Justification for Taxing Income of Non-residents on the Basis of Origin in Australia
17.63. There are obvious reasons why a country will wish to exercise jurisdiction on the basis of origin. More especially where it is a debtor country—an importer rather than an exporter of capital—income will be generated by economic activity within the country which, if not taxed on the basis of origin, would be excluded from the total base of income tax. The tax on the remaining base will need to be so much the greater, or other means of taxation used. Whatever the immediate incidence of any other tax, it will for the most part be borne by Australian residents, more particularly in their capacity as consumers. Indeed, income tax on non-residents may have to be retained at existing levels even if the movement away from income tax towards commodity taxation, favoured by the Committee, occurs in the taxing of residents.
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17.64. Revenue considerations aside, the justification for imposing income tax on non-residents on the basis of origin in Australia rests on the ‘benefit’ principle referred to earlier in paragraph 3.7. The non-resident's income has been generated by economic activity conducted under the protection of the country of origin and relying on facilities provided, at least in part, at public expense. This is equally true whether the income has been produced by the activity of the non-resident himself, as by manufacturing operations in Australia conducted by him through a branch, or by a resident who pays what would otherwise have been his profit to the non-resident, by way of interest or royalties.
17.65. The benefit principle is an aspect of equity. More refined notions of equity, deriving from the principle of ‘ability to pay’, have no obvious relevance in the present context. Australia taxes a non-resident on a base representing only part of his total income, and does not attempt to concern itself with the remainder of his income. Ensuring that the non-resident's tax liability reflects his ability to pay must rest with his country of residence.
17.66. The equity reflected in the application of the benefit principle will to some extent run parallel with the objective of efficiency in the sense of neutrality. It will be apparent, though, from observations made in paragraphs 17.29–17.31 that no provisions of the Australian tax system standing alone can ensure neutrality. Whether a non-resident chooses to invest in his own country, in another foreign country or in Australia will depend, in terms of tax, on the whole range of taxes in each of those countries.
17.67. If it is thought that efficiency requires a deliberate non-neutrality—the encouragement or perhaps the discouragement of foreign investment—the Committee would take the view, in line with its observations in paragraphs 17.32–17.35, that this should be done as far as possible outside the tax system. If the tax system is used, explicit provisions directed to the specific non-neutrality are to be preferred to any general provision. Sections 128F and 128G of the Act, which exempt certain interest from withholding tax, are illustrations of such specific provisions.
17.68. Because it need not concern itself with ability to pay aspects of equity, income tax on Australian-origin income of non-residents can, to this extent, be a simple tax. Tax is imposed, for the most part, at the flat rates associated with company tax and withholding tax. In the case of withholding tax there is also an element of simplicity in the collection of the tax by withholding rather than by assessment.