Hostname: page-component-745bb68f8f-mzp66 Total loading time: 0 Render date: 2025-02-04T20:50:42.111Z Has data issue: false hasContentIssue false
  • English
  • Français

Taxing Sovereign Wealth Funds: Looking to Singapore for Inspiration

Published online by Cambridge University Press:  01 January 2025

Sally-Ann Joseph
Sally-Ann Joseph*
Affiliation:
Centre for Law & Business, Faculty of Law, National University of Singapore
Get access Rights & Permissions [Opens in a new window]

Abstract

The taxation of sovereign wealth funds is an important issue for governments as they are both investors and need to attract investment. Operating in global markets, how these funds are taxed can affect investment location decisions. In Australia there are currently no legislative provisions for these investments and issues of residency, applicability and terminology hamper the use of tax treaties.

The basis of how sovereign wealth funds are taxed in Australia is administrative where tax exemptions are provided on the basis of private ruling applications. It is an inefficient and costly process which lacks certainty. Over the period 2009 to 2011 the government of the day proposed legislating its practices dealing with sovereign wealth funds. In 2010 Singapore introduced a fund exemption scheme, markedly different from that proposed in Australia. Yet it is a method that is able to be adapted to the Australian income tax legislation. It avoids definitional issues by targeting the entities the policy aims to cover, is compatible with a self-assessment system and provides flexibility in policy making. Recommendations with accompanying considerations are made with respect to incorporating Singapore's tax exemption for sovereign wealth funds into the Australian tax legislation.

Type
Article
Information
Federal Law Review , Volume 45 , Issue 1 , March 2017 , pp. 17 - 38
Copyright
Copyright © 2017 The Australian National University

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

1 Compiled from SWFI, Sovereign Wealth Fund Rankings (April 2017) <http://www.swfinstitute.org/sovereign-wealth-fund-rankings/>.

2 International Monetary Fund, ‘Sovereign Wealth Funds—A Work Agenda’ (Work Agenda, Monetary and Capital Markets and Policy Development and Review Departments, 29 February 2008) 4.

3 OECD, ‘OECD Guidelines on Corporate Governance of State-Owned Enterprises’ (Guidelines, OECD, 2015) 15.

4 P E, Nygh and P, Butt (eds), Butterworths Australian Legal Dictionary (Butterworths, 1997), ‘sovereign immunity’Google Scholar; Jonathan, Law and Elizabeth, A Martin (eds), A Dictionary of Law (Oxford University Press, 7th ed, 2009) ‘sovereign immunity’Google Scholar.

5 See, eg, Compania Naviera Vascongado v SS Cristina [1938] AC 485, 490 (Lord Atkin).

6 Elsevier Science B.V., Encyclopedia of Public International Law, vol 4 (at 24 April 2017) State Immunity, 615 [1].

7 Kazuhiro, Nakatani, ‘Sovereign Wealth Funds: Problems of international law between possessing and recipient States’ (2015) 2 International Review of Law 1, 7Google Scholar; Sally-Ann Joseph, ‘Do tax treaties embody the application of sovereign immunity: an assessment of sovereign wealth funds?’ (2015) 69(11) Bulletin for International Taxation 637.

8 The points noted here are discussed in detail in this paper.

9 Sally-Ann, Joseph, Michael, Walpole and Robert, Deutsch, ‘Taxation of Sovereign Wealth Funds—A Suggested Approach’ (2015) 10(1) Journal of the Australasian Tax Teachers Association 119, 143Google Scholar.

10 Australian Taxation Office, Private rulings for sovereign immunity—supporting information (26 August 2014) <https://www.ato.gov.au/General/ATO-advice-and-guidance/In-detail/Private-rulings/Supporting-documents/Sovereign-Immunity/>.

11 Ibid.

12 Australian Taxation Office, Sovereign Immunity, PBR 31076, 17 September 2003.

13 Ibid. The tax treaties referred to are ‘the provisions of the International Tax Agreements Act 1953’.

14 Ibid.

15 Taxpayers Australia Inc, The Taxpayers Guide 2014–2015 (Wrightbooks, 26th ed, 2014)Google Scholar para 22.810; KPMG, ‘SWFs—Riders through the storm’ (Advisory Report, KPMG International, November 2014) 27.

