THE TAXATION OF FOREIGN INVESTMENT IN AUSTRALIA BY SOVEREIGN WEALTH FUNDS: WHY HAS AUSTRALIA NOT PASSED LAWS ENSHRINING THE DOCTRINE OF SOVEREIGN IMMUNITY?
By John McLaren
The doctrine of sovereign immunity as it is applied in taxation law allows for foreign governments to be exempt from income tax on their passive investments, as opposed to direct foreign investments (‘FDI’) in a number of jurisdictions. The US, for example, has legislated for the recognition of sovereign immunity in relation to withholding taxes on foreign investments by foreign governments and sovereign wealth funds (‘SWFs’). However, Australia has not passed similar laws enshrining this exemption for SWFs or State Owned Enterprises (‘SOEs’).
The Australian Treasury and other interest groups have advocated the need to have similar laws enacted in Australia in order to compete for foreign investment and to formalise the law. Simply requiring SWFs and SOEs to apply for a private ruling from the Australian Taxation Office is not sufficient when other countries have enshrined this immunity in their domestic law. Private rulings only apply to the particular taxpayer and are only granted for a limited number of financial years. However, with the growth in foreign investment by China and in particular through SOEs predominantly in mining and agricultural land, it would appear that the Australian government is reluctant to formalise the taxation exemption for political reasons.
The issue of Chinese investment in mining and agricultural land has been politicised by various sides of politics in Australia and appears to be of great public concern. The paper will examine the doctrine of sovereign immunity in relation to taxation and then discuss the current situation with foreign investment by China through SOEs and other government sovereign funds. The paper will then assess the merits of formally granting the sovereign immunity from taxation for SWFs and Chinese SOEs and the likely political repercussions in Australia. The main thrust of the paper is that the political considerations appear to have dominated this area of taxation law and that the lack of formal recognition of the immunity from taxation is threatening the future of foreign investment in Australia.
UNDERSTANDING THE EFFECTS OF COERCIVE AND PERSUASIVE TAX COMPLIANCE TOOLS ON LARGE CORPORATE TAXPAYERS
By Zakir Akhand
Coercion and persuasion are the two main approaches to increase tax compliance. The former attempts to promote tax compliance mainly by using penalty and tax audits, while the latter focuses on increased taxpayer services, simplified tax law and enhanced mutual understanding. There has been little attempt to provide a contextual explanation as to why an instrument fails or succeeds in boosting tax compliance of large corporations – a gap this paper attempts to fill. Using an empirical analysis, this research found that factors underlying the power of the coercive approach are the rationality and regularity of its application, along with its legal and financial imperatives. Reasons contributing to the appeal of the persuasive approach are a reduction in tax compliance costs, an improvement in accountability and a reduction in knowledge gaps, and coordination of the various tax laws. The research found that the explanation of tax compliance patterns is not straightforward, and in countries with different taxation and institutional systems, instruments tested would not be expected to yield similar outcomes. Therefore, verification of the study results in different contexts is essential.
THE UNITED STATES CAPITAL GAINS TAX REGIME AND THE PROPOSED NEW ZEALAND CGT: THROUGH ADAM SMITH’S LENS
By Andrew Maples and Stewart Karlinsky
Political commentators have long said that the enactment of a comprehensive capital gains tax (CGT) in New Zealand (NZ) would be political suicide. However, sentiment towards a CGT in NZ has softened more recently with a number of commentators as well as business and political leaders supporting the introduction of a CGT.
In both the 2011 and 2014 General Elections the centre-left Labour Party campaigned on inter alia introducing a comprehensive CGT levied at a rate of 15 per cent. They lost in both elections but on the basis that a CGT is now part of the NZ political agenda of the left-of-centre parties coupled with the current mixed member proportional (MMP) electoral system (which lends itself to coalition-based governments) it is arguably only a matter of time before a CGT is introduced in NZ by a Labour-led coalition.
This paper, using Adam Smith’s canons for a good income tax, considers the Labour Party CGT proposal and the United States (US) experience in dealing with capital gains. It notes that the NZ proposals are consistent with CGT regimes generally, such as it being realisation-based and not permitting indexing, but may involve complexities and pitfalls that the US system has previously encountered.