Taxation of Branch Operations in Australia
17.91. Where a foreign company has a branch operation in Australia it will, subject to the provisions of any double taxation agreement, be subject to Australian company tax on its Australian-source profits. When it makes a distribution to its shareholders from those profits, the shareholders will, again subject to any double taxation agreement, be subject to Australian tax on the dividends they receive. But this is generally only a theoretical liability which the Commissioner will not be able to enforce. When the foreign company has a subsidiary company carrying on the operations in Australia, there will be company tax on the subsidiary company's profits and withholding tax at 30 per cent (or 15 per cent if a double taxation agreement applies) on profits distributed to the company by way of dividends. The result is a discrimination in favour of the branch operation.
17.92. In some countries a special tax is imposed on profits of branch operations to remove the discrimination. The Committee would favour the introduction of a branch earnings tax in the form of an additional tax on a proportion of a non-resident company's Australian taxable income after the deduction of company tax. Tax on half the after-tax income is proposed. The rate of tax should be the normal dividend withholding tax rate of 30 per cent; but where a company establishes that it is a resident of a country that has a double tax agreement with Australia under which the withholding tax rate is reduced to 15 per cent, the rate should be 15 per cent.
17.93. Dividends paid by a non-resident company to non-resident shareholders after the commencement of the proposed provision should be made exempt from Australian tax. In addition, the requirement that a non-resident private company make a sufficient distribution to avoid the imposition of Division 7 tax should be dispensed with. However, neither of these two proposed measures ought to have application if the company is a tax-haven company.
17.94. The branch earnings tax should not be applied to income of the branch which takes the form of dividends. These dividends under the present law will have been taxed in the hands of the branch by assessment at corporate rates as the section 46 rebate does not operate; withholding tax does not apply. The treatment of dividends received by a non-resident company which has a branch operation in Australia involves a discrimination against a branch operation. If the non-resident company operates through a subsidiary the dividends received by the subsidiary will be relieved from tax by the operation of the inter-corporate rebate (section 46) and when distributed as dividends paid to the non-resident company they will attract only withholding tax.
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17.95. Submissions have been made to the Committee that the discrimination against branch operations in relation to dividend income should be removed by extending the inter-corporate rebate to dividends received by a non-resident company which has a branch operation in Australia. In the Committee's view this treatment would be too generous since, for reasons already explained, there is unlikely to be any further Australian tax when the non-resident company distributes to its shareholders. There is, however, in the Committee's view a case for applying withholding tax to dividends received by a non-resident company which has a branch operation in Australia. The dividends would then not be subject to tax by assessment and would in effect bear the same Australian tax as would apply to dividends received by an Australian subsidiary which are the subject of a distribution to the non-resident parent company. The rate of withholding tax should be the same as would apply to distributions by an Australian subsidiary of the non-resident company.