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INCOME TAX REGULATIONS (AMENDMENT) 1991 NO. 20
EXPLANATORY STATEMENTSTATUTORY RULES 1991 No. 20
Issued by Authority of the Treasurer
Income Tax Assessment Act 1936
Income Tax Regulations (Amendment)
GENERAL OUTLINE
Purpose of regulations
The main purpose of these regulations, which amend the Income Tax Regulations, is to give effect to the proposal to introduce an accruals system of taxing certain income derived by Australian residents from foreign companies which are controlled by those residents and from certain foreign trusts to which those residents have transferred property or services.
The proposal was announced in the April 1989 Economic Statement and modified in press statements of 17 December 1989, 15 February 1990, 3 June 1990 and 29 June 1990.
The legislation giving effect to the accruals tax measures, the Taxation Laws Amendment (Foreign Income) Act 1990, received Royal Assent on 8 January 1991.
Matters covered by regulations
The regulations giving effect to the accruals tax measures cover five matters. They are:
(a) listed countries;
(b) designated concession income;
(c) Swiss cantonal taxes;
(d) capital gains 'roll-over relief' for the purposes of the 'subject to tax´ test;
(e) service of notices.
Jurisdictional coverage of accruals tax measures
Broadly, the accruals tax measures apply to companies that are resident in:
(a) an "unlisted country", i.e., a country that is not included in a prescribed list of countries referred to in paragraph (b) below; or
(b) a "listed country" (i.e., in a country declared by the regulations to be a listed country) but only in respect of the following income:
(i) designated concession income, i.e., income or profits of a kind specified in the regulations because of a feature (also specified in the regulations) that results in concessional tax treatment;
(ii) income derived from sources outside the listed country that is not 'subject to tax' in that listed country or in another listed country;
(iii) certain categories of trust income.
The accurals tax measures also apply in a broadly similar manner to trusts.
Listed countries
The term 'listed country' is defined in section 320 of the Income Tax Assessment Act 1936 (the Act) to mean a foreign country, or part of a foreign country, that is declared by the regulations to be a listed country. A listed country is one in which the tax rates and basic design features of the tax system are similar to those in Australia.
Sixty countries (including Australia's major trading partners and all our tax treaty partners) are declared in the regulations to be listed countries. A reference to the German Democratic Republic has been included in the list of listed countries because its tax laws continue to have effect until 1 January 1991. Countries not specified in the regulations will automatically be treated as 'unlisted countries'. In broad terms, an unlisted country is one in which tax is generally significantly lower than Australia's.
With the exception of two overseas territories of France, viz, New Caledonia and French Polynesia and a non-self governing territory of New Zealand, viz, Tokelau, the foreign countries declared in the regulations to be listed countries are independent foreign states.
The term 'foreign country' is not defined for the purposes of the Act. The term is however defined in section 22 of the Acts Interpretation Act 1901 to mean "any country (whether or not an independent sovereign state) outside Australia and the external Territories". Subsections 320(2), (3) and (4) of the Act will have the effect of modifying the expression "foreign country" to ensure that a colony, overseas territory or protectorate of a foreign country is treated as a separate country.
Designated concession income
The listing of a country in the regulations as a listed country may be qualified in respect of certain tax concessions provided under the tax law of the country. The proposed regulations give effect to this qualification by the use of the concept of 'designated concession income'. This concept enables a country to be listed even though the country's tax system has one or more features that would otherwise prevent the country from being listed at all.
Designated concession income, in relation to a particular listed country, is defined in section 317 of the Act to mean, broadly, income or profits of a kind that are specified in the regulations on which no tax is payable or a reduced amount of tax is payable in the listed country because of a feature of a kind specified in the regulations (for example, a concessional rate of tax that may apply to all or some of the income derived by an entity).
The features specified in the regulations may be either country-specific or relate to the tax systems of several countries.
Swiss cantonal taxes
The regulation relating to this matter provides that a Swiss cantonal tax on income is to be treated as if it were an additional federal foreign tax of Switzerland. It reflects the fact that it is necessary to add both Swiss cantonal and federal income taxes to make a proper comparison with the amount of income tax levied at the federal level in Australia.
Capital gains 'roll-over relief'
The regulation relating to this matter will treat as 'subject to tax' capital gains for which 'roll-over relief' is provided in a listed country. Broadly, a gain will be taken to be subject to tax for the purposes of section 324 of the Act in circumstances where the gain would have been subject to tax if roll-over provisions of a kind specified in the regulations were not contained in the tax law of a particular listed country. Roll-over relief provides for the deferral of tax on a capital profit arising from the disposal of an asset.
Service of notices
The regulation relating to this matter provides a mechanism for the service of notices by certain taxpayers and overseas companies for the purposes of sections 451 and 452 of the Act. These sections permit notices to be served on overseas companies to obtain information relating to the substantiation requirements for the active income, test. This test is used in the accurals tax measures to determine if such companies are conducting an active business (as opposed to passive investment) in an overseas country.
DETAILED NOTES ON THE REGULATIONS
Regulation 1 - Commencement
The amending regulations, subject to the two exceptions in application provisions in regulation 6, are to commence on 1 July 1989. Section 60 of the Taxation Laws Amendment (Foreign Income) Act 1990 (F.I. Act) provides that the first set of regulations made for a provision of the Income Tax Assessment Act 1936 (the Act) inserted by the F.I. Act may operate retrospectively because they assist the operation of the Act in providing particulars of listed countries and designated concession income. Further information on this aspect is set out in the explanatory memorandum to the regulations.
Regulations 2 and 3
Regulations 2 and 3 are procedural and simply modify the existing Income Tax Regulations as necessary and incorporate a new Part 8A in those Regulations. New Part 8A contains new regulations 152A to 152K and the following notes will discuss those new regulations under their respective headings.
Regulation 152A - Interpretation
Regulation 152A contains definitions of terms that have general use in new Part 8A. Each defined term is to have the given meaning unless the contrary intention appears. Subregulation 152A(1) makes it clear that where words or phrases are not defined in subregulation 152A(2), they are to have the same meaning as in Part X of the Act.