16 Income Tax Assessment Act 1997 (Cth) ss 6–5(3), 6–10(5) (‘ITAA’).

17 Commissioner of Inland Revenue v N V Philips’ Gloeilampenfabrieken [1955] NZLR 868, 886–88 (North J).

18 Ibid 879–80 (Gresson J). In Spotless Services Ltd v Federal Commissioner of Taxation (1993) 93 ATC 4397, 4409–4410 at first instance Lockhart J held that the place where the contract was made and where the money was lent were ‘of considerable importance’. Although the Full Federal Court agreed on appeal, Beaumont J did caution that attributing ‘source’ was a ‘matter of judgment, and of assessment’: FCT v Spotless Services Limited (1995) 95 ATC 4775, 4789.

19 ITAA 1936 s 44(1).

20 The collection of withholding tax is contained in Taxation Administration Act 1953 (Cth) sch 1 sub-div 12-F ss 12-210–12-300.

21 ITAA 1936 s 128D.

22 ITAA 1997 s 995–1 (definition of ‘foreign government agency’).

23 s 2B (definition of ‘foreign country’).

24 ITAA 1936 s 128B(3)(ga).

25 These rates are reflected in Australia's 44 double tax agreements. See The Treasury, Australian Government, Income Tax Treaties <http://www.treasury.gov.au/Policy-Topics/Taxation/Tax-Treaties/HTML/Income-Tax-Treaties>.

26 This is a consequence of imputation.

27 See, eg, PwC, Australia: Corporate - Withholding taxes (22 November 2016) <http://taxsummaries.pwc.com/uk/taxsummaries/wwts.nsf/ID/Australia-Corporate-Withholding-taxes>.

28 ITAA 1936 ss 317(1) (definition of ‘CFC or controlled foreign company’), 340.

29 Ibid s 317(1) (definition of ‘non-portfolio dividend’).

30 ITAA 1997 s 960–195.

31 Ibid s 960–190.

32 ITAA 1936 s 350.

33 Ibid s 128A(1AB) (definition of ‘interest’).

34 Ibid s 128A(1AB)(a).

35 Ibid s 128A(1AB)(b).

36 See, eg, Australian Taxation Office, Withholding Tax Exemption—Sovereign Immunity, PBR 69161, 18 January 2007 (‘PBR 69161’); Australian Taxation Office, Sovereign Immunity—Interest Withholding Tax Exemption, PBR 94751, 25 November 2009 (‘PBR 94751’); Internal Revenue Service, A Selection of Internal Revenue Service Tax Information Publications (Department of the Treasury, 1989) vol 3, 291.

37 Australian Taxation Office, Withholding Tax Sovereign Immunity, ATO ID 2002/45, 24 January 2002 (‘ATO ID 2002/45’); PBR 94751 ; Brian J Arnold, Jinyan Li and Daniel Sandler, ‘Comparison and Assessment of the Tax Treatment of Foreign Source Income in Canada, Australia, France, Germany and the United States’ (Working Paper No 96–1, Technical Committee on Business Taxation, Ottawa Department of Finance, December 1996) 4.

38 ITAA 1936 s 446(1).

39 OECD, ‘Model Tax Convention on Income and Capital’ (Model Convention, OECD, 2010) art 1.

40 Ibid art 4(1).

41 OECD, ‘Commentaries on the Articles of the Model Tax Convention’ (Commentary, OECD, 2010) 85 [8.4].

42 Ibid 58 [6.35]; 85 [8.4].

43 Ibid 85 [8.5].

44 Ibid 58 [6.36].

45 Ibid 48 [6.9].

46 Post-2009 treaties were signed with Chile (10 March 2010) and Turkey (28 April 2010); amending protocols were signed with India (16 December 2011) and Malaysia (24 February 2010). See The Treasury, Australian Government, Income Tax Treaties at <http://www.treasury.gov.au/Policy-Topics/Taxation/Tax-Treaties/HTML/Income-Tax-Treaties>.

47 See, eg, Agreement between the Government of the Republic of Singapore and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Singapore-Malaysia, signed 5 October 2004 (entered into force 13 February 2006) art 4(1) (‘Singapore Malaysia Double Tax Agreement’).

