tax regime for multinational companies in Australia
is not very inviting, although the international business
tax regime has been the subject of various reviews in
if a multinational corporation (meaning, a company with
subsidiaries or affiliates in more than just one or
two countries) needs to be based in Australia, it can
take advantage of certain characteristics of the Australian
companies pay tax on their worldwide income and capital
gains (with certain categories of income and capital
gains being exempted and with tax credits being granted
where income and capital gains have already been taxed
in a foreign jurisdiction).
is resident in Australia for tax purposes if:
- It is incorporated
in Australia (irrespective of where central management
and control is exercised). Once a company has been
incorporated in Australia it can never lose its Australian
residence for tax purposes.
- Central management
and control is exercised in Australia (irrespective
of which country the company was incorporated in).
- The company is neither
incorporated in Australia nor is its central management
and control exercised there but carries on business
in Australia and its voting control is in the hands
of resident Australian shareholders.
taxation of foreign income for resident Australian companies
has traditionally avoided by the following rules (but
see changes put forward by the Ralph Report and the
relaxation of the CFC rules that
took place in 2003):
- Income from subsidiaries
resident in "listed" jurisdictions is exempt
from any further tax in Australia, subject however
to Controlled Foreign Corporation (CFC) rules. A listed
jurisdiction is a jurisdiction which has a similar
tax system to Australia. Since the income is exempt
from further tax in Australia no tax credits can be
claimed in the jurisdiction even if the tax paid abroad
is higher than what would have been paid in Australia.
For this rule to apply to a subsidiary the resident
parent corporation must control at least 10% of the
- Income from subsidiaries
resident in "unlisted" jurisdictions is
taxed a second time in Australia but a tax credit
is given for any tax already paid in the foreign jurisdiction
whether it be corporate income tax, capital gains
tax or withholding taxes. An "unlisted"
jurisdiction is a jurisdiction which does not have
a similar tax system to Australia (e.g. low tax offshore
jurisdictions). For this rule to apply to a subsidiary
the resident parent corporation must control at least
10% of its share capital.
- Where income with
a foreign source has already been taxed in a foreign
country and is to be taxed again in Australia a tax
credit is granted to the resident corporation for
any taxes paid in the foreign jurisdiction. Tax credits
are granted under both the provisions of double taxation
treaties and where there is no double taxation treaty
in place under the provisions of domestic legislation.
They cover corporate income tax, capital gains taxes
and withholding taxes.
- If the corporate income
tax payable in Australia is less than the tax which
has already been paid in a foreign jurisdiction the
balance of the tax credit can be carried forward for
5 years or transferred to other companies within a
taxes are imposed on outgoing dividends, royalties and
loan interest payments. "Treaty shopping"
whereby a corporation from a jurisdiction with which
Australia has a particularly favorable double tax treaty
is interposed between the Australian company and the
foreign investor is an absolute necessity for a foreign
investor seeking to reduce Australian withholding taxes
on dividends (from 30% to 15%) and on royalties (from
30% to 10%). It is not possible to reduce the withholding
taxes on interest payments through treaty shopping.
Unlike some other countries there are currently no Australian
laws against treaty shopping.
3 rates of withholding
taxes are payable on dividends remitted from a resident
subsidiary corporation to a non-resident parent corporation
- 30% if the dividend
is "unfranked" (ie it is being paid out
of untaxed income) and the parent corporation is resident
in a jurisdiction with which Australia does not
have a double taxation treaty. This rate was reduced
in stages to 7.5% by 2010 for certain distributions
from Managed Investment Trusts for countries with
which Australia has exchange of information agreements;
- 15% if the dividend
is "unfranked" and the parent corporation
is resident in a jurisdiction with which Australia
does have a double taxation treaty
- 0% if the dividend
is "franked" irrespective of whether or
not the parent corporation is or is not resident in
a jurisdiction with which Australia has a double taxation
tax is also zero on dividends paid out of income received
from a 'listed' jurisdiction (see above).
tax stands at 10% on the interest on loans irrespective
of the residence of the recipients, but it does not
apply to the returns on federal bonds. The 10% rate
will be reduced to 7.5% in 2014 and to 5% in 2015.