'asset' This term has the meaning given by section 160A of the Act. It is relevant to the meaning of 'capital gains' in regulation 152B.
'compulsory acquisition' This term is defined for the purposes of subregulation 152G(1).
'concessional rate of tax' This term is defined to mean a rate of tax which is less than the normal company rate imposed under the tax law of a listed country. The concept is used in new Part 8A to test whether income or profits are concessionally taxed in a listed country.
'interest income' This term is defined for the purposes of regulation 152D. It includes amounts in the nature of interest (like discounts) and amounts that would be assessable income under Division 168 of Part III of the Act if the entity deriving the amount were a resident of Australia. In broad terms, Division 16E taxes on an accruals basis income derived from discounted and other deferred interest securities.
"normal company tax rate' In relation to a listed country, with the exception of Switzerland, the term 'normal company tax rate' is defined as the normal rate of tax paid by a company that is a resident of the listed country. In Switzerland, it is defined as the addition of both the federal company tax rate and the cantonal (State) company tax rate. The reason for this is outlined above in the GENERAL OUTLINE section under the heading of 'Swiss cantonal taxes'. This term is used only in subregulations 152D(4) and (5);
'offshore banking business'; 'offshore financial business'; 'offshore income'; 'offshore insurance business'; 'offshore investment business'; and 'offshore reinsurance business' These terms are defined for the purposes of regulation 152D. The businesses of the types specified would be located in a particular listed country and have a connection outside that country.
Normally, they are businesses which are prohibited under a law of a listed country from carrying on business with residents of that country but are granted concessional tax treatment in respect of income derived from offshore activities, i.e., from non-residents of the country.
'permanent establishment' This term is defined to mean, broadly, a place at or through which a person carries on any business. Examples of permanent establishments are branches, factories and mines.
The definition of permanent establishment in section 6 of the Act will apply in the regulations except for the purposes of section 23AH of the Act where Australia has a comprehensive double tax agreement with the listed country, in which case the definition of "permanent establishment" contained in the relevant agreement will apply.
The term is used in connection with the following kinds of designated concession income:
(a) capital gains;
(b) interest income;
(c) royalties;
(d) shipping income;
(e) offshore income.
'relevant listed country' In relation to capital gains;
interest, shipping or offshore income; or royalties derived by an entity, the term 'relevant listed country' is used to identify which country is being tested to determine whether the gains, etc., referred to above are subject to a reduction of tax within the meaning of regulation 152C. It should be noted that the term is not relevant for the purposes of income or profits to which paragraph 152D(1)(c) of the regulations applies as the appropriate country in respect of that paragraph is identified by reference to the appropriate item in Part 2 of Schedule 9 to these regulations.
'relevant period' This term is defined to encompass three time periods used in the accruals tax measures. They are:
(a) "statutory accounting period" in relation to a controlled foreign company (see sections 385, 403 and 436 of the Act);
(b) "accounting period" in relation to a company resident in an unlisted country which derives income from a listed country through a permanent establishment (but only in connection with section 377 of the Act); and
(c) "year of income" in relation to:
(i) a non-resident trust estate; and
(ii) an Australian taxpayer who derives foreign source income from an overseas branch.
The term 'relevant period' is used throughout the regulations to determine when income or profits are derived by an entity.
'relevant tax accounting period' This term is defined to mean a tax accounting period (as defined in section 317 of the Act) which ends before the end of, or commences during, the relevant period in relation to an entity.
'shipping income' This term is defined for the purposes of regulation 152D. Broadly, the term includes rental income from the leasing of ships and containers and profits normally derived from shipping operations.
Meaning of 'resident' for certain definitions
Subregulations 152A(3) and (4) insert a definition of 'resident' to assist in the application of the definitions of 'offshore banking business', 'offshore financial business', 'offshore investment business' and 'offshore reinsurance business'. These definitions require consideration of whether dealings have taken place with a person who is not a resident of the listed country in question.
Subregulation 152A(3) provides that a person is a resident of a listed country if the person is treated as a resident under the tax law of the listed country.
Subregulation 152A(4) extends the meaning of resident in subregulation 152A(3), to include a person in respect of whom the tax law of a country imposes tax liability on the worldwide income of the person because of some form of attachment to the country other than the criterion of residence - for example, by reason of domicile, incorporation, place of effective management or a criterion of a similar nature.
Regulation 152B What are capital gains?
Regulation 152B defines the term 'capital gains' for the purposes of regulation 152D.
Subregulation 152B(1) defines the term in relation to a CFC that is a resident of a listed country at the end of a statutory accounting period. This subregulation is relevant for the purposes of section 385 of the Act.
Interposed trusts and partnerships
Subregulation 152B(2) will ensure that where an asset is disposed of through a partnership or trust, particularly where subregulation 152B(3) does not apply (i.e., not in connection with a permanent establishment of a trust or partnership), a CFC's interest is to be taken into account. This is relevant for the purposes of paragraphs 385(2)(c) and (d) of the Act when calculating a CFC's notional assessable income which includes partnership or trust income.
Permanent establishments
Subregulation 1528(3) defines capital gains in relation to an entity deriving gains in connection with a permanent establishment. This subregulation would be relevant for the purposes of Division 6AAA and sections 23AH, 377, 385, 403 and 436 of the Act. Of course, by virtue of the definition of entity in Part X of the Act, it includes capital gains derived by a partnership or trust in connection with a permanent establishment.
Possible overlap
Given that subregulation 152B(1) covers capital gains derived by a CFC on a worldwide basis, there could be some overlap between subregulations 152B(1) and (3), for example, where a CFC resident in a listed country derives capital gains in connection with a permanent establishment which is located in another listed country. However, this will not result in double taxation.
Nexus between disposal of an asset and derivation of a gain
Subregulation 152B(4) is a deeming provision which establishes a nexus between the relevant period during which an asset is sold or otherwise disposed of and the derivation of the gain in respect of the sale or disposal.
Regulation 152C - When are income or profits subject to a reduction of tax?
