OECD BEPS Project: Endorsement by G20 leaders

At the Leaders' Summit held in Turkey on 15 and 16 November 2015, the leaders of the Group of Twenty (G20) endorsed the package of measures (BEPS 2015 Final Reports) developed under the Base Erosion and Profit Shifting (BEPS) project by the Organisation for Economic Cooperation & Development (OECD), noting that wide-spread and consistent implementation will be critical in the effectiveness of the project, and reaffirming previous commitments to information exchange on-request as well as to automatic exchange of information by 2017 or end-2018. Our TaxTalk Alert provides an analysis of the package from an Australian perspective.

Further details are set out in the G20 Leaders' Communique.

New tax treaty with Germany

On 13 November 2015, the Commonwealth Treasurer announced that a new Tax Treaty (Treaty) had been signed with Germany, aimed at reducing tax impediments to increased bilateral trade and investment, and improving the integrity of the tax system. It replaces a previous Double Taxation Agreement between Australia and Germany signed in 1972.

According to the media statement the new Treaty gives effect to the OECD/G20 Base Erosion and Profit Shifting (BEPS) recommendations with the main features of the new Treaty including:

  • Treaty benefits will be denied if a principal purpose of a person is to take advantage of the Treaty.
  • Nothing in the Treaty will prevent either country from applying their domestic laws which are designed to prevent the evasion or avoidance of taxes.
  • The Australian taxes covered by the Treaty are income tax, fringe benefits tax and resource rent taxes.
  • The German taxes covered by the Treaty are income tax, corporate income tax, trade tax and capital tax.
  • Treaty benefits will be available for income derived through fiscally transparent entities but only to the extent that the income is treated as the income of a resident of Australia or Germany under domestic law.
  • Treaty benefits will be available under certain circumstances for income received by Australian managed investment trusts.
  • The definition of ‘permanent establishment’ has been strengthened and supplemented by new integrity provisions, which will broaden the range of circumstances in which both countries can tax business profits.
  • A ten year time limit will generally apply for making transfer pricing adjustments, with a correlative adjustment to be made to the profits of an associated enterprise so that the transfer pricing adjustment does not result in double taxation of the same profits in the hands of two associated enterprises.
  • The definition of ‘immovable property’ will enhance both countries’ ability to tax income derived from the use of immovable property, including mining rights.
  • Dividends may be taxed in the source (of the dividend) country up to the following limits:
    • Zero for intercorporate dividends paid to publicly listed companies, or subsidiaries thereof, or unlisted companies in certain circumstances, that hold 80 per cent or more of the paying company;
    • 5 per cent of the gross amount of the dividend for intercorporate dividends paid to companies that hold 10 per cent or more of the paying company; 
    • 15 per cent for all other dividends. 
  • Interest may be taxed in the source (of the interest) country up to the following limits:
    • Zero for interest derived by government bodies, central banks and unrelated financial institutions; and
    • 10 per cent for all other interest.
  • Royalties may be taxed in the source (of the royalty) country up to a limit of 5 per cent of the gross royalty. The right to use industrial, commercial or scientific equipment has been removed from the revised definition of ‘royalties’.
  • Comprehensive rules will govern the allocation of taxing rights between Australia and Germany over income, profits or gains from the alienation of different categories of property.
  • Rules are included prescribing the circumstances under which Germany may apply its capital tax to capital owned by Australian residents.  Rules are included for seeking a refund of overpaid withholding tax, including the requirement that the refund be requested within four years of receiving the relevant income.
  • The revenue agencies of Australia and Germany will be authorised to exchange taxpayer information in respect of all taxes imposed in either country. Strict rules will govern the protection of tax information exchanged in relation to individuals.
  • The revenue agencies will assist each other in the collection of outstanding tax debts.

The new Treaty will enter into force in Australia on 1 January for withholding taxes, 1 April for Fringe Benefit Tax, 1 July for other taxes, after both countries have completed their domestic requirements and instruments of ratification have been exchanged. For Germany, the treaty applies from 1 January following ratification of the treaty.

A copy of the text of the new treaty is available on the Treasury website.

For further information please contact Christian Holle on 61 (2) 8266 5697 or at christian.holle@au.pwc.com.

Papua New Guinea (PNG): Budget 2016

The 2016 Papua New Guinea National Budget was handed down on Tuesday 3 November 2015. PwC PNG's National Budget Commentary is available online, and includes an overview of the tax developments and amendments contained in the Budget.

New Zealand: Consultation on tax simplification

The New Zealand (NZ) Minister of Revenue has released the following two consultation papers containing further tax simplification proposals as part of the Government's "Making Tax Simpler" consultation series:

  • Making tax simpler – Towards a new Tax Administration Act, which looks at the role of the Commissioner of Inland Revenue, how taxpayer information can be used more efficiently to provide better services for New Zealanders, and the role of taxpayers and third parties
  • Making tax simpler - Better administration of PAYE and GST, which looks at how to make Pay As You Earn (PAYE) and Goods and Services Tax (GST) systems fit with business processes rather than the other way round.

A third paper on business taxation is expected to be released in 2016. The Minister has also released a summary of public feedback received from the first round of public consultation - Making tax simpler - Green paper and Better digital services: summary of feedback.

New Zealand: Taxing gains on sale of residential land

The Taxation (Bright-line Test for Residential Land) Bill has now passed its third reading in the NZ Parliament and will become law upon receipt of Royal Assent. Under the measures, a new ‘brightline’ test will require income tax to be paid on gains from residential property acquired on or after 1 October 2015 that is sold within two years (with exceptions for main residence, inherited property, and transfer of relationship property). For further details see the Minister of Revenue's media statement available on Inland Revenue's Policy Advice website.

Board of Taxation: Consultation on proposed anti-hybrid rules

On 20 November 2015, the Board of Taxation (Board) released its Discussion Paper (Paper) on the Implementation of the anti-hybrid rules. The Paper has been developed by the Board to invite submissions and facilitate stakeholder consultation on the issues raised in accordance with the terms of reference given for the review.

Under the terms of reference, the Board has been requested to undertake consultation on the implementation of new tax laws to neutralise hybrid mismatch arrangements (anti-hybrid rules), pursuant to the recommendations of the G20 and OECD under Action Item 2 of the Base Erosion and Profit Shifting (BEPS) Action Plan and to examine how best to implement anti-hybrid rules in the Australian legal context. In particular, the Board has been asked to identify an implementation strategy that has regard to: 

  • Delivering on the objectives of eliminating double non-taxation, including long term tax deferral
  • Economic costs for Australia
  • Compliance costs for taxpayers, and
  • Interactions between Australia’s domestic legislation (e.g. the debt-equity rules and regulated capital requirements for banks), international obligations (including tax treaties) and the new anti-hybrid rules.

The Board has been requested to report to Government by March 2016 to allow this issue to be considered as part of the 2016 Federal Budget. So as to meet this timeframe, the Board has requested that submissions to this review be made by 15 January 2016.