Chapter 10International taxation arrangements

Contents

Summary 301

10.1 Introduction 301

10.2 Residence 302

10.3 Treatment of foreign source income 30510.3.1 Treatment of an individual’s foreign source income 30510.3.2 Treatment of a company’s foreign source income 31210.3.3 Foreign tax credit (FTC) systems 315

10.4 Treatment of income of non-residents 31910.4.1 Treatment of conduit income 324

10.5 Attribution and other international tax integrity rules 325

10.6 Tax treaties 327

Page 301

10. INTERNATIONAL TAXATION ARRANGEMENTS

SUMMARY

Australia’s international taxation arrangements are consistent with OECD practice and the other OECD-10 countries in the following areas:

• the application of its domestic taxation system to cross-border investment and transactions (inbound and outbound);

• the taxation of temporary residents1; and

• the taxation of dividends, interest and royalties paid to non-residents, although some countries have zero withholding tax rates on these payments, while others have extended withholding taxes to a broader range of non-resident income.

In some areas, Australia’s international taxation arrangements differ, for example:

• Australia’s treatment of the capital gains of non-residents and foreign losses2; and

• Australia has an extensive foreign business income exemption for its companies and does not tax foreign business income flowing through Australian companies to foreign shareholders.

The extent of Australia’s attribution rules, which prevent residents accumulating passive income (such as dividends and interest) in non-resident entities in low-tax countries to defer Australian tax, is broadly similar to those in other OECD-10 countries. Australia also has other international tax integrity rules, as do the rest of the OECD-10.

10.1 INTRODUCTION

International tax arrangements involve modifications to the normal rules of a country’s domestic income tax system where they interact with the tax system of another country as a result of cross-border investments or transactions. They form part of the personal and corporate tax bases and seek to enhance the economic benefits derived from cross-border activities (or limit the economic costs of them). The balance between the costs and benefits of cross-border activities and the consequent international tax rules may vary depending on the circumstances of a particular country.

1 The Australian Government announced in the 2005-06 Budget (and has recently introduced legislation to Parliament) measures to align more closely its tax treatment of temporary residents to that of other countries.

2 Reforms announced in the 2005-06 Budget will address these areas and bring Australia into line with other OECD-10 countries.

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• For example, inbound foreign direct investment may be valued more highly by a net capital-importing country than by a net capital-exporting country. As a result, the capital-importing country may decide to modify its domestic tax law to a larger degree to accommodate this type of activity (for example, reduce the non-resident withholding tax rate or base). Conversely, if it is in need of more revenue and it perceives its inbound investments as being sufficiently profitable, then it may choose to increase the source taxation on those inbound investments (for example, increase the non-resident withholding tax rate or base).

To compare international tax arrangements, it is necessary to consider the basis on which tax is levied — the residence of the taxpayer or the source of the income. This chapter considers ‘residence’ and ‘source’ for international tax purposes (to tax foreign source income), and compares tax residence rules for both natural and legal persons across the OECD-10. It goes on to look at the tax treatment of foreign source income, firstly for individuals (including for temporary residents) and then for companies. It then compares the foreign tax credit (FTC) systems (with a company focus) across the OECD-10.

The tax treatment of the income of non-residents, including conduit income (for example, foreign business income earned by a resident company and distributed to non-resident shareholders), is then considered, followed by commonly used international tax integrity rules. The chapter concludes with a comparison of tax treaty networks and features across the OECD-10.

Box 10.1: Australia and the Review of International Taxation Arrangements (RITA) Australia recently reviewed many of its international tax arrangements (and continues to implement recommendations/commitments from the review, including the changes announced in the 2005-06 Budget). The review focused on ensuring that, in an increasingly integrated global business environment, Australia’s tax system was not hindering its attractiveness as a place for multinational business and investment. One of the key outcomes was the reduction in, and streamlining of, Australia’s taxation of inbound, outbound and conduit investment. By doing so, it will potentially raise the attractiveness of outbound investment and regional headquarter activity from Australia, increase its attractiveness to inbound foreign investment and help reduce its cost of capital.

Ensuring that international tax arrangements are not discouraging these cross-border investments is a key focus for many countries, including Australia.

10.2 RESIDENCE

Generally, countries tax both residents and non-residents on domestic source income. Tax residence rules usually extend the taxation of residents to their foreign source income.

• Residence is an international tax law construct used to tax the legal and natural persons of a country on their foreign source income. Without such a construct, a country would only be able to tax these persons on their domestic source income (see Box 10.2).

As a result, only resident taxpayers tend to be taxed on their worldwide income whereas non-resident taxpayers are generally only taxed on their domestic source income

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(see Box 10.3). Some countries have a territorial tax system which only taxes income arising within their own borders, irrespective of the residence of the taxpayer. Key reasons for taxing the foreign source income of residents are to achieve horizontal and vertical equity goals, and to improve the tax neutrality of investment decisions (efficiency).

Box 10.2: Residency rules All countries have residence tests for both natural persons (individuals) and legal persons (companies). These tests can be based on legal form and/or economic form (substance).

The tax residence of individuals is usually based on either: physical presence in the country (legal form, such as citizenship); facts and circumstances that prove residence in a country (economic substance, such as the country where the person has a fiscal presence); or a combination of the two. In many cases, this may be satisfied simply by being present in a country for a set period of time, such as 183 days.

The tax residence of companies (that is, where companies are established or carry on business) is usually based on either place of incorporation (legal seat), location of management (real seat) or a combination of the two.

Residency rules have an important role to play in tax treaties as they clarify the right to tax and assist in the avoidance of double taxation.

Box 10.3: Source rules Broadly, source rules operate to identify income arising within a country’s geographical boundaries.

The term ‘source’ is not defined in Australia’s tax legislation. Australia’s source rules are derived from a combination of common law, statutory provisions and Australia’s tax treaties. For example, Australia has statutory source rules which identify profits arising from certain import and export sales as having an Australian source.

The common law has developed a range of principles which operate in the absence of statutory provisions. Whether or not the income will be seen to be sourced in Australia under the common law principles is a question of fact in the circumstances of the particular case.

In addition, Australia is largely unique in the world in that its tax treaties contain source rules that empower Australia to exercise taxing rights that are allocated to it by the treaty even when domestic law may not otherwise provide source country taxing rights.

International practice varies as to the nature and extent of the source rules. Generally, countries use geographical boundaries, types of income, or a mixture of both to determine the extent to which they will seek to tax income sourced in their jurisdiction.

Table 10.1 shows for the OECD-10 the basis of the residence test for both individuals and companies.

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Table 10.1: Residence tests for individuals and companies Country Tax residence test — individuals Tax residence test — companies

Australia Facts and circumstances; in practice, high reliance on time present. Individuals deemed a resident if they spend more than one-half of the income year in Australia (unless they can establish a usual place of abode outside Australia and no intention to take up residence).

A company is an Australian resident if it is incorporated in Australia, or carries on business in Australia and has either its voting power controlled by resident shareholders or its central management and control in Australia.

Canada Facts and circumstances; in practice, high reliance on residential ties. Individuals deemed a resident for entire year if they sojourn to Canada for 183 days or more.

A corporation is a Canadian resident if it is either managed and controlled, or incorporated, in Canada.

Ireland Facts and circumstances; in practice, high reliance on time present. Individuals deemed a resident if they spend 183 days or more in Ireland during the tax year. Also deemed a resident if they spend 280 days in that year and the previous year taken together in Ireland.

A company is an Irish resident if it is managed and controlled in Ireland. All new companies incorporated in Ireland are regarded as resident for tax purposes, however this does not apply to a company if: (1) it (or a related company) carries on a trading

activity in Ireland, and: (i) it is under the control of persons resident in

an EU member state or in a treaty country; or (ii) is (or is related to a company which is)

quoted on an EU or treaty country stock market; or

(2) it is regarded under a tax treaty as being a resident in a treaty country and not resident in Ireland.

Japan Facts and circumstances; in practice, high reliance on time present. An individual is a resident if they have a domicile or have maintained a residence in Japan continuously for one year or more. Residents are either permanent or non-permanent (non-permanent if they do not intend to stay in Japan, unless they continued to maintain a domicile or residence for more than five years). A permanent resident is a resident other than a non-permanent resident.

A company is a Japanese resident if it is incorporated, or has its head office, in Japan.

Netherlands Facts and circumstances; in practice, high reliance on personal and economic ties (especially the centre of economic and social interests). No time limits are mentioned as an indicator of residence.

Company is treated as resident in the Netherlands if: (1) it is incorporated under Dutch law, generally as

an NV (public limited) or BV (private limited) company; or

(2) it is actually situated in the Netherlands. A principal criterion is the location of the company’s central management.

New Zealand

Facts and circumstances; in practice, high reliance on time present. Deemed a resident if present in New Zealand for an aggregate of 183 days or more in any 12-month period. Also resident if an individual has a permanent place of abode in New Zealand (social and financial associations are relevant here).

A company is a New Zealand resident if it is incorporated in New Zealand, it has its head office in New Zealand, its centre of management is in New Zealand or the directors (acting as directors) exercise control of the company in New Zealand. The head office of a company means the centre of its administration management.

Spain Time present in Spain, and centre of vital economic and business interests are main factors. A person will be resident in Spain if they stay there for more than 183 days in any calendar year.

A company is a Spanish resident if it is incorporated in Spain, has its registered office in Spain or has its place of management there.

Switzerland Facts and circumstances; in practice, high reliance on time present. Deemed a resident if carrying on gainful activity in Switzerland for more than 30 days or if in Switzerland for more than 90 days (without a gainful activity). The centre of an individual’s personal and economic interests is also decisive.

A company is a Swiss resident if it is incorporated, or if its place of effective management is, in Switzerland.

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Table 10.1: Residence tests for individuals and companies (continued) Country Tax residence test — individuals Tax residence test — companies

United Kingdom

Facts and circumstances; in practice, high reliance on time present. Individual regarded as a resident for an income tax year if they spend an aggregate of 183 days in the United Kingdom for that tax year, or if habitually visiting the United Kingdom for more than 91 days or more in four consecutive years (residence from the fifth year). There is also strong reliance on the maintenance of a permanent home in the United Kingdom.

A company is a United Kingdom resident if its central management and control is in the United Kingdom, or it is incorporated in the United Kingdom.

United States

Time present in the United States, lawful permanent residence and citizenship. An individual is treated as a resident of the United States under the substantial presence test for a calendar year if: they spend 31 days or more in the United States; or if the sum of the days present in the United States during the current year, plus one-third the number of days present in the first preceding calendar year, plus one-sixth the number of days present in the second preceding year, equals 183 days or more.

A company is a United States resident if it is incorporated under the laws of any State in the United States.

Source: Various, see Chapter 1 (1.4.1). Most of the OECD-10, including Australia, supplement their residence tests for both individuals and companies with substance-based tests. Without these tests, individuals and companies may be able quite easily to reduce or avoid worldwide income taxation by migrating (in legal form) to a low-tax country without their underlying economic circumstances changing.

For individuals, the majority of the OECD-10, including Australia, have a residence test based upon the facts and circumstances of the case. The most common factor appears to be time present in the country. Most countries consider that around six months (183 days) is sufficient to establish residency unless there are other facts to suggest otherwise regardless of time spent.

For companies, only the United States relies solely on the incorporation test to establish residence.3 All other countries in the OECD-10, including Australia, have some form of management or control test as a part of their company residence test.

10.3 TREATMENT OF FOREIGN SOURCE INCOME

10.3.1 Treatment of an individual’s foreign source income

As noted, resident individuals are generally taxed on their worldwide income while non-resident individuals are generally only taxed on their domestic source income. But some individuals have features of both residents and non-residents. A common example is foreign long-stay individuals, often referred to as ‘temporary residents’ or ‘expatriates’, who may work in a country for more than half a year (when they might ordinarily become residents)

3 The United States has experienced some difficulties in recent times with resident companies migrating in legal form to low-tax countries in part because of such a black and white test.

International comparison of Australia’s taxes

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but are not permanent (for example are on work visas — quasi-non-resident). Many countries specifically cater for these individuals by not taxing them on their worldwide income unless their temporary nature becomes permanent (however determined). These rules are intended to improve the attractiveness of countries to internationally mobile labour.

Table 10.2 shows for the OECD-10 what constitutes temporary residence and compares the tax treatment of their income with that of ordinary resident and non-resident individuals.

Page 307

Chapter 10: International taxation arrangements

Page 307

Tabl

e 10

.2: C

ompa

ring

tax

trea

tmen

t of t

empo

rary

resi

dent

s (e

xpat

riate

s) w

ith re

side

nt a

nd n

on-r

esid

ent i

ndiv

idua

ls

Cou

ntry

K

ey te

mpo

rary

re

side

nce

rule

s (e

xpat

riate

s)

Liab

ility

to ta

x Ta

x ra

tes

Tax

base

(inc

ludi

ng s

ocia

l sec

urity

con

trib

utio

ns/o

blig

atio

ns o

f em

ploy

ees

and

empl

oyer

s)

Aus

tralia

(a)

No

spec

ific

rule

s ex

ist f

or te

mpo

rary

re

side

nts.

Th

ere

are

som

e ex

empt

ions

for

shor

t-ter

m a

nd

‘exe

mpt

’ vis

itors

.

Res

iden

ts: w

orld

wid

e in

com

e.

Exp

atria

tes:

ther

e is

no

sepa

rate

cat

egor

y of

te

mpo

rary

resi

dent

s, s

o lia

bilit

y to

tax

depe

nds

on s

tatu

s as

resi

dent

or

non-

resi

dent

. The

re is

a

limite

d ex

empt

ion

for

‘exe

mpt

vis

itors

’ fro

m

the

fore

ign

inve

stm

ent

fund

rule

s fo

r fou

r yea

rs

prov

ided

they

are

ho

lder

s of

a te

mpo

rary

vi

sa. A

lso

an e

xem

ptio

n fro

m th

e C

GT

deem

ed

disp

osal

rule

(whi

ch

appl

ies

whe

n re

side

nts

beco

me

non-

resi

dent

s)

for s

hort-

term

resi

dent

s (th

at is

, ind

ivid

uals

who

ha

ve o

nly

been

re

side

nts

for l

ess

than

5

of th

e pa

st 1

0 ye

ars)

on

pre-

resi

denc

e or

be

quea

thed

ass

ets.

N

on-r

esid

ents

: A

ustra

lian

sour

ce

inco

me.

Inco

me:

resi

dent

s ar

e ta

xed

at

redu

ced

rate

s, c

ompa

red

with

no

n-re

side

nts,

at i

ncom

es le

ss

than

A$2

1,60

0.