Regulation 152C defines the term 'subject to a reduction of tax' which is central to the operation of the regulations. The definition sets out the features which would result in income or profits being regarded as concessionally taxed in a listed country.
Broadly, the term covers a situation where income or profits are subject to a tax benefit that reduces the amount of tax which would otherwise be payable under the tax law of a listed country.
The benefit may be provided in a number of ways, e.g., under any law or by administrative arrangement. In this regard, it is to be noted that the expression 'feature' used in the definition of section 317 of the Act is not intended to be read down to mean a feature of a tax law - it is to be taken to mean a feature of any kind whether or not contained in the tax law and whether or not the feature applies to a class of cases or only one case. For example, an offshore banking act of a listed country may provide for an exemption of tax under a tax law of that country in respect of income derived by a bank from certain activities or operations. In other words, in this case, the exemption (in relation to foreign tax, within the meaning of section 6AB of the Act, imposed by the tax law of the listed country) may be contained in the offshore banking legislation, not the tax law.
What constitutes a reduction of tax?
In regulation 152C, a reduction of tax refers to situations where, as a result of a law, or a proclamation, decree, instrument or direction of a competent authority, or an administrative arrangement, income or profits are
(a) exempt from tax;
(b) subject to a concessional rate of tax (a term defined in subregulation 152A(2));
(c) not used as a basis for determining the taxable income, taxable profits or tax base, as the case may be, or establishing the tax liability of an entity, for example
(i) foreign sales corporations, distribution and co-ordination centres in Belgium which are taxed on a cost-plus basis;
(ii) headquarter, holding and other entities in France, Federal Republic of Germany, Luxembourg and the Netherlands which are taxed on a similar basis to the Belgian entities referred to above;
(d) reduced other than for normal expenses or losses, e.g., situations where income or profits are reduced on an arbitrary or notional basis in accordance with a statutory or administrative formula; or
(e) subject to other tax benefits which would have the effect of reducing the amount of tax otherwise payable (see subregulation 152C(5) for an expanded meaning of 'tax benefit').
Subregulation 152C(2) provides that where income or profits derived in a relevant period are included in the normal tax base and taxed at the normal company tax rate in a listed country in a tax accounting period that commences in (or ends before the end of) the relevant period, those income or profits shall not be treated as being subject to a reduction of tax in any other tax accounting period.
Subregulation 152C(3) provides that losses or outgoings which are incurred in deriving income or profits, or relate to a business for the purposes of gaining income or profits, may be deducted from the income or profits for the purposes of paragraph 152C(1)(g).
Subregulation 152C(4) requires that, in the case of Switzerland, the feature of 'concessional rate of tax' is to be tested against both the federal tax law and the cantonal (State) tax law.
The term 'tax benefit' is defined in subregulation 152C(5) but this subregulation needs to be read in conjunction with subregulation 152C(1).
Regulation 152D - Income or profits as designated concession income
Regulation 152D is the operative regulation in relation to designated concession income.
what kinds of income or profits are designated concession income?
Subregulation 152D(1) specifies the kinds of income or profits that are designated concession income for the purposes of section 317 of the Act. These are -
(a) capital gains (a term defined in regulation 152B) that are exempt from tax in a relevant listed country;
(b) interest income (a term defined in regulation 152A) that is subject to a reduction of tax in a relevant listed country;
(c) royalties (as defined in subsection 6(1) of the Act) that are subject to a reduction of tax in a relevant listed country;
(d) shipping income (a term defined in regulation 152A) that is subject to a reduction of tax in a relevant listed country;
(e) offshore income (as defined in regulation 152A) that is subject to a reduction of tax in a relevant listed country;
(f) income and/or profits derived by an entity, which is an entity referred to in Part 2 of Schedule 9 of the regulations, that are subject to a reduction of tax in a particular listed country. The particular listed country is identified by reference to column 2 of an item in Part 2 of Schedule 9.
For the purposes of capital gains, interest income, royalties, shipping income and offshore income, the definition of 'relevant listed country' in regulation 152A is relevant.
As mentioned above, paragraph 152D(1)(a) sets out the circumstances in respect of which capital gains are to be regarded as designated concession income. However, it is also necessary to have regard to the notes below on paragraph 152D(1)(b) to examine the effect that the concepts of eligible designated concession income (defined in section 317 of the Act) and the active income test (see section 432 of the Act) may have on capital gains that are designated concession income.
Paragraph 152D(1)(b) sets out the circumstances in which offshore income, interest income, royalties and shipping income (referred to as 'income' below) are to be regarded as designated concession income (dci). To determine if the income is dci, subject to certain exceptions in subregulations 152D(4), (5) and (6), the income is tested in terms of the 'subject to a reduction of tax' test (as outlined in regulation 152C).
The 'subject to a reduction of tax' test is, in effect, applied in relation to the following two tests. The first test is in relation to a CFC which is a resident of a listed country at the end of a statutory accounting period and the second test relates to the derivation of income by an entity at or through a permanent establishment situated in a listed country. The two tests are set out below.
1st Test
Income derived by a CFC is tested against the laws and administrative arrangements applying to the CFC in the listed country in which it is a resident to determine if the income is subject to a reduction of tax in that country
2nd Test
Income derived by any entity (as defined in section 317 of the Act) through a permanent establishment is tested against the laws, and administrative arrangements (in relation to the entity) by the appropriate authorities, of the country in which the permanent establishment is located to determine if it is subject to a reduction of tax in that country.
Possible for a CFC to satisfy both tests
In circumstances where a CFC (resident in a listed country) has derived income from a permanent establishment in another listed country, the income is, in effect, tested twice, first against the laws and arrangements of the country of residence of the CFC and, secondly, against the laws and arrangements of the country in which the permanent establishment is located.
This is best illustrated by way of example. Let us assume that a CFC:
(a) is a resident of listed country A which has a normal company tax rate of 30%;
(b) has a permanent establishment in listed country B which has a normal company tax rate of 40%;
(c) derives $100 interest income in connection with its permanent establishment in country B which is subject to withholding tax at a rate of 5%.
