Time for a new China tax treaty

The landmark free trade agreement that Australia has signed with China after the conclusion of the G20 summit is excellent news for the economy. But to get the full benefit of increased trade ties between the two countries, we believe another step is needed – and that is an updated tax treaty.

The current treaty between Australia and China was signed in 1988 – and as we know from the public debate about digital companies and tax that acted as such a backdrop to the G20, a quarter of a century is a lifetime ago in tax policy.

Business models have changed permanently since pre-internet days, and tax law has not kept pace. We have made the argument to the Treasury that an outdated treaty of 26 years does reflect a perception of how serious Australia is about attracting Chinese inbound and outbound investments.

Other countries with similar tax systems to Australia are competing for Chinese capital and have newer treaties in place that would help facilitate its arrival. KPMG’s own research has shown that this year, Australia lost (to the US) its mantle as the world’s top destination for Chinese outbound direct investment. It also showed that there was greater diversification and volatility of Chinese investment. So there is no room for complacency.

It should be noted that Australia has an updated tax treaty with Japan. Given political sensitivities between the countries, it is important that we demonstrate our equal commitment to increasing trade with China. There are some notable differences – for a start, China inbound investors are subject to 15 percent dividend withholding tax on unfranked dividends while Japanese companies can have a 0 percent rate. Companies in the US, UK and New Zealand can enjoy the same advantages over China.

Outbound investment flows into China also suffer from various capital gains tax barriers. Australian investment funds making portfolio investments in Chinese stocks are subject to 10 percent Chinese CGT. German, French, UK, and other European countries do not suffer as they have updated treaties with China. Australia’s efforts to become a regional financial and funds management centre are put at risk by these CGT problems. The agreement reached recently to also review the bilateral tax treaty to ensure the benefits from the free trade agreement between Australia and China is maximised is definitely welcomed, but it needs to occur speedily.

The free trade agreement is very welcome news. Lets move swiftly on complementing it with a much needed updated tax treaty.


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