48 See, eg, Convention Between Canada and New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Canada-New Zealand, signed 3 May 2012, UNTS 66177 (entered into force 26 June 2015) art II.

49 OECD, above n 39, art 4(1).

50 Ibid.

51 Ibid.

52 Ibid.

53 An Agreement Between the Government of the Republic of India and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, India-United Arab Emirates, signed 29 April 1992, 737 UNTS 237 (entered into force 22 September 1993) art 4(1).

54 Comprising Abu Dhai Investment Authority US$792b, Investment Corporation of Dubai US$196b, Abu Dhabi Investment Council US$110b, International Petroleum Investment Company US$66.3b, Mubadala Development Company US$66.3b, Emirates Investment Authority US$15b and RAK Investment Authority US$1.2b: SWFI, Sovereign Wealth Fund Rankings (April 2017) <http://www.swfinstitute.org/sovereign-wealth-fund-rankings/>.

55 OECD, above n 41, Commentary on art 1 [6.39].

56 Agreement between the Government of the UK of Great Britain and Northern Ireland and the Government of Malaysia for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed 10 December 1996, [1996] UKTS 12 (entered into force 8 July 1998) art 11(8)(a).

57 Singapore Malaysia Double Tax Agreement, art 11(5).

58 OECD, above n 41, 59 [6.38].

59 Ibid.

60 OECD, ‘Discussion Draft on the Application of Tax Treaties to State-Owned Entities, Including Sovereign Wealth Funds’ (Public Discussion Draft, Centre for Tax Policy and Administration, 25 November 2009 to 31 January 2010); Joseph, Walpole and Deutsch, above n 9, 126.

61 See, eg, Singapore Malaysia Double Tax Agreement; Agreement between the Government of the Republic of Singapore and the Government of the Lao People's Democratic Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed 21 February 2014 (entered into force 11 November 2016); Convention Between the Republic of Poland and the Kingdom of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed 9 September 2009, 2674 UNTS 233 (entered into force 25 May 2010).

62 Explanatory Memorandum, International Tax Agreements Amendment Bill (No 1) 2007 (Cth) [2.131].

63 Agreement Between Australia and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, signed 30 July 2013, [2014] ATS 33 (entered into force 14 October 2014) arts 10(4)(a)–(b).

64 Ibid art 11(3)(a).

65 Explanatory Memorandum, International Tax Agreements Amendment Bill 2014 (Cth) [1.138].

66 Ibid.

67 Convention Between Australia and New Zealand for the Avoidance of Double Taxation with Respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion, signed 26 June 2009, [2010] ATS 10 (entered into force 19 March 2010) arts 10(4), 11(3](a) respectively.

68 House of Representatives Joint Standing Committee on Treaties, Parliament of Australia, Taxation Agreement with New Zealand (2009) 8 [2.13].

69 Australian Taxation Office, Withholding Tax: Exemption from Interest Withholding Tax for a German Bank Undertaking Central Bank Activities, ID 2005/355, 3 November 2005 (‘ATO ID 2005/355’).

70 Agreement between the Commonwealth of Australia and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed 24 November 1972, [1975] ATS 8 (entered into force 15 February 1975) Protocol para 9.

71 ATO ID 2005/355.

72 Ibid.

73 Explanatory Memorandum, Income Tax (International Agreements) Bill 1984 (Cth).

74 ATO ID 2005/355.

75 Ibid.

76 See below Part III for discussion on Income of foreign governments and of international organizations, 26 USC § 892.

77 Convention Between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed 31 January 2008, [2008] ATS 21 (entered into force 3 December 2008) art 11(3)(c)(ii).

78 Ibid art 11(3)(c)(iii).

79 Explanatory Memorandum, International Tax Agreements Amendment Bill (No 1) 2008 (Cth) 6.

80 Ibid [1.175].

81 See, eg, Future Fund Act 2006 (Cth) s 16(2); Nation-building Funds Act 2008 (Cth) s 32(2); Medical Research Future Fund Act 2015 (Cth) s 37(2).

