Tax Talks Between The US And Australia Reach Sticking Point

by Mary Swire, Tax-News.com, Hong Kong

20 August 2001

It appears that a landmark deal renegotiating the terms of the tax treaty between the United States and Australia may be in jeopardy as the Australian government is said to be balking at the cost to the budget of satisfying US demands.

Since the talks began, instigated by the relocation of Australian construction company James Hardie over the issue of withholding taxes, there has always been friction, but initial difficulties were blamed on the United States. 'The Americans don't want to reduce their tax rates on American income earned by Australian companies,' Australian Treasurer Peter Costello said last month. 'We're asking for a big drop.'

However, the US government has since signalled that it is willing to lower withholding tax on dividends paid to Australian companies from 15% to 5%, and is even understood to have dropped its demand that Australia give up its capital gains tax on non-residents.

In return, however, the US wants Australia to abolish the 10% withholding tax on royalties paid to US companies, a move which according to concerned estimates from the ATO and the Australian Treasury, would cut tax revenue by around $200 million a year.

However, in the wake of the Hardie relocation, pressure is starting to build on Mr Costello to close the deal. Australian investment in the US rose to $92 billion last year, which means that the reduction of withholding tax rates is a crucial factor in preventing a possible exodus.

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