Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
INTERNATIONAL TAX AGREEMENTS AMENDMENT BILL (No. 1) 2007
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello MP)
Table of contents
Glossary ....................................................................................... 1
General outline and financial impact ....................................................... 3
Chapter 1 2006 Australia-France tax Convention ........................ 11
Chapter 2 2006 Australia-Norway tax Convention ....................... 81
Chapter 3 Regulation impact statement for the
2006 France Convention ........................................... 153
Chapter 4 Regulation impact statement for the
2006 Norway Convention .......................................... 169
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ATO Australian Taxation Office
CGT capital gains tax
Commissioner Commissioner of Taxation
FBT fringe benefits tax
GATS General Agreement on Trade in Services
GST goods and services tax
GST Act A New Tax System (Goods and Services Tax)
Act 1999
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
MEC group multiple entry consolidated group
MFN most favoured nation
OECD Organisation for Economic Co-operation
and Development
OECD Model OECD Model Tax Convention on Income
and on Capital
the Airline Profits Agreement the Agreement between the Government of
the Commonwealth of Australia and the
Government of the French Republic for the
Avoidance of Double Taxation of Income
Derived from International Air Transport
(signed 27 March 1969)
the existing France treaty the Agreement between the Government of
Australia and the Government of the French
Republic for the Avoidance of Double
Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income
(signed on 13 April 1976)
1
International Tax Agreements Amendment Bill (No.1) 2007
Abbreviation Definition
the existing Norway treaty the Convention between Australia and the
Kingdom of Norway for the Avoidance of
Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on
Income and on Capital, and its associated
Protocol (signed in 1982)
the France Convention the Convention between the Government of
Australia and the Government of the French
Republic for the Avoidance of Double
Taxation with Respect to Taxes on Income
and the Prevention of Fiscal Evasion and its
associated Protocol
the Norway Convention the Convention between Australia and the
Kingdom of Norway for the Avoidance of
Double Taxation with respect to Taxes on
Income and the Prevention of Fiscal Evasion
the Protocol the Protocol to the Convention between the
Government of Australia and the
Government of the French Republic for the
Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to
Taxes on Income
UK United Kingdom of Great Britain and
Northern Ireland
US United States of America
2
General outline and financial impact
What will this Bill do?
This Bill amends the International Tax Agreements Act 1953 to give the
force of law in Australia to the following tax treaties:
· The Convention between the Government of Australia and
the Government of the French Republic for the Avoidance of
Double Taxation with Respect to Taxes on Income and the
Prevention of Fiscal Evasion, and its associated Protocol,
(together referred to as `the France Convention' for the
purposes of this general outline) which was signed in Paris
on 20 June 2006.
· The Convention between Australia and the Kingdom of
Norway for the Avoidance of Double Taxation with respect to
Taxes on Income and the Prevention of Fiscal Evasion
(referred to as `the Norway Convention' for the
purposes of this general outline) which was signed in
Canberra on 8 August 2006.
The 2006 France Convention is Australia's second comprehensive tax
treaty with France. The existing tax treaty, which was concluded in 1976
and partially revised by an amending Protocol in 1989, is not well aligned
with modern business practices, the respective tax systems and modern
tax treaty practice. The France Convention will also cover airline profits
which are currently covered by the Agreement between the Government of
Australia and the Government of the French Republic for the Avoidance
of Double Taxation of Income Derived from International Air Transport
(the Airline Profits Agreement) signed in 1969. The new France tax
treaty will modernise the tax relationship between the two countries and
will serve to facilitate trade and investment between Australia and France.
The 2006 Norway Convention is Australia's second comprehensive tax
treaty with Norway. The existing tax treaty, which was concluded in
1982 is, like the existing tax treaty with France, and reflecting its age, not
well aligned with modern business practices, the respective tax systems
and modern tax treaty practice. The new Norway tax treaty will
modernise the tax relationship between the two countries and will serve to
facilitate trade and investment between Australia and Norway. Both the
existing France and Norway treaties contained most favoured nation
(MFN) obligations around providing similar taxation treatment in respect
3
International Tax Agreements Amendment Bill (No.1) 2007
of dividends, interest and royalties to that provided by Australia to other
countries. The obligation to negotiate was triggered by the entry into
effect in 2003 of amendments to the treaty with the United States (US)
and the renegotiated United Kingdom (UK) treaty.
Who will be affected by this Bill?
Persons who are residents of Australia and/or France or Norway and who
derive income, profits or gains from Australia or France or Norway will
be affected by this Bill.
How is the legislation structured?
The International Tax Agreements Act 1953 gives the force of law in
Australia to Australia's tax treaties which appear as Schedules to that Act.
The provisions of the Income Tax Assessment Act 1936 (ITAA 1936), the
Income Tax Assessment Act 1997 (ITAA 1997) and the Fringe Benefits
Tax Assessment Act 1986 are incorporated into and read as one with the
International Tax Agreements Act 1953. The provisions of this Act
(including the terms of the tax treaties) take precedence over provisions of
the:
· ITAA 1936 (other than section 160AO which determines
maximum foreign tax credits and the general anti-avoidance
rules under Part IVA);
· ITAA 1997; and
· Fringe Benefits Tax Assessment Act 1986 (other than
section 67 which is an anti-avoidance rule).
In what way does this Bill change the International Tax
Agreements Act 1953?
The International Tax Agreements Act 1953 is amended to insert the text
of the France Convention and the Norway Convention as Schedules to
that Act. Australia's tax treaties (with the exception of the Timor Sea
Treaty which incorporates provisions for the avoidance of double taxation
between Australia and Timor Leste) appear as Schedules to the above Act,
which gives them the force of law.
4
General outline and financial impact
When will these changes take place?
From the date of Royal Assent.
When will the Conventions enter into force, and from what
date will the Conventions have effect?
The 2006 France Convention
The France Convention will enter into force on the first day of the second
month following the date of last notification by diplomatic notes that the
domestic processes to give the Convention the force of law in the
respective countries has been completed. In Australia, enactment of this
Bill giving the force of law to the Convention is the prerequisite to such
notification.
Once it enters into force the Convention will apply as follows
Application in Australia
For withholding taxes on income derived:
· on or after 1 January next following the date on which the
treaty enters into force.
For other Australian taxes on income, profits or gains:
· the Australian year of income beginning on or after 1 July in
the calendar year next following the date on which the treaty
enters into force.
Application in France
For taxes on income withheld at source:
· the calendar year following the calendar year in which the
treaty enters into force.
For taxes on income not withheld at source:
· any calendar year or accounting period beginning after the
calendar year in which the treaty enters into force.
5
International Tax Agreements Amendment Bill (No.1) 2007
For other taxes, for taxation where the taxable event occurs:
· after the calendar year in which the treaty enters into force.
