Items Nos. 7 and 8 on double taxation relief may be discussed together.
Private Members' Business. - Double Taxation Relief (Republic of Austria) Order, 1987: Motion.
I move:
That Dáil Éireann approves the following Order in draft:—
Double Taxation Relief (Taxes on Income and Capital Gains) (Republic of Austria) Order, 1987.
a copy of which Order in draft was laid before the House on 25th day of November, 1987.
Before proceeding with the motion for the Austrian agreement I would like to draw the attention of the House to the fact that there is a minor printing error in the draft Order. This is on page six of the draft order where the heading "Article IV" appears twice. The second heading should obviously read "Article V". It is only the heading which is incorrect, and I think it will be corrected.
The existing Double Taxation Convention between Ireland and Austria was signed at Vienna on 24 May 1966. Consequent on the changes which have taken place in the taxation laws of both countries, and in particular because of the new system of company taxation in Ireland, it was desirable that the Convention be amended to take account of those changes. This is being done by way of a protocol to the existing Convention.
The Protocol was signed on 19 June 1987. An order by the Government under section 361 of the Income Tax Act, 1967, will be required to give it the force of Irish law. Before such an Order is made a draft of it must be laid before and approved by Dáil Éireann.
The draft order was laid before the Dáil on 25 November 1987 and contains in its schedule the text of the Protocol. An explanatory memorandum which outlines the effects of the Protocol has also been circulated. The White Paper containing the text of the Protocol was laid before both Houses of the Oireachtas by the Minister for Foreign Affairs on 27 November 1987. I will now briefly outline the main features of the Protocol.
Article II expands the definition of "Ireland" contained in the existing Convention to include areas outside the territorial waters of Ireland within which rights to the sea bed and subsoil and their natural resources may be exercised.
Article III inserts a new Article 2A dealing with the determination of residence status for the purposes of the Convention. This is in the form first adopted in the Ireland-United Kingdom Double Taxation Convention of 1976 and is in accordance with the wording of the relevant Article later included in the 1977 OECD Model Convention. The starting point in determining residence is the revenue law of each country and in the event of both countries claiming residence there is provision for settling which country is to be regarded as the country of residence for the purposes of the Convention. This eliminates the possibility of double residence arising in any case.
Article IV amends Article 3 of the Convention, which sets out provisions concerning the determination of a "permanent establishment" for business activities. The effect of the additional wording now being included is to secure that the exploration of natural resources by an enterprise of a contracting state in the territory of the other contracting state is to be regarded as constituting a permanent establishment in the state where the activities are being undertaken.
Article V substitutes a new Article 8 to take the place of the existing Article in the Convention and is necessary in view of the revised treatment of Irish dividend income introduced by the Corporation Tax Act, 1976.
Article V secures payment to Austrian portfolio investors of the Irish tax credit, less 15 per cent of the distribution plus the tax credit. This is in line with other double taxation arrangements concluded by this country since 1976. There is no provision for payment of the tax credit to Austrian direct investors. A direct investor is defined as a company controlling directly or indirectly at least 25 per cent of the voting power in the company paying the dividend. In the case of Austrian dividends flowing to an Irish investor, the rate of Austrian withholding tax is not to exceed 10 per cent in all circumstances.
An important feature of the Article is that the benefits of the Irish tax incentive reliefs included in the Convention have been retained for Austrian companies. An Austrian company which holds at least 25 per cent of the shares in an Irish company for more than one year will not be subject to tax in Austria in respect of dividends received from that company. This preserves for an Austrian parent company the benefit of any incentive relief which its Irish subsidiary might have obtained.
Under Article IX the Protocol will be effective in Ireland as respects: (i) income tax for any year of assessment beginning on or after 6 April 1976; (ii) income levy for any year of assessment beginning on or after 6 April 1983; (iii) corporation tax for the financial year 1974 and subsequent financial years; and (iv) capital gains tax for any year of assessment beginning on or after 6 April 1974.
I recommend that Dáil Éireann approve the draft order.
I will now move to the New Zealand Convention.
A Convention between Ireland and New Zealand for the avoidance of double taxation with respect to taxes on income and capital gains was signed on behalf of the respective Governments on 19 September 1986 at Dublin. This is the first such arrangement between the two countries.
