Taxing Sovereign Wealth Funds: Looking to Singapore for Inspiration
| DOI | 10.1177/0067205X1704500102 |
| Author | Sally-Ann Joseph |
| Published date | 01 March 2017 |
| Date | 01 March 2017 |
| Subject Matter | Article |
TAXING SOVEREIGN WEALTH FUNDS: LOOKING TO
SINGAPORE FOR INSPIRATION
Sally-Ann Joseph*
ABSTRACT
The taxation of sovereign wealth funds is an importa nt issue for governments as they
are both investors and need to attract investment. Opera ting 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 peri od 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.
I INTRODUCTION
The taxation of sovereign wealth funds is an important issue for governments for two
reasons. Firstly, governments are investors as the funds in sovereign wealth funds are
government assets. Governments therefore have an interest in how they are taxed or not
taxed. Secondly, part of the economic function of governments is in attracting foreign
investment. Sovereign wealth funds operate in global markets and, as such, are an
important source of investment in the domestic market. How they are taxed can affect
investment location decisions. There are currently around 77 funds operating out of 49
countries with assets of around US$7.25 trillion.
1
A sovereign wealth fund is an investment fund, owned or controlled by the
government, and which holds, manages, or administers assets primarily for medium- to
* Post-Doctoral Research Fellow, Centre for Law & Business, Faculty of Law, National
University of Singapore.
1
Compiled from SWFI, Sovereign Wealth Fund Rankings (April 2017)
<http://www.swfinstitute.org/sovereign-wealth-fund-rankings/>.
18 Federal Law Review Volume 45
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long-term macroeconomic and financial objectives.
2
This ca n be differentiated from a
state owned enterprise which is an entity, owned or controlled by the government, with
the purpose of engaging in commercial activities.
3
What differ entiates the taxation of
sovereign wealth funds from other investment funds is the fact that they are sovereign,
and therefore the notion of sovereign immunity is an important consideration.
The doctrine of sovereign immunity is entrenched in public international law. This is
generally defined in terms of being immune from the jurisdiction of municipal courts.
4
As such there is a presumption that a statute does not bind a foreign state unless
expressly waived.
5
Sovereign immunity ari ses from both the equality of states and the
independence of states. It is not a concept or idea in and of itself, but rather ‘the legal
principles and rules under which a foreign State may claim exemption from, suspension
of, or non-amenability to the jurisdiction of another State’.
6
Given the nature of the
principle, it is not surprising that there is a lack of international consensus o n the scope
of the a pplication of sovereign immunity. In particular, not all countries acknowledge
the principle in matters of taxation and those that do adopt and apply it in varying
degrees.
7
Many countries offer tax ex emptions for the interest and dividend i ncome of
sovereign wealth funds. Australia is no exception. Yet the tax exemption is not currently
grounded in the tax legislation. An attempt was ma de in around 2011 to enact effecting
legislation, but was scuttled by a change in government. Around the same time,
Singapore legislated a tax exemption for sovereign wealth funds.
8
The question this paper seeks to answer is whether the legislation adopted in
Singapore could be applied to Australia, and thereby incorporated as a tax exemption in
Australia’s income tax legislation. Section 2 provides an overview of the current taxation
practice in Australia. Legislation, tax treaties and the administrative practice of private
rulings a re considered. The previously proposed Australian legislation is outlined in
section 3, followed by a description of Singapore’s application legislation in section 4.
Specially, the operation of the tax law pr ovision and supporting regulations are
explained, from which an analysis of the provision is made. This analysis and evaluation
determines how Singapore’s legislative provision could work in Australia. From this,
recommendations are made.
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’; Jonathan Law and Elizabeth A Martin (eds), A Dictionary of Law
(Oxford University Press, 7th ed, 2009) ‘sovereign immunity’.
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, 7; 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.
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