Cap

ital g

ains

: oth

er th

an

diffe

renc

e in

rate

s re

ferr

ed to

ab

ove,

no

diffe

renc

e be

twee

n no

n-re

side

nts

and

resi

dent

s (c

apita

l gai

ns a

re a

ggre

gate

d w

ith in

com

e).

Inco

me:

min

or re

lief f

or s

uppo

rt of

dep

enda

nts

avai

labl

e to

resi

dent

s. M

edic

are

(com

puls

ory

med

ical

insu

ranc

e sy

stem

) rig

hts

and

oblig

atio

ns a

re n

ot a

pplic

able

to n

on-r

esid

ents

. C

apita

l gai

ns: c

ompr

ehen

sive

(res

iden

ts) A

ustra

lian

land

, bus

ines

s as

sets

and

dire

ct in

tere

sts

in A

ustra

lian

entit

ies

(non

-res

iden

ts).

Exp

atria

te tr

eatm

ent o

f cap

ital g

ains

will

dep

end

on

whe

ther

they

are

con

side

red

a re

side

nt o

r non

-res

iden

t. G

ains

are

incl

uded

in ta

xabl

e in

com

e, a

nd th

eref

ore

pote

ntia

lly s

ubje

ct to

diff

eren

t rat

es a

s be

twee

n re

side

nts

and

non-

resi

dent

s.

International comparison of Australia’s taxes

Page 308

Tabl

e 10

.2: C

ompa

ring

tax

trea

tmen

t of t

empo

rary

resi

dent

s (e

xpat

riate

s) w

ith re

side

nt a

nd n

on-r

esid

ent i

ndiv

idua

ls (c

ontin

ued)

C

ount

ry

Key

tem

pora

ry

resi

denc

e ru

les

(exp

atria

tes)

Liab

ility

to ta

x Ta

x ra

tes

Tax

base

(inc

ludi

ng s

ocia

l sec

urity

con

trib

utio

ns/o

blig

atio

ns o

f em

ploy

ees

and

empl

oyer

s)

Can

ada

Non

e R

esid

ents

: wor

ldw

ide

inco

me.

E

xpat

riate

s: n

/a.

Non

-res

iden

ts:

Can

adia

n so

urce

in

com

e.

Inco

me:

no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Cap

ital g

ains

: no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Inco

me:

min

or re

lief f

or s

uppo

rt of

dep

enda

nts

avai

labl

e to

resi

dent

s. C

anad

a ha

s a

prov

inci

al

med

ical

insu

ranc

e sy

stem

. The

met

hod

of fu

ndin

g va

ries

from

pro

vinc

e to

pro

vinc

e.

Com

puls

ory

med

ical

insu

ranc

e sy

stem

righ

ts a

nd o

blig

atio

ns a

re n

ot a

pplic

able

to

non-

resi

dent

s.

Em

ploy

ees

and

empl

oyer

s m

ust c

ontri

bute

to th

e em

ploy

men

t ins

uran

ce fu

nd. T

he m

axim

um

cont

ribut

ion

for a

n em

ploy

ee is

C$7

29 a

nd fo

r em

ploy

ers

C$1

,021

(em

ploy

ee c

ontri

butio

ns a

re

C$1

.87

and

empl

oyer

con

tribu

tions

are

C$2

.62

per C

$100

of I

nsur

able

ear

ning

s); m

axim

um

Insu

ranc

e ea

rnin

gs is

C$3

9,00

0. A

cces

s to

mos

t soc

ial p

rogr

amm

es is

rest

ricte

d to

resi

dent

s.

Can

adia

n pe

nsio

n pl

an c

ontri

butio

ns a

re re

quire

d on

ann

ual e

arni

ngs

(as

at 2

005)

exc

eedi

ng

C$3

,500

(to

max

of C

$41,

100)

; con

tribu

tion

rate

is 4

.95

per c

ent o

f suc

h ea

rnin

gs (s

plit

betw

een

empl

oyer

and

em

ploy

ee).

Som

e ju

risdi

ctio

ns in

Can

ada

impo

se a

form

al p

ayro

ll ta

x (N

ewfo

undl

and,

Man

itoba

, Que

bec,

O

ntar

io, t

he N

orth

wes

t ter

ritor

ies

and

Nun

avut

). C

apita

l gai

ns: c

ompr

ehen

sive

(res

iden

ts) C

anad

ian

land

, Can

adia

n bu

sine

ss a

sset

s an

d di

rect

in

tere

sts

in C

anad

ian

com

pani

es a

nd tr

usts

(non

-res

iden

ts).

Irela

nd

Res

iden

t, bu

t not

or

dina

rily

dom

icile

d in

Ire

land

.

Res

iden

ts: w

orld

wid

e in

com

e.

Exp

atria

tes:

inco

me

from

an

Irish

sou

rce

and

Uni

ted

Kin

gdom

em

ploy

men

t and

oth

er

fore

ign

sour

ce in

com

e re

mitt

ed to

Irel

and.

N

on-r

esid

ents

: Iris

h so

urce

inco

me.

Inco

me:

non

-res

iden

ts a

re n

ot

entit

led

to p

oten

tially

low

er ra

tes

asso

ciat

ed w

ith jo

int

asse

ssm

ent.

Cap

ital g

ains

: no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Inco

me:

non

-res

iden

ts a

re n

ot ta

xed

on in

tere

st fr

om g

over

nmen

t sec

uriti

es. R

esid

ents

are

ab

le to

cla

im in

tere

st d

educ

tions

(cap

ped)

on

hom

e lo

ans

used

for a

prin

cipa

l res

iden

ce;

non-

resi

dent

s un

likel

y to

hav

e Iri

sh p

rinci

ple

resi

denc

e.

All

Irish

resi

dent

s ar

e en

title

d to

cer

tain

bas

ic h

ealth

car

e se

rvic

es. A

ll em

ploy

ees

and

self-

empl

oyed

indi

vidu

als

othe

r tha

n m

edic

al c

ard

hold

ers

mus

t pay

a h

ealth

con

tribu

tion

levy

of

2 p

er c

ent o

f the

ir gr

oss

earn

ings

(if a

nnua

l inc

ome

is a

t lea

st €

22,8

80).

In

term

s of

soc

ial s

ecur

ity, a

ll em

ploy

ed a

nd s

elf-e

mpl

oyed

indi

vidu

als

and

empl

oyer

s co

ntrib

ute

to th

e so

cial

wel

fare

fund

(em

ploy

ers

10.7

5 pe

r cen

t on

all i

ncom

e; e

mpl

oyee

s 4

per c

ent o

n in

com

e up

to €

46,6

00 (f

rom

200

6); s

elf-e

mpl

oyed

app

roxi

mat

ely

3 pe

r cen

t on

all

inco

me)

. Soc

ial s

ecur

ity c

ontri

butio

ns a

re n

ot d

educ

tible

aga

inst

inco

me.

The

se b

enef

its a

re

larg

ely

limite

d to

resi

dent

s.

Cap

ital g

ains

: com

preh

ensi

ve (r

esid

ents

). C

ompr

ehen

sive

, but

fore

ign

gain

s on

ly ta

xed

on

rem

ittan

ce b

asis

(exp

atria

tes)

. Iris

h la

nd, I

rish

busi

ness

ass

ets

and

shar

es in

Iris

h la

nd o

r bu

sine

ss a

sset

rich

non

-list

ed c

ompa

nies

(non

-res

iden

ts).

Japa

n R

esid

ents

who

do

not i

nten

d to

live

pe

rman

ently

in

Japa

n, a

nd d

o no

t st

ay fo

r mor

e th

an

five

year

s in

any

10

-yea

r per

iod.

Res

iden

ts: w

orld

wid

e in

com

e.

Exp

atria

tes:

Jap

anes

e so

urce

inco

me

and

fore

ign

sour

ce in

com

e re

mitt

ed to

Jap

an.

Non

-res

iden

ts:

Japa

nese

sou

rce

inco

me.

Inco

me:

resi

dent

s ar

e ta

xed

at

prog

ress

ive

rate

s up

to

37 p

er c

ent (

if no

t a p

erm

anen

t re

side

nt, 5

0 pe

r cen

t).

Non

-res

iden

ts a

re ta

xed

at a

flat

ra

te o

f 20

per c

ent.

Cap

ital g

ains

: res

iden

ts ta

xed

at

14-3

9 pe

r cen

t (de

pend

s on

type

of

gai

n). N

on-r

esid

ents

usu

ally

ta

xed

at fl

at ra

te o

f 10

per c

ent.

Inco

me:

non

-res

iden

ts a

re n

ot e

ntitl

ed to

a b

asic

ded

uctio

n of

¥38

0,00

0. E

xpat

riate

s ar

e en

title

d to

tax

free

relo

catio

n an

d an

nual

hom

e le

ave

allo

wan

ces.

It

is c

ompu

lsor

y fo

r an

empl

oyee

or s

elf-e

mpl

oyed

indi

vidu

al in

Jap

an to

join

the

thre

e so

cial

in

sura

nce

sche

mes

: hea

lth, p

ensi

on, a

nd e

mpl

oyee

s in

sura

nce.

Hea

lth a

nd p

ensi

on in

sura

nce

sche

mes

are

pay

able

mon

thly

by

the

empl

oyee

and

em

ploy

er in

equ

al a

mou

nts.

Any

co

ntrib

utio

ns m

ade

by a

n in

divi

dual

will

be

dedu

ctib

le fo

r inc

ome

tax

purp

oses

. For

exp

atria

tes,

on

ly J

apan

sou

rced

pay

men

ts a

re c

harg

eabl

e an

d on

ly if

pay

roll

oper

ated

in J

apan

. C

apita

l gai

ns: c

ompr

ehen

sive

(res

iden

ts a

nd e

xpat

riate

s); J

apan

ese

right

s/lic

ence

s, d

irect

in

tere

sts

in J

apan

ese

com

pani

es, J

apan

ese

busi

ness

es a

nd c

erta

in s

ecur

ities

(non

-res

iden

ts).

Chapter 10: International taxation arrangements

Page 309

Tabl

e 10

.2: C

ompa

ring

tax

trea

tmen

t of t

empo

rary

resi

dent

s (e

xpat

riate

s) w

ith re

side

nt a

nd n

on re

side

nt in

divi

dual

s (c

ontin

ued)

C

ount

ry

Key

tem

pora

ry

resi

denc

e ru

les

(exp

atria

tes)

Liab

ility

to ta

x Ta

x ra

tes

Tax

base

(inc

ludi

ng s

ocia

l sec

urity

con

trib

utio

ns/o

blig

atio

ns o

f em

ploy

ees

and

empl

oyer

s)

Net

herla

nds

Exp

atria

tes

wor

king

in th

e N

ethe

rland

s w

ith a

D

utch

com

pany

w

ith s

carc

e sp

ecifi

c ex

perti

se.

A ti

me

limit

of u

p to

10

year

s ap

plie

s (a

lthou

gh a

fter f

ive

year

s th

e ta

x ad

min

istra

tion

may

re

quire

pro

of th

at

expa

triat

e st

ill h

as

the

spec

ific

know

-how

).

Res

iden

ts: w

orld

wid

e in

com

e.

Exp

atria

tes:

eith

er

resi

dent

or n

on-r

esid

ent

treat

men

t, at

exp

atria

te’s

el

ectio

n.

Non

-res

iden

ts: D

utch

so

urce

inco

me.

Inco

me:

no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Cap

ital g

ains

: no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Inco

me:

exp

atria

tes

can

rece

ive

30 p

er c

ent o

f the

ir sa

lary

and

wag

es ta

x fre

e fo

r a m

axim

um

of 1

0 ye

ars.

Cer

tain

per

sona

l allo

wan

ces,

min

or re

lief f

or s

uppo

rt of

dep

enda

nts

and

inco

me-

split

ting

are

not a

vaila

ble

for n

on-r

esid

ents

. B

oth

empl

oyee

s an

d ot

her r

esid

ents

are

obl

iged

to p

ay s

ocia

l sec

urity

pre

miu

ms

unde

r the

na

tiona

l soc

ial s

ecur

ity s

chem

e (a

ppro

xim

atel

y 32

per

cen

t of t

axab

le in

com

e up

to €

30,3

57;

peop

le o

ver 6

5 pa

y ap

prox

imat

ely

14 p

er c

ent).

The

re is

als

o an

add

ition

al o

blig

ator

y so

cial

se

curit

y sc

hem

e w

hich

cov

ers

empl

oyee

s on

ly (p

rem

ium

s ap

porti

oned

to b

oth

empl

oyer

s an

d em

ploy

ees)

. Non

-res

iden

ts: E

U n

atio

nals

who

com

e to

the

Net

herla

nds

to w

ork

on a

tem

pora

ry

basi

s ca

n ap

ply

for a

one

or t

wo

year

exe

mpt

ion

from

pay

ing

natio

nal s

ocia

l sec

urity

pre

miu

ms

on th

e ba

sis

of E

U le

gisl

atio

n. T

his

exem

ptio

n is

ava

ilabl

e fo

r oth

er n

on-r

esid

ents

as

wel

l if

Net

herla

nds

has

a so

cial

sec

urity

trea

ty w

ith th

eir h

ome

coun

try.

As

of 2

006

a ne

w h

ealth

car

e in

sura

nce

syst

em e

xist

s (to

repl

ace

the

old

dual

sch

eme)

. The

pr

emiu

m w

ill b

e 6.

5 pe

r cen

t of s

alar

y w

ith a

max

imum

of €

1,95

1. T

he s

ame

treat

men

t exi

sts

for r

esid

ents

and

non

-res

iden

ts.

An

unem

ploy

men

t ins

uran

ce c

ontri

butio

n is

levi

ed a

t a ra

te o

f app

roxi

mat

ely

5.2

per c

ent o

n an

nual

inco

me

betw

een

€15,

138

and

€43,

848

(the

cont

ribut

ion

is d

educ

tible

). C

apita

l gai

ns: n

o di

ffere

nce

betw

een

resi

dent

s an

d no

n-re

side

nts.

New

Ze

alan

d N

ew Z

eala

nd is

in

the

proc

ess

of

amen

ding

its

law

s so

that

firs

t-tim

e (o

r firs

t tim

e in

10

year

s) re

side

nts

who

com

e to

New

Ze

alan

d fo

r wor

k w

ill b

e ex

empt

on

fore

ign

inco

me

othe

r tha

n di

vide

nds,

inte

rest

, em

ploy

men

t in

com

e an

d se

rvic

e bu

sine

ss

inco

me.

Lim

it of

fiv

e ye

ars

(or t

hree

if

not e

mpl

oyed

on

arriv

al).

Res

iden

ts: w

orld

wid

e in

com

e.