Exchange of information application date
From the date of entry into force of the treaty.
Assistance in recovery date of application
From the date agreed in an exchange of notes between Australia and
France.
The 2006 Norway Convention
The Norway Convention will enter into force on the last date of
notification by diplomatic notes that the domestic processes to give the
Convention the force of law in the respective countries has been
completed.
Once it enters into force the Convention will apply as follows
Application in Australia
For withholding taxes on income derived:
· on or after 1 January next following the date on which the
treaty enters into force.
For other Australian taxes on income, profits or gains:
· the Australian year of income beginning on or after 1 July in
the calendar year next following the date on which the treaty
enters into force.
Application in Norway
For taxes on income withheld at source:
· the calendar year following the calendar year in which the
treaty enters into force.
Exchange of information application date
From the date of entry into force of the treaty.
6
General outline and financial impact
Assistance in collection of taxes date of application
From the date agreed in an exchange of notes between Australia and
France.
The financial impact of this Bill
The France Convention
The direct cost to revenue from the proposed tax treaty is estimated to be
approximately A$10 million per annum. The estimated distribution of
this first round cost in future years is shown in the table below:
2007-08 2008-09 2009-10 2010-11
A$5m A$10m A$10m A$10m
Treasury has not estimated the second round impact of the proposed tax
treaty as Treasury does not quantify the second round impact of minor
policy proposals as the benefits are generally too small to measure with
any degree of certainty. However, it is expected that the Convention
could lead to an increase in foreign investment in Australia and an
increase in economic activity. The increase in economic activity is likely
to lead to increases in other forms of tax collection. The second round
effects could offset the direct costs to revenue.
The Norway Convention
Treasury has estimated the impact of the first round effects on forward
estimates as unquantifiable but probably negligible.
Compliance costs
No significant compliance costs will result from the entry into force of the
two Conventions.
7
International Tax Agreements Amendment Bill (No.1) 2007
Summary of regulation impact statements
The France Convention
Impact: Medium.
Main points:
· The France Convention is expected to have an impact on
Australian residents doing business with France and includes
Australian investors, banks, suppliers of technology,
consultants, exporters, Australian employees working in
France, and Australian residents receiving pensions from
France. The treaty will also impact on the Australian
Government and the Australian Taxation Office (ATO).
· While source country tax on interest will continue to be
limited to 10 per cent, there will be no withholding tax
charged on interest derived by a financial institution resident
in the other country, or on interest derived by a government
body of the other country. No tax is payable on dividends in
the source country where the dividend is paid out of profits
that have borne the normal rate of company tax (in Australia,
where the dividend is franked). A 5 per cent rate limit
applies to other dividends where, in the case of Australia, the
dividend recipient is a company that holds directly at least
10 per cent of the voting power of the company paying the
dividend, or, in the case of France, 10 per cent of the capital
of the company paying the dividend. A 15 per cent limitation
applies to other dividends. The 5 per cent and 15 per cent
limits apply to both franked and unfranked dividends. The
general limit for royalties will be reduced from 10 per cent to
5 per cent.
· The revised tax treaty will assist the bilateral relationship by
updating an important treaty in the network of commercial
treaties between the countries, and by providing for greater
cooperation between tax authorities to prevent fiscal evasion
and tax avoidance.
· The direct annual cost to revenue of the proposed treaty is
estimated to be around A$10 million, which is likely to be
offset by estimated second round revenue gains from
increased investment, gross domestic product, and growth.
No material costs to taxpayers have been identified as likely
to arise from the proposed treaty but there is likely to be a
8
General outline and financial impact
small, unquantifiable administration cost. It is expected that
overall, the new treaty will produce a positive economic
outcome for Australia.
The Norway Convention
Impact: Medium.
Main points:
· The Norway convention is expected to have an impact on
Australian residents doing business with Norway and
includes Australian investors, banks, suppliers of technology,
consultants, exporters, Australian employees working in
Norway, and Australian residents receiving pensions from
Norway. The treaty will also impact on the Australian
Government and the ATO.
· While source country tax on interest will continue to be
limited to 10 per cent, there will be no withholding tax
charged on interest derived by a financial institution resident
in the other country, or on interest derived by a government
body of the other country. No tax is payable on dividends in
the source country where the dividend recipient is a company
that holds directly at least 80 per cent of the voting power of
the company paying the dividend, subject to certain
conditions. A 5 per cent rate limit applies to other dividends
where the dividend recipient is a company that holds directly
at least 10 per cent of the voting power of the company
paying the dividend. A 15 per cent limitation applies to other
dividends. These limits apply to both franked and unfranked
dividends. The general limit for royalties will be reduced
from 10 per cent to 5 per cent.
· The revised tax treaty will assist the bilateral relationship by
updating an important treaty in the network of commercial
treaties between the countries and provides for greater
cooperation between tax authorities to prevent fiscal evasion
and tax avoidance.
· Treasury has estimated the impact of the first round effects
on forward estimates as unquantifiable but probably
negligible. No material costs to taxpayers have been
identified as likely to arise from the proposed treaty but there
is likely to be a small, unquantifiable administration cost. It
9
International Tax Agreements Amendment Bill (No.1) 2007
is expected that overall, the new treaty will produce a
positive economic outcome for Australia.
10
Chapter 1
2006 Australia-France tax Convention
Outline of chapter
1.1 Schedule 1 amends the International Tax Agreements Act 1953.
This chapter explains the rules that apply in the 2006 Australia-France tax
Convention.
Context of amendments
1.2 The Convention between the Government of Australia and the
Government of the French Republic for the Avoidance of Double Taxation
with Respect to Taxes on Income and the Prevention of Fiscal Evasion,
and its associated Protocol, (together referred to as `the Convention',
however for the remainder of this chapter, referred to as the France
Convention) was signed in Paris on 20 June 2006.
1.3 Once in force, the France Convention will replace:
· the Agreement between the Government of Australia and the
Government of the French Republic for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income signed on 13 April 1976 (the
existing France treaty);
· the Protocol to the existing France treaty as signed on
19 June 1989 (the 1989 Protocol); and
· the Agreement between the Government of the
Commonwealth of Australia and the Government of the
French Republic for the Avoidance of Double Taxation of
Income Derived from International Air Transport (the
Airline Profits Agreement) signed on 27 March 1969.
11
International Tax Agreements Amendment Bill (No. 1) 2007
Summary of new law
Main features of the new Convention
1.4 The main features of the France Convention are as follows:
· Income from real property may be taxed in full by the
country in which the property is situated. Income from real
property for these purposes includes natural resource
royalties [Article 6].
