NO.073

AUSTRALIA-UNITED KINGDOM DOUBLE TAXATION TREATY

The Treasurer and the British High Commissioner today signed a new double

tax treaty (the new Treaty) between Australia and the United Kingdom

replacing the existing Agreement and amending Protocol signed in 1967

and 1980 respectively.

The new Treaty will substantially reduce the withholding tax on certain

dividend, interest and royalty payments in line with outcomes achieved

in the recent amending Protocol to the United States treaty. This will

provide long term benefits for business, making it cheaper for Australian

based business to obtain intellectual property, equity and finance for

expansion. It will also remove obstacles currently inhibiting Australian

corporate expansion offshore.

This reflects the close economic relations between Australia and the

United Kingdom (UK). Australia’s investment and trade relationship with

the UK is the largest Australia has with any European country. Overall,

the UK is Australia’s second largest source of foreign investment, second

largest destination for Australian investment abroad, third largest trading

partner, and sixth largest merchandise trading partner.

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

treaty network for Australian companies. A modernised Australia-UK treaty

is important for future economic relations given the international economic

significance of the UK and the magnitude of Australia-UK investment and

trade relationships.

This further demonstrates the Government’s commitment to update aging

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

Benefits for Australia from reduced withholding tax on certain dividend,

interest and royalty payments

• Under current arrangements, the Interest Withholding Tax (IWT)

  charged on interest paid to foreign financial institutions is passed

  onto Australian borrowers making it more expensive to seek funds

  from offshore. The IWT changes in this treaty will reduce the cost

  of obtaining funds from UK financial institutions. The new Treaty

  will also remove obstacles for Australian banks seeking to lend

  offshore thereby improving Australia’s standing as a global financial

  centre.

• The reduction in the Royalty Withholding Tax (RWT) limit from 10

  per cent to 5 per cent in the new Treaty will reduce the cost to

  those Australian businesses using intellectual property that is

  owned offshore. In many cases when intellectual property is licensed

  to Australian companies, the owner of the intellectual property

  will require the RWT to be met by the Australian licensee. The

  reductions of this tax will also make Australia a more attractive

  destination for overseas investment in research and development.

  Because RWT limits set in treaties are reciprocal, the new Treaty

  make it more attractive to promote Australian products offshore

  by reducing the rate of royalty withholding tax charged under

  the treaty. Currently Australian companies that earn royalties

  from the UK for rights to use Australian intellectual property

  such as Australian music, film and TV series or for the use

  of products that result from our research and development may

  have 10 percent of that payment withheld by the UK.

• The Dividend Withholding Tax (DWT) changes will assist in ensuring

  that Australia remains an attractive destination Foreign Direct Investment

  (FDI). The DWT changes are expected to improve the flow of FDI from

  the UK to Australia. Currently UK subsidiaries operating in Australia

  must pay withholding tax of 15 percent on any unfranked dividends

  paid to the UK. This increases the cost of investing in Australia

  and may result in UK companies investing elsewhere. The changes in

  this treaty help ensure that Australia remains an attractive destination

  for UK investment.

The new Treaty is important to the many British businesses who have traditionally

viewed Australia as an attractive base for regional operations. Around

a third of all regional headquarters operations in Australia are European,

and almost half of these are British. It is also important to over one

thousand Australian companies active in the UK, with a large number of

these using the UK as a base into Continental Europe.

The gateway relationship that the UK has with Europe and Australia has

with Asia makes the new Treaty particularly important for Australia’s

economy. Updating this treaty is crucial given the international economic

significance of the UK and the size of the Australia-UK investment and

trade relationships. The treaty has clear benefits for those businesses

seeking to expand in these economic regions.

Removing business uncertainty

The new Treaty will minimise a number of major disincentives to the expansion

of international trade and investment between Australia and the UK by

clearly allocating tax jurisdictions between partner countries.

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 the new Treaty.

The new Treaty achieves 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 new Treaty ensures 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.

The new Treaty will enter into force when both countries advise that

they have completed their domestic requirements. Legislation for this

purpose will be introduced in the Australian Parliament as soon as practicable.