Exp

atria

tes:

if

amen

dmen

ts a

re p

asse

d,

fore

ign

sour

ce in

com

e ot

her t

han

divi

dend

s,

inte

rest

, em

ploy

men

t in

com

e an

d se

rvic

e bu

sine

ss in

com

e w

ill b

e ex

empt

. N

on-r

esid

ents

: New

Ze

alan

d so

urce

inco

me.

Inco

me:

no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Cap

ital g

ains

: no

capi

tal g

ains

ta

x.

Inco

me:

min

or re

lief f

or s

uppo

rt of

dep

ende

nt c

hild

ren

avai

labl

e to

resi

dent

s.

Ther

e is

no

com

puls

ory

heal

th o

r soc

ial s

ecur

ity in

sura

nce.

The

re is

a c

ompr

ehen

sive

acc

iden

t co

mpe

nsat

ion

sche

me

adm

inis

tere

d by

Acc

iden

t Com

pens

atio

n C

orpo

ratio

n, fu

nded

by

levi

es

on e

mpl

oyer

s an

d em

ploy

ees,

and

sel

f-em

ploy

ed in

divi

dual

s. L

evie

s pa

yabl

e ar

e ba

sed

on

earn

ings

and

col

lect

ed th

roug

h th

e P

AYE

sys

tem

. The

fund

pay

s ou

t for

‘acc

iden

t-rel

ated

’ m

edic

al s

ervi

ces

and

for l

oss

of e

arni

ngs.

C

apita

l gai

ns: n

o ca

pita

l gai

ns ta

x.

International comparison of Australia’s taxes

Page 310

Tabl

e 10

.2: C

ompa

ring

tax

trea

tmen

t of t

empo

rary

resi

dent

s (e

xpat

riate

s) w

ith re

side

nt a

nd n

on re

side

nt in

divi

dual

s (c

ontin

ued)

C

ount

ry

Key

tem

pora

ry

resi

denc

e ru

les

(exp

atria

tes)

Liab

ility

to ta

x Ta

x ra

tes

Tax

base

(inc

ludi

ng s

ocia

l sec

urity

con

trib

utio

ns/o

blig

atio

ns o

f em

ploy

ees

and

empl

oyer

s)

Spa

in

Indi

vidu

als

(exp

atria

tes)

who

m

ove

thei

r re

side

nce

to S

pain

to

wor

k m

ay o

pt to

be

taxe

d un

der t

he

Spa

nish

inco

me

tax

as

non-

resi

dent

s.

Res

iden

ts: w

orld

wid

e in

com

e.

Non

-res

iden

ts: S

pani

sh

sour

ce in

com

e.

Inco

me:

resi

dent

s ar

e ta

xed

at

prog

ress

ive

rate

s up

to

45 p

er c

ent.

Non

-res

iden

ts a

re

taxe

d at

flat

rate

of 2

5 pe

r cen

t w

ithou

t ded

uctio

ns o

r al

low

ance

s (te

mpo

rary

wor

k is

on

ly ta

xed

at 2

per

cen

t).

Exp

atria

tes:

may

ele

ct to

be

taxe

d as

resi

dent

s (th

at is

, the

pr

ogre

ssiv

e ra

tes

abov

e w

ith

certa

in e

xpen

ses

dedu

ctib

le)

or a

s no

n-re

side

nts

(flat

rate

of

25 p

er c

ent,

but n

o de

duct

ions

) in

the

tax

year

th

ey m

ove

to S

pain

and

for t

he

next

five

yea

rs.

Cap

ital g

ains

: res

iden

ts a

re

taxe

d at

15

per c

ent f

lat r

ate.

N

on-r

esid

ents

are

taxe

d on

lo

ng-te

rm g

ains

(ass

ets

held

fo

r mor

e th

an o

ne y

ear)

gene

rally

at a

rate

of

35 p

er c

ent.

Inco

me:

exe

mpt

inco

me

for r

esid

ents

incl

udes

: ind

emni

ties

for p

hysi

cal/m

enta

l dam

ages

; m

anda

tory

com

pens

atio

n fo

r ter

min

atio

n of

em

ploy

men

t; di

sabi

lity

pens

ions

; chi

ld s

uppo

rt pa

ymen

ts. D

educ

tions

allo

wab

le fo

r soc

ial s

ecur

ity c

ontri

butio

ns a

nd c

ontri

butio

ns to

priv

ate

pens

ion

sche

mes

(non

-res

iden

ts n

ot e

ntitl

ed to

thes

e).

All resident

em

ploy

ed a

nd s

elf-e

mpl

oyed

indi

vidu

als

mus

t pay

mon

thly

con

tribu

tions

to th

e so

cial

sec

urity

sys

tem

, whi

ch c

onsi

sts

of a

gen

eral

con

tribu

tion

syst

em a

nd a

spe

cial

co

ntrib

utio

n sc

hem

e. T

he g

ener

al s

yste

m d

ivid

es e

mpl

oyee

s in

to p

rofe

ssio

nal c

ateg

orie

s to

de

term

ine

thei

r soc

ial s

ecur

ity c

ontri

butio

n. T

he g

ener

al c

ontri

butio

n sy

stem

has

a m

inim

um

and

max

imum

con

tribu

tion

base

that

is a

djus

ted

annu

ally

. For

200

6, th

e m

axim

um m

onth

ly

base

is a

ppro

xim

atel

y €2

,897

.70.

Com

puls

ory

soci

al s

ecur

ity c

ontri

butio

ns a

re d

educ

tible

for

indi

vidu

al in

com

e ta

x pu

rpos

es.

Cap

ital g

ains

: the

re a

re s

hort-

term

gai

ns (a

sset

s he

ld fo

r one

yea

r or l

ess)

whi

ch a

re ta

xed

as

inco

me,

and

long

-term

gai

ns w

hich

are

sub

ject

to a

sep

arat

e ca

pita

l gai

ns ta

x (1

5 pe

r cen

t).

Exe

mpt

ions

exi

st fo

r ind

ivid

uals

’ prim

ary

resi

denc

e.

Sw

itzer

land

E

xpat

riate

s ar

e en

title

d to

cer

tain

de

duct

ions

. E

xpat

riate

s ar

e ex

ecut

ives

or

spec

ialis

t who

are

as

sign

ed to

S

witz

erla

nd fo

r a

perio

d no

t ex

ceed

ing

five

year

s (a

s so

on a

s in

tent

ion

to s

tay

for l

ess

than

five

ye

ars

chan

ges

the

dedu

ctio

ns a

re n

o lo

nger

ava

ilabl

e.

They

are

not

de

nied

re

troac

tivel

y).

Res

iden

ts: ‘

inla

nd in

com

e’

(gen

eral

ly in

clud

es a

ll w

orld

wid

e so

urce

s of

re

venu

e fro

m m

ovea

ble

prop

erty

). N

on-r

esid

ents

: Sw

iss

sour

ced

inco

me.

Inco

me:

the

sam

e ta

x ra

tes

are

appl

icab

le fo

r no

n-re

side

nts

as fo

r res

iden

ts.

Res

iden

t im

mig

rant

s: s

peci

al

rate

s ap

ply

on p

assi

ve in

com

e fo

r a li

mite

d pe

riod

from

im

mig

ratio

n.

Cap

ital g

ains

: no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s (S

wis

s bu

sine

ss

capi

tal g

ains

are

trea

ted

as

inco

me)

.

Inco

me:

no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s. E

xpat

riate

s m

ay c

laim

spe

cific

de

duct

ions

acc

ordi

ng to

’sub

-nat

iona

l and

nat

iona

l’ la

w (f

or e

xam

ple

cost

s fo

r hou

sing

, mov

ing,

an

d tra

velli

ng).

Hea

lth in

sura

nce

is m

anda

tory

, but

is a

lso

the

resp

onsi

bilit

y of

the

indi

vidu

al (p

rem

ium

s va

ry

depe

ndin

g on

the

insu

ranc

e co

mpa

ny a

nd a

ge o

f the

indi

vidu

al).

Non

-res

iden

ts a

re n

ot s

ubje

ct

to th

e m

inim

um m

edic

al in

sura

nce.

In

term

s of

soc

ial s

ecur

ity, e

mpl

oyer

s w

ithho

ld e

mpl

oyee

s’ c

ontri

butio

ns (o

ld-a

ge s

urvi

vors

in

sura

nce

4.2

per c

ent;

disa

bilit

y 0.

7 pe

r cen

t; m

ilita

ry c

ompe

nsat

ion

0.15

per

cen

t; un

empl

oym

ent i

nsur

ance

1 p

er c

ent).

No

cont

ribut

ion

is le

vied

on

inco

me

in e

xces

s of

C

HF1

06,8

00.

Em

ploy

ees

with

ann

ual w

age

exce

edin

g C

HF1

9,35

0 m

ust c

ontri

bute

to c

ompa

ny’s

pen

sion

sc

hem

e; c

ontri

butio

ns v

ary

depe

ndin

g on

sch

eme

(the

sche

me

mus

t mee

t cer

tain

sta

ndar

ds).

Em

ploy

er h

as to

bea

r at l

east

one

-hal

f of o

vera

ll co

ntrib

utio

ns o

f the

em

ploy

ee.

Cap

ital g

ains

: res

iden

ts n

ot s

ubje

ct to

CG

T on

gai

ns fr

om m

ovab

le p

rope

rty o

r whe

re re

al

esta

te is

hel

d fo

r priv

ate

inve

stm

ent p

urpo

ses.

N

on-r

esid

ents

: sub

ject

to C

GT

on g

ains

from

land

/bui

ldin

g st

ruct

ures

in S

witz

erla

nd a

nd a

sset

s us

ed in

car

ryin

g on

a tr

ade/

busi

ness

from

a p

erm

anen

t est

ablis

hmen

t in

Sw

itzer

land

.

Chapter 10: International taxation arrangements

Page 311

Tabl

e 10

.2: C

ompa

ring

tax

trea

tmen

t of t

empo

rary

resi

dent

s (e

xpat

riate

s) w

ith re

side

nt a

nd n

on re

side

nt in

divi

dual

s (c

ontin

ued)

C

ount

ry

Key

tem

pora

ry

resi

denc

e ru

les

(exp

atria

tes)

Liab

ility

to ta

x Ta

x ra

tes

Tax

base

(inc

ludi

ng s

ocia

l sec

urity

con

trib

utio

ns/o

blig

atio

ns o

f em

ploy

ees

and

empl

oyer

s)

Uni

ted

Kin

gdom

R

esid

ent,

but n

ot

ordi

naril

y re

side

nt

in th

e U

nite

d K

ingd

om (t

hat i

s,

inte

nd to

rem

ain

for l

ess

than

thre

e ye

ars)

or w

ho a

re

dom

icile

d ou

tsid

e th

e U

nite

d K

ingd

om.

Res

iden

ts: w

orld

wid

e in

com

e.

Exp

atria

tes:

ear

ning

s fro

m U

nite

d K

ingd

om

empl

oym

ent a

nd

othe

r for

eign

sou

rce

inco

me

rem

itted

to

the

Uni

ted

Kin

gdom

. N

on-r

esid

ents

: U

nite

d K

ingd

om

sour

ce in

com

e.

Inco

me:

no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Cap

ital g

ains

: no

diffe

renc

e be

twee

n re

side

nts

and

non-

resi

dent

s.

Inco

me:

non

-res

iden

ts g

ener

ally

do

not g

et a

cces

s to

the

stan

dard

ded

uctio

n.

All

indi

vidu

als

resi

dent

in th

e U

nite

d K

ingd

om fo

r 12

mon

ths

or m

ore

are

entit

led

to fr

ee m

edic

al tr

eatm

ent

unde

r the

Nat

iona

l Hea

lth S

ervi

ce. T

his

is fi

nanc

ed o

ut o

f gen

eral

taxa

tion

(ther

e ar

e no

add

ition

al s

peci

fic

cont

ribut

ions

or t

axes

). S

ocia

l sec

urity

ben

efits

: ben

efits

are

div

ided

bet

wee

n co

ntrib

utor

y be

nefit

s an

d no

n-co

ntrib

utor

y be

nefit

s.

Con

tribu

tory

ben

efits

(une

mpl

oym

ent,

pens

ions

) are

thos

e w

hich

are

pai

d to

indi

vidu

als

who

hav

e th

e re

quis

ite

cont

ribut

ions

reco

rd. T

he c

ontri

butio

ns re

ferr

ed to

are

nat

iona

l ins

uran

ce c

ontri

butio

ns (t

hat i

s, c

ontri

butio

ns to

th

e N

atio

nal I

nsur

ance

Fun

d) o

ut o

f whi

ch c

ontri

buto

ry b

enef

its a

re p

aid.

Non

-con

tribu

tory

ben

efits

(for

ex

ampl

e ch

ild b

enef

it) d

o no

t req

uire

a c

ontri

butio

ns re

cord

and

are

fund

ed o

ut o

f gen

eral

taxa

tion.

A

ll in

divi

dual

s pr

esen

t in

the

Uni

ted

Kin

gdom

are

liab

le to

pay

nat

iona

l ins

uran

ce c

ontri

butio

ns, w

hate

ver t

heir

leve

l of i

ncom

e, o

nce

it ex

ceed

s a

basi

c th

resh

old.

A lo

wer

rate

of c

ontri

butio

ns is

pay

able

by

thos

e em

ploy

ees

who

are

mem

bers

of a

con

tract

ed-o

ut o

ccup

atio

nal o

r per

sona

l pen

sion

sch

eme.

Em

ploy

ers

are

also

liab

le to

pay

nat

iona

l ins

uran

ce c

ontri

butio

ns in

resp

ect o

f the

ir em

ploy

ees.

The

em

ploy

ers’

con

tribu

tions

fu

nctio

n as

a p

ayro

ll ta

x.

Exp

atria

tes:

fore

ign

natio

nals

com

ing

to th

e U

nite

d K

ingd

om d

o no

t hav

e to

pay

nat

iona

l ins

uran

ce

cont

ribut

ions

for t

he fi

rst 5

2 w

eeks

afte

r arr

ival

pro

vide

d th

eir s

tay

in th

e U

nite

d K

ingd

om is

tem

pora

ry, t

hey

are

empl

oyed

by

a fo

reig

n em

ploy

er a

nd th

eir n

orm

al p

lace

of a

bode

bef

ore

arriv

al w

as n

ot th

e U

nite

d K

ingd

om (o

ther

wis

e lia

bilit

y ge

nera

lly a

rises

imm

edia

tely

upo

n ar

rival

). M

ost s

ocia

l sec

urity

trea

ties

prov

ide

that

fore

ign

natio

nals

will

be

exem

pt fr

om li

abili

ty to

nat

iona

l ins

uran

ce c

ontri

butio

ns fo

r a fi

xed

perio

d af

ter

arriv

al, p

rovi

ded

they

hav

e a

certi

ficat

e fro

m th

eir h

ome

coun

try a

ttest

ing

to th

eir c

ontin

ued

liabi

lity

to th

e eq

uiva

lent

tax

ther

e.

