1. International Taxation
Chapter 16
International Taxation
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Overview
In general terms, Australian tax law is based on the premise that a resident is subject to Australian tax on their worldwide income from all sources in or outside of Australia.
There are specific provisions that apply to international dealings .
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Double Tax Agreements
DTAs are formal bilateral agreements between two countries.
They do not themselves operate to impose income tax, but instead aim to:
reduce or eliminate double taxation caused by overlapping tax jurisdictions.
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Double Tax Agreements
Provide a level of security about the tax rules that will apply to a particular international transaction by allocating tax rights between countries over different categories of income. Prevent tax avoidance and evasion of taxes on forms of income flows between tax treaty partners through the exchange of information between the respective taxation authorities.
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5. Accruals Taxation of Foreign Income
The system is designed to counteract tax minimisation. Certain foreign income derived by offshore companies and trusts is included in the assessable income of the Australian resident taxpayers who control those entities.
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6. Accruals Taxation of Foreign Income
The provisions apply to the tax that Australian resident taxpayers pay on the income of non-resident entities in which they have an interest and which has not been comparably taxed in offshore jurisdictions. This income is taxed on an accruals basis according to when the income is derived, not when it is remitted back to Australia.
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7. Accruals Taxation of Foreign Income
The foreign income accruals taxation system operates by taxing income derived by Australian resident taxpayers who hold substantial interests in entities which are residents of overseas tax havens. These entities are called "Controlled Foreign Company's" or CFC's.
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8. Accruals Taxation of Foreign Income
Controlled Foreign Company (CFC)
A CFC is a company which is a non-resident (located in a foreign country) but which is controlled by Australian residents.
s.340 ITAA36 provides three “control tests”.
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9. Accruals Taxation of Foreign Income
Controlled Foreign Company (CFC)
The control tests are:
5 or fewer Australian entities own at least 50% of the foreign company.
5 or fewer Australian residents effectively control the foreign company.
a single Australian entity owns at least 40% of the foreign company.
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10. Accruals Taxation of Foreign Income
The accruals system particularly applies where a CFC in an unlisted country has attributable income The purpose of the CFC tax rules is to tax Australian shareholders on their share of a CFC’s tainted income as it is earned, unless that income is taxed comparably offshore.
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11. Accruals Taxation of Foreign Income
Tainted income
Tainted income generally includes passive income, such as income from investments (e.g. rent, some interest, dividends and royalties), and certain sales and services income arising from related party transactions
Basically it is income from investments or arrangements that are likely to be significantly affected by taxation considerations.
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12. Accruals Taxation of Foreign Income
Attributable income
The two types of attributable income are income derived by:
foreign companies controlled by Australian residents.
trusts to which residents have transferred property or services.
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13. Accruals Taxation of Foreign Income
Attributable income
An attributable taxpayer must include in his assessable income a share of a CFC’s attributable income that is the sum of that taxpayer's direct and indirect percentage interest in the CFC.
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14. Accruals Taxation of Foreign Income
Income excluded from attributable income
Two broad categories of income excluded from attribution are:
active income (i.e. income derived by a CFC from the active conduct of a trade or business).
income derived by a CFC which has already been taxed in Australia or in a "listed country“.
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15. Accruals Taxation of Foreign Income
Listed country
A listed country is one which has a tax system closely comparable to the Australian taxation system.
The listed countries are Canada, France, Germany, Japan, New Zealand, UK, and USA.
Income derived from these countries is normally not subject to attribution.
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16. Accruals Taxation of Foreign Income
Unlisted country
All other countries are unlisted countries.
e.g. a tax haven or a country considered not to have, in any way, a closely comparable taxation system to Australia.
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17. Accruals Taxation of Foreign Income
Tax Havens
Tax havens are countries with secretive tax or financial systems.
They impose no or only nominal taxes and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape tax in their country of residence.
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18. Accruals Taxation of Foreign Income
Tax Havens
The ATO definition of a tax haven is based on the criteria used by the Organisation for Economic Cooperation and Development (OECD).
The OECD identifies three key factors in considering whether a jurisdiction is a tax haven:
Lack of effective exchange of information.
Lack of transparency.
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19. Tax Havens and Tax Administration
The ATO uses a variety of intelligence techniques and tools to identify tax haven arrangements and their promoters. In particular, the ATO uses computer-based analytical tools to draw links between internal and external data and intelligence and to identify high-risk transactions and the parties involved.
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20. Tax Havens and Tax Administration
Information sources include:
AUSTRAC.
international information exchanges under our tax treaties.
financial institutions and other external sources.
credit and debit card transaction data.
tax returns.
internet research.
information from the public
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