82 Explanatory Memorandum, International Tax Agreements Amendment Bill 2014 (Cth) [1.138].

83 Explanatory Memorandum, International Tax Agreements Amendment Bill (No 1) 2008 (Cth) [1.176].

84 Sovereign immunity does not apply to commercial activities.

85 Australian Taxation Office, Sovereign Immunity—Interest Withholding Tax Exemption, PBR 63031, 4 July 2006; PBR 94751.

86 These are set out in ATO ID 2002/45.

87 Ibid.

88 Ibid.

89 ITAA 1997 s 960–195 defines the ‘non portfolio interest test’ to be passed where the holding is ‘10% or more’.

90 Ibid s 995–1 (definition of ‘foreign government agency’).

91 Foreign States Immunity Act 1985 (Cth) ss 3(1) (definition of ‘foreign State’), 3(3) (‘FSIA’).

92 Ibid s 3(3).

93 Ibid.

94 Ibid s 3(1) (definition of ‘separate entity’).

95 Ibid s 22, except for the special provisions for transactions between states (at governmental level).

96 The Treasury, ‘Greater Certainty for Sovereign Investments’ (Consultation Paper, Australian Government, November 2009) (‘Consultation paper’).

97 The Treasury, ‘Options to Codify the Tax Treatment of Sovereign Investments’ (Proposals Paper, Australian Government, April 2011) (‘Options Paper’).

98 Ibid 2.

99 These are discussed in more detail in Joseph, Walpole and Deutsch, above n 9, 134–8.

100 ATO ID 2002/45 ; ATO PBR 94751 ; ATO PBR 69161 .

101 Tax Administration Act 1953 (Cth) sch 1.

102 The Treasury, above n 97, [5.4].

103 Ibid.

104 Ibid.

105 Stijn Janssen, ‘How to Treat(y) Sovereign Wealth Funds? The Application of Tax Treaties to State-owned Entities, Including Sovereign Wealth Funds’ in Dennis Weber and Stef van Weeghel (eds) The 2010 OECD Updates: Model Tax Convention & Transfer Pricing Guidelines—A Critical Review (Wolters Kluwer, 2011).

106 Defined in Foreign Government Defined (Temporary Regulations) § 26 CFR 1.892-2T (a)(1).

107 Ibid § 26 CFR 1.892-2T(a)(3) (definition for ‘controlled entity’).

108 Ibid § 26 CFR 1.892-2T(a)(3)(iii)–(iv).

109 See Income of Foreign Governments and of International Organizations, 26 USC § 892(a)(2)(A).

110 Arthur Sinodinos, ‘Integrity restored to Australia's taxation system’ (Media Release, 14 December 2013) 11.

111 Singapore, Parliamentary Debates, 18 October 2010, 1354 (Tharman Shanmugaratnam, Minister for Finance).

112 Income Tax Act (Singapore, cap 134, 2014 rev ed) s 13Y(2) was extended by Act 37 of 2014 (‘ITA’) .

113 Income Tax (Exemption of Income of Non-Residents Arising from Funds Managed by Fund Manager in Singapore) Regulations 2010 (Singapore, cap 134, S 6/2010) s 2.

114 ITA s 13Y(1)(a).

115 Ibid s 13Y(1)(b).

116 Income Tax (Exemption of Certain Income of Prescribed Sovereign Fund Entities and Approved Government-Owned Entities) Regulations 2012 (Singapore, cap 134, S 50/2012) s 3 (‘ITR’) .

117 ITA s 13Y(4).

118 Ibid.

119 Ibid s 13Y(2).

120 State Immunity Act (Singapore, cap 313, 2014 rev ed) s 5(3).

121 ITA s 13Y(3).

122 Income Tax (Exemption of Certain Income of Prescribed Sovereign Fund Entities and Approved Government-Owned Entities) (Amendment) Regulations 2015 (Singapore, cap 134, S 100/2015) s 4(1).

123 Ibid s 4(2).

124 Ibid s 4(4)

125 ITR s 8.

126 Ibid s 6(a).

127 Ibid s 6(b).

128 Ibid s 7.

129 Other defining factors that could be taken into account were discussed in section 2.2.1.

130 Duncan, Bentley, ‘Tax Law Drafting: The Principled Method’ (2004) 14(1) Revenue Law Journal 1Google Scholar; Greg, Pinder, ‘The Coherent Principles Approach to Tax Law Design’ (2005) Economic Round-up 75Google Scholar.