· Business profits (including income derived from professional
services or other activities of an independent nature) are
generally to be taxed only in the country of residence of the
recipient unless they are derived by a resident of one country
through a branch or other prescribed permanent
establishment in the other country, in which case that other
country may tax the profits. These rules also apply to:
- business trusts; and
- payments for spectrum licences [Article 7; Protocol, item 3].
· Profits derived from the operation of ships and aircraft in
international traffic are generally to be taxed only in the
country of residence of the operator [Article 8].
· Profits of associated enterprises may be taxed on the basis of
dealings at arm's length [Articles 9 and 22].
· Dividends, interest and royalties may generally be taxed in
both countries, but there are limits on the tax that the country
in which the dividend, interest, or royalty is sourced may
charge on such income flowing to residents of the other
country who are the beneficial owners of the income
[Articles 10 to 12].
· In the case of dividends:
- no source country tax is payable on intercorporate
dividends where the dividend recipient is a company
that holds directly at least per 10 per cent of the voting
power of the Australian company paying the dividend
(or at least 10 per cent of the capital of the company in
the case of France), and the dividend is paid out profits
12
2006 Australia-France tax Convention
that have borne the normal rate of company tax
[Article 10, subparagraph 2(a)];
- a 5 per cent rate limit applies to other intercorporate
dividends where the dividend recipient is a company
that holds directly at least 10 per cent of the voting
power of the Australian company paying the dividend
(or at least 10 per cent of the capital of the company in
the case of France) [Article 10, subparagraph 2(b)]; and
- a 15 per cent limitation applies to all other dividends
[Article 10, subparagraph 2(c)].
· Source country taxation on interest is limited to 10 per cent
[Article 11, paragraph 2]. However, exemptions from source
country taxation have been provided for certain interest paid
to:
- certain government bodies [Article 11, subparagraph 3(a)];
and
- financial institutions [Article 11, subparagraph 3(b)].
· The rate limit on source country taxation of royalties is
5 per cent [Article 12, paragraph 2].
· Income, profits or gains from the alienation of real property
may be taxed in full by the country in which the property is
situated. Subject to that rule and other specific rules in
relation to business assets and shares or other interests in land
rich entities (which may be taxed in full by the country in
which the property is situated), all other capital gains will be
taxable only in the country of residence. A specific provision
deals with the alienation of property by departing residents
[Article 13].
· Income from employment, that is, employees' remuneration,
will generally be taxable in the country where the services
are performed. However, where the services are performed
during certain short visits to one country by a resident of the
other country, the income will be exempt in the country
visited [Article 14].
· Directors' remuneration may be taxed in the country in
which the company of which the person is a director is
resident for tax purposes [Article 15].
13
International Tax Agreements Amendment Bill (No. 1) 2007
· Income derived by entertainers and sportspersons may be
taxed by the country in which the activities are performed
[Article 16].
· Pensions and annuities will generally be taxed only in the
country of residence of the recipient. Some public service
pensions may be taxed only by the paying country [Articles 17
and 18].
· Income from government service (including government
service pensions) will generally be taxed only in the country
that pays the remuneration. However, the remuneration shall
only be taxed in the other country where the services are
rendered in that other country by a resident who is a national
or citizen of that other country, provided that the resident is
not a dual national or citizen [Article 18].
· Payments made from abroad to visiting students for the
purposes of their maintenance or education will be exempt
from tax in the country visited [Article 19].
· Other income (ie, income not dealt with by other Articles)
derived by a resident of one country from sources in the other
country may generally be taxed in both countries, with the
country of residence of the recipient providing double tax
relief [Article 20].
· Source rules in the France Convention prescribe, for
domestic law and treaty purposes, the source of income or
profits derived by a resident of one country which may be
taxed in the other country [Article 21].
· Double taxation relief for income which, under the France
Convention, may be taxed by both countries, is required to be
provided by the country of which the taxpayer is a resident
under the terms of the Convention as follows:
- in Australia, by allowing a credit for the French tax
against Australian tax payable on income derived by a
resident of Australia from sources in France [Article 23,
paragraph 1]; and
- in France, by allowing either a credit for the Australian
tax against French tax payable in some circumstances, or
for an amount equal to the French tax attributable to
certain types of income provided the income has been
14
2006 Australia-France tax Convention
taxed in Australia. The method applied will depend on
the type of income [Article 23, paragraph 2].
· In the case of Australia, effect will be given to the double tax
relief obligations arising under the France Convention by
application of the general foreign tax credit provisions of
Australia's domestic law, or the relevant exemption
provisions of that law where applicable.
· Consultation and exchange of information between the two
taxation authorities is authorised by the France Convention.
The Convention authorises and requires Australia to
exchange information where the information relates to taxes
administered by the Commissioner of Taxation
(Commissioner) [Articles 24 and 25].
· The France Convention ensures the integrity of the tax
system by providing for the mutual assistance in the
collection of tax debts. This will allow the Australian
Taxation Office, in certain circumstances, to seek assistance
from the French tax administration to collect Australian
taxation debts [Article 26].
· Australian expatriates who are temporarily resident in France
are protected from paying French capital tax on non-French
property [Article 28].
· Australian and French partnership taxation is asymmetric.
The France Convention therefore includes a Partnerships
Article to provide Australian partners of French partnerships
greater access to treaty benefits [Article 29].
15
International Tax Agreements Amendment Bill (No. 1) 2007
Comparison of key features of new law and current law
New law Current law
Not applicable.
Updates all Articles, having regard to
Australian, French and the
Organisation for Economic
Co-operation and Development
(OECD) tax treaty developments
since the existing France treaty
arrangements were entered into.
Extends the coverage of the France In the case of Australia, the taxes to
Convention to Australian tax on which all Articles of the existing
capital gains and updates the list of France treaty apply are:
taxes to which the new treaty · the income tax; and
arrangements apply. In the case of
· any identical or substantially
Australia, these taxes are:
similar taxes imposed under the
· the income tax; federal law of Australia.
· the resource rent tax; and
· any identical or substantially
similar taxes imposed under the
federal law of Australia.
However, a broader range of taxes
apply in the case of Articles 25
(Exchange of Information) and 26
(Assistance in Recovery). In the case
of Australia the taxes covered are all
federal taxes administered by the
Commissioner.
Updates the meaning of `permanent A building site constitutes a
establishment' in Article 5. In permanent establishment only where
particular, under the new Convention the project lasts for more than
an enterprise is deemed to have a 12 months. In addition, an enterprise
permanent establishment if: is deemed to have a permanent
establishment if:
· it has a building site etc which
· it carries on supervisory
lasts more than 12 months or
connected supervisory activities for more than
activities which last more than six months in connection with a
six months; or building site; or
· it maintains substantial · substantial equipment is being
equipment for rental or other used in that country for more
purposes for more than than six months by, for, or
six months. under contract.
