NO.021

REVIEW OF INTERNATIONAL TAX ARRANGEMENTS

I am announcing today details of a review of international tax arrangements

with particular attention to be given to whether current international tax arrangements

impede Australian companies expanding offshore, whether they impede attraction

of domestic and foreign equity, and how they affect holding companies and conduit

holdings being located in Australia. The Review will concentrate on at least

four principal areas:

• the dividend imputation system’s treatment of foreign source income
  • Australian companies can currently provide imputation credits to their

    shareholders in respect of Australian, but not foreign, company tax paid.

    The review will examine business concerns with the imputation “bias”

    against foreign source income;

• the foreign source income rules (comprising principally of the controlled

  foreign corporation (CFC), foreign investment fund (FIF) and the foreign tax

  credit/exemption rules)

  • the review will examine claims that the rules are complex and impose

    significant compliance costs on business, are out of step with modern

    business practice, and negatively affect decisions to locate in Australia

    vis-a-vis countries with less stringent or no such rules;

• the overall treatment of `conduit income’
  • `conduit’ taxation rules concern the treatment of foreign source income

    flowing through an Australian entity (companies and managed funds) to

    non-resident investors. The review will examine the adequacy of the current

    conduit rules and their impact on the establishment of regional holding

    companies and managed funds (with an international clientele) in Australia;

    and

• high level aspects of Double Tax Agreement (DTA) policy and processes
  • in light of the recent agreement with the US and the ongoing negotiations

    with the UK, the review will examine Australia’s DTA policy and related

    aspects of the domestic tax law as they relate to the balance between

    residence and source taxation.

The Treasury is preparing a paper for public release around mid-year to serve

as a basis for consultations. I have asked the Board of Taxation to undertake

public consultations on these issues in the second half of this year and provide

the Government with a report by the end of the year. This timing takes account

of the immediate priorities of both the Government and business sector in implementing

existing tax reforms, such as consolidation for wholly-owned corporate groups,

which comes into effect on 1 July 2002.

The review will build on the progress made by the delivery of an internationally

competitive company tax rate of 30 per cent, the introduction of GST in place

of wholesale sales tax and inefficient transaction taxes, the successful negotiation

in late 2001 of changes to the Australia/United States Double Tax Convention.

CANBERRA

2 May 2002