Cap

ital g

ains

: com

preh

ensi

ve (r

esid

ents

). C

ompr

ehen

sive

, but

fore

ign

gain

s on

ly w

hen

rem

itted

to th

e U

nite

d K

ingd

om (e

xpat

riate

s). U

nite

d K

ingd

om la

nd a

nd b

usin

ess

asse

ts (n

on-r

esid

ents

).

Uni

ted

Sta

tes

Non

e R

esid

ents

: wor

ldw

ide

inco

me.

N

on-r

esid

ents

: U

nite

d S

tate

s so

urce

in

com

e.

Inco

me:

no

n-re

side

nts

taxe

d as

per

resi

dent

s bu

t ar

e ta

xed

flat

30 p

er c

ent o

n in

vest

men

t inc

ome.

C

apita

l gai

ns: n

o di

ffere

nce

betw

een

resi

dent

s an

d no

n-re

side

nts.

Inco

me:

non

-res

iden

ts c

anno

t use

mar

ried

filin

g or

hea

d of

hou

seho

ld re

turn

s. A

lso,

can

not c

laim

dep

ende

nts

exem

ptio

ns. R

esid

ents

are

abl

e to

cla

im in

tere

st d

educ

tions

on

hom

e lo

ans

used

for a

prin

cipa

l res

iden

ce;

non-

resi

dent

s un

likel

y to

hav

e U

nite

d S

tate

s pr

inci

ple

resi

denc

e.

Res

iden

ts a

nd n

on-r

esid

ents

are

sub

ject

to s

ocia

l sec

urity

(ie

old-

age,

sur

vivo

rs a

nd d

isab

ility

insu

ranc

e) a

nd

Med

icar

e ta

x on

rem

uner

atio

n pa

id fo

r ser

vice

s pe

rform

ed w

ithin

the

Uni

ted

Sta

tes

rega

rdle

ss o

f whe

ther

the

empl

oyee

will

be

elig

ible

for b

enef

its. N

atio

nal l

aw re

quire

s em

ploy

ers

to w

ithho

ld s

ocia

l sec

urity

and

Med

icar

e ta

xes

from

rem

uner

atio

n. F

or 2

005

the

first

US

$90,

000

of re

mun

erat

ion

paid

to e

ach

empl

oyee

is s

ubje

ct to

so

cial

sec

urity

tax

at a

rate

of 1

2.4

per c

ent (

empl

oyer

pay

s 6.

2 pe

r cen

t and

with

hold

s 6.

2 pe

r cen

t fro

m th

e em

ploy

ee’s

rem

uner

atio

n). T

he M

edic

are

tax

is im

pose

d on

the

empl

oyee

’s e

ntire

rem

uner

atio

n at

a ra

te o

f 2.

9 pe

r cen

t (em

ploy

er p

ays

1.45

per

cen

t and

with

hold

s 1.

45 p

er c

ent f

rom

the

empl

oyee

’s re

mun

erat

ion)

. C

erta

in e

xem

ptio

ns a

vaila

ble

to n

on-r

esid

ent a

liens

und

er s

ocia

l sec

urity

tota

lisat

ion

agre

emen

ts, i

f tho

se

non-

resi

dent

s co

ntin

ue to

pay

soc

ial s

ecur

ity ta

xes

in h

ome

coun

try.

Cap

ital g

ains

: com

preh

ensi

ve (r

esid

ents

). G

ener

ally

exe

mpt

, but

Uni

ted

Sta

tes

real

pro

perty

gai

ns a

re ta

xed

at m

argi

nal t

ax ra

tes

(non

-res

iden

ts).

(a)

Tax

Law

s A

men

dmen

t (20

06 M

easu

res

No.

1) B

ill 2

006,

whi

ch in

clud

es m

easu

res

affe

ctin

g th

e ta

x tre

atm

ent o

f tem

pora

ry re

side

nts,

is c

urre

ntly

bef

ore

the

Aus

tralia

n P

arlia

men

t. If

enac

ted

as

intro

duce

d, th

ese

mea

sure

s w

ill a

lign

mor

e cl

osel

y A

ustra

lia’s

tax

treat

men

t of t

empo

rary

resi

dent

s to

that

of o

ther

cou

ntrie

s, in

par

t by

gene

rally

exe

mpt

ing

thei

r for

eign

non

-em

ploy

men

t inc

ome.

S

ourc

e: V

ario

us, s

ee C

hapt

er 1

(1.4

.1).

International comparison of Australia’s taxes

Page 312

Table 10.2 shows that temporary residence rules generally limit the tax base to employment income and domestic source investment income. Among the countries that have special taxation rules for these individuals, however, there is a general trend to limit these rules. Limitations can relate to: exempting non-employment foreign income only if it is not remitted to the country; providing that the exemption only applies for a maximum period of time; and providing that the exemption is only available to individuals with scarce specific expertise (that are not generally available in the particular country concerned).4

Table 10.2 also shows that most countries apply the same tax rates to residents and non-residents. Where differences in treatment apply, the general trend seems to be for non-residents to be subject to a slightly higher effective tax rate. Australia’s approach is consistent with this general trend.

In terms of income, most countries treat residents similarly by taxing worldwide income; they also treat non-residents similarly by taxing domestic source income only. As between residents and non-residents, some countries will often allow residents to claim some deductions and relief not available to non-residents. For countries that have a compulsory medical insurance system, non-residents are usually not covered and therefore not required to contribute.

In terms of capital gains tax, most countries comprehensively tax residents, but limit the taxation of the gains of non-residents to land or real property situated in the country concerned. Australia does not currently have such a limitation.5

Countries that levy social security contributions taxes often apply them equally to their residents, temporary residents and non-residents alike. Some countries deny temporary and non-resident individuals entitlement to the related benefits (for example, the United States).

10.3.2 Treatment of a company’s foreign source income

As with individuals, resident companies are generally taxed on their worldwide income while non-resident companies are generally only taxed on their domestic source income. Temporary residence tests are not necessary for companies.

Typically, all residents are taxed on their foreign source income unless the income is expressly carved out of the tax base by a foreign income exemption, either unilaterally (in the domestic law) or by a tax treaty with another country. Table 10.2 showed that resident individuals across the OECD-10 are generally comprehensively taxed (with relatively few exemptions) on their worldwide employment, business and investment income. Key reasons for this may be to achieve horizontal and vertical equity goals, and to improve the tax neutrality of investment decisions (efficiency).

4 The Australian Government announced in the 2005-06 Budget (and has recently introduced legislation to Parliament) measures to align more closely our tax treatment of temporary residents to that of other countries. Once enacted, Australia will have few restrictions in its temporary residence rules. The main limitation will be simply that the individual hold a temporary visa and not be an Australian resident for social security purposes (whether directly or via their spouse).

5 The reforms announced in the 2005-06 Budget to the capital gains tax treatment of non-residents will bring Australia into line with international practice.

Chapter 10: International taxation arrangements

Page 313

By contrast, resident companies typically receive greater exemptions, particularly on their foreign business income. A key reason for this may be because such exemptions interfere less with goals of horizontal and vertical equity, given the withholding aspect of corporate taxation, and the existence of a subsequent taxing point on company income (when the dividends are distributed to resident shareholders).

Foreign income exemptions for resident companies can be based on:

• the type of income earned (for example business, investment income);

• the type of country the income is sourced from (for example comparable tax, treaty or non-tax-haven countries);

• the type of non-resident entity that earns the foreign income on behalf of the resident company (for example company, superannuation fund, managed fund);

• the degree to which it has been taxed (for example subject to tax, taxed at 75 per cent of the resident company tax rate, taxed by a listed country); or

• a combination of the above.

Table 10.3 shows for the OECD-10 the extent to which resident companies are taxed on their foreign source income, and in particular, the foreign income exemptions they receive.

Table 10.3: Treatment of foreign source income of corporate residents Country Taxation of resident companies Key foreign income

exemptions from worldwide income taxation

Australia Corporate residents subject to tax on worldwide income and capital gains. Foreign income exemptions are extensive (based on active income and active business tests), with FTC system unilaterally covering the rest. Non-exempt foreign losses are quarantined from domestic income on a per-class (of income) basis and can be carried forward indefinitely (and set off against future foreign income of the same class).(a) Foreign affiliate: foreign company in respect of which a resident company owns directly at least 10 per cent of the voting stock (a ‘non-portfolio’ interest). A foreign affiliate effectively also has a (foreign) affiliate if it owns a non-portfolio interest in another foreign company.(b)

Foreign branch business profits (active income) are exempt. Non-portfolio dividends are exempt, including when paid through a chain of foreign companies. Capital gains on shares in foreign affiliates carrying on an active business are exempt. (Full participation exemption.)

Canada Corporate residents subject to tax on worldwide income and capital gains. Foreign income exemptions are narrow, with FTC system unilaterally covering the rest. All foreign branch income is assessable with unilateral credit, as are most types of foreign dividends and all other foreign income. Foreign losses are deductible against domestic income without recapture against, or recharacterisation of, future foreign income. Foreign affiliate: foreign company in respect of which a resident company owns (directly or indirectly) at least 10 per cent of the shares of any class.

No unilateral exemptions. Generally, only dividends from foreign affiliates in treaty countries paid out of ‘exempt surplus’ (active or business income and certain capital gains) are exempt.

Ireland Corporate residents subject to tax on worldwide income and capital gains. Essentially, there are no foreign income exemptions, and FTC system only partially covers the rest (mainly by treaties). All foreign branch income assessable, with foreign tax generally deducted as business expense (unless treaty applies). Foreign losses are quarantined from domestic income on a per-source basis and can be carried forward indefinitely. Foreign affiliate: foreign company in respect of which a resident company owns (directly or indirectly) at least 5 per cent of the ordinary share capital.

None

International comparison of Australia’s taxes

Page 314

Table 10.3: Treatment of foreign source income of corporate residents (continued) Country Taxation of resident companies Key foreign income

exemptions from worldwide income taxation

Japan Corporate residents subject to tax on worldwide income and capital gains. Essentially, there are no foreign income exemptions, with FTC system unilaterally applicable. All foreign branch income and qualifying participation dividends and capital gains are assessable with a credit for foreign tax paid. Foreign losses are deductible against domestic income without recapture against, or recharacterisation of, future foreign income. Foreign affiliate: foreign company in respect of which a resident company owns (directly or indirectly) at least 25 per cent of the voting shares (for previous six months).

None

Netherlands Corporate residents subject to tax on worldwide income and capital gains. Foreign income exemptions are very broad, with a treaty and developing country-based FTC system, and deduction method of double tax relief, covering the rest. Foreign losses are deductible against domestic income without recapture against, or recharacterisation of, future foreign income (unless the foreign branch is subsequently converted into a subsidiary, in which case prior-year losses may be recaptured against future dividends of the subsidiary). Foreign affiliate: foreign company in respect of which a resident company owns (directly or indirectly) at least five per cent of the issued and paid-up share capital and is subject to tax in its country of residence.

All foreign branch income subject to foreign tax or from a treaty country is exempt, as are qualifying participation dividends and capital gains. ‘Exemption with progression’ exists (as taxable profit below €22,689 is taxed at 25.5 per cent and at 29.6 per cent above it). Excess exempt foreign losses can reduce future foreign income from the same country.

New Zealand

Corporate residents subject to tax on worldwide income but not capital gains (as New Zealand has no capital gains tax). Foreign income exemptions are effectively narrow, with FTC system unilaterally covering the rest. All foreign branch income is assessable with a unilateral credit. Foreign losses are deductible against domestic income without recapture against, or recharacterisation of, future foreign income.

Foreign source dividends received by companies are exempt from income tax, but subject to foreign dividend withholding payment. (Grey-listed country entities, including controlled foreign companies (CFCs), are generally exempt from attribution.)

Spain Corporate residents subject to tax on worldwide income and capital gains. Foreign income exemptions are quite broad, with FTC system unilaterally covering the rest. Losses of foreign permanent establishments (PEs) are deductible against domestic income but recapture occurs against future exempt or assessable income of that PE (that is, future PE income is made assessable without credit). Foreign affiliate: foreign company with an active business in a comparable country (that is, a tax treaty country with provisions for Exchange of Information) in respect of which a resident company owns (directly or indirectly) at least five per cent of the capital stock, uninterrupted for at least one year.

Income of PEs, and dividends from (including capital gains on sale of interests in) foreign affiliates, in comparable tax countries, undertaking active business, are exempt.

Switzerland Corporate residents subject to tax on worldwide income and capital gains. Foreign income exemptions are extensive, with FTC system unilaterally covering the rest. Foreign losses are generally exempt – no quarantining. Exempt foreign income and losses used to calculate marginal tax rate of company (exemption with progression), and therefore FTC cap. Foreign affiliate: foreign company in respect of which a resident company owns (directly or indirectly) at least 20 per cent of the capital or the value of the participation is at least CHF2 million. Participation relief for capital gains has the additional requirement that ownership must be for the previous 12 months.

Income attributable to a foreign business or PE and income from foreign immovable property are exempt. Foreign dividends, interest and royalties only qualify for the exemption if derived through, and attributable to, a foreign PE. A partial participation exemption effectively applies in respect of foreign dividend income — 5 per cent of the grossed-up dividend is excluded from the effective exemption.

Chapter 10: International taxation arrangements

Page 315

Table 10.3: Treatment of foreign source income of corporate residents (continued) Country Taxation of resident companies Key foreign income

exemptions from worldwide income taxation

United Kingdom

Corporate residents subject to tax on worldwide income and capital gains. Essentially, there are no foreign income exemptions, with FTC system unilaterally applicable. All foreign branch income and qualifying participation dividends and capital gains are assessable with a credit for foreign tax paid. Foreign losses are deductible against domestic income without recapture against, or recharacterisation of, future foreign income. Foreign affiliate: foreign company in respect of which a resident company owns (directly or indirectly) at least 10 per cent of the voting power.

None

United States

Corporate residents subject to tax on worldwide income and capital gains. Essentially, there are no foreign income exemptions, with FTC system unilaterally applicable. All foreign branch income and qualifying participation dividends and capital gains are assessable with a credit for foreign tax paid. Foreign losses are deductible against domestic income, but recaptured by setting off future foreign income of the same class (recharacterising it as domestic income, which prevents FTCs from arising). Foreign affiliate: foreign company in respect of which a resident company owns directly at least 10 per cent in the voting stock (or owns indirectly at least five per cent in each of the lower tier foreign companies).