1st scenario
|
Country A: Country B:
|
Assessable income Allowable expenses Taxable income Tax payable ($90 x30%) Tax credit for withholding tax paid in country B Net tax payable Gross income Withholding tax (@5%) Balance
|
$ 100 10 90 27 5 22 $ 100 5 95
|
In relation to country A, the interest income is not 'subject to a reduction of tax' and is therefore not designated concession income in relation to that country. The allowance of a tax credit in country A for tax paid in country B does not constitute a 'reduction of tax' within the meaning of subregulation 152C(1) because of the provisions of subregulation 152C(5).
In relation to country B, the interest income is subject to a reduction of tax because a concessional rate of tax of 5% applies, as opposed to the normal company rate of 40%.
The above result does not mean that the interest income, which is dci in relation to country B, is automatically included in the 'notional assessable income' of the CFC in question for the purpose of calculating its attributable income. This is because the Act, by virtue of the definiton of eligible designated concession income in section 317, requires the dci to be tested to see whether, broadly, it has been subject to tax (within the meaning of section 324 of the Act) in another listed country.
In this case, the $100 interest income is dci in relation to country B, but is subject to tax in another listed country, viz, country A. Thus, in this case, the $100 interest income is not eligible designated concession income and therefore will not be included in the attributable income of the CFC. By virtue of that fact, it would not be attributed to the Australian taxpayers who control the CFC.
2nd scenario
Country A: Interest income is exempt from tax.
Country B: Same circumstances as scenario 1.
In relation to country A, the interest income is 'subject to a reduction of tax' because it is exempt from tax (see paragraph 152C(1)(d)). Therefore the interest income is designated concession income in relation to country A. For the same reasons as in scenario 1, the interest income is desgnated concession income (dci) in relation to country B.
For the same reasons outlined in scenario 1, it is now necessary to determine if the dci is eligible designated concession income (edci) in terms of the definiton of edci in section 317 of the Act. In other words, we need to ascertain whether the interest income is subject to tax (within the meaning of section 324 of the Act) in another listed country.
Step 1
In relation to country B, the interest income is dci. Is the income subject to tax in another listed country? In this case the answer is no because it is exempt from tax in country A.
Step 2
In relation to country A, the interest income is dci. Is the income subject to tax in another listed country?
At this point, it is necessary to understand that the 'subject to tax' test as defined in section 324 of the Act is not satisfied where tax is imposed or levied on a withholding tax basis. In other words, the 'subject to tax' test is, in effect, only satisfied if the income or profits are subject to tax by assessment procedures at the normal rate applied to resident companies.
In country B, tax is paid on a withholding tax basis at a rate of 5%, but it is not subject to tax at normal rates payable by resident companies (ie, tax by assessment) in country B. In the circumstances, the $100 interest income is edci.
Step 3
The fact that income or profits derived by a CFC is edci (i.e., dci in relation to a particular listed country which is not subject to tax in another listed country) does not necessarily mean that it will automatically be included in the 'notional assessable income' of the CFC in order to determine its attributable income (i.e., its notional taxable income). The active income test has to be applied.
Broadly, the active income test is used to determine whether a CFC is predominantly engaged in active business and trading activities as opposed to passive investment activities. In the case of a listed country, the active income test only applies to activities which give rise to edci and not to activities giving rise to other types of income. In this regard, see the section of the GENERAL OUTLINE headed 'Jurisdictional coverage of accruals tax measures'.
If the CFC passes the active income test, the edci is not included in the CFC's attributable income.
Further information on edci, the active income test and the calculation of a CFC's attributable income is included in the explanatory memorandum relating to the Taxation Laws Amendment (Foreign Income) Bill 1950.
Interposed trusts and partnerships
Subregulation 152D(2) ensures that a CFC's interest in the offshore income, interest income, royalties and shipping income derived by an interposed partnership or trust are taken into account for the purpose of determining which income or profits are to be regarded as designated concession income.
When are amounts of deferred interest and discount income derived?
For the purposes of subparagraph 152D(1)(b)(i), subregulation 152D(3) provides that interest income, (being amounts to which Division 16E of Part III of the Act are deemed to apply) is derived in respect of the relevant period to which the amount relates. (See earlier note on 'interest income' in relation to Division 16E amounts.)
Exceptions for interest income and royalties
Subregulations 152D(4) and (5) provide that certain interest income and royalties are not to be regarded as designated concession income for the purposes of subregulation 152D(1).
1st Exception
Subregulation 152D(4) provides that interest income and royalties are not to be regarded as dci if they are taxed in a relevant listed country (ie, country of residence or where P.E. located) on a withholding tax basis at the normal company tax rate applicable in the relevant listed country.
It is not expected that the application of this subregulation would be a common occurrence because income or profits derived by an entity would normally be taxed on an assessment basis in its country of residence or in the country where its permanent establishment (PE) is located. However, the provision has keen inserted to ensure that in the event that a listed country taxes "resident income" or "PE income" on a withholding tax basis at the normal company tax rate, the income or profits will not be taken to be designated concession income because of the "subject to a reduction of tax" test in regulation 152C.
2nd Exception
Subregulation 152D(5) provides a similar exclusion from designated concession income if interest and royalties are taxed at the normal company rate in a listed country other than the country of residence of the CFC or country of location of the PE.
Exception for shipping income
Subregulation 152D(6) provides that shipping income is not to be regarded as designated concession income if it is taxed on a withholding-type tax basis in its country of source (if it is not a relevant listed country or Australia) at a rate which is not less than 5% of the gross amount of shipping income.
Regulation 152E - When are capital gains exempt from tax?
Subregulation 152E(1) sets out the circumstances in which capital gains are to be taken to be exempt from tax for the purposes of subregulation 152D(1). The circumstances are similar to that in regulation 152C but are limited to a situation where the gains are exempt from tax as opposed to the other concessional situations outlined in regulation 152C.
