Australian Foreign Minister Stephen Smith has signed the new treaty, labelling it a “comprehensive taxation convention”. He said the new model dealt with the avoidance of double taxation as well as the prevention of fiscal evasion in relation to income flowing between the two countries.

Tax professionals have applauded the introduction of the new treaty. KMPG tax partner Rick Asquini hailed it as a vital update on the previous agreement, established nearly 40 years ago. “Business has changed dramatically over this time and this new treaty reflects the strength of the trading relationship,” he said.

The changes are part of a broader push to modernise Australia’s international tax agreements, bringing them into line with those Australia has singed more recently with the US, UK and other countries, according to Betsy Howe, a taxation partner in Mallesons Stephen Jaques’ Sydney office.

“Australia has already got or has negotiated new treaties with the US, UK and other countries, which have features very similar to what we’re now seeing in the Australia-Japan treaty,” she explained.

The treaty is purported to increase investment between the two countries and Howe believes it will deliver results. “There’re a number of important aspects to it, but I think … the intention of the treaty is to make it more attractive … on a mutual basis for Australians to invest in Japan, especially in interest-bearing type securities. And I think also for Japanese companies to invest here,” she said. “I think that’s all part and parcel of the fact that Australia’s got a large pool of savings and that’s all being invested outside Australia.”

The treaty encompasses a broad range of tax issues, including provisions to cover a sliding scale of income brackets for withholding taxes in each of the jurisdictions. “I think the important ones really are the withholding taxes … and I think also the [capital gains tax] provision which now aligns alienation of property articles with other treaties,” Howe said.

Howe commended the treaty’s compliance with the wider Organisation for Economic Co-operation and Development approach. “I think it’s a good thing … I would just say it’s very much a consistent treaty with [others internationally that] we’ve been negotiating,” she said. “[It tries to] make investment to and from Australia and Japan as easy as possible.”

There will be other benefits arising from the agreement for tax professionals. KPMG’s transfer pricing partner, Anthony Seve noted that many Japanese companies in Australia would be relieved by the newly-established time limit on transfer pricing reviews. Seve predicted the agreement would deliver greater certainty, and assist in the timely resolution of difficult transfer pricing cases still under examination.

“In the past, there was no time limit on these reviews and that meant there was a high degree of uncertainty and administrative burden for many companies. Now that uncertainty has been removed, it will help Japanese companies to better manage their transfer pricing risk in a more practical and efficient manner,” Seve said.