Australia’s international taxation arrangements are consistent with OECD practice and the other OECD-10 countries in the following areas:
- the application of its domestic taxation system to cross-border investment and transactions (inbound and outbound);
- the taxation of temporary residents1; and
- the taxation of dividends, interest and royalties paid to non-residents, although some countries have zero withholding tax rates on these payments, while others have extended withholding taxes to a broader range of non-resident income.
In some areas, Australia’s international taxation arrangements differ, for example:
- Australia’s treatment of the capital gains of non-residents and foreign losses2; and
- Australia has an extensive foreign business income exemption for its companies and does not tax foreign business income flowing through Australian companies to foreign shareholders.
The extent of Australia’s attribution rules, which prevent residents accumulating passive income (such as dividends and interest) in non-resident entities in low-tax countries to defer Australian tax, is broadly similar to those in other OECD-10 countries. Australia also has other international tax integrity rules, as do the rest of the OECD-10.
International tax arrangements involve modifications to the normal rules of a country’s domestic income tax system where they interact with the tax system of another country as a result of cross-border investments or transactions. They form part of the personal and corporate tax bases and seek to enhance the economic benefits derived from cross-border activities (or limit the economic costs of them). The balance between the costs and benefits of cross-border activities and the consequent international tax rules may vary depending on the circumstances of a particular country.
- For example, inbound foreign direct investment may be valued more highly by a net capital-importing country than by a net capital-exporting country. As a result, the capital-importing country may decide to modify its domestic tax law to a larger degree to accommodate this type of activity (for example, reduce the non-resident withholding tax rate or base). Conversely, if it is in need of more revenue and it perceives its inbound investments as being sufficiently profitable, then it may choose to increase the source taxation on those inbound investments (for example, increase the non-resident withholding tax rate or base).
To compare international tax arrangements, it is necessary to consider the basis on which tax is levied — the residence of the taxpayer or the source of the income. This chapter considers ‘residence’ and ‘source’ for international tax purposes (to tax foreign source income), and compares tax residence rules for both natural and legal persons across the OECD-10. It goes on to look at the tax treatment of foreign source income, firstly for individuals (including for temporary residents) and then for companies. It then compares the foreign tax credit (FTC) systems (with a company focus) across the OECD-10.
The tax treatment of the income of non-residents, including conduit income (for example, foreign business income earned by a resident company and distributed to non-resident shareholders), is then considered, followed by commonly used international tax integrity rules. The chapter concludes with a comparison of tax treaty networks and features across the OECD-10.
Box 10.1: Australia and the Review of International Taxation Arrangements (RITA)
Australia recently reviewed many of its international tax arrangements (and continues to implement recommendations/commitments from the review, including the changes announced in the 2005-06 Budget). The review focused on ensuring that, in an increasingly integrated global business environment, Australia’s tax system was not hindering its attractiveness as a place for multinational business and investment. One of the key outcomes was the reduction in, and streamlining of, Australia’s taxation of inbound, outbound and conduit investment. By doing so, it will potentially raise the attractiveness of outbound investment and regional headquarter activity from Australia, increase its attractiveness to inbound foreign investment and help reduce its cost of capital.
Ensuring that international tax arrangements are not discouraging these cross-border investments is a key focus for many countries, including Australia.
1 The Australian Government announced in the 2005-06 Budget (and has recently introduced legislation to Parliament) measures to align more closely its tax treatment of temporary residents to that of other countries.
2 Reforms announced in the 2005-06 Budget will address these areas and bring Australia into line with other OECD-10 countries.