Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2022
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TREASURY LAWS AMENDMENT (AUSTRALIA-INDIA ECONOMIC
COOPERATION AND TRADE AGREEMENT IMPLEMENTATION) BILL 2022
EXPLANATORY MEMORANDUM
(Circulated by authority of the Assistant Treasurer and Minister for Financial Services,
the Hon Stephen Jones MP)
Table of Contents
Glossary................................................................................................. iii
General outline and financial impact ...................................................... 1
Adjustment to tax on certain payments or credits made
to Indian residents ....................................................... 3
Statement of Compatibility with Human Rights ............ 9
Glossary
This Explanatory Memorandum uses the following abbreviations and acronyms.
Abbreviation Definition
Agreements Act International Tax Agreements Act 1953
AI-ECTA Australia-India Economic Cooperation
and Trade Agreement
the Bill Treasury Laws Amendment (Australia-
India Economic Cooperation and Trade
Agreement Implementation) Bill 2022
Indian agreement Agreement between the Government of
Australia and the Government of the
Republic of India for the Avoidance of
Double Taxation and the Prevention of
Fiscal Evasion with respect to Taxes on
Income (signed at Canberra,
25 July 1991) [1991] ATS 49 (entered
into force on 30 December 1991), as
amended by the Indian protocol (No. 1)
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
Treasury Laws Amendment (Australia-India Comprehensive Economic Cooperation Agreement
Implementation) Bill 2022
General outline and financial impact
Adjustment to tax on certain payments or credits
made to Indian residents
Outline
The Bill amends the Agreements Act to stop Australian taxation on certain payments
or credits made to entities that are Indian residents for tax purposes. These payments or
credits are made for services provided remotely (not through a permanent
establishment in Australia) to Australian customers that are covered by Article 12(3)(g)
of the Indian agreement, that is not a royalty within the meaning of the ITAA 1936,
and that is only taxable in Australia because of the operation of Article 12(3)(g) and
Article 23 of the Indian agreement, as given effect by the Agreements Act.
Date of effect
The Bill will commence on the later of the day of Royal Assent and the day the
AI-ECTA signed at Melbourne and New Delhi on 2 April 2022, enters into force for
Australia. The Minister must announce, by notifiable instrument, the day the AI-ECTA
enters into force for Australia. However, the provisions do not commence at all if the
AI-ECTA does not enter into force for Australia. The amendments will apply in
relation to assessments for years of income starting on or after the commencement of
the Bill.
Proposal announced
This measure implements the side letter signed by the former Minister for Trade,
Tourism and Investment and his Indian counterpart on 2 April 2022 in connection with
the AI-ECTA.
Financial impact
This measure was estimated to have a cost to receipts of $145 million over the forward
estimates at the time of the 2022 Pre-election Economic and Fiscal Outlook.
All figures in this table represent amounts in $m.
2021-22 2022-23 2023-24 2024-25 2025-26
0.0 0.0 -25.0 -60.0 -60.0
1
General outline and financial impact
Regulation impact statement
The regulation impact statement was presented to Parliament, along with the
AI-ECTA, on 4 April 2022 and is available to view on the Australian Parliament
House website.1
Through a side letter to the AI-ECTA, dated 2 April 2022, Australia and India have
agreed to resolve an issue concerning the application of taxing powers under the
Double Taxation Avoidance Agreement between the Government of the Republic of
India and the Government of Australia for the avoidance of double taxation and the
prevention of fiscal evasion. The proposed amendment will facilitate increased
business activity from India for Australian consumers and supports the implementation
of the AI-ECTA, which Department of Foreign Affairs and Trade estimates will have a
positive impact on Australian markets. More detailed evidence supporting this
proposition is provided in the full regulation impact statement.
Human rights implications
This Bill does not raise any human rights issues. See Statement of Compatibility with
Human Rights -- Chapter 2.
Compliance cost impact
This measure is estimated to decrease compliance costs as it removes taxation in
Australia.
1
https://www.aph.gov.au/-
/media/02_Parliamentary_Business/24_Committees/244_Joint_Committees/JSCT/2022/Austral
ia-
India_ECTA/32_NIA_II.pdf?la=en&hash=BDEBB01EC3E768BC40EF199D51377A69169946
0F
2
Adjustment to tax on
certain payments or credits made to
Indian residents
Outline of chapter
1.1 The Bill amends the Agreements Act to stop Australian taxation on certain
payments or credits made to entities that are Indian residents for tax purposes.
