Most favoured nations: government consulting on new tax treaties
Tax treaties can be driven by politics, economics, or both. Current negotiations with Ukraine, Brazil, Sweden, South Korea, and New Zealand highlight the different drivers at play.
The Australian government is consulting on new tax treaties with Ukraine and Brazil, while it looks to update its existing agreements with New Zealand, Sweden, and South Korea.
The negotiations form part of a broader Australian government tax treaty expansion program, set to conclude in 2027.
The Ukrainian decision came at a pivotal time in the nation’s history, within a year of the Russian conflict breaking out.
Rumours of the negotiations first emerged in September, after the Australian government declined to engage with Ukrainian negotiators based on resourcing constraints.
“Originally, the government was not very keen to start the negotiations as they didn’t have the negotiating capacity,” Vasyl Myroshnychenko, the Ukrainian Ambassador to Australia, told attendees at a Business NSW event.
“I’m happy that they have now decided to launch and commence the negotiations with the Ukrainian finance ministry,” he said.
Myroshnychenko had been urging the Australian government to come to the table over the tax negotiations to assist in a Ukrainian rebuild following its conflict with Russia.
Tax treaties, also known as double tax agreements (DTAs) are bilateral agreements designed to promote economic cooperation between jurisdictions.
They are designed to reduce barriers to international trade and investment by, in part, delivering greater certainty and reduced compliance costs to taxpayer individuals and businesses.
Negotiations can be triggered for a range of reasons. Sometimes, it can be to formalise existing economic flows between countries, while other times it can be to stimulate growth, often for political reasons.
“I think Ukraine is a shining example of when it’s probably politically motivated,” said Liam Telford, national tax technical director at RSM Australia.
“There’s not a huge amount of economic activity [between Ukraine and Australia] to date, and [the negotiations were announced] with a view to fostering that.”
The move to sign a new agreement with Sweden is an example of the alternative kind of incentive at play.
“Australia does a lot of trade with Sweden, but we’ve got a very old treaty – one that doesn’t contain a lot of the latest OECD model convention [principles],” he said.
Brazil, meanwhile, is an example of a country with whom Australia does relatively little trade but maintains a steady flow of migration, said Telford. Those taxpayers would be served by greater tax clarity in the form of a treaty.
Despite the relatively low levels of trade between Brazil and Australia, Telford said he was “surprised” to learn that no tax treaty existed between the two G20 nations.
Assistant Treasury Minister Andrew Leigh said the Brazil treaty will bring "significant economic benefits to both nations through reduced taxation barriers to trade and investment, more certainty and reduced compliance cost for taxpayers."
Leigh also flagged the Brazil treaty will include integrity measures to "reduce tax evasion."
Concerning the South Korean negotiations, Telford said a treaty update to bring the agreement in line with Australia’s most favoured nation obligations was “long overdue.”
“We’ve amended the UK and US treaties to include reduced withholding tax and non-discrimination clauses, respectively. But we haven’t incorporated that into the Korean treaty,” he said.
While nothing in particular seemed to require amending in the New Zealand tax treaty, Telford said that, given the level of trade between the two nations, having a “watertight” agreement was essential.
In 2021, then Treasurer Josh Frydenberg announced Australia’s “economic recovery” would come, in part, off the back of a revitalised tax treaty network.
The plan was to capture 80 per cent of foreign investment in Australia under tax treaties, or $6.3 trillion of Australia’s two-way trade and investment.
Negotiations with India, Luxembourg, and Iceland were targeted as the first phase of the expansion program.
While the government, by then under the leadership of Prime Minister Anthony Albanese, signed the Iceland tax treaty in late 2022, neither of the other two negotiations have been finalised.