Roll-over relief for capital gains that are designated concession income
Subregulation 152E(2) provides that capital gains will not be taken to be exempt from tax where the tax law of a foreign country provides roll-over relief similar to Australia. The purpose of roll-over relief is to defer the payment of tax from one tax period to another where an asset is disposed of in certain circumstances, e.g., an asset may be lost, damaged or destroyed, or an asset is transferred between companies in the same group. The roll-over relief provisions in the regulations are based on the roll-over relief provisions contained in the capital gains provisions of the Act and have the effect that the capital gains are not dci.
Tax sparing for capital gains which are designated concession income
Subregulation 152E(3) provides for. a situation where tax sparing provisions are contained in a double tax agreement or in regulations made for the purposes of section 160AFF of the Act in relation to capital gains. In broad terms, the purpose of this subregulation is to ensure that where Australia has agreed to tax sparing in certain circumstances through either
(a) tax sparing provisions of an Article in a double tax agreement; or
(b) regulations made under section 160AFF of the Act,
the accruals provisions maintain that tax sparing by regarding the gains as not exempt from tax.
Further information on tax sparing is contained in the notes on regulation 152H.
By way of background information only, the accruals tax measures provide tax sparing arrangements in paragraph 324(1)(b) of the Act for capital gains which, for the purposes of the Act, do not fall within the (legal) class of capital gains specified for the purposes of the definition of designated concession income in section 317 of the Act. The (legal) class of capital gains which do not fall within the concept of designated concession income are referred to regulation 152F. It is necessary to have regard to provisions of the Taxation Laws Amendment (Foreign Income) Act 1990 to distinguish between capital gains specified for the purposes of section 317 of the Act and capital gains referred to in other areas of the Act relating to the accruals tax measures.
Regulation 152E - Certain capital gains regarded as subject to tax
The purpose or regulation 152E is to prescribe 'roll-over relief' as a feature within the meaning of paragraph 324(2)(b) of the Act. In relation to this matter, it is also necessary to have regard to the provisions of subsection 23AH(11) and section 102AAD which apply for the purposes of the Act in a similar manner to subsection 324(2).
This regulation applies for the purposes of the 'subject to tax' test (within the meaning of section 324 of the Act) where the tax law of a listed country grants roll-over relief of a kind that would be available under Australian tax law.
Specifically, a capital gain will be taken to be subject to tax for the purposes of section 324 of the Act in circumstances where the gain would have been subject to tax if roll-over provisions of the kind specified in the regulations were not contained in the tax law of a particular listed country.
The 'subject to tax' test is not used for the purposes of determining whether income or profits are designated concession income. However, as mentioned earlier in these notes relating to paragraph 152D(1)(b), the 'subject to tax' test is used, amongst other things, to detemine whether designated concession income is to be treated as eligible designated concession income.
Also, the final paragraph of the earlier notes on subregulation 152E(3) outlines, in broad terms, the distinction between capital gains as comprehended by regulation 152F as opposed to capital gains comprehended by paragraph 152D(1)(a) and regulation 152E of these regulations.
Regulation 152G - Circumstances specified for purposes of regulations 152E and 152F
This regulation specifies the circumstances, relating to 'roll-over relief' provided in regulations 152E and 152F, which must be contained in the tax law of a listed country which provides the relief. The roll-over relief is limited to these circumstances notwithstanding that the actual roll-over relief provisions of the tax law cater for a wider set of circumstances.
The circumstances referred to in this regulation relate to the type of circumstances in the roll-over relief provisions that are available for capital gains purposes under Australian tax law.
In broad terms, the circumstances relate to:
(a) the involuntary disposal of an asset or where an asset is lost, damaged or destroyed;
(b) the transfer of an asset to a wholly-owned company;
(c) the exchange of shares, rights or options where there is a share split or a consolidation.
Regulation 152H - Tax sparing
Regulation 152H deals with the situation where tax sparing is provided for offshore income, interest income, royalties and shipping income. It ensures that the tax sparing provisions operate in a similar manner as they would for an Australian resident. The regulations have the effect that where:
(a) tax is not paid by an entity because of a provision of a tax law of a listed country; and
(b) the tax is regarded as having been paid in relation to that provision by:
(i) the tax sparing provisions of an Article in a double tax agreement; or
(ii) regulations made under the general tax sparing provisions of section 160AFF of the Act,
then,
(c) for the purposes of paragraph 152D(1)(b), subregulation 152H(1) provides that the income or royalties will not be taken to be subject to a reduction of tax;
(d) for the purposes of subregulations 152D(4), (5) and (6), subregulation 152H(2) provides that the tax is regarded as having been paid.
The tax sparing provisions in a double tax agreement are normally contained in the Article relating to the "Methods of Elimination of Double Taxation" and, depending upon the provisions of that Article, the provisions of section 4A of the Income Tax (International Agreements) Act 1953.
As discussed in the notes above on subregulation 152E(3), the situation where tax sparing provisions relate to capital gains are dealt with by that subregualtion.
Part 2 of Schedule 9 of the Regulations has been drafted to ensure that Part 2 does not include a provision of a tax law of a listed country in respect of which Australia has agreed to tax sparing.
Regulation 152I - Features relating to taxation in listed countries
Regulation 152I is simply a drafting measure. Its sole purpose is to provide explicity that the features specified in subregulation 152D(1) are specified for the purposes of the definition of designated concession income in section 317 of the Act.
Regulation 152J - Listed countries
Regulation 152J provides that the countries specified in Schedule 10 of the Regulations are declared to be listed countries. Further information on listed countries is contained in the GENERAL OUTLINE section above.
Regulation 152K - State foreign taxes that are treated as federal foreign taxes
Regulation 152K provides that, in relation to Switzerland, a cantonal (State) tax on income is to be treated as if it were an additional federal foreign tax of Switzerland. Further information on this matter is contained in the GENERAL OUTLINE above. Amongst other things, this regulation will, in effect, apply to the determination of the 'country's normal company tax rate' in connection with the term 'tax law' for the purposes of section 325 of the Act.
Regulation 4 - Regulation 170 (Services of notices, etc)
What is the purpose of the regulation?