These are payments or credits made for services provided remotely (not
through a permanent establishment in Australia) to Australian customers that
are covered by Article 12(3)(g) of the Indian agreement, that is a not a royalty
within the meaning of the ITAA 1936, and that is only taxable in Australia
because of the operation of Article 12(3)(g) and Article 23 of the Indian
agreement, as given effect by the Agreements Act.
1.2 Unless otherwise stated, all treaty references in this chapter are to the Indian
agreement. Any references to providing technical services remotely means
services not provided through a permanent establishment in Australia. In
addition, all references to payments or credits in this chapter are to payments or
credits that are not royalties within the meaning of the ITAA 1936. A reference
in this chapter to an Indian resident is a reference to a person who is a resident
of India, and not a resident of Australia, for the purposes of Article 4 of the
Indian agreement.
Context of amendments
1.3 Currently, Australia is taxing payments or credits made to an Indian resident
by Australian customers for services covered by Article 12(3)(g) that are
provided remotely. These services are referred to as technical services because
they are of a technical nature and are made available to the person acquiring
the service through the supply or transfer of technical knowledge, experience,
skill, knowhow or processes or consist of the development and transfer of a
technical plan or design. Australia taxes these payments or credits of Indian
residents due to operation of both the royalty definition and the Source Article
(Article 23) under the Indian agreement, which were included when it was first
agreed in 1991.
1.4 Following extensive negotiations in 2021 and 2022, as part of the AI-ECTA,
the Australian Government agreed to stop the taxation of payments or credits
made to Indian residents by Australian customers for technical services
covered by Article 12(3)(g) that are provided remotely. This commitment was
3
Adjustment to tax on certain payments or credits made to Indian residents
reflected through an exchange of side letters on 2 April 2022 between the then
Minister for Trade, Tourism and Investment and their Indian counterpart. The
Australian Government agreed to implement this legislative change in a similar
time frame to the implementation of the AI-ECTA, an interim agreement.
Comparison of key features of new law and
current law
Table 1.1 Comparison of new law and current law
New law Current law
Payments or credits made to Indian Payments or credits made to Indian residents
residents by Australian customers for by Australian customers for technical
technical services provided remotely that services provided remotely that are covered
are covered by Article 12(3)(g) of the by Article 12(3)(g) of the Indian agreement,
Indian agreement, are not subject to tax in are subject to tax in Australia
Australia
Detailed explanation of new law
1.5 Currently, payments or credits made to Indian residents by Australian
customers for technical services provided remotely are taxable in Australia
through the interaction between the ITAA 1936, the ITAA 1997, the
Agreements Act and the Indian agreement. Specifically, these payments or
credits are taxable because:
• they are covered by Article 12(3)(g); and
• they are considered to be sourced in Australia because of the operation
of Articles 12 and 23, as given effect by sections 4 and 5 of the
Agreements Acts; and
• paragraph 6-5(3)(a) of the ITAA 1997 includes the amounts in
assessable income.
1.6 These payments or credits are taken to have an Australian source by reason of
the Source Article (Article 23) which deems an Australian source for royalties
in Article 12(3)(g) for the purposes of Australian law relating to its tax and the
Agreements Act, which gives effect to the provisions of the Indian agreement.
Consequently, this income is assessable income under section 6-5 of the
ITAA 1997 as being Australian sourced income of a non-resident. Without
these provisions in the Indian agreement, Australia would not tax these
payments or credits.
4
Treasury Laws Amendment (Australia-India Comprehensive Economic Cooperation Agreement
Implementation) Bill 2022
New section 11J of the Agreements Act will stop the Australian taxation on
payments or credits made to Indian residents by Australian customers for
technical services covered by Article 12(3)(g) that are provided remotely if
three criteria are met.
[Schedule 1, item 3, section 11J of the International Tax Agreements
Act 1953]
1.7 Firstly, the payments or credits have to be made or credited to an Indian
resident as consideration for a service covered by Article 12(3)(g).
Article 12(3)(g) covers services (including those of technical or other
personnel) which make available technical knowledge, experience, skill,
know-how or processes or consists of the development and transfer of a
technical plan or design.
1.8 The Income Tax (International Agreements) Amendment Act (No. 2) 1991
amended domestic legislation to give force to the Indian agreement. The
Explanatory Memorandum to the Bill for that Act outlines broadly the types of
technical service covered in Article 12(3)(g). 'Technical service' is intended to
cover services of a technical nature, which is made available to the person
acquiring the service through the supply or transfer of technical knowledge,
experience, skill, knowhow or processes or consist of the development and
transfer of a technical plan or design. The typical categories of services
intended to be covered by Article 12(3)(g) include:
• engineering services;
• architectural services; and
• computer software development.
