Australia's Tax Treaty Negotiation Program needs an Asian pivot

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8 August 2014

Australia’s tax treaty network remains unduly geared towards old world economies like the US and UK. If we are to have any chance in the global race for capital, then an urgent refocus of Australia’s tax treaty program is needed.

Since coming to power last year, the Coalition government has taken the catchcry, “Australia is open for business”, around the world.

But if Team Australia is truly open for business, then an urgent refocus of our bilateral tax treaty network is needed – one that is clearly aimed at promoting trade with and attracting investment from and to our Asian neighbours.

Tax treaties encourage trade and investment flows between countries by eliminating the potential for residents of treaty countries to be double taxed. Double taxation happens when an individual or company is taxed in the foreign country in which they are doing business, and then taxed again in their own country without credit for the foreign tax paid.

By limiting Australia’s right to impose tax, Australia’s tax treaty network is a powerful tool that can improve Australia’s trading relations and appeal as an investment destination.

Refocusing our tax treaty priorities

With the Japan and Korea free trade agreements freshly sealed, and a similar arrangement being pursued with China, it’s logical to assume Australia’s Tax Treaty Negotiation Program would be similarly focused on promoting trade and investment with our neighbours in Asia. 

However, while Australia does have treaties with many Asian nations, most of them are quite old – e.g. Australia’s tax treaty with China is over 20 years old – and have not been renegotiated. This is despite the growing importance of investment from Asia to Australia.

Apart from Japan, the tax treaties that Australia has renegotiated and liberalised in recent years are dominated by our “old world” trading and investment partners, the United States, the United Kingdom and even Switzerland.

The following table compares investment and trade relationships with the dividend, interest and royalty withholding tax rates that Australia applies to investors from various countries.

While the top withholding rates are similar across jurisdictions, these disguise the substantial concessions that are available to investors from the US and the UK, including a zero withholding tax rate on unfranked dividends which may be available where a US or UK 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.

 

 

Parent resident in:

USA

UK

JPN

CN

SNG

KOR

IND

Annual growth in inbound Australian investment (2007-2012)[1]

5.4%

4.9%

14.5%

46.4%

10.9%

N/A

N/A

Rank in Australia’s top 10 export markets (by value)[2]

4

9

2

1

7

3

5

Dividends

0/5/15%

0/5/15%

0/5/10%

15%

15%

15%

15%

Interest

0/10%

0/10%

0/10%

10%

10%

15%

15%

Royalties

5%

5%

5%

10%

10%

15%

10/15%

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 be competitive in the global race for capital.

Successive governments have aspired to Australia becoming a hub for investments from Asia into other regions and countries. While we have some advantages in our skill base and regulatory stability, the current state of Australia’s tax regime and treaty network means other trading and financial hubs such as Singapore and Hong Kong are more attractive than Australia.

Hong Kong imposes a flat rate of corporate tax of 16.5%, 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, has a low headline corporate tax rate of 17%, an extensive treaty network in Asia, and incentives to establish regional headquarters there, provides a clear incentive to invest through Singapore.

Of course, it is not just about inbound investment: by renegotiating our tax treaties within Asia, we help Australian companies remain competitive for trade and investment in the region.

We need to act fast. Hopefully, it is not already too late.


This is a modified version of a submission made to the Tax Treaties Unit at the Department of Treasury.


  [1] Australian Trade Commission, ‘Foreign investment in Australia up 8.6pc in 2012’, Data Alert 22 May 2013

  [2] Department of Foreign Affairs and Trade, ‘Australia's trade in goods and services by top ten partners, 2013




The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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