Under the provisions of section 361 of the Income Tax Act, 1967, an arrangement with a foreign Government to afford relief from double taxation will have the force of law in Ireland provided the Government make an order accordingly. Before such an order can be made, it must be laid in draft form before Dáil Éireann and a resolution approving it must be passed by the House.
The draft order was laid before the Dáil on 25 November 1987 and contains in its schedule the text of the Convention. An explanatory memorandum which outlines the effects of the Convention has also be circulated. The White Paper containing the text of the Convention was laid before both Houses of the Oireachtas by the Minister for Foreign Affairs on 24 March 1987.
In relation to Ireland, the Convention will be effective for income tax and capital gains tax for any year of assessment beginning on or after 6 April following the date on which the Convention enters into force. For corporation tax purposes, the Convention will have effect for any financial year beginning on or after 1 January following the date on which the Convention enters into force.
The Convention follows the general principles of the Model Convention published by the Organisation for Economic Co-operation and Development in 1977. The provisions are similar to those contained in the treaties which Ireland has concluded with the United Kingdom and Australia in recent years and those which are in course of negotiations with other states.
For the purposes of eliminating double taxation, the Convention follows the two basic rules established in the OECD Model. The first is that certain income may be taxed in one country only. Thus, Government and local authority salaries will normally be taxable only in the country of source while interest and royalties will normally be taxable only in the country of residence of the beneficial recipient. The second basic rule is that where the same income or capital gains may be charged to tax in both countries the country of residence will allow a credit against its own tax in respect of the tax paid in the country of source. I will now briefly outline the main features of the Convention.
Article (iv) provides a series of tests to determine the country of residence where, under the separate residence criteria used by each country, there would be a double residence position.
Article V defines the term "permanent establishment" as being, in general, a fixed place of business in which the business of an enterprise is carried on. This definition is particularly important for the taxation of business profits.
The purpose of Article VI for which there is no corresponding provision in the OECD Model Convention is to regulate in an international context taxation rights in respect of profits, income or capital gains derived from offshore exploration. An enterprise which carries on offshore activities in connection with the exploration and exploitation of natural resources is deemed to be carrying on business through a permanent establishment. The creation of a permanent establishment position means that the profits attributable to the activities of that permanent establishment are liable to tax in the country in which it is situated.
Article 9 is concerned with two questions. First, it restates the generally accepted principle of double taxation conventions that an enterprise of one State shall not be taxed in the other State unless it carries on business in that other State through a permanent establishment situated therein. Secondly, when the enterprise carries on business through a permanent establishment in another State, that State may tax the profits of the enterprise but only so much of them as is attributable to the permanent establishment.
Article 12 relates to the treatment of dividends flowing from one country to the other. It provides that, in the case of dividends flowing from Ireland to New Zealand, a New Zealand resident portfolio investor is entitled to the same tax credit as an individual resident in Ireland subject to a charge to Irish tax at a rate not exceeding 15 per cent of the value of the dividend plus the tax credit attached to it. No tax credit is payable to a New Zealand company which controls directly or indirectly at least 10 per cent of the voting power in the Irish company paying the dividend. In the case of dividends paid by a New Zealand company to an Irish resident, the New Zealand withholding tax charge will be limited, in the normal case, to a rate of 15 per cent.
Unlike Ireland, New Zealand does not have a separate capital gains tax but certain capital profits are chargeable as income. Accordingly, the present Article 15 was drafted so that it applies both to income and to capital gains. The article has, therefore, been entitled "Alienation of Property". The broad effect of that Article is that income or capital gains derived from the disposal of immovable property and certain related movable property may be taxed in the State in which the property is situated. The State of residence may also tax such property but is obliged to relieve any double taxation arising by allowing a credit for the tax suffered in the State of source.
Article 24 deals with the elimination of double taxation where this has not been achieved either by the Convention or under the domestic law of the contracting states. Broadly speaking, it provides by way of the credit method for the country of residence to allow against its own tax a credit for the tax paid in the other country on the same income or capital gains.
