|Submission No. 247||Back to full list of submissions|
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|16 April 1999
Dear Dr Preston
SUBMISSION TO REVIEW OF BUSINESS TAXATION
Please find enclosed a submission dealing with international taxation issues.
I appreciate the opportunity to provide input into your review of business taxation and am happy to assist further in any way you consider appropriate and helpful.
I can be contacted on 0409-004-233 if you need to discuss this submission.
DAVID G STEVENS
REVIEW OF BUSINESS TAXATION
SUBMISSION ON INTERNATIONAL TAXATION ASPECTS
This submission will focus on the international taxation aspects of Australias business tax system, in particular foreign earnings paid to foreign shareholders. It draws on the taxation principles outlined in A New Tax System and is consistent with the objectives, terms of reference and strategies described in the Review of Business Taxations A Platform for Consultation (APC).
Summary of key proposals:
These measures encapsulate a systemic solution to implement a more internationally competitive taxation treatment of foreign income and foreign shareholders which is of fundamental importance in ensuring that Australian entities can both attract foreign capital and participate in foreign earnings growth.
In the context of global financial markets (where Australia is a net importer of capital), these measures will also be beneficial to Australian capital markets by: improving effective returns for both domestic and overseas shareholders of Australian entities; and ameliorating the need for Australian groups with large offshore assets and earnings from considering relocating offshore.
Reform in this area should be regarded as one of the absolutely key reforms for business taxation and is an essential component of any package of measures for a bold, visionary and globally competitive taxation and economic system. A series of objectives I entirely support.
Illustrated below is the Conceptual model of an integrated international taxation system. It would fully integrate Australian and foreign tax systems for both income and residents. Thereby, eliminating inter and intra jurisdictional "double taxation", i.e. taxing the same income more than once.
The Conceptual model would include a comprehensive tax and credit (or tax then exempt) approach, within and between countries. It would not matter how (directly or through an entity) or where (domestic or offshore) the income was earned as the tax applicable would be the same in each case. That it, there is no tax difference and no "double tax" in particular.
Assuming (for simplicity) in the diagram above that the tax rate is 30% for entities in both countries and shareholders in both countries, then the 30% tax would always be the final and total amount of tax payable.
The following tables illustrate as opposed to being comprehensive or case studies - the actual system for tax on foreign income & foreign investment through an Australian entity (without allowance for possible streaming). They highlight the situations under which "double taxation" can occur and will continue to occur unless otherwise addressed.
Note 1: Assuming 30% Australian & foreign corporate rates, 30% investor marginal tax rate, 15% Dividend Withholding Tax rates & full franking for all Australian income (i.e. DCT or RWDT)
Note 2: "Double taxed" i.e taxed more than once
Notes 1 & 2: as above
WHY IS INTERNATIONAL TAXATION SUCH A MAJOR ISSUE?
WHAT IS PROPOSED?
I note that in Chapter 31 of APC, on Page 654, the RBT puts forward the conceptual principle underpinning this proposal. Namely,
"Where income from major foreign investments flows through Australian entities to non-residents, Australia should not levy additional tax where that income has already been comparably taxed in the country where the income is derived. Australia should not cause the income to be double taxed."
This submission wholeheartedly endorses that principle for reform and proposes a practical solution to achieve that highly worthwhile objective.
HOW WOULD IT WORK?
The key assumptions for this proposal are:
There are two possible approaches to implement this proposal.
Firstly, to expand the Foreign Dividend Account (or Foreign Income Account as you propose) provisions to remove the proportionality test so it is only pro-rataed over foreign shareholders - and any Australian franking impact. Many companies already have FDAs and this could be a simple, transparent and certain way of achieving the policy. This main disadvantage with this approach is that the entity may still incur transaction costs of bringing the funds back to Australia and possibly foreign dividend withholding tax, especially in the US, Canada and Germany. These added imposts (which are present today) have an adverse impact on the entitys published Profit and Loss.
Secondly, Australian law could permit the creation of "special purpose vehicles", in practice most likely to be stapled securities, such as trusts, that could be used for paying dividends to foreign shareholders. The extra advantage of allowing this option is that it could provide greater tax advantages in the investors home country depending on the particular tax regime they reside in or where the income was earned. Some companies, especially in the UK, have special trusts already established that they could use for this purpose. It could also result in lower or no foreign dividend withholding tax being applicable to the dividends. The major disadvantage with this approach is that it depends as much on the overseas country/countries tax regimes as it does Australias so it may not always be legally or economically viable.
Therefore, as both approaches can achieve the policy proposal objective, I recommend that the option be given to entities to utilise either or both options. As at the end of the day, the consequences for Australian tax will be nil and only foreign tax consequences will be relevant in determining the method used, a choice simply provides greater flexibility to maximise the benefits.
A final issue is the proposed order of distributions for payment. At present taxed profits (with franking) must be paid before unfranked dividends can be made. If different profits/cash can be paid to different shareholders consistent with all getting the same amount then an ordering may be desired. A possible ordering could be as follows:
The ordering would only be relevant to the FDA approach if foreign profits had been remitted.
WHAT ARE THE BENEFITS OF THIS APPROACH?
This is a systemic solution to a systemic problem. It represents a bold and significant internationalisation of our business tax system in respect of international taxation.
The key benefits are:
Other approaches that focus solely on providing Australian imputation credits fail to provide the most effective (if any at all) relief to foreign shareholders. And in failing to address this crucial part of the problem they can not match this proposals likely positive impact on capital markets.
Notwithstanding the major improvement that it would represent, it is neither a perfect nor complete solution to possible double taxation of foreign earnings and/or shareholders. It will still be possible for Australian shareholders to pay double tax on foreign earnings (although it will be less severe than now) and for foreign shareholders to waste franking credits (although it will be less common and of lesser value, especially with a 30% entity tax rate).
While its only other disadvantage is the potential cost, estimated at up to $500 million when combined with providing imputation credits for foreign dividend withholding tax.
I thank you for the opportunity to present this proposal to you. I hope you find it an interesting, constructive and practical solution to a significant flaw in our existing taxation system. A flaw admittedly not entirely our doing (as international tax regimes are not integrated) but one nonetheless that we as a nation, seeking to introduce an internationally competitive taxation regime, should seek to address.
I would welcome any further opportunity to discuss this or any other options with you and to assist wherever possible in any further developments thereof.