Many inbound investments to date have been structured using trusts. The government proposes to eliminate the advantages by taxing trusts the same as companies commencing in July 2000. Transition rules would apply to existing investments.

Another proposal would eliminate the concept of “franked dividends,” or distributions out of earnings that were already taxed at the company level. Franked dividends are not subject to further tax to the shareholder receiving them. This has given rise to “streaming” arrangements where franked income is steered to Australian shareholders and unfranked dividends go to shareholders who are outside the Australian tax net. Instead, companies will have to pay a top-up “equalization tax” when paying dividends to ensure all earnings have been subject to full corporate tax.

The government also proposes a rule where any distribution by a company would be treated as a dividend to the extent the company has profits. This will affect share buybacks, capital reductions and liquidations.

A general goods and services tax (GST) would be imposed by the federal government, probably at a 10% rate. The GST would replace the federal wholesale sales tax and certain state taxes, including most stamp duties.

The government also said it intends to talk to the business community about reducing the corporate tax rate to 30% (from the current 36%) in exchange for scaling back accelerated depreciation and possibly other concessions.

The proposals will be included in the election manifesto of the ruling Liberal-National coalition for the next national election, currently expected in October. The government is currently trailing in the polls, but the main opposition party is backing most of the reforms.

RUSSIA SOURS ON CYPRUS TAX TREATY... Foreign investment into Russia is often routed through Cyprus as a way of reducing withholding taxes on interest and dividends at the Russian border. The Russia-Cyprus treaty reduces these taxes to 0%. The Russian government has reportedly prepared draft legislation that would unilaterally renounce the treaty. The government should have given Cyprus notice by July 1 this year if it intended to renounce during 1998. This suggests the treaty will remain in effect at least until next year.

INDONESIAN FALLOUT . . . The Indonesian government is reviewing all tax breaks given to businesses in which Suharto cronies owned interests. Investment minister Hamzah Haz said a list of “transparent” requirements for foreign companies seeking tax incentives for investing in the country will be announced soon.

Meanwhile, a new tax treaty took effect recently with Mauritius that reduces withholding taxes on dividends to 5% — the lowest under any treaty — but there are reports the Indonesian tax office wants to make revisions.

BRAZIL TAGS CAYMANS AS A TAX HAVEN. . . The Brazilian tax authorities said they will subject all financial dealings and trade between Brazilian companies and entities in the Cayman Islands, British Virgin Islands and Netherlands Antilles to closer inspection to verify compliance with transfer pricing rules.

TURKEY INCREASED ITS CORPORATE TAX RATE from 25% to 30%.

It also eliminated withholding taxes on dividends in favor of a tax on the distributing corporation at the time it pays dividends. The rate for the distributions tax is expected to be 10%. A 10% corporate surtax will continue to apply.

Turkey may soon find itself in the same bind as India. India last year eliminated a requirement that Indian companies paying dividends to foreign shareholders must withhold income taxes on the shareholder. Instead, a tax is imposed on the distributing corporation directly. Some argue the move backfired because the typical power sales contract with a state electricity board allows a passthrough of taxes imposed on the project company. Thus, the government ends up bearing the new distributions tax.

SOME EXPATRIATES LIVING IN CHINA would be wise to leave the country for at least 30 continuous days or a total of 90 days before the end of the year. Starting in 1999, expatriates who have lived in China for five consecutive years will become subject to Chinese income taxes on worldwide income. This result can be avoided by leaving the country for an extended period before the end of this year.