Copies of the new Treaty and an associated exchange of notes are available

on the Treasury’s website at:

http://www.treasury.gov.au.

CANBERRA

21 August 2003

Contact: David Alexander

(02) 6277 7340

APPENDIX 1 – TECHNICAL CHANGES TO THE TREATY

The new Treaty is a comprehensive taxation convention and contains provisions

for the avoidance of double taxation and the prevention of fiscal evasion

in relation to income flowing between Australia and the United Kingdom

(UK). The associated exchange of notes (the Notes) contain a number of

operative provisions (as well as an explanatory clause) which apply to

the new Treaty. These Notes (known as third person notes) were exchanged

on signature of the new Treaty and enter into force at the same time

as the Treaty.

The new Treaty and Notes replace the existing Australia-UK double taxation

agreement (signed in 1967 and amended by Protocol in 1980).

The new Treaty provides that dividends, interest and royalties will generally

remain taxable in both countries, but with limits on the tax that the

source country may charge on residents of the other country who beneficially

own the income. Subject to a number of broad exceptions outlined below,

a general limit of 15 per cent continues to apply for dividends and 10

per cent for interest. The general limit for royalties will be reduced

from 10 to 5 per cent.

Dividends

Under the new Treaty, no tax is payable on dividends in the source country

where the dividend recipient is a company that holds directly at least

80 per cent of the voting power of the company paying the dividend, subject

to certain conditions. A 5 per cent rate limit applies to dividends where

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

of the voting power of the company paying the dividend.

These limits will apply to both franked and unfranked dividends.

Interest

Source country tax on interest will continue to be limited to 10 per

cent. However, no tax will be chargeable in the source country on interest

derived by:

• a government body of the other country (including a body exercising

  governmental functions or a bank performing central banking functions);

  or

• a financial institution resident in the other country.

The beneficial rate limit and exemptions available are subject to certain

safeguards.

Royalties

The general limit for royalties will be reduced from 10 to 5 per cent.

The new Treaty also provides that amounts derived from equipment leasing

(including certain container leasing) will be excluded from the royalty

definition. Such amounts would either be treated as profits from international

transport operations (for container leasing) or as business profits (for

other types of equipment leasing). The Notes clarify that payments for

the use of spectrum licences will be treated as business profits.

Other features

In modernising the double tax Treaty arrangements in line with Australia’s

current tax law and treaty policies and practice, the new Treaty and

Notes contain:

• a revised list of taxes covered;

• a clause within the Residence Article to deem dual listed companies

  to be resident only in the country of incorporation (provided that

  they have their primary stock exchange listing in the same country);

• revised Articles on Shipping and air transport, and Other income;

• a new Fringe benefits Article ensuring fringe benefits are taxable

  only in the country with the sole or primary taxing right over

  that benefit where it is paid as ordinary employment income;

• a clause specifically addressing the treatment of benefits arising

  from certain employee share option plans granted in respect of

  employment partly or wholly exercised in the other country;

• comprehensive provisions on the alienation of property, including

  a provision that would allow the source country to tax capital

  gains not otherwise dealt with; and

• a new Non-discrimination Article to protect taxpayers from tax

  discrimination in the treat partner country and to give them rights

  of appeal against such discrimination.

The new Treaty and Notes will enter into force when the Australian and

UK governments’ exchange diplomatic notes, advising that the constitutional

processes required for entry into force have been completed.

In Australia, the process involves the new Treaty, the Notes and a National

Interest Analysis being tabled in the Parliament for review by the Joint

Standing Committee on Treaties. Legislation will also be required to

complete the necessary procedures for entry into force, and a Bill for

that purpose will be introduced into Parliament as soon as practicable.

In the UK, the signed text is laid before the House of Commons in the

form of a draft statutory instrument for approval.

Upon entry into force, the new Treaty will have effect for Australian

and UK withholding taxes in relation to dividends, interest and royalties

on or after 1 July next following the date on which the new Treaty

enters into force.

The dates of effect for Australian fringe benefits tax and income tax

are respectively 1 April and 1 July next following the date

on which the new Treaty enters into force.