Dividends derived from Ireland by New Zealand resident companies will remain free from New Zealand tax under New Zealand domestic law. Where such dividends are relieved from Irish tax under the incentive reliefs the benefits of those reliefs will be preserved for New Zealand resident companies. If the relevant provisions of New Zealand domestic law relating to the relief mentioned should cease to have effect, Article 24 provides that both states will enter into negotiations to establish new provisions concerning the credit to be allowed by New Zealand in relation to its tax on such dividends.
According to Article 29 the Convention will enter into force when instruments of ratification have been exchanged between the two countries.
I recommend that Dail Éireann approve the draft order and while we are debating it somebody might get rid of the fog in the Chamber.
Unfortunately the fog has been with us for some time.
(Limerick East): I should like to welcome the Conventions. The one with New Zealand is new and it is only proper that the House should ratify it at the earliest possible date. The Conventions have already been signed. It is important that individuals or companies who invest or work in each other's economies should not be taxed twice and that in countries that are friendly and trade with each other circumstances should not arise that result in individuals or companies being subject to double taxation. Obviously, there must also be some arrangement to ensure that individuals or companies are taxed in one country or the other. The key to this is the avoidance of double taxation.
Firstly I should like to deal with the New Zealand Convention. I understand it follows very much along the lines of the OECD 1977 model convention and that we have similar conventions with the United Kingdom and Australia. I understand that others are in the course of negotiation and that they all follow much the same line. In the Convention before us the two basic rules established in the OECD model are followed. The first is that certain income may be taxed in one country only and thus, as the Minister said, Government and local authority salaries will normally be taxable only in the country of source while interest and royalties will normally be taxable only in the country of residence of the beneficial recipient. The second basic rule is that where the same income or capital gains may be charged to tax in both countries the country of residence will allow a credit against its own tax in respect of the tax paid in the country of source.
As far as I can see — I hope the Minister can confirm this — the Convention with New Zealand follows the lines of the OECD model in all respects save one. I understand that it is along the lines of Conventions we have already agreed with other common law countries, namely the UK and Australia.
That is correct.
(Limerick East): The one departure which is not along the lines of the OECD model is Article 6 covering income or capital gains derived from offshore exploration.
Exactly.
(Limerick East): I have no objection to that. It is right that the definition of the country should extend to the offshore area and that activities in that area should be subject to the provisions of the Convention just as if those activities took place on shore. I welcome the new Convention with New Zealand. There is nothing controversial in it and I should like to congratulate the Minister on having the initiative to bring it into the House because quite frequently noncontroversial work is left aside while more pressing matters are brought forward. It is well worth while formalising the arrangements, as the Minister is doing tonight.
The Convention with Austria is an update of the previous Convention. I understand that it needed to be updated because of changes in the law in both countries, particularly in the case of Ireland where the Corporation Tax Act was passed in 1976. The previous Convention with Austria was signed in 1966. The Convention follows what seems to be a pattern now in such agreements coming from the Department of Finance in that it preserves the incentive package applicable to manufacturing industry here and for investment from abroad. It is important to note that. We should congratulate the officials who negotiated that agreement. I understand from the Explanatory Memorandum that Article V preserves for an Austrian parent company the benefit of any Irish tax incentive reliefs which its Irish subsidiary might have obtained. Sometimes it is difficult to know where the headquarters of a company are located and which country would be the beneficiary of any tax accruing. We have companies which originated in Austria but whose corporate headquarters are no longer in that country. Esoteric double taxation agreements discussed in the House may have a practical application to factory workers in this city. I welcome that Convention. I notice that in both cases the Conventions refer to the country of source or the country of residence and do not get entangled in the concept of domicile at all. I presume that the country of source would be the nearest equivalent of the country of domicile. I hope the Minister will be able to cast some light on that.
The Progressive Democrats welcome the accession of Ireland to those conventions which are part of the growing pattern of international tax co-operation. I should like to congratulate the Minister's officials for negotiating a 10 per cent rate in relation to the withholding tax that New Zealand has applied because it appears that other countries have been subjected to a 15 per cent rate of withholding tax in relation to interest and royalty payments. Therefore, the Irish negotiators have done well.