This regulation will amend regulation 170 of the Income Tax Regulations to provide a mechanism for the service of notices by
(a) a taxpayer who is authorised to serve a notice on a CFC under subsection 451(2) of the Act; or
(b) a CFC which is authorised to serve a notice on a partnership under subsection 452(2) of the Act.
Why would a taxpayer or a CFC serve such a notice?
A taxpayer or a CFC would serve this type of notice in response to receiving a notice from the Commissioner of Taxation concerning the substantiation requirements for the active income test (see section 453 of the Act).
DETAILED NOTES ON SCHEDULE 9
Schedule 9 specifies the entities and listed countries referred to in paragraph 152D(1)(c) of new Part 8A of the Regulations. The notes outlined below relating to Schedule 9 are in country order and, in certain cases, are in item order under the country heading.
Belgium
Co-ordination centres, distribution centres and foreign sales corporations established in Belgium:
(a) may, in certain circumstances, be exempt from tax; or
(b) do not pay tax on their actual income or profits, i.e., the income or profits are not used as a basis for determining the taxable income of the entity. Their taxable income would normally be determined on an arbitrary (notional) basis as a percentage of certain expenses incurred, i.e., on a cost-plus basis.
The activities of co-ordination centres must be in one or more of the following fields:
advertising; supply and gathering of information; insurance and re-insurance; scientific research; relations with national and international authorities; centralization of accounting, administrative or information technology services; centralization of financial transactions or of protection against currency fluctuations; or any other activity of an auxiliary or preparatory nature. However, co-ordination centres are not to engage in banking activities. These activities must be performed for the benefit of a "group of companies" which have a multinational character, e.g., the group must own subsidiaries in at least four different countries.
A distribution centre is a resident or a non-resident company carrying on one or more of the following activities for resident and/or non-resident group companies:
(a) the purchase of raw or auxiliary materials;
(b) the storage, administration or packaging of such materials;
(c) the sale, transport or delivery of such materials only to group companies;
(d) the storage, administration or packaging of goods and products owned by group companies; and
(e) the transport and delivery (not sale or related activities) of goods or products on account of group companies to third parties.
See notes on:
(a) Luxembourg for a cost-plus example; and
(b) Netherlands for further information on foreign sales corporations.
Brazil
An entity that derives income or profits through an authorised investment. fund, receives tax concessions.
Bulgaria
The Bulgarian authorities provide tax concessions to entities that carry on certain activities and operations in the specified duty free zones.
France
The French tax authorities provide a tax concession to the headquarters of foreign companies, usually in the form of a formulatory 'tax base' which is applied to the normal rate of tax. The formulatory tax base is generally calculated by reference to a percentage of the headquarter's annual operating expenses. To obtain the concession, the headquarters acts for the sole benefit of a foreign enterprise or international group in the performance of management, control or coordination functions in a defined geographical area, e.g., Europe.
Germany
A tax concession is provided by the German tax authorities to international companies which set up their European headquarters in the Federal Republic of Germany. This concession is provided under the Decree on management centres (Kontrollstellenerlass) of 24 August 1984. This concession permits such entities to calculate their taxable income in respect of their management centres on the basis of a cost-plus method which is usually applied to the running expenses of those management centres. The cost-plus on the operating expenses is normally in the order of 5% to 10%.
Greece
A tax concession is provided to entities established in Greece under law 89/1967 in respect of their offshore operations provided they do not undertake business activities in Greece.
Hungary
Decree No. 1 of 1977 of the Minister for Finance provides for the establishment of permanent representations in Hungary of foreign financial institutions to undertake certain banking and financial activities. The activities of foreign representations include maintaining contact with Hungarian enterprises and mediating in bank transactions, although the representative may not conclude or arrange transactions. The activities of permanent representations are normally tax exempt. If the representation engages in normal commercial, activities in Hungary, it must pay the corporation tax.
Ireland
An entity which derives income or profits from certain activities of the type specified in the item numbers relating to Ireland may be subject to a tax benefit in the form of an effective concessional rate of tax not exceeding 10%. For assessment purposes, the income or profits are normally charged at the full corporation rate of tax (currently about 43%) but the amount of tax charged is reduced by a factor to achieve the desired effective concessional rate of tax of 10% or less.
Headquarter entities are normally taxed on a negotiated basis on a proportion of operating costs.
Israel
The Encouragement of Capital Investment Law permits a foreign entity to base its headquarters in Israel and pay no tax on income earned in international trade outside Israel.
Luxembourg
A Luxembourg holding company may:
(a) acquire, hold and dispose of the shares and bonds of Luxembourg or foreign companies, whether or not they are substantial participations;
(b) hold cash and foreign currencies, gold, and negotiable securities, and place funds on deposit with financial institutions;
(c) finance subsidiaries or companies in which the holding company has a direct shareholding;
(d) hold and license patents and receive income from the granting of licences (but it may not exploit the patents); and
(e) buy back up to 10% of its own shares where permitted by its statutes and agreed by a general meeting of shareholders.
A Luxembourg holding company may not:
(a) be an active member of a general partnership or partnerships limited by shares (under certain conditions);
(b) carry on any industrial or commercial activities;
(c) carry on brokerage or banking activities,.
(d) grant loans to companies which are not direct subsidiaries, unless it is a financial holding company; or
(e) own real estate, except, the premises used for its own offices, though it may own shares in real estate companies.
Normally, the income or profits derived by a holding company are tax exempt.
Luxembourg co-ordination centre provides administrative services to members of a multinational group. Broadly, a multinational group is a group established by one or more companies participating in at least 25% of the capital in one or more other companies. Companies in the group must be incorporated in at least two countries other than Luxembourg. The ultimate parent must not be resident in Luxembourg. Administrative services include central organisation and secretarial services, advertising and marketing services, collection and processing of.technical and administrative information, liaison services with national and international authorities, centralisation of bookkeeping, financial administration, computer and legal evaluation services together with support for these activities.