16
2006 Australia-France tax Convention
New law Current law
No equivalent.
Broadens the meaning of `real
property' in Article 6 to include
exploration and mining rights over
natural resources.
Aligns the treatment of income from Income from independent personal
independent personal services to the services is treated under the previous
OECD standard under Article 7 international standard in Article 13
(Business Profits). It also clarifies (Independent Personal Services).
the application of this Article to
business trusts.
Reduces the rate of dividend The rate of dividend withholding tax
withholding tax to: is limited to 15 per cent.
· zero for dividends on
non-portfolio holdings of more
that 10 per cent, where the
income out of which the
dividend is paid has borne the
full rate of company tax; and
· 5 per cent for other
non-portfolio holdings.
No equivalent. An additional branch profits tax is
permitted, but the rate is limited to
10 per cent of the after-tax amount in
the case of Australia, and 15 per cent
in the case of France.
No equivalent.
Reduces the rate of interest
withholding tax from 10 per cent to
zero where certain interest is derived:
· from investment of official
reserve assets; or
· by a financial institution.
Reduces the rate of royalty The rate of royalty withholding tax is
withholding tax from a maximum of limited to 10 per cent of the gross
10 per cent to 5 per cent of the gross payment.
royalty payment.
Updates the definition of `royalties' Definition of `royalties' includes
and excludes payments for use of payments for use of industrial,
equipment. commercial and scientific equipment.
Includes a comprehensive Alienation Coverage limited to income from
of Property Article which allocates alienation of real property and
taxing rights over capital gains. interests in land-rich companies.
17
International Tax Agreements Amendment Bill (No. 1) 2007
New law Current law
No equivalent. Exemption of remuneration of
teachers and professors from visits of
less than two years.
Allocates taxing rights over income Deals only with `other income' of a
not dealt with elsewhere in the treaty. dual resident.
Closely aligns Article 25 (Exchange The existing rules apply to a
of Information) to the 2005 OECD narrower range of taxes.
standard. The effect of the changes
is to expand the range of taxes to
which the Article applies and to
clarify that bank secrecy laws do not
limit the exchange of information.
No equivalent.
Includes a new Article 26 (Assistance
in Recovery) which authorises and
requires Australia and France to
provide assistance to each other in
collection of cross-border tax debts.
No equivalent.
Provides that Australian expatriates
temporarily resident in France are
protected from paying capital tax on
non-French property.
No equivalent.
Provides for flow-through treatment
of Australian partnerships and
provides Australian partners in
French partnerships with greater
access to treaty benefits.
Detailed explanation of new law
Article 1 -- Persons Covered
Scope
1.5 This Article establishes the scope of the application of the
France Convention by providing for it to apply to persons (defined to
include individuals, companies and any other body of persons) who are
residents of one or both of the countries. It generally precludes
extra-territorial application of the treaty. [Article 1]
1.6 The application of the France Convention to persons who are
dual residents (ie, residents of both countries) is dealt with in
Article 4 (Residence).
18
2006 Australia-France tax Convention
1.7 The Protocol clarifies that the competent authorities of each
country may settle, jointly or separately, the mode of application of the
treaty. [Protocol, item 1]
Article 2 -- Taxes Covered
Taxes covered
1.8 Article 2 specifies the existing taxes of each country to which
the France Convention applies. These are, in the case of Australia:
· the Australian income tax (including that imposed on capital
gains); and
· the resource rent tax in respect of offshore petroleum
projects.
1.9 The new treaty extends the operation of the treaty to Australian
tax on capital gains, which are not covered in the existing France treaty.
[Article 2, subparagraph 1(a)]
1.10 Although Australia considers the resource rent tax to be
encompassed by the term `income tax', a specific reference to this has
been included in the France Convention to put beyond doubt that it is a
tax covered. [Article 2, subparagraph 1(a)]
1.11 As with the existing France treaty, the France Convention
generally does not cover Australia's goods and services tax (GST), wool
tax and levies, customs duties, state taxes and duties and estate tax and
duties. However, federal taxes administered by the Commissioner are
covered for the purposes of the Exchange of Information and Assistance in
Recovery Articles. [Article 2, subparagraph 3(a)]
1.12 It is specifically stated that the France Convention applies only
to taxes imposed under the federal law of Australia. This is to ensure that
the Convention does not bind Australian states and territories and applies
only to federal taxes. [Article 2, subparagraph 1(a)]
1.13 For France, the France Convention applies to:
· the income tax;
· the corporation tax;
· the additional taxes on corporations; and
19
International Tax Agreements Amendment Bill (No. 1) 2007
· the widespread social security contributions and
contributions for the reimbursement of the social debt.
[Article 2, subparagraph 1(b)]
Identical or substantially similar taxes
1.14 The application of the France Convention will be automatically
extended to any identical or substantially similar taxes which are
subsequently imposed by either country in addition to, or in place of, the
existing taxes. The competent authorities (ie, the Commissioner in
Australia and the Minister in charge of the budget in France, or their
authorised representatives) are required to notify each other in the event of
a significant change in the taxation law of the respective countries.
[Article 2, paragraph 2]
Taxes covered for the purposes of information exchange and assistance
in the collection of tax debts
1.15 Paragraph 3 specifies the taxes to which Article 25 (Exchange of
Information) and Article 26 (Assistance in Recovery) will apply. The
taxes to which these Articles apply are, in the case of Australia, all federal
taxes administered by the Commissioner, and in the case of France, all
taxes. [Article 2, paragraph 3]
Article 3 -- General Definitions
Definition of Australia
1.16 As with Australia's other recent tax treaties, `Australia' is
defined to include certain external territories and areas of the continental
shelf. By reason of this definition, Australia preserves its taxing rights,
for example, over mineral exploration and mining activities carried on by
non-residents on the seabed and subsoil of the relevant continental shelf
areas (under section 6AA of the Income Tax Assessment Act 1936
(ITAA 1936), certain sea installations and offshore areas are to be treated
as part of Australia). [Article 3, subparagraph 1(a)]
Definition of France
1.17 The defined term `France' covers France and the European and
Overseas departments of the French Republic (including areas of the
continental shelf). The Overseas departments of the French Republic are:
French Guiana, Guadeloupe, Martinique and Réunion. France does not
cover other dependent areas of France, such as French Polynesia and
New Caledonia. [Article 3, subparagraph 1(b)]
20
2006 Australia-France tax Convention
Definition of person
1.18 The definition of `person' includes individuals, companies and
any other body of persons. This includes a partnership (as a body of
persons). [Article 3, subparagraph 1(d)]
Definition of company
1.19 The definition of `company' in the France Convention accords
with Australia's tax treaty practice.