None

(a) Implementation of 2005-06 Budget announcement will remove all foreign loss quarantining. (b) Many OECD countries have foreign affiliate rules which allow resident companies more generous tax treatment of the

income and gains arising from their foreign affiliates (for example, exemptions or credits for underlying foreign taxes paid). Source: Various, see Chapter 1 (1.4.1). Some countries tax the foreign source income of their resident companies comprehensively (for example, the United States, the United Kingdom, Japan and Ireland) while others allow their companies extensive foreign income exemptions (for example, Australia, Switzerland, the Netherlands, and to a lesser extent Spain).

Australia exempts extensively the foreign income of its resident companies. Foreign ‘active’ income (trading or business income) is generally exempt, as are the capital gains from the sale of active foreign businesses; generally only foreign income that is passive or arises from related party transactions is taxable at the Australian company level. This active income exemption is quite extensive relative to the other OECD-10 countries (and OECD practice in general), as most have more piecemeal or conditional exemptions.

10.3.3 Foreign tax credit (FTC) systems

Where a resident’s foreign source income is not exempt, it remains assessable and potentially subject to double tax. In these circumstances, double tax may be relieved by the resident country, either unilaterally or through treaties, by allowing credits for the tax paid in the foreign country (against the resident country’s tax), or the foreign tax to be deducted as an expense of doing foreign business. Box 10.4 provides further detail on the features of FTC arrangements.

International comparison of Australia’s taxes

Page 316

Box 10.4: Features of FTC systems Most countries have FTC systems where certain foreign ‘income-like’ taxes are creditable with credits being limited or ‘capped’ by the amount of home country tax payable on the foreign income. Other key defining features of FTC systems include:

• whether only certain foreign income is eligible for FTCs for example, non-passive income;

• whether only foreign income from certain countries is eligible for FTCs for example, treaty countries;

• whether the FTC cap is protected by a form of quarantining, either on a per-class of income, per-country or per-source basis (or multiple bases);

• the treatment of foreign losses; and

• whether FTCs in excess of the cap may be carried forward (or back) a number of years, or are wasted.

Table 10.4 shows for the OECD-10 the key features of their FTC systems.

Page 317

Chapter 10: International taxation arrangements

Tabl

e 10

.4: F

TC s

yste

m c

ompa

rison

C

ount

ry

Key

feat

ures

of F

TC s

yste

m

Trea

tmen

t of e

xces

s FT

Cs

Aus

tralia

C

redi

ts a

vaila

ble

unila

tera

lly a

nd th

roug

h tre

atie

s fo

r for

eign

inco

me-

like

taxe

s.

Cre

dits

cap

ped

at A

ustra

lian

tax

paya

ble,

and

qua

rant

ined

on

a pe

r-cl

ass

(of i

ncom

e) b

asis

— o

ne a

ctiv

e an

d th

ree

pass

ive.

(a)

Div

iden

ds fr

om fo

reig

n af

filia

tes

are

exem

pt (f

ull p

artic

ipat

ion

exem

ptio

n), s

o no

cre

dits

or i

ndire

ct c

redi

ts fo

r und

erly

ing

fore

ign

taxe

s.

Exc

ess

FTC

s ca

n be

car

ried

forw

ard

for

five

year

s an

d se

t off

agai

nst A

ustra

lian

tax

on fu

ture

fore

ign

inco

me

of th

e sa

me

clas

s.

Can

ada

Cre

dits

ava

ilabl

e un

ilate

rally

and

thro

ugh

treat

ies

for f

orei

gn in

com

e-lik

e ta

xes.

C

redi

ts c

appe

d at

Can

adia

n ta

x pa

yabl

e, a

nd q

uara

ntin

ed o

n a

per-

clas

s (o

f inc

ome)

bas

is —

one

bus

ines

s an

d on

e no

n-bu

sine

ss

clas

s (w

hich

incl

udes

pro

perty

and

cap

ital g

ains

) — a

nd o

n a

per-

coun

try b

asis

. D

ivid

ends

from

fore

ign

affil

iate

s in

non

-trea

ty c

ount

ries

paid

out

of e

xem

pt s

urpl

us, a

re ta

xabl

e as

business

inco

me,

with

cre

dits

and

in

dire

ct c

redi

ts fo

r und

erly

ing

fore

ign

taxe

s pa

id, a

nd a

re q

uara

ntin

ed o

n a

per-

sour

ce b

asis

. O

ther

div

iden

ds fr

om fo

reig

n af

filia

tes

(that

is, t

hose

pai

d ou

t of ‘

taxa

ble

surp

lus’

, whi

ch in

clud

es p

assi

ve in

com

e an

d ca

pita

l gai

ns),

are

taxa

ble

as non-business

inco

me,

with

cre

dits

and

indi

rect

cre

dits

for u

nder

lyin

g fo

reig

n ta

xes

paid

, and

are

als

o qu

aran

tined

on

a pe

r-sou

rce

basi

s.

No

tier l

imit

for i

ndire

ct c

redi

ts.

Exc

ess

FTC

s on

fore

ign

busi

ness

in

com

e (o

nly)

can

be

carr

ied

back

thre

e ye

ars

and

carr

ied

forw

ard

10 y

ears

and

se

t off

agai

nst C

anad

ian

tax

on fu

ture

fo

reig

n in

com

e of

the

sam

e cl

ass

and

coun

try.

Exc

ess

FTC

s on

fore

ign

non-

busi

ness

in

com

e ca

nnot

be

carr

ied

back

or

forw

ard

but m

ay b

e cl

aim

ed a

s a

dedu

ctio

n in

the

year

the

fore

ign

tax

is

paid

. FTC

s on

non

-bus

ines

s in

com

e ar

e us

ed fi

rst.

Irela

nd

Cre

dits

ava

ilabl

e un

ilate

rally

(alth

ough

lim

ited

to c

erta

in fo

reig

n in

com

e), t

hrou

gh tr

eatie

s ge

nera

lly, a

nd th

roug

h ce

rtain

EU

dire

ctiv

es,

for f

orei

gn in

com

e-lik

e ta

xes.

U

nila

tera

l cre

dit r

elie

f lim

ited

to fo

reig

n di

vide

nds

(and

fore

ign

with

hold

ing

taxe

s on

the

fore

ign

inco

me

of c

erta

in c

ompa

nies

taxe

d at

th

e sp

ecia

l 10

per c

ent r

ate,

exp

iring

by

2010

). C

redi

t rel

ief f

or a

ll ot

her f

orei

gn b

usin

ess

inco

me

and

fore

ign

inte

rest

and

roya

lty in

com

e on

ly a

vaila

ble

by tr

eaty

. C

redi

ts c

appe

d at

Iris

h ta

x pa

yabl

e, a

nd q

uara

ntin

ed o

n a

per-

item

bas

is g

ener

ally

. D

ivid

ends

from

fore

ign

affil

iate

s ar

e ta

xabl

e w

ith c

redi

t and

indi

rect

cre

dits

for u

nder

lyin

g fo

reig

n co

mpa

ny (o

nly)

taxe

s pa

id, a

nd c

an

be p

oole

d w

ith o

ther

fore

ign

affil

iate

div

iden

ds. F

TCs

on n

on-fo

reig

n af

filia

te d

ivid

ends

are

qua

rant

ined

on

a pe

r-ite

m a

nd p

er-s

ourc

e ba

sis.

N

o tie

r lim

it fo

r ind

irect

cre

dits

.

Exc

ess

FTC

s on

fore

ign

divi

dend

s (o

nly)

can

be

carr

ied

forw

ard

(inde

finite

ly) a

nd s

et o

ff ag

ains

t Iris

h ta

x on

futu

re fo

reig

n di

vide

nd in

com

e.

(Und

er tr

eatie

s, ta

xpay

er c

an e

lect

to

forg

o cr

edit

for d

educ

tion

relie

f ins

tead

.)

Japa

n C

redi

ts a

vaila

ble

unila

tera

lly a

nd th

roug

h tre

atie

s fo

r for

eign

inco

me-

like

taxe

s.

Cre

dits

cap

ped

at J

apan

ese

tax

paya

ble

(bas

ed o

n th

e pr

opor

tion

that

taxa

ble

fore

ign

inco

me

is to

ove

rall

taxa

ble

inco

me)

, and

ca

lcul

ated

on

a gl

obal

bas

is (t

hat i

s, n

ot q

uara

ntin

ed).

FTC

s ar

e av

aila

ble

agai

nst n

atio

nal c

orpo

ratio

n ta

x, th

en a

gain

st p

refe

ctur

al in

habi

tant

s ta

x, th

en a

gain

st th

e m

unic

ipal

inha

bita

nts

tax.

D

ivid

ends

from

fore

ign

affil

iate

s ar

e ta

xabl

e w

ith c

redi

ts a

nd in

dire

ct c

redi

ts fo

r und

erly

ing

fore

ign

taxe

s pa

id, a

nd a

re n

ot q

uara

ntin

ed.

Two-

tier l

imit

for i

ndire

ct c

redi

ts.

Exc

ess

FTC

s (in

add

ition

to e

xces

s lim

itatio

n) c

an b

e ca

rrie

d fo

rwar

d fo

r th

ree

year

s an

d se

t off

agai

nst t

ax o

n fu

ture

fore

ign

inco

me.

Net

herla

nds

Cre

dits

ava

ilabl

e on

ly th

roug

h tre

atie

s fo

r for

eign

inco

me-

like

taxe

s. (C

redi

ts a

lso

allo

wed

for f

orei

gn ta

xes

on d

ivid

ends

, int

eres

t and

ro

yalti

es fr

om c

erta

in d

evel

opin

g co

untri

es.)

Cre

dits

cap

ped

at th

e N

ethe

rland

s ta

x pa

yabl

e (b

ased

on

the

prop

ortio

n th

at th

e ta

xabl

e fo

reig

n in

com

e is

to o

vera

ll ta

xabl

e in

com

e),

and

quar

antin

ed o

n a

per-

sour

ce a

nd p

er-c

ount

ry b

asis

. D

ivid

ends

from

fore

ign

affil

iate

s ar

e ex

empt

(ful

l par

ticip

atio

n ex

empt

ion)

, so

no c

redi

ts o

r ind

irect

cre

dits

for u

nder

lyin

g fo

reig

n ta

xes.

Exc

ess

FTC

s ca

n be

car

ried

forw

ard

inde

finite

ly a

nd s

et o

ff ag

ains

t the

N

ethe

rland

s ta

x on

futu

re fo

reig

n in

com

e of

the

sam

e co

untry

.

International comparison of Australia’s taxes

Page 318

Tabl

e 10

.4: F

TC s

yste

m c

ompa

rison

(con

tinue

d)

Cou

ntry

K

ey fe

atur

es o

f FTC

sys

tem

Tr

eatm

ent o

f exc

ess

FTC

s N

ew Z

eala

nd

Cre

dits

ava

ilabl

e un

ilate

rally

and

thro

ugh

treat

ies

for f

orei

gn in

com

e-lik

e ta

xes.

C

redi

ts c

appe

d at

New

Zea

land

tax

paya

ble

(bas

ed o

n th

e pr

opor

tion

that

taxa

ble

fore

ign

inco

me

sour

ce is

to o

vera

ll ta

xabl

e in

com

e),

and

quar

antin

ed o

n a

per-

sour

ce a

nd p

er-c

ount

ry b

asis

. Fo

reig

n di

vide

nds

rece

ived

by

com

pani

es a

re e

xem

pt fr

om ta

x, b

ut s

ubje

ct to

fore

ign

divi

dend

with

hold

ing

paym

ent o

f 33

per c

ent o

f gr

oss

divi

dend

. For

eign

with

hold

ing

tax

and

som

e un

derly

ing

fore

ign

taxe

s ca

n be

offs

et a

gain

st th

e fo

reig

n di

vide

nd w

ithho

ldin

g pa

ymen

t (in

dire

ct c

redi

t onl

y w

here

min

imum

10

per c

ent s

hare

hold

ing

is s

atis

fied

or re

side

nt in

‘gre

y lis

t’ co

untry

). D

ivid

ends

der

ived

by

indi

vidu

als

are

asse

ssab

le w

ith a

dire

ct c

redi

t onl

y.

Thre

e-tie

r lim

it fo

r ind

irect

cre

dits

.

Exc

ess

FTC

s ar

e ge

nera

lly w

aste

d (a

lthou

gh th

ose

aris

ing

from

a C

FC

can

be c

arrie

d fo

rwar

d in

defin

itely

or

trans

ferr

ed to

ano

ther

com

pany

with

in

the

sam

e ju

risdi

ctio

n an

d w

ithin

a

who

lly-o

wne

d gr

oup)

.

Spa

in

Cre

dits

ava

ilabl

e un

ilate

rally

and

thro

ugh

treat

ies

for f

orei

gn in

com

e-lik

e ta

xes.

C

redi

ts c

appe

d at

Spa

nish

tax

paya

ble,

and

qua

rant

ined

on

a pe

r-co

untry

bas

is g

ener

ally

(alth

ough

on

a pe

r-P

E b

asis

for P

E in

com

e).

Div

iden

ds fr

om fo

reig

n af

filia

tes

are

exem

pt. D

ivid

ends

from

fore

ign

com

pani

es th

at a

re n

ot fo

reig

n af

filia

tes

but a

re a

t lea

st fi

ve

per c

ent o

wne

d (d

irect

ly o

r ind

irect

ly) w

ill b

e en

title

d to

cre

dits

and

indi

rect

cre

dits

for u

nder

lyin

g fo

reig

n ta

xes

paid

, whi

ch a

re

quar

antin

ed o

n a

per-

coun

try b

asis

. Th

ree-

tier l

imit

for i

ndire

ct c

redi

ts.

Exc

ess

FTC

s ca

n be

car

ried

forw

ard

for 1

0 ye

ars

and

set o

ff ag

ains

t S

pani

sh ta

x on

futu

re fo

reig

n in

com

e of

the

sam

e co

untry

(or P

E).

Sw

itzer

land

C

redi

ts a

vaila

ble

only

thro

ugh

treat

ies

for f

orei

gn in

com

e-lik

e ta

xes

(oth

erw

ise,

exe

mpt

ion

or d

educ

tion)

. C

redi

ts c

appe

d at

Sw

iss

tax

paya

ble

(a th

ird o

f the

ove

rall

FTC

is a

lloca

ted

to e

ach

tier o

f gov

ernm

ent)

— n

o qu

aran

tinin

g (a

ll as

sess

able

fore

ign

inco

me

pool

ed fo

r FTC

pur

pose

s).

Div

iden

ds fr

om fo

reig

n af

filia

tes

are

indi

rect

ly e

xem

pt (a

s a

resu

lt of

the

parti

cipa

tion

relie

f rat

io).

