EXPLANATORY STATEMENT
Select Legislative Instrument 2008 No. 142
Issued by authority of the Assistant Treasurer
Taxation Administration Act 1953
Taxation Administration Amendment Regulations 2008 (No. 2)
Section 18 of the Taxation Administration Act 1953 (the Act) provides, in part, that the Governor-General may make regulations, not inconsistent with the Act, prescribing all matters which by the Act are required or permitted to be prescribed, or which are necessary or convenient to be prescribed for giving effect to the Act.
The purpose of the Regulations is to amend the Taxation Administration Regulations 1976 (the Principal Regulations) to specify the foreign countries and foreign territories that are an information exchange country for the purposes of sub-section 12-385(4) of the Taxation Administration Act 1953. This is relevant for calculating the amount to be withheld from a fund payment by the trustee of a managed investment trust or custodian, or by another entity. It is also relevant for calculating a foreign resident’s income tax liability in accordance with proposed subsection 840-805(1) of the Income Tax Assessment Act 1997.
Tax Laws Amendment (Election Commitments No. 1) Act 2008 replaced the previous 30 per cent withholding tax regime applying to certain distributions from Australian managed investment trusts to foreign residents with a new withholding regime. The rate of withholding under the new regime depends on the place of payment, address or residency of the foreign investor.
Most foreign investors are now subject to a reduced and final rate of withholding under the new regime, with the rate falling to 7.5 per cent once the measure is fully implemented (from 1 July 2010). This is expected to enhance the competitiveness of the Australian managed funds industry, and its ability to attract foreign investment.
The reduced withholding rate is restricted to residents of jurisdictions with which Australia has effective exchange of information (EOI) arrangements, for tax matters. This will enhance integrity by ensuring the Commissioner of Taxation can obtain relevant information from those jurisdictions, for example to verify the investor’s identity and place of residence, to support taxation compliance activities. It will also reinforce Australia’s international reputation for having a strong regulatory system and encourage other jurisdictions to enter into enhanced EOI arrangements with Australia.
EOI is the process by which countries share taxpayer information to combat tax avoidance and evasion and enforce their domestic tax laws. For Australia, the legal basis for EOI is typically provided by the EOI article of a bilateral tax or other treaty or by a bilateral tax information exchange agreement (TIEA). EOI can also be provided, for criminal purposes only, by mutual assistance arrangements with other jurisdictions, which are administered by the Attorney-General’s Department.
The countries and territories specified in the Regulations are Australia’s tax treaty and tax information exchange agreement (TIEA) partners that are able to cooperate effectively with Australia, without domestic law impediments.
Further details on Australia’s EOI standard are included in the Attachment.
A Regulation Impact Statement was not required. Compliance costs were assessed as low.
Industry consultation was undertaken in the development of the Regulations.
The Regulations commenced on the commencement of the Tax Laws Amendment (Election Commitments No. 1) Act 2008.
Attachment
Australia’s EOI standard is consistent with the highest international standard, and reflects Australia’s commitment to international cooperation to address tax abuse. Australian tax authorities can fully utilise their domestic access and information gathering powers for the purpose of obtaining and providing information to the revenue authority of another jurisdiction under a tax treaty or TIEA.
However, some jurisdictions, including some of Australia’s tax treaty partners, have domestic laws or administrative practices that impede effective EOI, and encourage the concealment of income and assets in those jurisdictions, to the detriment of Australia. These impediments include bank secrecy, a domestic tax interest requirement and a dual criminality requirement.
• Bank secrecy prevents tax authorities from obtaining bank information to administer and enforce domestic tax laws, and leads to inequities in the tax system. Internationally, bank secrecy obstructs international cooperation by curtailing a jurisdiction’s ability to assist its tax treaty partners.
• A domestic tax interest requirement is a requirement that the requested country needs the relevant information for its own purposes before it can supply it to the requesting country.
• Dual criminality is the requirement that the conduct under investigation by the requesting country would constitute a crime in the requested country before the latter country can supply the relevant information. Application of this principle where the definitions of tax crimes in both countries are markedly different can make it impossible for the requesting country to obtain information that is vital to a criminal tax investigation.
The laws or administrative practices of the jurisdictions specified in the Regulations are consistent with corresponding Australian laws and administrative practices and therefore ensure effective EOI with Australia.
Jurisdictions not specified in the Regulations do not have a legal basis for EOI with Australia, or have laws or administrative practices that impede effective EOI (or both). However, the Principal Regulations will be updated as necessary, to include jurisdictions that implement effective EOI with Australia in the future, either by establishing a legal basis or by removing their domestic impediments.
Establishing transparency and effective EOI internationally is a key objective of the Organisation for Economic Co-operation and Development’s (OECD) Harmful Tax Practices Initiative. Australia is a long-standing and active supporter of this work. The participation of Australian residents in arrangements designed to exploit secrecy laws have adverse effects on the Australian economy and impose an unfair burden on compliant businesses and individuals. They also offer safe havens for funds associated with other activities such as money laundering, drug trafficking and terrorist financing. The Australian Taxation Office dedicates significant resources to examining such arrangements but remains impeded by a lack of access to information held in some jurisdictions.
The OECD has established the following key principles of transparency and effective information exchange for tax purposes:
• Existence of mechanisms for exchange of information upon request
• Exchange of information for purposes of domestic law in both criminal and civil tax matters
• No restrictions of information exchange caused by application of dual criminality principle or domestic tax interest requirement
• Respect for safeguards and limitations
• Strict confidentiality rules for information exchanged
• Availability of reliable information (in particular bank, ownership, identity and accounting information) and powers to obtain and provide such information in response to a specific request
Australia and many other countries, including most OECD members, already meet these standards, and have done so for many years. In addition, a growing number of other jurisdictions, including 35 low-tax jurisdictions, have recently made a commitment to OECD principles of transparency and effective exchange of information for tax purposes.