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Ernst & Young Welcomes Australian International Tax Changes

by Mary Swire,, Hong Kong

15 December 2003

Accounting firm Ernst & Young has welcomed the recent introduction of legislation into the Australian parliamentary Lower House which promises long-awaited reform of the country’s international tax system.

The initial stages of the reforms will deal with the relaxation of Australia’s Controlled Foreign Company (CFC) rules as they apply to countries possessing broadly similar taxation regimes, such as the US, the UK, Germany, France, Canada, Japan and New Zealand.

Commenting on the changes, Mr Alf Capito, tax partner at Ernst & Young, said that the country’s business sector will be supportive of the new legislation when it comes into effect next July, as it will relieve firms of a significant compliance burden associated with application of the CFC rules.

"In effect they will exempt income derived from outside the comparable countries,” explained Mr Capito.

He added: "Currently, the income from sources within the comparable countries may be taxed if it is identified in the regulations as subject to the CFC measures. The Bill does not address this. We expect that this next step in reform of the CFC measures will occur in the New Year, after further consultation between Treasury and the private sector.”

"Once the package is complete, Australian multinationals doing business in these major commercial centres will no longer need to be overly concerned with measures that are aimed at tax haven operations. The Government has clearly recognised the fact that business takes place in these countries for commercial rather than tax related reasons. However, CFC rules will continue to apply to income derived through a trust or arising under the Foreign Investment Fund (FIF) measures, even if derived through CFCs resident in such comparable tax countries," said Mr Capito.

Changes in the FIF rules will also be welcomed by the superannuation and funds management industry, as the new legislation will allow fund managers to invest up to 10% of their fund in foreign passive investments before FIF rules apply, and will also relieve complying superannuation funds from the FIF measures.

The proposed amendments also provide a withholding tax exemption on widely distributed debentures issued to non-residents if those debentures are issued by public unit trusts. According to E&Y this welcome measure will allow Australian public unit trusts to raise capital on "globally competitive" terms.

"We also look forward to the speedy implementation of the remaining measures that the Government announced in May 2003, which will benefit not only Australian companies but will also encourage foreign companies and fund managers to invest further in Australia," Mr Capito noted.

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