Fede

ral i

ncom

e ta

x is

redu

ced

by th

e pr

opor

tion

of n

et fo

reig

n pr

ofit

to to

tal n

et p

rofit

. Tr

eatie

s al

low

a ta

x cr

edit

on re

ques

t for

fore

ign

with

hold

ing

taxe

s le

vied

on

divi

dend

s, in

tere

st a

nd ro

yalti

es.

Exc

ess

FTC

s ca

nnot

be

carr

ied

forw

ard

or b

ack

at a

ny le

vel o

f go

vern

men

t and

are

sim

ply

was

ted.

Uni

ted

Kin

gdom

C

redi

ts a

vaila

ble

unila

tera

lly a

nd th

roug

h tre

atie

s fo

r for

eign

inco

me-

like

taxe

s (d

omes

tic la

w a

llow

s de

duct

ion

to b

e cl

aim

ed in

lieu

). C

redi

ts c

appe

d at

Uni

ted

Kin

gdom

tax

paya

ble,

and

gen

eral

ly q

uara

ntin

ed o

n a

per-

sour

ce b

asis

. Cre

dits

als

o lim

ited

to w

hat t

he

fore

ign

tax

wou

ld h

ave

been

if a

ll re

ason

able

ste

ps h

ad b

een

take

n to

min

imis

e th

e am

ount

of f

orei

gn ta

x.

Div

iden

ds fr

om fo

reig

n af

filia

tes

are

taxa

ble

with

cre

dits

and

indi

rect

cre

dits

for u

nder

lyin

g fo

reig

n ta

xes

paid

, whi

ch c

an b

e po

oled

with

ot

her f

orei

gn a

ffilia

te d

ivid

ends

(alth

ough

div

iden

ds fr

om fo

reig

n af

filia

tes

that

are

CFC

s ar

e qu

aran

tined

by

sour

ce).

Div

iden

ds fr

om

othe

r for

eign

com

pani

es a

re s

epar

atel

y po

oled

for F

TC p

urpo

ses.

N

o tie

r lim

it fo

r ind

irect

cre

dits

.

Exc

ess

FTC

s in

rela

tion

to p

oole

d fo

reig

n af

filia

te d

ivid

ends

can

be

carr

ied

back

thre

e ye

ars

and

carr

ied

forw

ard

inde

finite

ly a

nd s

et o

ff ag

ains

t U

nite

d K

ingd

om ta

x on

futu

re p

oole

d fo

reig

n af

filia

te d

ivid

ends

. Thi

s is

si

mila

rly th

e ca

se fo

r CFC

s, b

ut o

n a

per-s

ourc

e ba

sis.

Uni

ted

Sta

tes

Cre

dits

ava

ilabl

e un

ilate

rally

and

thro

ugh

treat

ies

for f

orei

gn in

com

e-lik

e ta

xes

(dom

estic

law

allo

ws

dedu

ctio

n to

be

clai

med

in li

eu).

Cre

dits

cap

ped

at U

nite

d S

tate

s ta

x pa

yabl

e, a

nd q

uara

ntin

ed o

n a

per-

clas

s (o

f inc

ome)

bas

is —

one

act

ive

and

eigh

t pas

sive

‘b

aske

ts’.

For t

axab

le y

ears

beg

inni

ng a

fter 3

1 D

ec 2

006,

the

eigh

t pas

sive

inco

me

bask

ets

will

be

redu

ced

to o

ne, l

eavi

ng tw

o ba

sket

s ov

eral

l. D

ivid

ends

from

fore

ign

affil

iate

s ar

e ta

xabl

e w

ith c

redi

ts a

nd in

dire

ct c

redi

ts fo

r und

erly

ing

fore

ign

taxe

s pa

id, q

uara

ntin

ed to

one

of t

he

seve

ral p

assi

ve d

ivid

end

bask

ets

(dep

endi

ng o

n th

e ty

pe o

f for

eign

affi

liate

pay

ing

the

divi

dend

). S

ix-ti

er li

mit

for i

ndire

ct c

redi

ts (l

ast t

hree

mus

t be

CFC

s).

Exc

ess

FTC

s ca

n be

car

ried

back

one

ye

ar a

nd c

arrie

d fo

rwar

d 10

yea

rs a

nd

set o

ff ag

ains

t Uni

ted

Sta

tes

tax

on

futu

re fo

reig

n in

com

e of

the

sam

e cl

ass.

(a)

Impl

emen

tatio

n of

200

5-06

Bud

get a

nnou

ncem

ent w

ill re

mov

e FT

C q

uara

ntin

ing

by c

lass

of i

ncom

e.

Sou

rce:

Var

ious

, see

Cha

pter

1 (1

.4.1

).

Chapter 10: International taxation arrangements

Page 319

Australia does not appear to differ substantially from the other OECD-10 countries in terms of its FTC system and key attributes. Australia allows significant double tax relief for income from foreign affiliates (generally by exemption) and quarantines foreign losses to a significant degree.6

10.4 TREATMENT OF INCOME OF NON-RESIDENTS

Non-residents are generally only taxed on their domestic source income. This usually includes payments of dividends, interest and royalties from residents and income earned through a permanent establishment (PE), partnership or trust in the country.

Table 10.5 shows for the OECD-10 the way in which these different types of income of non-residents are treated for tax purposes.

6 The Australian Government announced in the 2005-06 Budget the removal of foreign loss and FTC quarantining. This will remove the per-class quarantining of foreign losses and allow them to be immediately deductible against domestic income. It will also remove the per-class quarantining of FTCs. These changes will significantly improve the way in which Australia treats the foreign income of its residents.

International comparison of Australia’s taxes

Page 320

Tabl

e 10

.5: T

reat

men

t of i

ncom

e of

non

-res

iden

t tax

paye

rs(a

) C

ount

ry

With

hold

ing

tax

on d

ivid

ends

pai

d to

non

-res

iden

ts

With

hold

ing

tax

on in

tere

st a

nd ro

yalti

es

paid

to n

on-r

esid

ents

W

ithho

ldin

g ta

x on

oth

er in

com

e pa

id to

non

-res

iden

ts

Aus

tralia

Fr

anke

d di

vide

nds

attra

ct n

o w

ithho

ldin

g ta

x.

With

hold

ing

tax

on u

nfra

nked

div

iden

ds is

30

per c

ent.

This

redu

ces

gene

rally

to 1

5 pe

r cen

t in

the

case

of

doub

le ta

x ag

reem

ents

(Uni

ted

Sta

tes

and

Uni

ted

Kin

gdom

resi

dent

com

pani

es m

ay re

ceiv

e a

rate

of z

ero

or 5

per

cen

t on

unfra

nked

div

iden

ds re

ceiv

ed in

som

e ca

ses)

. Th

e C

ondu

it Fo

reig

n In

com

e re

gim

e al

low

s fo

reig

n so

urce

inco

me

to p

ass

thro

ugh

to n

on-r

esid

ent

shar

ehol

ders

with

out a

ny w

ithho

ldin

g ta

x.

The

rate

of w

ithho

ldin

g ta

x on

inte

rest

is

10 p

er c

ent w

ith a

bro

ad ra

nge

of e

xem

ptio

ns

(incl

udin

g in

tere

st p

aid

to U

nite

d S

tate

s an

d U

nite

d K

ingd

om re

side

nt fi

nanc

ial i

nstit

utio

ns

unde

r the

Uni

ted

Sta

tes

and

Uni

ted

Kin

gdom

tre

atie

s).

Roy

altie

s ar

e su

bjec

t to

with

hold

ing

tax

at

30 p

er c

ent.

Und

er m

ost t

reat

ies,

the

rate

is

redu

ced

to 1

0 pe

r cen

t, ho

wev

er o

ther

rate

s m

ay a

pply

, for

exa

mpl

e, 5

per

cen

t und

er th

e U

nite

d S

tate

s an

d U

nite

d K

ingd

om tr

eatie

s.

With

hold

ing

tax

appl

ies

at ra

tes

prov

ided

in p

revi

ous

colu

mns

to d

ivid

ends

, int

eres

t and

roya

lties

rece

ived

thro

ugh

partn

ersh

ips

and

trust

s.

Whi

lst n

ot le

gally

a ‘w

ithho

ldin

g ta

x’, A

ustra

lian

sour

ce

inco

me

deriv

ed b

y a

non-

resi

dent

thro

ugh

a tru

st (o

ther

than

th

e ty

pes

abov

e) is

sub

ject

to ta

x in

the

hand

s of

the

trust

ee

(at t

he ra

te a

pplic

able

to th

e be

nefic

iary

) with

cre

dit p

rovi

ded

to th

e be

nefic

iary

for t

he tr

uste

e ta

x pa

id.

Ren

tal i

ncom

e is

not

oth

erw

ise

subj

ect t

o w

ithho

ldin

g ta

x (b

ut is

like

ly to

be

subj

ect t

o ta

x by

ass

essm

ent a

s a

PE

). U

nles

s ot

herw

ise

prov

ided

in a

tax

treat

y ce

rtain

shi

ppin

g ac

tiviti

es o

f non

-res

iden

ts w

ithin

Aus

tralia

are

sub

ject

to

Aus

tralia

n ta

x on

a d

eem

ed ta

xabl

e in

com

e of

5 p

er c

ent o

f re

leva

nt fr

eigh

t inc

ome.

A

ustra

lia a

lso

colle

cts

with

hold

ing

tax

on a

mou

nts

paid

to

non-

resi

dent

s in

resp

ect o

f cer

tain

insu

ranc

e, g

ambl

ing,

en

terta

inm

ent a

nd c

onst

ruct

ion

activ

ities

. How

ever

, the

am

ount

s w

ithhe

ld a

re fu

lly c

laim

able

aga

inst

the

non-

resi

dent

s fin

al ta

x as

sess

men

t.

Can

ada

The

prim

ary

divi

dend

with

hold

ing

tax

rate

is 2

5 pe

r cen

t, bu

t may

be

redu

ced

to 5

per

cen

t, 10

per

cen

t or

15 p

er c

ent s

ubje

ct to

var

ious

dou

ble

tax

treat

ies.

The

basi

c ra

te fo

r int

eres

t and

roya

lty

with

hold

ing

taxe

s is

25

per c

ent.

How

ever

, thi

s m

ay b

e lo

wer

sub

ject

to ta

x tre

atie

s.

For i

nter

est w

ithho

ldin

g ta

x, it

may

be

10 p

er c

ent t

o 15

per

cen

t dep

endi

ng o

n th

e tre

aty.

R

oyal

ty w

ithho

ldin

g ta

x is

gen

eral

ly le

vied

at a

ra

te o

f be

twee

n ze

ro a

nd 2

5 pe

r cen

t de

pend

ing

on th

e tre

aty.

In

tere

st o

n go

vern

men

t deb

t and

arm

’s le

ngth

de

bt is

exe

mpt

pro

vide

d th

at th

e ta

xpay

er is

no

t obl

iged

to re

pay

mor

e th

an 2

5 pe

r cen

t of

the

prin

cipa

l with

in fi

ve y

ears

.

If a

non-

resi

dent

per

form

s se

rvic

es in

Can

ada,

a 1

5 pe

r cen

t w

ithho

ldin

g ta

x ap

plie

s. (A

wai

ver m

ay b

e ob

tain

ed b

ut o

nly

if ce

rtain

con

ditio

ns a

re s

atis

fied.

) The

tax

with

held

may

be

refu

nded

to th

e no

n-re

side

nt, p

ursu

ant t

o a

tax

treat

y.

Man

agem

ent f

ees,

est

ate

or tr

ust i

ncom

e, im

mov

able

pr

oper

ty, a

limon

y, fi

lms,

per

iodi

c pe

nsio

n an

d an

nuity

pa

ymen

ts, a

nd lu

mp

sum

pen

sion

, ann

uity

or s

imila

r typ

e pa

ymen

ts ta

xed

at 2

5 pe

r cen

t, re

duce

d un

der t

reat

ies.

Chapter 10: International taxation arrangements

Page 321

Tabl

e 10

.5: T

reat

men

t of i

ncom

e of

non

-res

iden

t tax

paye

rs (c

ontin

ued)

C

ount

ry

With

hold

ing

tax

on d

ivid

ends

pai

d to

non

-res

iden

ts

With

hold

ing

tax

on in

tere

st a

nd ro

yalti

es

paid

to n

on-r

esid

ents

W

ithho

ldin

g ta

x on

oth

er in

com

e pa

id to

non

-res

iden

ts

Irela

nd

With

hold

ing

tax

of 2

0 pe

r cen

t in

gene

ral.

Irish

legi

slat

ion

prov

ides

an

exem

ptio

n fro

m d

ivid

end

with

hold

ing

tax

if ce

rtain

con

ditio

ns a

re s

atis

fied.

To

qual

ify fo

r the

exe

mpt

ion

the

Irish

com

pany

’s p

aren

t m

ust:

• be

ent

itled

to th

e be

nefit

of t

he E

U P

aren

t/Sub

sidi

ary

Dire

ctiv

e; o

r •

be a

com

pany

resi

dent

in a

n E

U/tr

eaty

cou

ntry

and

no

t be

unde

r the

con

trol o

f Iris

h re

side

nts;

or

• be

a c

ompa

ny u

ltim

atel

y co

ntro

lled

by re

side

nts

of

EU

/trea

ty c

ount

ries;

or

• be

a c

ompa

ny w

hose

prin

cipa

l cla

ss o

f sha

res

is

trade

d on

a s

tock

exc

hang

e in

an

EU

/trea

ty c

ount

ry,

or b

e a

75 p

er c

ent s

ubsi

diar

y of

suc

h a

com

pany

; or

• be

a c

ompa

ny w

holly

ow

ned,

dire

ctly

or i

ndire

ctly

, by

two

or m

ore

com

pani

es w

hich

are

list

ed o

n a

stoc

k ex

chan

ge in

an

EU

/trea

ty c

ount

ry.

In p

ract

ice

this

resu

lts in

mos

t div

iden

d pa

ymen

ts to

no

n-re

side

nts

bein

g ex

empt

from

with

hold

ing

tax.

The

basi

c ra

te is

20

per c

ent.

In

rela

tion

to ro

yalti

es, w

ithho

ldin

g ta

x on

ly

appl

ies

to p

aten

t roy

altie

s or

roya

lties

on

an

asse

t whi

ch is

a p

assi

vely

hel

d as

set o

wne

d by

the

non-

resi

dent

. Fur

ther

, the

EU

inte

rest

an

d ro

yalty

dire

ctiv

e el

imin

ates

roya

lty

with

hold

ing

tax

on ro

yalti

es to

cer

tain

rela

ted

EU

cou

ntrie

s. M

any

treat

ies

redu

ce th

e w

ithho

ldin

g to

0, 5

, or 1

0 pe

r cen

t. In

rela

tion

to in

tere

st, I

rish

legi

slat

ion

prov

ides

an

exe

mpt

ion

for i

nter

est w

ithho

ldin

g ta

x on

in

tere

st p

aid

to a

com

pany

resi

dent

in th

e E

U

or a

trea

ty c

ount

ry.