In relation to Article 24 of the New Zealand agreement, the position regarding the repatriation of profits qualifying for Irish tax incentives to New Zealand is outlined. Under present New Zealand law dividends received by New Zealand resident companies from other resident companies are generally exempt from company income tax. This exemption also applies to dividends from non-resident companies except where the distribution is in respect of certain preference shares or the amount received has been the subject of a deduction claimed by the paying company in calculating their own tax.
In summary, the dividends from Ireland to New Zealand are exempt from New Zealand tax but Article 24.1.(b) provides that if this New Zealand exemption on dividends is removed, then the two contracting states will have to enter into negotiations in order to establish new provisions concerning the taxation of such dividends.
I understand that a similar clause exists in the double taxation agreement between Ireland and Australia. The treaty was negotiated prior to the tax reform provisions which have recently been introduced in Australia. Prior to that, dividends received from non-resident companies were effectively exempt from Australian income tax. After tax reform in Australia last year the rules were changed and this exemption was removed. The effect of this change is that an Australian company investing in Ireland will pay tax on their dividends at the difference between the Australian rate and the Irish rate applicable.
I voice concern that the wording of the draft treaty with New Zealand does not guarantee that the favourable position now negotiated will continue in the event of a change in New Zealand domestic tax law. In the Australian situation there has been some indication that the Australian revenue regard themselves as not bound at all to retain the beneficial arrangements we have and feel open and at liberty to increase the rate of taxation in respect of such dividends. I suppose that the Irish negotiators did the best they could and that they could not ask for a more binding commitment in relation to future arrangements, but it is unfortunate that this element of uncertainty still persists.
Going to the Austrian agreement, I mentioned in the case of the Swedish treaty that there was an exemption in respect of corporate investors from the residual Irish income tax liability, but an individual investor will still be subject to the theoretical liability, although I appreciate it is limited to 15 per cent. I mentioned that to the Minister on the last occasion and I hope something will be done in respect of this theoretical liability. He indicated then that he was of a mind to do something some day about it, but I appreciate it is a thorny issue.
Paragraph 4 of Article IV continues the exemption from Austrian tax in respect of dividends paid by an Irish resident company to their Austrian parent. That provision allows tax relieved companies to repatriate profits to Austria free of Austrian tax. Although the provisions in the Austrian treaty are not quite as generous as in some others — for instance, it does not allow for foreign branch profits exemptions — I am advised and I accept that it is nonetheless adequate.
Having made those comments, I congratulate the negotiators as Deputy Noonan has done. They have done a good job and the Minister can rest assured that he is getting good service from those who have done this work for him.
I thank both Deputies for their generous comments and their support for these two motions and these double taxation agreements. Not much has been raised. I can say immediately to Deputy McDowell that we will look at the points he raised in relation to these arrangements regarding the difference between ten and 35. I honour that commitment and confirm it again.
In relation to the position the Deputy raised about possible changes in New Zealand law, while we are negotiating these we can only look at the law as it is at the time and when the law is changed subsequently or at any change in the law in any country we then request renegotiation of the terms of these arrangements. That will be ongoing. In fact, we have already begun that process in the situation vis-à-vis Australia because of changes since the arrangements were concluded there.
I do not know if I understood Deputy Noonan correctly. I answered some of the points to and fro but he talked about resources, residence and domicile. If I read Article 4.1 of the order relating to New Zealand it might explain some of what was on his mind:
For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the law of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.
Domicile is one of the factors taken into account, residence is another and so on.
But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State.
The terms "resident of Ireland" and "resident of Austria" shall be construed accordingly. I do not know if that helps the Deputy. We could go into a long definition of sources and what that means and get the dictionary definition of residence, domicile, nature of business and so on——
Do not touch domicile.
We can be happy that the people concerned on our behalf, the officials who this year or last year have been involved in this, have done a very good job in relation not only to these two but to the two others we agreed a few weeks ago, and I am sure they are working on others at present and will continue the good work on our behalf.
If they produce any more agreements they will not be debated in these circumstances.
Ceo draíochta a bhí ann. If the fog would bring the same tranquility to every debate I would welcome it.
Question put and agreed to.