royalties the withholding tax rate stands at 30% unless
the recipient is resident in a jurisdiction with which
Australia has a double taxation treaty in which case
the withholding tax rate may be reduced to as low as
Dividend Account Exemption: Dividends received by
an Australian company from a foreign company may be
put into a special segregated account known as the "foreign
dividend account" and any dividend paid out of
this "Foreign Dividend Account" to a non resident
is exempt from withholding tax. The purpose of this
provision is to take away an impediment under which
multinational companies were deterred from transferring
income through Australia. The Australian company must
hold at least 10% of the foreign company's shares, and
there are some further technical conditions.
legislation which came into effect in 2001 introduced
'thin capitalisation' rules for Australian business,
ie putting limits on the amount of interest that can
be deducted for tax purposes if a firm finances itself
predominantly by loan capital, something that was a
common practice for foreign companies wanting to extract
returns from their Australian subsidiaries without incurring
withholding tax on dividends.
August 2007, then Minister for Revenue and Assistant
Treasurer, Peter Dutton, introduced Tax Laws Amendment
(2007 Measures No. 5) Bill 2007 to implement a number
of improvements to Australia’s taxation system.
regard to thin capitalisation, the legislation aimed
to ensure that an integrity measure in the thin capitalisation
rules operated as intended by removing from the definition
of ‘excluded equity interest’ those equity
interests that remain on issue for a total period of
180 days or more.
addition, the legislation also sought to reduce compliance
costs for groups containing ADIs (authorised deposit
taking institutions), where the only ADIs in the group
are specialist credit card institutions, by allowing
the head companies of such groups to apply the rules
as if the group did not contain any ADIs.
2002 Review Of International Tax Regime Responding
to a barrage of pre-election criticism, the newly re-elected
right-wing Australian government began an extensive
review of business taxation in 2002.
Government had been shocked when James Hardie Industries,
a major building materials group, announced in July,
2001 that it would shift its base to the Netherlands
in order to minimise tax charges. The widely diversified
group has substantial international income flows.
rates of foreign tax are imposed on our foreign income
when it is repatriated to Australia to pay dividends
to shareholders. Under the current structure, this problem
will increase as international demand for our products
grows," said Peter Macdonald, chief executive.
group said that adopting the new structure - which will
also involve a secondary listing on the New York Stock
Exchange - would nearly halve its average tax rate to
Assistant Treasurer at the time, Senator Helen Coonan
announced in May 2002 that the Federal government planned
to provide tax relief for companies looking to demerge,
as long as they fitted certain criteria. In order to
claim capital gains tax relief during the demerger process,
the underlying ownership of the company must not change,
but the demerging entity must divest at least 80% of
its ownership interests in a subsidiary.
proposals became effective in October, and Andrew Binns,
Tax Partner with Ernst & Young Australia praised
them, saying that: 'As companies get to understand it
more, they will come to see it as allowing them to restructure
in a way that makes them more valuable to shareholders.'
Binns also argued that the move towards tax-free demergers
is likely to provide a boost to the country's investment
government is trying to encourage people to invest and
take long-term views in the market,' he explained.'To
have a tax cost, just because a company restructures
to make it more efficient, is an impediment to that
sort of activity.'
companies will no longer suffer capital gains tax penalties,
while shareholders will also benefit through the deferral
of capital gains tax and relief of tax on deemed dividends.
has reacted positively to the Government's demerger
legislation and several large Australian companies have
been keenly awaiting the passage of this Bill,"
said Senator Coonan, continuing: "Tax relief for
demergers will increase efficiency by allowing greater
flexibility in restructuring businesses, providing an
overall benefit to the economy."
as it may have been by some signs of progress, Australian
business interests were far from happy, and in October
of that year, the Business Council of Australia (BCA)
and Corporate Tax Association (CTA) suggested several
reforms for the Howard government of the time to consider
during its review of Australia's international tax regime.
Chief Executive, Katie Lahey explained that: 'Simply
put, our international tax systems are inadequate for
a modern economy. The review provides a very timely
opportunity to remove obstacles, reduce complexity and
enhance the competitiveness of Australia's international
other topics, the submission addressed issues such as
dividend imputation, controlled foreign company rules,
tax treaties, conduit income, residency, foreign investment
fund rules, and expatriate taxation.