The amount of tax payable by a Luxembourg co-ordination centre is usually determined by reference to 5% of expenses incurred by the centre (as opposed to the income or profits it derives) times the normal company tax rate. For example, if a co-ordination centre incurs expenses of LF 30m, the amount of corporate income tax to be paid would be:
LF 30m x 5% x 34% = LF 510,000
Malaysia
The provisions in column 3 of item 21 relate to activities of an entity which are accorded a concessional rate of tax of 5%. The activities include the:
(a) insurance of offshore (i.e., outside Malaysia) risks and events; and
(b) the reinsurance of risks and events where the risks or events are outside Malaysia and the original policy is issued by an insurer who is not a resident of Malaysia.
The provisions in column 3 of item 22 relate to entities which set up operational headquarters in Malaysia. They are normally taxed at a reduced corporate rate of 10% on income derived from the provision of qualifying services, to the operational headquarters in Malaysia or related companies outside Malaysia. Services include:
(a) general management and administration;
(b) business planning;
(c) procurement of raw materials and components for use in the business of its offices or related companies outside Malaysia;
(d) technical support;
(e) marketing control and sales promotion planning;
(f) training and personnel management;
(g) provision of credit facilities to its offices or related companies outside Malaysia where the funds for providing facilities are obtained from financial institutions in Malaysia;
(h) research and development work carried out in Malaysia on behalf of its offices or related companies outside Malaysia.
Malta
The Acts referred to in column 3 of item 23 provide concessionary tax treatment to the following types of entities:
(a) holding companies;
(b) offshore banks;
(c) offshore insurance companies;
(d) general trading offshore companies; and
(e) offshore trusts.
Netherlands
In the Netherlands, headquarter entities act for the benefit of an international group of companies in the performance of management, control or coordination functions. They may also conclude contracts or receive orders for other companies in the group. Certain coordination activities are accorded tax exempt status. Headquarter entities engaged. in the conclusion of contracts and receipts or orders may negotiate with the tax authorities about the amount which is subject to tax in the Netherlands. The amount if often fixed as a percentage of overhead costs.
In item 25, a foreign sales corporation is a corporation within the meaning of Subpart C of Part III of Subchapter N of Chapter 1 of the Internal Revenue Code of the United States of America (see sections 921-927 inclusive).
Pakistan
Rental income and normal profits from air transport operations which are subject to a reduction of tax qualify as designated concession income.
Philippines
offshore banking units accept foreign currency deposits from sources outside the Philippines. Income of the units from foreign currency transactions with non-residents of the Philippines are normally exempt from tax.
Foreign currency deposit units accept foreign currency, not otherwise required to be surrendered to the commercial banking system, from both local and foreign sources.
Regional and area headquarters established in the Philippines are entitled to an exemption from income tax. The activities of such entities are limited to supervising and acting as communications and coordination centre for its associates and branches in the Asia-Pacific region. To qualify for the tax incentive, a headquarters entity is not permitted to derive income from local sources.
Portugal
Items 29 and 30 relate to entities that operate in the Madeira and Azores tax free zones. Item 29 covers the laws which provide tax incentives in the Madeira archipelago whereas item 30 covers the laws which apply to the Azores archipelago.
Singapore
Item 31
Asian Currency Units are separate departments in banks which are licensed to handle Asian dollar business. Asian dollars are an off-shoot of Euro dollars. They are the same as Euro dollars except that they are held in Asia. They include US dollars, German deutsche marks, Swiss francs, Japanese yen and certain other currencies deposited in Singapore and lent out to the Asian region. Normally, income derived by Asian Currency Units is concessionally taxed at a rate of 10%.
Singapore
Item 32
Approved securities companies engage in the following activities:
(a) services on behalf on non-residents in connection with:
(i) stocks, shares, bonds and other securities in foreign currency issued by a non-resident company;
(ii) foreign currency negotiable certificates of deposit;
(iii) Asian dollar bonds;
(b) the sale of the above stocks, shares, bonds and other securities to:
(i) anon-resident;
(ii) an Asian Currency Unit;
(iii) another approved securities company.
Approved securities companies normally pay tax at the concessionary rate of 10%.
Item 33
The regulation in item 33 provides concessional tax treatment for Asian currency units of banks and financial institutions in Singapore from syndicated offshore credit or underwriting facilities.
The facilities relate to situations where a consortium of lenders is constituted because a single lender is unable to handle the substantial amount required by the borrower or accept the risks involved.
Item 34
A concessionary rate of 10% is payable by an approved fund manager on his fees and commissions derived from managing the funds of foreign investors.
Item 35
A concessionary rate of 10% is payable by an insurance company in relation to:
(a) the income it derives from accepting general insurance and reinsurance covering offshore risks; and
(b) dividends and interest it derives from the investment of its income arising from its business of insuring and reinsuring offshore risks.
Item 36
This item deals with the 10% concessionary rate of tax for offshore gold transactions. The concession applies to an approved member of the Singapore International Monetary Exchange, whether trading on his own account or as a broker, which derives income from gold bullion or gold futures transactions.
The transactions must be carried out on the Singapore International Monetary Exchange, the Chicago Mercantile Exchange, the Commodity Exchange Incorporated, the London International Financial Futures Exchange, the Chicago Board of Trade, the Sydney Future Exchange or on any gold exchange or in any gold market with:
(a) an Asian Currency Unit;
(b) another member of the Singapore International Monetary Exchange;
(c) a person who is neither a resident nor a permanent resident in Singapore;
(d) a branch office outside Singapore of a company resident in Singapore.
Item 37
A concessionary rate of 10% is payable on the income of an approved headquarters company derived by it from the provision of qualifying services. Qualifying services means:
(a) the following services provided by an approved headquarters company to its offices, associated companies and other persons where such offices, associated companies and persons are outside Singapore:
(i) general management and administration;
(ii) business planning;
(iii) procurement of raw materials and components for use in the business of its approved offices and associated companies and other approved persons;
(iv) technical support services;
(v) marketing control and sales promotion planning;
(vi) training and personnel management;
(vii) treasury and fund management;
(viii) corporate finance advisory services;
(ix) economic or investment research and analysis; and
(x) credit control and administration;
(b) the provision of credit facilities to its approved offices and associated companies outside Singapore where the funds for providing the facilities were obtained from financial institutions in Singapore; and
(c) research and development work carried out in Singapore on behalf of its approved offices and associated companies outside Singapore.