1.20 The Australian tax law treats certain trusts (public unit trusts and
public trading trusts) and corporate limited partnerships (limited liability
partnerships) as companies for income tax purposes. These trusts and
partnerships are included as companies for the purposes of the France
Convention. [Article 3, subparagraph 1(e)]
Definition of international traffic
1.21 In this Convention, this term is of relevance for taxation of
profits from shipping and air transport operations (Article 8 (Ships and
Aircraft)), income, profits or gains from the alienation of ships and
aircraft (paragraph 3 of Article 13 (Alienation of Property) and wages of
crew (paragraph 3 of Article 14 (Income from Employment)).
1.22 The definition of `international traffic' covers international
transport by a ship or aircraft operated by an enterprise of one country, as
well as domestic transport within that country. However, it does not
include transport where the ship or aircraft is operated solely between
places in the other country, that is, where the place of departure and the
place of arrival of the ship or aircraft are both in that other country,
irrespective of whether any part of the transport occurs in international
waters. For example, a `voyage to nowhere' which begins and ends in
Sydney on a ship operated by a French enterprise would not come within
the definition of international traffic, even if the ship travels through
international waters in the course of the cruise. [Article 3, subparagraph 1(l)]
Definition of tax
1.23 For the purposes of the France Convention, the terms
`Australian tax' and `French tax' do not include any amount of penalty or
interest imposed under the respective domestic tax law of the two
countries. This is important in determining a taxpayer's entitlement to a
foreign tax credit under the double tax relief provisions of Article 23
(Elimination of Double Taxation) of the Convention.
21
International Tax Agreements Amendment Bill (No. 1) 2007
1.24 In the case of a resident of Australia, any penalty or interest
component of a liability determined under the domestic taxation law of
France with respect to income that France is entitled to tax under the
France Convention, would not be a creditable `French tax' for the
purposes of paragraph 1 of Article 23 (Elimination of Double Taxation).
This is in keeping with the meaning of `foreign tax' in subsection 6AB(2)
of the ITAA 1936. Accordingly, such a penalty or interest liability would
be excluded from calculations when determining the Australian resident
taxpayer's foreign tax credit entitlement under paragraph 1 of Article 23
(pursuant to Division 18 of Part III of the ITAA 1936 -- Credits in
respect of foreign tax). [Article 3, paragraph 2]
Terms not specifically defined
1.25 Where a term is not specifically defined within this Convention
or clarified in the Protocol, that term (unless used in a context that
requires otherwise) is to be taken to have the same interpretative meaning
as it has under the domestic taxation law of the country applying the
France Convention at the time of its application. In that case, the term's
meaning under the taxation law of the country will have precedence over
the meaning it may have under other domestic laws.
1.26 The same term may have a different meaning and a varied scope
within different Acts relating to specific taxation measures. For example,
GST definitions are sometimes broader than income tax definitions. The
definition more specific to the type of tax should be applied in such cases.
For example, where the matter subject to interpretation is an income tax
matter, but definitions exist in either the ITAA 1936 or the Income Tax
Assessment Act 1997 (ITAA 1997) and A New Tax System (Goods and
Services Tax) Act 1999, the income tax definition would be the relevant
definition to be applied.
1.27 If a term is not defined in the France Convention, but has an
internationally understood meaning in tax treaties and a meaning under
the domestic law, the context would normally require that the
international meaning be applied. [Article 3, paragraph 3]
Article 4 -- Residence
Residential status
1.28 This Article sets out the basis by which the residential status of a
person is to be determined for the purposes of the France Convention.
Residential status is one of the criteria for determining each country's
taxing rights and is a necessary condition for the provision of relief under
the Convention. The concept of who is a resident according to Australian
22
2006 Australia-France tax Convention
taxation law, or domiciled in France for purposes of French taxation law,
provides the basic test. [Article 4, paragraph 1]
Residency of Governments
1.29 The Article specifically provides that a country, a political
subdivision or statutory body or a local authority of the country are
residents for the purposes of the treaty. The Australian Federal
Government, the State Governments and local councils will be residents
for the purpose of the Convention. Public authorities and other entities
created for public purposes under an Australian law will also be residents.
This does not necessarily mean that income, profits or gains derived by
these bodies from sources in France will be subject to tax in France as
sovereign immunity principles may apply. [Article 4, paragraph 1]
1.30 The OECD Model Tax Convention on Income and on Capital
(OECD Model) Commentary makes it clear that it has always been the
understanding of member countries that the OECD Model applied to treat
governments as residents even in the absence of an express reference to
that effect.
Special residency rules
1.31 Paragraph 2 specifies that a person is not a resident of a country
(for purposes of the France Convention) if that person is liable to tax in
that State in respect only of income from sources in that State.
1.32 This paragraph deals with a person who may be considered to be
a resident of a State according to its domestic laws but is only subject to
taxation on income from sources in that State, such as, foreign diplomatic
and consular staff. In the Australian context, this also means that Norfolk
Island residents who are generally subject to Australian tax on Australian
source income only, will not be residents of Australia for the purposes of
the France Convention. Accordingly, France will not have to forgo tax in
accordance with the France Convention on income derived by residents of
Norfolk Island from sources in France (which will not be subject to
Australian tax). [Article 4, paragraph 2]
Dual residents
1.33 This Article also includes a set of tie-breaker rules for
determining how residency is to be allocated to one or other of the
countries for the purposes of the France Convention if a taxpayer, whether
an individual, a company or other taxable unit, qualifies as a dual resident,
that is, a resident of both countries in accordance with paragraph 1 of the
Article.
23
International Tax Agreements Amendment Bill (No. 1) 2007
1.34 The tie-breaker rules for individuals apply certain tests, in a
descending hierarchy, for determining the residential status (for the
purposes of the France Convention) of an individual who is a resident of
both countries under their respective domestic laws.
1.35 These rules, in order of application, are:
· If the individual has a permanent home available to them in
only one of the countries, the person is deemed to be a
resident solely of that country for the purposes of the France
Convention.
· If the individual has a permanent home available in both
countries or in neither, then the person's residential status
takes into account the person's personal or economic
relations with Australia and France, and the person is deemed
for the purposes of the France Convention to be a resident
only of the country with which the person has the closer
personal and economic relations.
· Residency will be determined on the basis of an individual's
citizenship or nationality where the foregoing test is not
determinative.
[Article 4, paragraph 3]
1.36 A dual resident remains, however, in relation to Australia, a
resident for the purposes of Australian domestic law. Accordingly, that
person remains liable to tax in Australia as a resident, insofar as the
France Convention allows.