Executive Director, Frank Drenth announced that the
submission sought especially to address the bias against
Australian companies which invest offshore:
bias manifests itself through the way our system double
taxes taxed foreign earnings when they are distributed
to Australian shareholders - mums, dads, super funds
- as unfranked dividends,' he told reporters, adding
that foreign source income rules also need addressing,
as they are currently too broad.
the moment, it's a bit like fishing with dynamite -
you get a lot of fish, but you get a lot of other things
that you don't necessarily want,' the CTA chief observed.
government took further steps towards improving the
international taxation regime for businesses in December,
2003, introducing measures which took effect from July,
2004, relaxing Controlled Foreign Company (CFC) rules
as they apply to countries possessing broadly similar
taxation regimes (BELCs), such as the US, the UK, Germany,
France, Canada, Japan and New Zealand, in effect exempting
income derived from outside such countries but passing
through them (and therefore taxed in them).
the package is complete", said Ernst and Young
at the time, "Australian multinationals doing business
in these major commercial centres will no longer need
to be overly concerned with measures that are aimed
at tax haven operations. The Government has clearly
recognised the fact that business takes place in these
countries for commercial rather than tax related reasons."
However, CFC rules will continue to apply to income
derived through a trust or arising under the Foreign
Investment Fund (FIF) measures, even if derived through
CFCs resident in such comparable tax countries."
The new legislation also allowed fund managers to invest
up to 10% of their fund in foreign passive investments
before FIF rules apply, and will also relieve complying
superannuation funds from the FIF measures. The amendments
also provided a withholding tax exemption on widely
distributed debentures issued to non-residents if those
debentures are issued by public unit trusts.
introduced to the Australian parliament in April, 2004,
simplified the taxation system for companies with offshore
earnings by ensuring that they only pay a single layer
of tax, according to the government.
Commenting on the New International Tax Arrangements
(Participation Exemption and Other Measures) Bill 2004,
the then Parliamentary Secretary to the Treasurer, Ross
Cameron, noted: "The measures in this bill will directly
assist Australian companies with foreign subsidiaries
or branch operations by generally ensuring that they
only pay one layer of (foreign) tax on the profits of
those offshore operations as well as reducing compliance
costs in many cases."
However, he added that “any passive or highly mobile
income shifted to those offshore investments will continue
to be taxed in Australia on an accrual basis."
The government hoped that the changes in the tax law
would make Australian firms more competitive overseas,
and Mr Cameron explained that they were designed to
help small, as well as large firms.
changes are not just relevant to big business with extensive
offshore operations," he observed. “They will also assist
those emerging Australian businesses looking to expand
offshore to take advantage of global opportunities."
Additionally, the new law allowed firms to ignore capital
gains from the sale of shares in a foreign subsidiary,
and would also expand the application of foreign dividend
exemption to all nations.
September 2004 the then Australian Treasurer Peter Costello
indicated that he wanted to overhaul the country’s international
taxation system to ease the tax burden on firms operating
revealed that one of his top priorities was to help
firms that derive much of their income overseas and
pay tax on it but do not benefit from a domestic tax
would like to improve Australia's international taxation
arrangements so that Australian companies can expand
in foreign jurisdictions, while remaining domiciled
in Australia," Costello said. "We want to promote Australia
as a place for regional headquarters - for Australian
companies but also for foreign companies," he added.
Costello spoke as News Corp, the largest firm listed
on the Australian Stock Exchange, prepared to move its
domicile and primary listing to the United States.
February 2006, a new study was launched, examining Australia's
international competitiveness in the area of tax.
2008, the political guard changed, meaning that a number
of the reform proposals put forward by the previous
government were subjected to close scrutiny by its Labor
May 2008, Kevin Rudd's government formally announced
that it was reviewing a raft of tax legislation proposed
under the former coalition government of John Howard.
the time the Parliament was dissolved on 15th October,
2007, prior to the federal elections, the previous government
was still to enact almost 60 announced tax measures,
and the Rudd government revealed that it had been working
its way through this stock of announced but unenacted
measures with a view to arriving at a decision on each
of them and eliminating the considerable uncertainty
that existed around them.
Rudd government announced in May that it had already
acted to introduce legislation to implement a number
of them, including urgent measures such as that proposing
tax-free treatment for superannuation lump sums paid
to persons suffering from a terminal medical condition.
which the government had decided should proceed, but
where it proposed to make changes to the announcements
by the previous government, were detailed in the Budget.
