Volume 17, Issue 1 – McLaren

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.

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