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International tax change next great leap forward

AUSTRALIA’S international tax arrangements affect the decisions of businesses to locate in Australia as well as Australia’s ability to attract foreign capital. In recent months, the calls for international tax reform have been coming in thick and fast.

In December, the Business Council of Australia released a white paper identifying the major impediments to making Australia an attractive location.

The Business Coalition for Tax Reform has nominated international tax reform as a critical area for progressing during 2002.

International tax reform was an election commitment of the Federal Government. Until last week, however, the Government had been particularly quiet on the matter.

Last week, Treasurer Peter Costello finally announced details of the Government’s review of international tax arrangements.

Mr Costello says particular attention will be given to whether current international tax arrangements:

p impede Australian companies from expanding offshore;

p impede attraction of domestic and foreign equity; and

p affect holding companies and conduit holdings being located in Australia.

Imputation credits are currently provided to shareholders in respect of Australian company tax paid, but not for foreign company tax. This is a concern of business, and the treasurer wants this bias against foreign source income examined as part of the review.

The review will also examine claims that the rules surrounding controlled foreign corporations, foreign investment funds, and the foreign tax credit and exemption rules:

p are complex;

p impose significant compliance costs on business;

p are out of step with modern business practice; and

p negatively affect decisions of businesses to locate in Australia compared with countries, which have less stringent rules.

Also to be addressed in the review, are high-level aspects of policy and processes for Australia’s double tax agreements with other countries.

In addition to providing details of the international tax review, Mr Costello also announced that, from July 1, responsibility for the design of tax laws and regulations would be taken away from the ATO and given to the Treasury Department.

Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, foreshadowed this change when she made her first major policy statement in February:

“Having primary responsibility for the detailed design and development of legislation, administration and compliance systems may not be the best way for the Australian Taxation Office to meet its core obligations,” Senator Coonan said.

According to the treasurer, tax administration is the core obligation of the ATO.

The prime minister commented last year that the jury was still out on the ATO’s performance during the implementation of the new tax system.

The Department of Treasury is expected to release a paper on the international tax review around the middle of this year.

The Board of Taxation will then undertake the public consultation phase of the Government’s review.

A recommendation of the Ralph Review of Taxation, the board was established to contribute a business and broader community perspective to improving the design of taxation laws and their operation. Its major task to date has been progressing the development of the Tax Value Method.

The tax board is expected to report to Government on international tax by the end of the year. This will be one to look out for. Some commentators have suggested this could be Australia’s next big tax reform.

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