1.37 Where a non-individual (such as a body corporate) is a resident
of both countries in accordance with paragraph 1, the entity will be
deemed, for purposes of the France Convention, to be a resident of the
country in which its place of effective management is situated. [Article 4,
paragraph 4]
French partnerships
1.38 A partnership or group of persons that has its place of effective
management in France is a resident of France provided that all its
partners, shareholders or other members are personally liable to French
tax on their share of the partnership or group's profits. This provision is
necessary to address the asymmetric taxation treatment of partnerships by
Australia and France. A partnership or group that is a resident of France
under this paragraph is entitled to the benefits of the France Convention,
24
2006 Australia-France tax Convention
notwithstanding that it may be fiscally transparent for purposes of
Australian tax law. [Article 4, paragraph 5]
1.39 However, where a member of such a partnership or group is a
resident of a third country (ie, is not a resident of either Australia or
France) and the partnership or group is not subject to corporation tax in
France, then Australia may tax that member on their share of income,
profits or gains in accordance with domestic law and any tax treaty with
the country of which the member is a resident. The Protocol makes clear
that Australia reserves the right to treat such partnership or group as
fiscally transparent for the purposes of determining entitlement to tax
benefits under any treaty with the member's country of residence.
[Protocol, item 2]
Article 5 -- Permanent Establishment
Role and definition
1.40 The application of various provisions of the France Convention
(principally Article 7 (Business Profits)) is dependent upon whether a
person who is a resident of one country carries on business through a
permanent establishment in the other country, and if so, whether income
derived by that person is attributable to, or assets of that person are
effectively connected with, that permanent establishment.
1.41 The definition of the term `permanent establishment' in this
Article corresponds generally with definitions of the term in Australia's
more recent tax treaties. The term also fully encompasses the concept of
`fixed base', which is used in the existing France treaty in a separate
Article dealing with independent personal services. As such services will
now be dealt with under Article 7 (Business Profits), it is intended that
places that constitute a fixed base for purposes of the existing France
treaty would come within the meaning of permanent establishment for
purposes of the France Convention.
Meaning of permanent establishment
1.42 The primary meaning of permanent establishment is expressed
as being a fixed place of business through which the business of an
enterprise is wholly or partly carried on. To be a permanent establishment
within the primary meaning of that term, the following requirements must
be met:
· there must be a place of business;
25
International Tax Agreements Amendment Bill (No. 1) 2007
· the place of business must be fixed (both in terms of physical
location and in terms of time); and
· the business of the enterprise must be carried on through this
fixed place.
[Article 5, paragraph 1]
1.43 Other paragraphs of this Article elaborate on the meaning of the
term by giving examples (by no means intended to be exhaustive) of what
may constitute a permanent establishment -- for example:
· an office;
· a factory;
· a mine or quarry; or
· an agricultural property.
1.44 As paragraph 2 of this Article is subordinate to paragraph 1, the
examples listed will only constitute a permanent establishment if the
primary definition in paragraph 1 is satisfied. [Article 5, paragraph 2]
Agricultural, pastoral or forestry activities
1.45 Most of Australia's tax treaties include as a permanent
establishment an agricultural, pastoral or forestry property. This reflects
Australia's policy of retaining taxing rights over exploitation of Australian
land for the purposes of primary production. This approach ensures that
the arm's length profits test provided for in Article 7 (Business Profits)
applies to the determination of profits derived from these activities. This
position is also reflected in this Convention. [Article 5, subparagraph 2(g)]
Preparatory and auxiliary activities
1.46 Certain activities do not generally give rise to a permanent
establishment (eg, the use of facilities solely for storage, display or
delivery).
1.47 Generally these activities are of a preparatory or auxiliary
character and are unlikely to give rise to substantial profits. The
necessary economic link between the activities of the enterprise and the
country in which the activities are carried on does not exist in these
circumstances.
26
2006 Australia-France tax Convention
1.48 Unlike the OECD Model, which provides that the listed
activities are deemed not to constitute a permanent establishment, the
France Convention provides that an enterprise will not be deemed to have
a permanent establishment merely by reason of such activities. This is to
prevent the situation where enterprises structure their business so that
most of their activities fall within the exceptions when, viewed as a
whole, the activities ought to be regarded as a permanent establishment.
1.49 Another feature consistent with Australia's tax treaty practice is
that subparagraph 4(f) of Article 5 (Permanent Establishment) of the
OECD Model -- dealing with combinations of the activities of the kind
referred to in subparagraphs 3(a) to 3(e) of this treaty -- is not included.
Australia does not consider that an enterprise undertaking multiple
functions of the kind indicated in subparagraphs 3(a) to 3(e) would
generally be engaged only in preparatory or auxiliary activities. [Article 5,
paragraph 3]
Deemed permanent establishment
Building site or construction or installation project
1.50 Under paragraph 4, an enterprise is deemed to have a permanent
establishment and to be carrying on business through that permanent
establishment in a country if it has a building site or construction,
installation or assembly project in that country which exists for more than
12 months. [Article 5, subparagraph 4(a)]
Supervisory and consultancy activities
1.51 Supervisory activities carried on for more than six months in
connection with a building site or construction, installation or assembly
project are deemed to constitute a permanent establishment. This
provision broadly aligns with Australia's reservation to Article 5
(Permanent Establishment) of the OECD Model.
1.52 The term `building site or construction, installation or assembly
project' includes not only the construction of buildings but also the
construction of roads, bridges or canals, the renovation (involving more
than mere maintenance or redecoration) of buildings, roads, bridges or
canals, the laying of pipelines and excavating and dredging. Planning and
supervision are considered part of the building site if carried out by the
construction contractor. However, planning and supervision carried out
by another unassociated enterprise will not be taken into account in
determining whether the construction contractor has a permanent
establishment in Australia. [Article 5, subparagraph 4(b)]
27
International Tax Agreements Amendment Bill (No. 1) 2007
Substantial equipment
1.53 Under subparagraph 4(c), an enterprise shall be deemed to have
a permanent establishment if it has substantial equipment in a country for
rental or other purposes for longer than six months, unless the equipment
is leased under a `hire-purchase' agreement. Under Australian law, the
lessee under a `hire-purchase' agreement (a lease accompanied by certain
lessee purchase options or rights) is broadly treated for tax purposes as the
owner of the leased property.
1.54 This provision reflects Australia's reservation to the
OECD Model concerning the use of substantial equipment. Australia's
experience is that the permanent establishment provision in the OECD
Model may be inadequate to deal with high value activities involved in
the development of natural resources, particularly in offshore regions.