[Schedule 1, item 3, subsection 11J(a) of the International Tax Agreements
Act 1953]
1.9 Secondly, these payments or credits are not royalties within the meaning of the
ITAA 1936. The effect is that an amount that is a royalty under the ITAA 1936
is not affected by the amendments and therefore continues to be subject to
taxation in Australia. The definition of "royalties" contained in Article 12(3)(g)
is different from the definition in Australia's domestic income tax law and
other tax treaties in that it includes payments or credits for certain technical
and consultancy services. If an amount paid or credited is covered by
Article 12(3)(g) and is also considered a 'royalty' under the ITAA 1936, then
the amendment will not apply and the amount paid or credited will continue to
be subject to Australian tax.
[Schedule 1, item 3, subsection 11J(b) of the International Tax Agreements
Act 1953]
1.10 Thirdly, these payments or credits must only be subject to Australian tax
because of the operation of Article 12(3)(g) and Article 23, as given effect by
the Agreements Act. If there are amounts that are covered or dealt with by
another article of the Indian agreement, these amounts would continue to be
5
Adjustment to tax on certain payments or credits made to Indian residents
subject to Australian tax. For example, if a technical service is provided in
Australia through a permanent establishment of an Indian resident, the
amendment does not apply in respect of an amount that Australia has a right to
tax under another article, such as the Business Profits Article (Article 7) due to
being attributable to that permanent establishment in Australia.
1.11 If Australia can tax these payments or credits outside of the operation
Article 12(3)(g) and Article 23, then Australia continues to retain and exercise
this taxing right.
[Schedule 1, item 3, subsection 11J(c) of the International Tax Agreements
Act 1953]
Example 1.1 Payment for technical service that will not be subject to
Australian tax
An Australian resident for tax purposes owns inventory control
software for use in its own chain of retail outlets throughout
Australia. It expands its sales operation by employing a team of
travelling salespeople to travel around the countryside selling the
company's wares. It wants to modify its software to permit
salesperson to access its central computers for information on what
products are available in inventory and when they can be delivered.
It hires a computer programming firm that is a resident of India for
tax purposes to modify its software for this purpose.
The payments which the Australian resident pays are royalties
within the meaning of Article 12(3)(g). The Indian firm performs a
technical service for the Australian company remotely, and it
transfers to the Australian company the technical plan (i.e. the
computer program) which it has developed for that company.
This payment is not subject to Australian tax because it satisfies the
three criteria in section 11J.
Consequential amendments
1.12 Consequential amendments are made to the Agreements Acts by amending
subsection 5(1) to include "section 11J" in the table item dealing with the
Indian agreement and the table item dealing with the India protocol (No. 1).
[Schedule 1, items 1 and 2, subsection 5(1) of the International Tax
Agreements Act 1953]
6
Treasury Laws Amendment (Australia-India Comprehensive Economic Cooperation Agreement
Implementation) Bill 2022
Commencement, application, and transitional
provisions
1.13 The amendments made by the Bill will commence on the later of the day this
Act receives Royal Assent and the day the AI-ECTA signed at Melbourne and
New Delhi on 2 April 2022, enters into force for Australia. However, the
provisions do not commence at all if the AI-ECTA does not enter into force.
The Minister must announce, by notifiable instrument, the day the AI-ECTA
enters into force for Australia.
The amendments made by the Bill apply in relation to assessments for years of
income starting on or after the commencement of this Bill.
[Schedule 1, item 4]
7
Statement of
Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny)
Act 2011.
Adjustment to tax on certain payments or credits
made to Indian residents
Overview
2.1 The Bill is compatible with the human rights and freedoms recognised or
declared in the international instruments listed in section 3 of the Human
Rights (Parliamentary Scrutiny) Act 2011.
2.2 The Bill inserts a new section 11J to the Agreements Act to stop the Australian
taxation on fees made to Indian residents by Australian customers for technical
services covered by Article 12(3)(g) that are provided remotely, in accordance
with the outcomes from the AI-ECTA which was signed on 2 April 2022.
Human rights implications
2.3 The Bill does not engage any of the applicable rights or freedoms as it is
dealing with the taxation of payments or credits related to the provision of
technical services by Indian residents.
Conclusion
2.4 The Bill is compatible with human rights as it does not raise any human rights
issues.
9