The government also announced at that time those measures
that it had decided should not proceed.
which the government intended to proceed with included
modifications to the income tax consolidation regime,
and amendments to the thin capitalisation regime, to
accommodate certain impacts arising from the 2005 adoption
of Australian equivalents to International Financial
Reporting Standards. It would also finalise the implementation
of the simplified imputation system and proceed with
new tax treaties with Japan and South Africa, the Rudd
government had not, however, decided whether to press
ahead with a programme of Tax and Information Exchange
Agreements (TIEAs) with offshore jurisdictions, it emerged.
Nor had it at that time made a final decision on foreign
dividend tax proposals, a review of tax secrecy, disclosure
and anti-avoidance provisions, amendments to company
residency rules, and modifications to transfer pricing
August 2008, the Australia’s Future Tax System
(AFTS) Discussion Paper was launched by Treasury Secretary
Dr Ken Henry - claimed to be the most comprehensive
review of the country's tax system in fifty years.
wide ranging review encompassed many aspects of the
federal and state/territorial tax system, and considered:
the balance of taxes on work, investment and consumption
and the role for environmental taxes; enhancements to
the tax and transfer system facing individuals, families
and retirees; the taxation of savings, assets and investments,
including the role and structure of company taxation;
the taxation of consumption and property and other state
taxes; simplification of the tax system, including the
interactions between federal, state and local government
taxes; and the proposed emission trading system.
review did not, however, consider the rate and base
of the GST, and interactions with the transfer system.
reform of our tax and welfare systems is a key way to
secure our economic foundations for the future, create
wealth, spread opportunity and reward working Australians,"
announced a statement issued by Treasurer Wayne Swan.
to modernize the CFC regime was due to come into effect
in 2010 but delays in implementation led to a postponement
with a further draft amendment to the CFC regulations
published in February, 2011. It is widely expected that
the new rules will apply from July, 2012.
has double tax treaties with virtually all of its major
trading partners (around 50 countries at the time of
writing). The majority of these follow the OECD model
treaty, and in all of Australia's full treaties, there
is usually a 'tie-breaker' clause to deal with those
who might otherwise be treated as residents of both
Australia and the treaty country.
November, 2005, New Zealand and Australia signed a protocol
updating the 1995 double tax agreement between the two
double tax agreement with Australia is our most important
tax treaty, given the significance of our economic relationship
and trans-Tasman investment, so it is essential that
it is kept up to date,” New Zealand's Revenue Minister
Peter Dunne stated on Tuesday.
Dunne went on to explain that: "Whether we negotiate
a completely new double tax agreement between the two
countries is still under review. It will depend in part
on whether New Zealand is willing to lower the withholding
rates covered by the agreement, a decision the government
expects to make next year."
the meantime, the protocol signed today makes urgent
administrative changes to the agreement to ensure it
works to maximum benefit for both parties."
protocol updates the article in the agreement governing
exchange of information and inserts a new article to
allow assistance with tax collection. These changes
will assist the extension of Australia’s Wine Equalisation
Tax Rebate to New Zealand wine producers who export
also ensures that Australia does not lose priority over
New Zealand’s 28 other treaty partners to negotiate
lower treaty withholding rates should we decide to reduce
amended agreement will be given effect in both countries
once they have introduced the necessary domestic legislation,
which in New Zealand’s case will be an Order in Council,
probably early next year."
September 2008, the Australian parliament approved a
new tax treaty with Japan.
the new Rudd government was undecided whether to press
ahead with a programme of Tax and Information Exchange
Agreements (TIEAs) with offshore jurisdictions. But
by the end of August 2009, it had signed TIEAs with
seven jurisdictions, including Bermuda, Antigua and
Barbuda, the Netherlands Antilles, the British Virgin
Islands, Jersey, Gibraltar and the Isle of Man. A tax
information exchange agreement has also been added to
the double tax agreement with Singapore.
in the footsteps of the Rudd government, the new administration
has continued to sign and ratify TIEAs with Anguilla,
Aruba, Bahamas, Belize, Cayman Islands, Cook Islands,
Dominican Republic, Monaco, San Marino, St Kitts and
Nevis, St Lucia, St Vincent and the Grenadines, Turks
& Caicos Islands and Vanuatu. Agreements with Andorra,
Bahrain, Costa Rica, Grenada, Liberia, Liechtenstein,
Macao, Marshall Islands, Mauritius, Montserrat and Samoa
have yet to come into force.