In September 2015, the Federal Government announced its intentions to commence negotiations on a Double Taxation Agreement (DTA) between Australia and Israel. The Treasurer declared that this would provide:
opportunities for Australian companies to take greater advantage of Israel’s knowledge-based economy – particularly in areas of biotechnology, ICT, education and training.
Additionally, the Treasurer predicted that such an agreement would encourage Israeli companies to use Australia as a ‘regional base and as a supplier of sophisticated foods and services’.
Most importantly, a double tax agreement would provide Australia resident companies with an increased opportunity to benefit from the Israeli technology boom. This will be due to an expected reduction in the withholding tax burden for any licence fees paid by Australian resident taxpayers for software, patents, and other intellectual property products imported from Israel.
How can a DTA affect taxation?
Ordinarily, if a resident Australian company pays dividends, interest, or royalties to a foreign entity, it is liable to pay withholding tax – which is the income tax payable – on the overseas payments.1
The rates of withholding tax are 30% on dividends and royalties, and 10% on interest.2 These rates are reduced by DTAs between Australia and a range of countries. Some DTAs have reduced the withholding tax amount to 15% with regards to dividends, and 10% of the gross amount of the royalty. For example, the DTA signed with China that came into force in 1990 limited withholding tax rates to 10% for royalties, 15% for dividends, and 10 % for interest. Our current DTA agreements with the United States, New Zealand and Japan limit withholding tax on royalties to 5%.
It is not uncommon for contracts between Australian entities and foreign entities to stipulate that payments made by the Australian entity will be grossed-up to include whatever withholding tax is payable, such that the foreign entity is left no worse off in terms of total monies received.
For the Australian entity, however, such withholding tax gross-up clauses represent a significant cost, especially when such payments are made to entities resident in countries with which Australia does not have an active DTA to reduce the applicable withholding tax rates.
How would a DTA with Israel provide commercial benefits to you?
Australia is currently a net importer of capital from Israel.3 This importation takes the form of Australian companies importing the IT services and intellectual property of Israeli companies. As a consequence, significant amounts of royalties are paid to Israeli entities.
Any DTA with Israel will likely reduce withholding tax rates and result in a more attractive environment through which Australian entities can access Israeli licensed products.
Importantly, as Israel is in the middle of a technology boom, Australian companies will have the benefits of Israeli technology products and services to stimulate home-grown innovation without the added burden of high withholding tax rates on any royalties paid in return.
The overall potential effect of the DTA with Israel is the reduced cost of doing business with Israeli companies.
1ITAA 1936, s 128B, s6.
2Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (Cth).
3Australian Bureau of Statistics, ‘5352.0 – International Investment Position, Australia: Supplementary Statistics, 2014’ http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5352.02013?OpenDocument