Ren

tal p

aym

ents

for I

rish-

loca

ted

prop

erty

pay

able

to

non-

resi

dent

s ar

e su

bjec

t to

20 p

er c

ent w

ithho

ldin

g ta

x.

A re

tent

ion

tax,

at t

he s

tand

ard

rate

of t

ax, m

ust b

e de

duct

ed

at s

ourc

e by

dep

osit

take

rs (f

or e

xam

ple,

ban

ks, b

uild

ing

soci

etie

s, P

ost O

ffice

Sav

ings

Ban

k, e

tc) f

rom

inte

rest

pai

d or

cre

dite

d on

dep

osits

of I

rish

resi

dent

s.

The

rete

ntio

n ta

x do

es n

ot a

pply

to in

tere

st o

n de

posi

ts

bene

ficia

lly o

wne

d by

non

- res

iden

ts.

Japa

n Th

e ba

sic

rate

is 2

0 pe

r cen

t but

may

be

redu

ced

by ta

x tre

atie

s to

zer

o pe

r cen

t (fo

r exa

mpl

e, U

nite

d K

ingd

om,

Uni

ted

Sta

tes

and

Fren

ch tr

eatie

s), 5

, 10

or 1

5 pe

r cen

t de

pend

ing

on th

e tre

aty.

Qua

lific

atio

n fo

r red

uced

rate

s ge

nera

lly re

quire

s sh

areh

oldi

ng o

f at l

east

25

per c

ent

and

in th

e ca

se o

f Uni

ted

Sta

tes

and

Uni

ted

Kin

gdom

sh

areh

olde

rs, s

atis

fact

ion

of li

mita

tion

of b

enef

it te

sts.

7

per c

ent (

natio

nal)

final

with

hold

ing

tax

at s

ourc

e on

di

vide

nds

paid

by

a pu

blic

ly tr

aded

com

pany

to a

no

n-re

side

nt th

roug

h 31

Mar

ch 2

008.

The

basi

c ra

te is

20

per c

ent f

or in

tere

st a

nd

roya

lties

(for

cer

tain

cat

egor

ies

of in

tere

st, t

he

basi

c ra

te is

15

per c

ent o

r zer

o pe

r cen

t).

Red

uced

trea

ty ra

tes:

zer

o, 1

0 or

15

per c

ent

depe

ndin

g on

trea

ty.

20 p

er c

ent w

ithho

ldin

g ta

x al

so a

pplic

able

to

certa

in te

chni

cal s

ervi

ces

perfo

rmed

in J

apan

su

bjec

t to

the

busi

ness

pro

fits

artic

le in

the

appl

icab

le ta

x tre

aty.

Unl

ess

othe

rwis

e pr

ovid

ed in

a tr

eaty

, 20

per c

ent

with

hold

ing

tax

on p

artn

ersh

ip d

istri

butio

ns to

non

-res

iden

t pa

rtner

s (o

ne e

xem

ptio

n pr

ovid

ed).

Ren

tal i

ncom

e pa

id to

non

-res

iden

ts fo

r use

of r

eal p

rope

rty

or in

dust

rial o

r com

mer

cial

equ

ipm

ent a

lso

subj

ect t

o 20

per

cen

t with

hold

ing

tax.

International comparison of Australia’s taxes

Page 322

Tabl

e 10

.5: T

reat

men

t of i

ncom

e of

non

-res

iden

t tax

paye

rs (c

ontin

ued)

C

ount

ry

With

hold

ing

tax

on d

ivid

ends

pai

d to

non

-res

iden

ts

With

hold

ing

tax

on in

tere

st a

nd ro

yalti

es

paid

to n

on-r

esid

ents

W

ithho

ldin

g ta

x on

oth

er in

com

e pa

id to

non

-res

iden

ts

Net

herla

nds

Div

iden

d pa

ymen

ts to

non

-res

iden

ts a

re ta

xed

at

25 p

er c

ent,

exem

pted

or r

educ

ed to

15,

5, o

r 0 p

er c

ent

unde

r tre

atie

s. D

ivid

ends

pay

able

to q

ualif

ying

EU

re

side

nts

are

tax

free.

With

hold

ing

tax

is n

ot c

olle

cted

on

inte

rest

or

roya

lty p

aym

ents

to n

on-r

esid

ents

. M

anag

emen

t ser

vice

fees

rece

ived

in re

latio

n to

m

anag

emen

t of a

Dut

ch re

side

nt c

ompa

ny a

re s

ubje

ct to

co

rpor

ate

inco

me

tax

in th

e N

ethe

rland

s.

New

Zea

land

W

ithho

ldin

g ta

x on

unf

rank

ed d

ivid

ends

is 3

0 pe

r cen

t. Th

is re

duce

s ge

nera

lly to

15

per c

ent i

n th

e ca

se o

f do

uble

tax

agre

emen

ts. T

he fo

reig

n in

vest

or ta

x cr

edit

regi

me

effe

ctiv

ely

redu

ces

com

pany

tax

by a

n am

ount

eq

ual t

o th

e di

vide

nd n

on-r

esid

ent w

ithho

ldin

g ta

x (N

RW

T) p

aid

by th

e N

ew Z

eala

nd c

ompa

ny to

the

exte

nt th

at th

e di

vide

nds

paid

to th

e no

n-re

side

nt a

re

fully

fran

ked

and

the

com

pany

has

pai

d a

supp

lem

enta

ry d

ivid

end

to th

e no

n-re

side

nt e

qual

to th

e am

ount

of t

he N

RW

T.

15 p

er c

ent i

nter

est a

nd ro

yalty

with

hold

ing

tax

is a

pplic

able

sub

ject

to tr

eaty

con

ditio

ns.

Inte

rest

pay

able

to a

rm’s

leng

th le

nder

s el

igib

le fo

r app

rove

d is

suer

levy

, und

er w

hich

in

tere

st is

exe

mpt

from

with

hold

ing

tax

but

subj

ect t

o 2

per c

ent d

uty.

U

nder

New

Zea

land

dom

estic

law

, in

som

e ca

ses

the

NR

WT

beco

mes

a m

inim

um ta

x an

d th

e in

tere

st a

nd ro

yalti

es m

ay b

e su

bjec

t to

tax

at fu

ll ra

tes

unle

ss th

e lia

bilit

y is

pro

tect

ed b

y a

treat

y.

Whe

re a

non

-res

iden

t pro

vide

s se

rvic

es in

New

Zea

land

, a

15 p

er c

ent n

on re

side

nt c

ontra

ctor

with

hold

ing

tax

(NR

CW

T)

will

app

ly. T

his

tax

is fu

lly c

redi

tabl

e ag

ains

t any

fina

l tax

lia

bilit

y fo

r the

non

-res

iden

t (30

per

cen

t in

case

s w

here

re

leva

nt p

aper

wor

k ha

s no

t bee

n co

mpl

eted

). E

xces

s am

ount

s ar

e re

fund

able

. Exe

mpt

ions

may

app

ly if

the

non

resi

dent

con

tract

or a

pplie

s fo

r an

exem

ptio

n ce

rtific

ate

from

th

e N

ew Z

eala

nd re

venu

e au

thor

ity.

Alth

ough

not

tech

nica

lly a

with

hold

ing

tax,

am

ount

s of

New

Ze

alan

d ta

x ar

e w

ithhe

ld fr

om p

rem

ium

s pa

id to

non

-res

iden

t in

sure

rs.

Spa

in

Dom

estic

with

hold

ing

tax

on d

ivid

ends

is 1

5 pe

r cen

t. Th

is is

gen

eral

ly re

duce

d to

10

or 5

per

cen

t in

a nu

mbe

r of t

reat

ies.

D

ivid

ends

pai

d to

non

-res

iden

ts b

y sp

ecia

l reg

ime

hold

ing

com

pani

es o

ut o

f qua

lifyi

ng in

com

e ar

e no

t su

bjec

t to

taxa

tion

in S

pain

. U

nder

the

Par

ent-S

ubsi

diar

y D

irect

ive,

div

iden

ds

dist

ribut

ed b

y a

Spa

nish

com

pany

to a

qua

lifyi

ng E

U

pare

nt a

re e

xem

pt fr

om S

pani

sh w

ithho

ldin

g ta

x.

Ther

e is

als

o dr

aft l

aw fo

r the

incr

ease

of t

he d

ivid

end

with

hold

ing

tax

rate

from

15

to 1

8 pe

r cen

t with

effe

ct

from

1 J

anua

ry 2

007.

The

dom

estic

with

hold

ing

tax

rate

on

inte

rest

an

d ro

yalti

es is

15

and

25 p

er c

ent

resp

ectiv

ely.

Thi

s is

gen

eral

ly re

duce

d un

der

treat

ies.

In

tere

st re

ceiv

ed b

y an

EU

resi

dent

is

gene

rally

exe

mpt

from

Spa

nish

with

hold

ing

tax.

R

oyal

ties

rece

ived

by

qual

ifyin

g E

U

com

pani

es a

re ta

xed

at th

e 10

per

cen

t rat

e.

Not

e th

at S

pain

taxe

s ro

yalti

es p

aid

to

non-

resi

dent

s in

con

side

ratio

n fo

r the

righ

t to

use

com

pute

r sof

twar

e, w

ith fe

w e

xcep

tions

.

Dom

estic

law

est

ablis

hes

a re

sidu

al 2

5 pe

r cen

t with

hold

ing

tax

rate

. Thi

s ap

plie

s to

pay

men

ts fo

r ser

vice

s re

nder

ed fr

om

juris

dict

ions

with

out a

dou

ble

tax

agre

emen

t, re

ntal

inco

me

inso

far a

s it

does

not

qua

lify

as ro

yalti

es, a

nd e

mpl

oym

ent

inco

me.

C

apita

l gai

ns o

btai

ned

by n

on-r

esid

ents

are

taxe

d at

the

35 p

er c

ent r

ate,

thou

gh a

dra

ft B

ill p

ut fo

rth b

y th

e G

over

nmen

t wou

ld re

duce

this

to 1

8 pe

r cen

t.

Sw

itzer

land

W

ithho

ldin

g ta

x is

35

per c

ent.

Indi

vidu

al n

on-r

esid

ents

be

nefit

ing

from

a tr

eaty

may

be

entit

led

to a

redu

ctio

n of

up

to 2

0 pe

r cen

t, re

sulti

ng in

resi

dual

with

hold

ing

tax

of

15 p

er c

ent.

C

orpo

ratio

ns w

ith a

sub

stan

tial i

nves

tmen

t (us

ually

20

or 2

5 pe

r cen

t) be

nefit

from

a re

duct

ion

resu

lting

in o

nly

5 or

zer

o pe

r cen

t with

hold

ing

tax.

Thi

s ho

lds

in

parti

cula

r for

par

ent c

ompa

nies

with

in th

e E

U d

ue to

bi

late

ral a

gree

men

ts b

etw

een

Sw

itzer

land

and

the

EU

.

No

with

hold

ing

tax

on ro

yalti

es.

With

hold

ing

tax

on in

tere

st is

lim

ited

to in

tere

st

that

is p

aid

by a

ban

k or

to in

tere

st w

here

the

unde

rlyin

g fin

anci

al in

stru

men

t is

a bo

nd. T

he

appl

icab

le ra

te is

35

per c

ent.

Trea

ty re

lief i

s co

mm

on (u

sual

ly 1

0 pe

r cen

t res

idua

l w

ithho

ldin

g ta

x).

Ther

e is

som

e w

age

with

hold

ing

tax

(pro

gres

sive

rate

s)

levi

ed o

n sa

lary

ear

ned

in S

witz

erla

nd a

nd o

n ol

d ag

e pe

nsio

ns fr

om S

wis

s pe

nsio

n fu

nds.

Chapter 10: International taxation arrangements

Page 323

Tabl

e 10

.5: T

reat

men

t of i

ncom

e of

non

-res

iden

t tax

paye

rs (c

ontin

ued)

C

ount

ry

With

hold

ing

tax

on d

ivid

ends

pai

d to

non

-res

iden

ts

With

hold

ing

tax

on in

tere

st a

nd ro

yalti

es

paid

to n

on-r

esid

ents

W

ithho

ldin

g ta

x on

oth

er in

com

e pa

id to

non

-res

iden

ts

Uni

ted

Kin

gdom

W

ithho

ldin

g ta

x is

not

app

lied

on d

ivid

end

paym

ents

to

non-

resi

dent

s.

The

with

hold

ing

tax

rate

on

inte

rest

pay

men

ts

(‘ann

ual i

nter

est’)

to n

on-r

esid

ents

is

20 p

er c

ent f

or n

on-tr

eaty

cou

ntrie

s an

d 22

per

cen

t for

roya

lties

. The

rate

s ar

e re

duce

d to

zer

o pe

r cen

t und

er m

ost t

reat

ies,

in

clud

ing

with

the

Uni

ted

Sta

tes

and

mos

t E

urop

ean

coun

tries

.

Ren

tal i

ncom

e is

sub

ject

to 2

2 pe

r cen

t with

hold

ing

tax.

P

aym

ents

mad

e to

non

-res

iden

t ent

erta

iner

s an

d sp

orts

men

ar

e al

so s

ubje

ct to

22

per c

ent w

ithho

ldin

g ta

x.

Uni

ted

Sta

tes

Bas

ic 3

0 pe

r cen

t rat

e m

ay b

e re

duce

d or

elim

inat

ed b

y tre

atie

s.

Uni

ted

Kin

gdom

, Aus

tralia

, Mex

ico

and

Sw

eden

are

ex

ampl

es o

f tre

atie

s w

hich

incl

ude

zero

per

cen

t di

vide

nd w

ithho

ldin

g ta

x.

With

the

othe

r tre

atie

s, m

ostly

5 p

er c

ent f

or c

orpo

rate

s w

ith a

requ

ired

perc

enta

ge o

wne

rshi

p, a

nd 1

5 pe

r cen

t ot

herw

ise.

Bas

ic 3

0 pe

r cen

t rat

e m

ay b

e re

duce

d or

el

imin

ated

by

tax

treat

ies.

Tr

eatie

s va

ry g

reat

ly in

thei

r tre

atm

ent o

f in

tere

st. A

num

ber o

f tre

atie

s ex

empt

inte

rest

pa

ymen

ts.

Roy

altie

s ge

nera

lly a

ttrac

t a ra

te o

f 0, 5

or

10 p

er c

ent.

A b

ranc

h pr

ofits

tax

whi

ch is

a d

ivid

end

equi

vale

nt ta

x ap

plie

s fo

r bra

nche

s.

