option plans granted in respect of employment partly or wholly exercised in the other country;

  • comprehensive provisions on the alienation of property, including a provision that would allow the source country to tax capital gains not otherwise dealt with; and

  • a new Non-discrimination Article to protect taxpayers from tax discrimination in the treat partner country and to give them rights of appeal against such discrimination.

The new Treaty and Notes will enter into force when the Australian and UK governments' exchange diplomatic notes, advising that the constitutional processes required for entry into force have been completed.

In Australia, the process involves the new Treaty, the Notes and a National Interest Analysis being tabled in the Parliament for review by the Joint Standing Committee on Treaties. Legislation will also be required to complete the necessary procedures for entry into force, and a Bill for that purpose will be introduced into Parliament as soon as practicable. In the UK, the signed text is laid before the House of Commons in the form of a draft statutory instrument for approval.

Upon entry into force, the new Treaty will have effect for Australian and UK withholding taxes in relation to dividends, interest and royalties on or after 1 July next following the date on which the new Treaty enters into force.

The dates of effect for Australian fringe benefits tax and income tax are respectively 1 April and 1 July next following the date on which the new Treaty enters into force.

 

21 Aug 2003

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