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International tax rules in urgent need of reform

Publication date: 19 Dec 05 | Source: AUSTRALIAN TAX RESEARCH FOUNDATION

In a study released by the Australian Tax Research Foundation today, entitled Is it Australia's? Residency and source analysed, its author Dr Michael Dirkis concludes that the law of residency and determination of source under Australia's income tax law is inadequate and in need of urgent reform. The law is incapable of engaging in a 21st century world where trade in services outstrips trade in goods and the communications revolution has removed the need for traditional physical linkages to jurisdiction.

The 'rubbery' rules allow taxpayers to structure transactions so that income that should be taxed in Australian is sourced in low tax countries and tax havens. So important is the need for reform in this area, the International Fiscal Association devoted its 2005 Buenos Aires Conference to discussing these issues on the world stage.

Residency and source are the basis of Australia's income tax base. Residency determines which persons and entities Australia seeks to tax on a world wide income basis, while source determines which income earned by non-residents has a close enough connection with Australia to be taxed. A determination of residency therefore is crucial in determining the amount of income taxed, the rate applicable and the application of concessional tax laws in a range of areas including entitlement to tax offsets (rebates) and the taxation and regulation of superannuation. Source is crucial in determining whether income is tax exempt, determining timing of assessment, whether losses will be quarantined and availability of tax credits.

The Australian residency and source rules are accidents of history, emerging from developments in the 19th and early 20th century at a time when there were virtually no Australian taxpayers who received an income from investments or business abroad, and Australia did not have a single Double Tax Agreement. The 'modernisation' of Australia’s international tax regime in the late 1980s and early 1990s was built on these crumbling foundations and despite the 1998-1999 Review of Business Taxation making a number of recommendations for reform the Government has failed to review these fundamental aspects of Australia’s international tax system.

The study concludes that the only way forward is for Australia for the first time to articulate its jurisdictional claim.