Pas

sive

inco

me

thro

ugh

a pa

rtner

ship

trea

ted

the

sam

e.

Not

gen

eral

ly c

over

ed b

y tre

atie

s, 3

0 pe

r cen

t with

hold

ing

tax

on:

• gr

oss

rent

, but

can

ele

ct to

be

taxe

d at

the

norm

al U

nite

d S

tate

s m

argi

nal r

ates

on

the

net r

ent;

• an

nuiti

es;

• al

imon

ies;

•

prem

ium

s.

(a

) Th

e ta

ble

does

not

dea

l with

inco

me

whi

ch is

taxe

d on

a n

et b

asis

suc

h as

whe

re it

is a

ttrib

utab

le to

a P

E.

Sou

rce:

Var

ious

, see

Cha

pter

1 (1

.4.1

).

International comparison of Australia’s taxes

Page 324

The income of non-residents is treated in a variety of ways across the OECD-10, and Australia does not appear to be unique in its framework or treatment. Most of these countries levy all three of the main non-resident withholding taxes (dividends, interest and royalties) through their domestic law. Some OECD-10 countries do not levy one or more of these (for example, United Kingdom and dividend withholding tax), while others have exemptions or significantly reduced rates under treaties, including Australia. The Netherlands levies no interest or royalty withholding taxes and, by virtue of its extensive treaty network, very little dividend withholding tax too.

Australia’s dividend withholding tax base is relatively narrow due to a number of significant exemptions (for example, franked dividends and conduit foreign income). It was further narrowed through recent treaties with the United States and United Kingdom. This is also broadly the case for Australia’s interest withholding tax base. Where income of non-residents is taxed, Australia’s extensive treaty network reduces applicable rates, particularly on dividends and royalties.

10.4.1 Treatment of conduit income

Conduit income typically arises where a non-resident owns an interest in a resident company which pays dividends out of foreign source income. A country can levy tax on conduit income when the resident company earns the foreign income (if the income is not exempt) and when the income is paid by dividend to the non-resident shareholder (for example, dividend withholding tax). Conduit taxation can also arise where the dividend is distributed along a chain of resident companies interposed between the first resident company and the non-resident.

Conduit regimes can help attract multinational operations and regional headquarter activity. A pure conduit regime imposes no domestic tax on foreign income that is eventually paid to non-residents. The more attractive regimes relieve tax at some or all possible conduit taxation points, either unilaterally or through (an extensive network of) treaties. Very few countries (if any) provide full conduit taxation relief in all circumstances.

No Australian tax is levied on dividends paid directly or indirectly (through interposed resident companies) to non-residents out of the foreign income of a resident company. This includes company tax exemptions for any further interposed Australian companies and no dividend withholding tax. When added to the already extensive company tax exemptions for foreign source income derived by resident companies (see Table 10.3), this gives a complete tax exemption for active business profits earned offshore and repatriated through one or more Australian companies to non-residents. Any passive income or gains sourced offshore by an Australian company remains subject to Australian tax but it may be distributed to non-resident shareholders free of any further Australian tax.

Other conduit examples

Similar conduit taxation issues can arise where investment activity is conducted through a domestic funds manager. Broadly, Australia’s tax treatment of such arrangements provides a tax exemption for foreign income earned by the Australian funds manager and distributed to non-resident investors.

Chapter 10: International taxation arrangements

Page 325

As an alternative to receiving distributions of foreign profits from interposed Australian companies or fund managers, non-resident investors can access those profits by disposing of their investments. Where that investment is through an Australian funds manager which holds foreign assets almost exclusively, the non-resident investor is now exempt from capital gains tax on the disposal of the investment.7

10.5 ATTRIBUTION AND OTHER INTERNATIONAL TAX INTEGRITY RULES

Foreign source income is normally taxed when derived by, or repatriated to, the resident. This enables residents to shift mobile (passive) assets and income to interposed entities in low-tax countries and defer Australian tax. Attribution rules are integrity measures designed to prevent deferral by including passive foreign income in a resident’s assessable income as it accrues. As a result, tax does not influence decisions on where to locate assets and income.

Attribution rules often include controlled foreign company (CFC) rules where residents are taxed on their share of certain (usually passive) income of foreign companies they are deemed to have a controlling interest in. Other attribution rules include foreign investment fund (FIF) rules where residents may be taxed on their share of accrued income in foreign portfolio investments.

Through transactions at non-arm’s length prices, related parties in different countries can shift income or profits to a lower-tax country (and deductions to a higher-tax country) and avoid tax. Transfer pricing rules are designed to prevent income being shifted in this way by ensuring more economic prices are charged on transactions between related parties.

By shifting debt (and therefore interest expenses and deductions) to higher tax countries, related parties in different countries can also minimise their overall tax. Thin capitalisation rules are designed to prevent uneconomic levels of debt being shifted to a higher-tax country by denying interest deductions above certain limits.

These rules help countries protect domestic and worldwide income tax bases from being lost to low-tax countries, while low-tax countries generally do not need these rules.

Table 10.6 shows for the OECD-10 the attribution and other international tax integrity rules used.

7 The Government also announced in the 2005-06 Budget that a similar exemption from CGT would be provided where a non-resident investor disposes of its investment in an Australian company, provided the company’s principal asset is not Australian land. When implemented, this change will align Australia’s law more closely with OECD practice on capital gains through narrowing the range of assets on which a non-resident is subject to Australian CGT to land and business assets used in Australia. These changes will significantly improve the way in which Australia treats the conduit foreign and other income of its non-residents.

International comparison of Australia’s taxes

Page 326

Table 10.6: Attribution and other international tax integrity rules Country CFC rules FIF or other

attribution rules Thin capitalisation rules Transfer pricing rules

Australia Yes Yes — FIF and transferor trust rules.

Yes Yes

Canada Yes Yes — Foreign Investment Entities (FIE) rules.

Yes Yes

Ireland No No No — besides a basic deemed dividend rule in certain cases for interest payments to a non-resident company or subsidiary in a non-EU or non-treaty country for interests of at least 75 per cent.

No specific rules, although tax authorities may adjust transaction prices between related parties if arm’s length principle has not been observed.

Japan Yes No Yes Yes

Netherlands No — although for companies, a statutory valuation rule exists where the (fair market value) gain or loss in participations in passive non-resident companies of at least 25 per cent (those with passive assets) of at least 90 per cent is included in taxable income.

No — although for individuals, the worldwide average net value of assets held as at 1 January and 31 December of the tax year is deemed to produce a 4 per cent net yield, flat taxed at 30 per cent (resulting in 1.2 per cent tax on the net assets).

Yes Yes

New Zealand

Yes Yes — FIF rules. Yes Yes

Spain Yes No Yes No specific rules, although tax authorities may adjust transaction prices between related parties if arm’s length principle has not been observed.

Switzerland No No Yes No specific rules, although tax authorities may adjust transaction prices between related parties if arm’s length principle has not been observed.

United Kingdom

Yes No No — replaced on 1 April 2004 by extended transfer pricing rules.

Yes

United States

Yes Yes — Passive Foreign Investment Companies (PFICs) rules. (Note that Foreign Personal Holding Companies (FPHCs) rules repealed from 31 Dec 2004).

Yes Yes

Source: Various, see Chapter 1 (1.4.1). This high level comparison indicates that most of the OECD-10 have CFC rules, while around half have some form of FIF rules. Thin capitalisation and transfer pricing rules are quite common across the OECD-10. Australia has all these integrity rules.8

8 The Government’s response to the RITA included a commitment to review the FIF attribution rules.

Chapter 10: International taxation arrangements

Page 327

10.6 TAX TREATIES

Tax treaties (or double tax agreements) govern the division of taxing rights between the country where the taxpayer is resident and the country where the income is sourced.

As a net importer of capital and technology, Australia has until recently advocated strong source country taxing rights in its treaty negotiations. As a result, the majority of Australia’s past tax treaties provide for withholding tax rates that are higher than the norm in treaties between OECD countries.

Australia’s tax treaty policy has moved more toward a residence-based treaty model, reflecting the fact that high levels of withholding tax have been seen to disadvantage Australian companies operating offshore and reduce Australia’s ability to attract foreign investment. It seeks to provide a competitive framework for cross-border trade and investment while ensuring that the Australian revenue base is sustainable and suitably protected.

The OECD Model Tax Convention on Income and on Capital (OECD Model) and the tax treaty policy of our key investment partner countries are appropriate benchmarks for considering the comparability of Australia’s tax treaty policy. In recent years, Australia has taken significant steps toward a more comparable position by:

• reducing withholding tax (WHT) rates in relation to dividends, interest and royalties (these are now at levels broadly comparable in most respects with the position agreed between the United States, the United Kingdom and Japan);

• aligning our treatment of capital gains with the OECD Model (to be implemented in treaties going forward); and

• including and giving effect to non-discrimination rules.

While in some cases, our practice differs from the OECD Model, it is consistent with countries in similar situations. For example:

• a 5 per cent royalty WHT, where the OECD Model has a zero rate, is broadly consistent with, or lower than, other countries that are net importers of intellectual property, such as Spain, New Zealand and Canada; and

• source taxing rights on income from the exploration for, or exploitation of, natural resources, are broadly consistent with recent treaty practice in resource-rich countries such as the Netherlands, Norway, Denmark and the United Kingdom.

Table 10.7 shows for the OECD-10 the network of treaties in place, their type and key attributes. Australia’s current treaty policy will promote tax treaties that are competitive by international standards whilst ensuring that Australia’s revenue base is suitably protected.

International comparison of Australia’s taxes

Page 328

Tabl

e 10

.7: T

ax tr

eatie

s C

ount

ry

Net

wor

k M

odel

pre

dom

inan

tly re

lied

on

Key

dep

artu

res

from

mod

el (w

ith re

spec

t to

PEs,

bus

ines

s pr

ofits

, with

hold

ing

taxe

s an

d al

iena

tion

of p

rope

rty)

A

ustra

lia

42

OE

CD

PE

s/bu

sine

ss p

rofit

s •

Aus

tralia

mai

ntai

ns s

trong

sou

rce

coun

try ta

xing

righ

ts fo

r det

erm

inin

g w

hat c

onst

itute

s a

PE

. W

ithho

ldin

g ta

xes

• A

ustra

lia a

dvoc

ates

a 5

per

cen

t WH

T ra

te o

ver r

oyal

ties

(the

OE

CD

Mod

el ra

te is

zer

o). O

n in

tere

st a

nd d

ivid

end

WH

T, th

e A

ustra

lian

posi

tion

is in

som

e in

stan

ces

less

than

the

OE

CD

Mod

el ta

x ra

te.

Can

ada

86

OE

CD

PE

s/bu

sine

ss p

rofit

s •

Can

ada

mai

ntai

ns s

trong

taxi

ng ri

ghts

ove

r the

exp

lora

tion

and

expl

oita

tion

of h

ydro

carb

ons.

W

ithho

ldin

g ta

xes

• C

anad

ian

tax

treat

ies

gene

rally

con

tain

a 1

0 pe

r cen

t WH

T ra

te o

n ro

yalti

es.

Irela

nd

44

OE

CD

PE

s/bu

sine

ss p

rofit

s •

Irel

and

mai

ntai

ns s

trong

taxi

ng ri

ghts

ove

r the

exp

lora

tion

and

expl

oita

tion

of h

ydro

carb

ons.

Japa

n 56

O

EC

D

Cap

ital g

ains

•

Japa

n re

serv

es th

e rig

ht to

tax

gain

s fro

m th

e al

iena

tion

of s

hare

s or

oth

er c

orpo

rate

righ

ts w

here

the

inte

rest

is p

art o

f a

subs

tant

ial p

artic

ipat

ion

(that

is, g

reat

er th

an 2

5 pe

r cen

t) in

a J

apan

ese

com

pany

.

Net

herla

nds

114

OE

CD

PE

s/bu

sine

ss p

rofit

s •

The

Net

herla

nds

mai

ntai

ns s

trong

taxi

ng ri

ghts

ove

r the

exp

lora

tion

and

expl

oita

tion

of h

ydro

carb

ons.

New

Zea

land

30

O

EC

D

PEs/

busi

ness

pro

fits

• N

ew Z

eala

nd m

aint

ains

stro

ng s

ourc

e co

untry

taxi

ng ri

ghts

for d

eter

min

ing

wha

t con

stitu

tes

a P

E.

With

hold

ing

taxe

s •

New

Zea

land

tax

treat

ies

gene

rally

con

tain

a 1

5 pe

r cen

t WH

T ra

te o

n di

vide

nds

and

a 10

per

cen

t WH

T ra

te o

n ro

yalti

es.

Spa

in

106

OE

CD

PE

s/bu

sine

ss p

rofit

s •

Spa

in m

aint

ains

stro

ng s

ourc

e co

untry

taxi

ng ri

ghts

for d

eter

min

ing

wha

t con

stitu

tes

a P

E.

With

hold

ing

taxe

s •

Spa

nish

tax

treat

ies

gene

rally

con

tain

WH

T ra

tes

on ro

yalti

es o

f bet

wee

n 5

per c

ent a

nd 1

0 pe

r cen

t. C

apita

l gai

ns

• S

pain

rese

rves

the

right

to ta

x ga

ins

from

the

alie

natio

n of

cer

tain

sub

stan

tial i

nter

ests

in a

com

pany

.

Sw

itzer

land

86

O

EC

D

No

key

depa

rture

s no

ted.

Uni

ted

Kin

gdom

11

4 O

EC

D

PEs

and

capi

tal g

ains

•

The

Uni

ted

Kin

gdom

, mai

ntai

ns s

trong

taxi

ng ri

ghts

ove

r the

exp

lora

tion

and

expl

oita

tion

of h

ydro

carb

ons.

Uni

ted

Sta

tes

63

OE

CD

W

ithho

ldin

g ta

xes

• Th

e U

nite

d S

tate

s ex

clud

es in

vest

men

ts th

roug

h ce

rtain

flow

-thro

ugh

entit

ies,

(i.e

. Rea

l Est

ate

Inve

stm

ent T

rust

s) fr

om th

e lo

wer

trea

ty d

ivid

end

WH

T ra

te.

Sou

rce:

Var

ious

, see

Cha

pter

1 (1

.4.1

).

Chapter 10: International taxation arrangements

Page 329

REFERENCES

Ault, H and Arnold, B 2004, Comparative Income Taxation: A Structural Analysis, Aspen Publishers, Second edition.

Review of Business Taxation, 1998, An International Perspective: An Information Paper commissioned from Arthur Anderson, examining how other countries approach business taxation, AGPS.

Rohatgi, R 2002, Basic International Taxation, Kluwer Law International.