1.55 The meaning of the term `substantial' depends on the relevant
facts and circumstances of each individual case. However, some
examples of substantial equipment would include:
· large industrial earthmoving equipment or construction
equipment used in road building, dam building or
powerhouse construction;
· manufacturing or processing equipment used in a factory;
· oil and drilling rigs, platforms and other structures used in
the petroleum/mining industry; and
· grain harvesters and other large agricultural machinery.
1.56 For the purposes of the France Convention the enterprise is
deemed to carry on business through the substantial equipment permanent
establishment. [Article 5, subparagraph 4(c)]
Anti-avoidance provision
1.57 Given that this Article contains certain timeframes, an
anti-avoidance rule is included to ensure that where associated enterprises
carry on connected activities the periods will be aggregated in
determining whether the enterprises have a permanent establishment in
the country in which the activities are being carried on. Activities will be
regarded as connected where, for example, different stages of a single
project are carried out by different subsidiaries within a group of
companies.
28
2006 Australia-France tax Convention
1.58 Paragraph 5 is an anti-avoidance measure aimed at counteracting
contract splitting for the purposes of avoiding the application of the
permanent establishment rules.
1.59 Subparagraph 5(c) provides that an enterprise shall be deemed to
be associated with another enterprise if one enterprise is controlled
directly or indirectly by the other or if both are controlled directly or
indirectly by the same third person or persons. Subparagraph 5(b) also
provides that a period of concurrent activities by such associated
enterprises is only counted as one period for aggregation purposes.
[Article 5, paragraph 5]
Dependent agents
1.60 Subparagraph 6(a) reflects Australia's tax treaty practice in
relation to a person who acts on behalf of an enterprise of another country
of deeming that person to constitute a permanent establishment if that
person has and habitually exercises an authority to conclude contracts on
behalf of the enterprise.
1.61 A person who substantially negotiates all essential parts of a
contract on behalf of an enterprise will be regarded as exercising an
authority to conclude contracts on behalf of that enterprise within the
meaning of this provision, even if the contract is subject to final approval
or formal signature by another person.
1.62 Activities of a dependent agent, however, will not give rise to a
permanent establishment where that agent's activities are limited to the
purchase of goods or merchandise for the enterprise. [Article 5,
subparagraph 6(a)]
Manufacturing or processing on behalf of others
1.63 Subparagraph 6(b) is consistent with another of Australia's
reservations to the OECD Model. It deals with situations where a person
acts on behalf of another in manufacturing or processing that other
person's goods. An example is the situation where a mineral plant refines
minerals at cost, so that the plant operations produce no Australian profits.
Title to the refined product remains with the mining consortium and
profits on sale are realised mainly outside of Australia.
1.64 Subparagraph 6(b) deems such a plant to be a permanent
establishment because the manufacturing or processing activity (which
gives the processed minerals their real value) is conducted in Australia,
and therefore Australia should have taxing rights over the business profits
arising from the sale of the processed minerals to the extent that they are
attributable to the processing activity carried on in Australia. This
29
International Tax Agreements Amendment Bill (No. 1) 2007
subparagraph prevents an enterprise which carries on substantial
manufacturing or processing activities in a country through an
intermediary from claiming that it does not have a permanent
establishment in that country.
1.65 This subparagraph is in the existing France treaty. The inclusion
of this subparagraph is insisted upon by Australia in its tax treaties and is
consistent with Australia's policy of retaining taxing rights over profits
from manufacturing or processing on behalf of others including,
importantly, in the exploitation of Australia's mineral resources. [Article 5,
subparagraph 6(b)]
Independent agents
1.66 Business carried on through an independent agent will not, of
itself, give rise to a permanent establishment, provided that the
independent agent is acting in the ordinary course of that agent's business
as such an agent. [Article 5, paragraph 7]
Subsidiary companies
1.67 Generally, a subsidiary company will not be a permanent
establishment of its parent company. A subsidiary, being a separate legal
entity, would not usually be carrying on the business of the parent
company but rather its own business activities. However, a subsidiary
company gives rise to a permanent establishment if the subsidiary permits
the parent company to operate from its premises such that the tests in
paragraph 1 of Article 5 are met, or acts as an agent of the parent
company such that a dependent agent permanent establishment is
constituted. [Article 5, paragraph 8]
Other Articles
1.68 The principles set down in this Article are also to be applied in
determining whether a permanent establishment exists in a third country,
or whether an enterprise of a third country has a permanent establishment
in Australia (or France), when applying the source rule contained in:
· paragraph 7 of Article 11 (Interest); and
· paragraph 5 of Article 12 (Royalties).
[Article 5, paragraph 9]
30
2006 Australia-France tax Convention
Article 6 -- Income from Real Property
Where income from real property is taxable
1.69 This Article provides that the income of a resident of France or
Australia from real property may be taxed by the country in which the real
property is situated. Thus, income from real property in Australia will be
subject to Australian tax laws. [Article 6, paragraph 1]
1.70 As in the existing France treaty, paragraph 1 provides that
income derived from agricultural, pastoral or forestry property will be
treated as income from real property. Income from agricultural, pastoral
or forestry property is also dealt with under Article 5 (Permanent
Establishment) and the related `business profits' provisions of Article 7
(Business Profits) of the treaty. [Article 5, subparagraph 2(g)]
1.71 The inclusion of income from agricultural, pastoral or forestry
property in both Articles 6 and 7 ensures that such income will receive the
same treatment regardless of which Article is considered to apply.
Definition
1.72 Income from `real property' (which is primarily defined as
having the meaning which it has under the domestic law of the country
where the property is situated) also extends, in the case of Australia, to
income from:
· the direct use, letting or use of any form of real property, a
lease of land and any other interest in or over land (including
exploration and mining rights); and
· royalties and other payments relating to the exploration for or
exploitation of mines or quarries or other natural resources or
rights in relation thereto.
[Article 6, subparagraph 2(a)]
1.73 This Article makes allowance for the fact that French law
recognises a concept of immovable property in place of the Australian law
concept of real property. As in the existing France treaty, `real property'
is defined separately for France and Australia to reflect this difference.
1.74 In the case of France, the definition follows the OECD Model
definition of immovable property and includes:
· property accessory to real property;
31
International Tax Agreements Amendment Bill (No. 1) 2007
· livestock and equipment used in agriculture and forestry;
· rights to which the provisions of the general law respecting
landed property apply;
· usufruct of immovable property (generally, a right to use
property without degrading it and to retain any profits
derived from it); and
· rights to variable or fixed payments as consideration for the
working of or right to work mineral deposits, mineral sources
and other natural resources.
[Article 6, paragraph 2(b)]
1.75 Ships and aircraft are excluded from the definition of real
property. Therefore, this Article does not cover income from their use.