Item 38
Income derived by a non-resident of Singapore arising from funds managed by any Asian Currency Unit of a financial institution or other approved fund manager is exempt from tax. The following income earned by non-residents is not subject to tax under the scheme:
(a) trading gains from approved assets; and
(b) foreign sourced income from the holding of investments in approved assets.
Item 39
Section 43F of the Singapore Income Tax Act authorises regulations to be made to grant a 10% concessionary rate of tax on income derived by a company from prescribed transactions in petroleum, petroleum products and petroleum futures.
More specifically:
(a) approved oil traders will enjoy a concessionary rate of tax of 10% on income from international oil trading activities; and
(b) profits received by approved oil traders and members of the Singapore International Monetary Exchange from transactions in oil future contracts will be taxed at the concessionary rate of tax of 10%.
Item 40
This item relates to an entity which derives income, attributable to the provision of financial (including insurance) services, that is subject to a reduction of tax by virtue of parts III, V, VIA or XII of the Economic Expansion Incentives (Relief from Income Tax) Act 1988 of Singapore.
Solomon Islands
Entities which are engaged in:
(a) carrying on an insurance business; or
(b) deriving rental income or profits from air transport activities, are covered by items 41 and 42.
Spain
A Spanish corporation that operates in Spain as a headquarters entity can have its income and capital gains reduced by 99 per cent. A headquarters entity is set up with the authorisation of the Ministry of Economy an Finance with the object of holding shares. A headquarters entity is not permitted to carry on business in Spain.
Royal Decree-Law 1 of 14 march 1986 authorised the formation of venture capital companies (Sociedad de Capital-Riesgo) and venture capital funds (Fondes de Capital -Riesgo). Such entities are entitled to certain tax benefits.
Sri Lanka Entities obtain tax relief under the following provisions of the Inland Revenue Act of Sri Lanka in respect of the following services:
(a) in the case of section 8(c)(iv) - offshore banking services;
(b) in the case of section 15(cc) - other services rendered outside of Sri Lanka.
Switzerland
Item 46
Swiss cantons provide special tax regimes for holding companies. The exact definition of a holding company varies from canton to canton. Generally, to qualify, a company must be exclusively or primarily engaged in the holding of shares in other companies. There may exist minimum requirements as to the size of the holding, which must normally be sufficient to give control, and which often involve the concept of a permanent, enduring interest.
Holding companies are normally exempt from income taxes.
Item 47
Service and auxiliary companies render services to a network of related companies located outside Switzerland. The services usually involve management, finance, marketing, public relations or technical assistance. These companies have more extensive administration facilities in the canton than domiciliary companies (see item 48 below).
In general, a service and auxiliary company differs from a domiciliary company in that it may:
(a) have Swiss offices and staff;
(b) be in receipt of Swiss source income (but the majority of its income must be foreign source);
(c) render technical services to non-residents.
Service and auxiliary companies are normally exempt from income tax.
Item 48
In general, a domiciliary company
(a) is registered in a particular canton and has no more than a registered office with a local agent (e.g., trustee company, lawyer or service company) in that canton;
(b) is managed from abroad;
(c) does not have a Swiss office (apart from the registered office) or carry on business activities in Switzerland;
(d) only receives foreign source income from, e.g., debt collection, registered patents, sales invoicing, factoring of book debts.
Item 49
This item relates to entities which are entitled to a holding privilege in Switzerland on the federal level in terms of Article 59 of the Decree of the Federal Council on levying a Federal Direct Tax.
The article provides that the receipt of dividend income by a company resident in Switzerland from a qualifying participation in another company is given a proportional reduction on income tax.
A qualifying participation is a holding of shares representing in the order of 20 percent or more of the registered capital of a resident or non-resident company. The reduction of income tax is in proportion to the ratio that the qualified dividend income bears to the company's gross income.
Tonga
This item relates to entities which receive a tax exemption for income or profits derived from offshore banking operations.
Turkey
This item relates to entities which obtain export incentives.
Western Samoa
This item relates to entities which obtain a tax exemption on income or profits derived from the following types of businesses conducted in Western Samoa:
• offshore banking business;
• offshore insurance business; and
• business conducted by an international trust (essentially a trust where all the beneficiaries are at all times non-residents of Western Samoa).
Regulation 6 - Application
What is the purpose of this regulation?
This regulation achieves two purposes, namely:
(a) it ensures that the regulations relating to designated concession income of a kind referred to in the Treasurer's press release of 29 June 1990 (and set out below) will take effect no earlier than 13 September 1990, i.e., the date on which the Taxation Laws Amendment (Foreign Income) Act 1990 was introduced into Parliament; and
(b) it ensures that CFC's may claim prior year losses.
Which subregulations achieve this purpose?
Subregulations 6.1 and 6.3 to 6.6 inclusive give effect to paragraph (a) above whereas subregulation 6.2 gives effect to paragraph (b) above.
When do the categories of designated concession income notified in the Information Paper apply from?
The commencement date of the regulations which apply to designated concession income referred to in the Treasurer's April 1989 Information Paper is contained in regulation 1. However, in respect of CFC prior year losses in relation to such income, regulation 1 is modified by the application provisions - see subregulation 6.2.
What type of designated concession income was notified in the Treasurer's press release of 29 June 1990?
The following types of designated concession income were notified in the Treasurer's press release of 29 June 1990:
(a) offshore income derived from any listed country;
(b) income or profits derived by an entity from
(i) distribution centres in Belgium;
(ii) tax free zones iii Bulgaria;
(iii) coordination centres in Luxembourg;
(iv) its operational headquarters in Malaysia;
(v) the Portugese tax free zones in the Madeira and Azores Archipelagos;
(vi) certain transactions in Singapore relating to petroleum, petroleum products and petroleum futures;
(vii) its operations as a domiciliary company in Switzerland;
(viii) activities which entitles it to a holding privilege at the federal level in Switzerland;
(ix) offshore banking activities in Tonga; and
(x) various offshore activities in western Samoa.