A refocused tax treaty network is key to achieving the Asian Century vision

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20 November 2012

The Asian Century White Paper acknowledges the need for Australia to be an attractive destination for globally mobile capital. A key to achieving this will be refocusing Australia’s bilateral tax treaty network towards Asia.

Australia’s bilateral tax treaty network sets out Australia’s tax arrangements with other countries to avoid or reduce double taxation, by specifying in what circumstances, and to what extent, Australia can impose tax on residents of our treaty partners.

By limiting Australia’s right to impose tax, Australia’s tax treaty network with Asia can have a significant impact on the attractiveness of Australia as an investment destination for our neighbours.

Resetting our treaty priorities

Australia already has a substantial number of treaties, including with many Asian countries. However, most of the treaties with Asian nations are now quite old – e.g. Australia’s treaty with China is over 20 years old - despite the growing importance of investment from Asia to Australia.

By contrast, Australia has more recently renegotiated its treaties with the United States, the United Kingdom and Canada. It appears Australia’s tax treaty network remains unduly geared towards attracting investment from “old world” trading and investment partners as illustrated by the following table of dividend, interest and royalty withholding tax rates:

 

Parent resident in:

 

USA

UK

China

Indonesia

Korea

India

Dividends

0-15%

0-15%

15%

15%

15%

15%

Interest

0-10%

0-10%

10%

10%

15%

15%

Royalties

5%

5%

10%

10-15%

15%

10-15%

While the top withholding rates are similar across jurisdictions, substantial concessions are available to investors from the US and the UK, including a zero withholding tax rate on unfranked dividends which may be available where the investor beneficially holds an 80% or greater stake in an Australian company, and no withholding tax on interest paid to US and UK resident financial institutions.

Also, although Australia has a tax treaty with China, this does not extend to cover Hong Kong. Countries such as the UK and New Zealand have stolen a march on us and entered tax treaties with Hong Kong, with effect from the 2011/12 and 2012/13 tax years respectively.

The idea of prioritising treaty negotiations with key trading partners is not new, having been recommended in the Board of Taxation’s 2003 Review of International Taxation Arrangements. However, the pace of change needs to speed up if we are to achieve our Asian Century objectives.

Becoming a competitive regional hub

Once the resources boom comes to an end, Australia will actively need to compete with other countries in the region for investment. Ideally, Australia would become a hub for investments from Asia into other regions and countries. While we have some advantages in terms of our skill base, e.g. see Investing in Africa via Australia - Why it makes sense, the current state of Australia’s tax regime and treaty network means other trading and financial hubs such as Singapore and Hong Kong are generally far more attractive than Australia.

Hong Kong imposes a flat rate of corporate tax of 15% (50% of Australia’s corporate tax rate), does not impose dividend or interest withholding tax and (as noted above) is building a treaty network with other countries.

The fact that Singapore does not impose tax on dividends paid, combined with a low headline corporate tax rate of 17% and an extensive treaty network with over 15 Asian countries, provides a clear incentive to invest through Singapore.

As the recent Business Tax Working Group Final Report has shown, gaining consensus on measures to facilitate a reduction in Australia’s corporate tax rate may be difficult in these financially lean times; however much more could be done on the international tax front to improve our competitiveness with our regional competitors. For instance, unlike Australia, Singapore has treaties with Mongolia, Myanmar and Brunei (amongst others), facilitating investment through Singapore into those countries.

If we are to maximise the opportunities that the Asian Century presents, urgent attention needs to be given to the refocusing of our tax treaty network towards Asia.


An edited version of this article was originally published in The Australian Financial Review on 7 November 2012.




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