NO.001

AUSTRALIA-UNITED KINGDOM AND AUSTRALIA-RUSSIA TAX TREATIES

Opportunities for increased trade and investment flows between Australia and

the United Kingdom (UK) and between Australia and the Russian Federation will

be improved as a result of the entry into force of the Australia-United Kingdom

and the Australia-Russia tax treaties.

Both the Australia-UK and the Australia-Russia tax treaties entered into force

on 17 December 2003. This followed an exchange of notes through diplomatic channels

indicating that the necessary procedures to give each treaty the force of law

had been completed in each country.

The Australia-UK tax treaty

The new Australia-UK tax treaty will modernise Australia’s tax arrangements

with the UK by replacing the existing agreement, which has not been modified

since 1980. The treaty underlines the critical importance to Australia of the

United Kingdom as a trading and investment partner and entry point into Europe.

This is a significant step in facilitating a competitive and modern tax treaty

network for Australia. A modernised Australia-UK treaty is important for future

economic relations between Australia and the UK reflecting the international

economic significance of the UK and the magnitude of our investment and trade

relationships.

This further demonstrates the Government’s commitment to updating ageing

treaties with major trading partners as recommended by the Ralph Report.

The UK treaty was signed in Canberra on 21 August 2003. Details of the treaty

were made public at the time and legislation providing for the treaty to be

given the force of law in Australia – the International Tax Agreements Amendment

Act (No. 123) 2003 – received Royal Assent on 5 December 2003.

The Australia-Russia tax treaty

The Australia-Russia tax treaty should promote an expansion of the economic

relationship between Australia and Russia. In particular, the new tax treaty

will assist in the development of Australia’s trade and investment links

with Russia. The treaty reduces double taxation by allocating taxing rights

between Australia and Russia in respect of all forms of income flows between

the two countries. The basis of allocating these rights is substantially similar

to that adopted in Australia’s other modern tax treaties.

The treaty was signed in Canberra on 7 September 2000. Details of the treaty

were made public at the time and legislation providing for the treaty to be

given the force of law in Australia – the International Tax Agreements Amendment

Act (No. 1) 2002 – received Royal Assent on 3 July 2002.

The Australia-Russia treaty will first have effect in Australia for all Australian

taxes covered by the treaty, in relation to income or profits of years of income

beginning on or after 1 July 2004. In the case of Russia, the treaty will have

effect for taxable years and periods beginning on or after 1 January 2004.

Combating fiscal evasion and protecting Australia’s tax revenue

The integrity of the tax system will be enhanced, and government revenues

will be protected, through the strengthened framework for the exchange of information

between revenue authorities and for establishment of a mechanism for settling

jurisdictional disputes under both treaties.

In the case of the Australia-Russia treaty, Australian revenue will be protected

under the treaty from inappropriate claims for treaty benefits by persons enjoying

tax privileges under preferential tax regimes which shelter income from taxation.

Article 23 (Limitation of Benefits) will operate to deny treaty benefits

for highly mobile income where the relevant income or profits are preferentially

taxed and information concerning that income is not readily exchanged.

Both treaties achieve a balance of outcomes that will provide Australia with

a competitive tax framework for international trade and investment, while ensuring

the Australian revenue base is sustainable and suitably protected. The treaties

ensure Australia can effectively apply its taxing rights in respect of Australian

sourced business profits, the exploitation of its natural resources and the

sale of significant Australian assets.

Formal notification of the entry into force of both treaties will be published

in the Gazette as soon as practicable. Copies of the treaties are available

on the Department of Treasury’s internet site (http://www.treasury.gov.au)

at “Taxation”.

Further details of the treaties are provided in the Attachment.

MELBOURNE

16 January 2004

Contact: David Alexander

03 9650 0244

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ATTACHMENT

Main features of the Australia-UK treaty

Reductions in interest withholding tax will reduce the borrowing costs for

Australian companies in the UK. Generally, nil interest withholding tax is payable

where interest is paid to a financial institution or a government body exercising

governmental functions. The new treaty will also remove obstacles for Australian

banks seeking to lend offshore thereby improving Australia’s standing

as a global financial centre.

Reductions in dividend withholding tax will help Australia to attract and

retain UK foreign direct investment. The new treaty exempts from withholding

tax dividends paid to a publicly listed company which controls 80 per cent or

more of the voting power in the company paying the dividend, a 5 per cent withholding

tax rate applies to dividends paid to other companies with voting power of 10

per cent or greater in the dividend paying company, and a 15 per cent withholding

tax rate applies for all other dividends.

The reduction in the rate of royalty withholding tax from 10 per cent to 5

per cent will improve Australian access to UK intellectual property. The reduction

will also positively affect Australian companies receiving royalties from the

export of Australian-owned technology.

The treaty also contains other features which are in line with Australia’s

current tax law and treaty policies and practice. They include provisions which

are designed to remove uncertainty for business by clearly allocating taxing

rights between the two jurisdictions, and to protect taxpayers from discrimination

and give them rights of appeal against such discrimination.

The new UK treaty will have effect for Australian and UK withholding taxes

in relation to dividends, interest and royalties on or after 1 July 2004. The

dates of effect for Australian fringe benefits tax and income tax are respectively

1 April 2004 and 1 July 2004.

Main Features of the Australia-Russia treaty

The treaty will reduce the withholding tax rates applicable to dividend and

royalty flows between Australia and Russia. This will benefit Australia through

reductions in the level of Russian tax on payments flowing back to Australia.

The 15 percent withholding tax rate that applies to dividends under the treaty

is lowered to 5 per cent if the following conditions are met:

• the dividends have been fully taxed at the corporate level and the dividend

  recipient is a company that holds directly at least 10 per cent of the capital

  of the company paying the dividend;

• the resident of the other State has invested a minimum of $A 700,000 dollars

  or the Russian rouble equivalent in the company; and

• where the dividends are paid by a company that is resident in Russia, the

  dividends must be exempt from Australian tax.

A royalty withholding tax rate limit of 10 per cent of the gross amount of

royalties will generally apply for both countries. The treaty is one of the

first of Australia’s new tax treaties to include spectrum licences in

the definition of royalties, as announced in the Treasurer’s Press Release

No. 26 of 1998.

The possibility of double taxation of capital gains is reduced under the treaty

by the inclusion of an Alienation of Property Article. This Article also includes

a provision that deals with the indirect alienation of real property following

the Federal Court’s decision in the Lamesa Holdings BV case.