[Article 6, paragraph 2]
Shares or other rights to enjoyment of real property
1.76 In accordance with French treaty practice, paragraph 4 of this
Article provides that income arising from the direct use, letting or use in
any other form from shares or other rights in a company, trust or
comparable institution that provide a right to enjoy real property situated
in a country may be taxed in that country.
1.77 Paragraph 4 would apply, for example, if a French resident owns
a share in a company, where that share gives rise to an entitlement to stay
in an apartment in Australia, often referred to as a time share arrangement.
In such a situation, Australia would have a taxing right over the income
the French resident received from letting the Australian apartment to
another person to occupy. This paragraph applies notwithstanding that the
French resident may not be carrying on business in Australia through a
permanent establishment, as required by Article 7 (Business Profits).
[Article 6, paragraph 4]
Form of exploitation of real property
1.78 Paragraphs 3 and 6 make it clear that the general rule in
paragraph 1 and the additional rule in paragraph 4 apply irrespective of
the form of exploitation of the real property. [Article 6, paragraphs 3 and 6]
Real property of an enterprise
1.79 Paragraph 5 extends the application of this Article to income
derived from the use or exploitation of real property of an enterprise.
32
2006 Australia-France tax Convention
1.80 Accordingly, this Article (when read with Article 7 (Business
Profits)) ensures that the country in which the real property is situated
may impose tax on the income derived from that property by an enterprise
of the other country, irrespective of whether or not that income is
attributable to a permanent establishment of such an enterprise situated in
the first-mentioned country. [Article 6, paragraph 5]
Deemed situs
1.81 Under Australian law the place where an interest in land, such as
a lease, is situated (situs) is not necessarily where the underlying property
is situated. This paragraph puts the situation of the interest or right
beyond doubt by deeming the situs to be where the underlying real
property over which the lease or right is granted is situated or where any
exploration may take place. [Article 6, paragraph 7]
Article 7 -- Business Profits
1.82 Article 7 is concerned with the taxation by one country of
business profits derived by an enterprise that is a resident of the other
country.
1.83 The taxing of these profits depends on whether they are
attributable to the carrying on of a business through a permanent
establishment in that country. If a resident of one country carries on
business through a permanent establishment (as defined in Article 5
(Permanent Establishment)) in the other country, the country in which the
permanent establishment is situated may tax the profits of the enterprise
that are attributable to that permanent establishment. [Article 7, paragraph 1]
1.84 If an enterprise which is a resident of one country derives
business profits in the other country other than profits attributable to a
permanent establishment in that other country, the general principle of this
Article is that the enterprise will not be liable to tax in the other country
on such business profits (except where paragraph 6 of this Article applies
-- see the explanation in paragraphs 1.88 and 1.89).
Determination of business profits
1.85 Profits of a permanent establishment are to be determined for the
purposes of this Article on the basis of arm's length dealings. The
provisions in the France Convention correspond to international practice
and the comparable provisions in Australia's other tax treaties. [Article 7,
paragraphs 2 and 3]
33
International Tax Agreements Amendment Bill (No. 1) 2007
1.86 No profits are to be attributed to a permanent establishment
merely because it purchases goods or merchandise for the enterprise.
Accordingly, profits of a permanent establishment will not be increased
by adding to them any profits attributable to the purchasing activities
undertaken for the head office. It follows, of course, that any expenses
incurred by the permanent establishment in respect of those purchasing
activities will not be deductible in determining the taxable profits of the
permanent establishment. [Article 7, paragraph 5]
Inadequate information
1.87 The domestic law of the country in which the permanent
establishment is situated (eg, Australia's Division 13 of Part III of the
ITAA 1936) may be applied to determine the tax liability of a person,
consistently with the principles of the Article. This is of particular
relevance where, due to inadequate information, the correct amount of
profits attributable on the arm's length principle basis to a permanent
establishment cannot be determined, or can only be ascertained with
extreme difficulty. Paragraph 4 explicitly recognises the right of each
country to apply its domestic law in these circumstances. This is
consistent with Australia's reservation to Article 7 (Business Profits) of
the OECD Model. [Article 7, paragraph 4]
Profits dealt with under other Articles
1.88 Where income is specifically dealt with under other Articles of
the France Convention, the effect of those particular Articles is not
overridden by this Article.
1.89 Paragraph 6 of this Article lays down the general rule of
interpretation that categories of income which are the subject of other
Articles of the France Convention (eg, Article 8 (Ships and Aircraft),
Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties) and
Article 13 (Alienation of Property)) are to be treated in accordance with
the terms of those Articles (except where otherwise provided, for
example, by paragraph 4 of Article 10 (Dividends) where the asset in
respect of which the income is paid is effectively connected with a
permanent establishment). [Article 7, paragraph 6]
Insurance with non-residents
1.90 Each country has the right to continue to apply any provisions in
its domestic law relating to the taxation of income from any form of
insurance, other than life insurance. However, if the relevant law in force
in either country at the date of signature of the treaty is subsequently
varied (otherwise than in minor respects so as not to affect its general
character), the countries must consult with each other with a view to
34
2006 Australia-France tax Convention
agreeing to any amendment of this paragraph that may be appropriate. An
effect of this paragraph is to preserve, in the case of Australia, the
application of Division 15 of Part III of the ITAA 1936 (Insurance with
Non-residents). This is consistent with Australia's reservation to Article 7
(Business Profits) of the OECD Model. [Article 7, paragraph 7]
Trust beneficiaries
1.91 The principles of Article 7 will apply to business profits which
under the France Convention fall to be taxed under this Article and which
are derived by a resident of one of the countries (directly or through one
or more interposed trust estates) as a beneficiary of a trust estate other
than a trust estate which is treated as a company for tax purposes.
1.92 In accordance with this provision, Australia has the right to tax a
share of business profits, originally derived by a trustee of a trust estate
(other than a trust estate that is treated as a company for tax purposes)
from the carrying on of a business through a permanent establishment in
Australia, to which a resident of France is beneficially entitled under the
trust estate. This ensures that such business profits will be subject to tax
in Australia where, in accordance with the principles set out in Article 5
(Permanent Establishment), the trustee of the relevant trust estate has a
permanent establishment in Australia in relation to that business. The
principles of this paragraph will also apply where relevant to other
Articles of the France Convention, such as Article 13 (Alienation of
Property) in its application to income, profits or gains arising from the
alienation of the assets of a permanent establishment or the permanent
establishment itself. [Article 7, paragraph 8]
Spectrum licenses
1.93 Payments made for use of, or the right to use, the radiofrequency
spectrum under a spectrum licence will fall under this Article.
Accordingly, profits of a non-resident licence holder from operating
radiocommunications devices under the licence, or authorising others to
use the rights under the spectrum licence will be taxable in Australia to
the extent that those profits are attributable to a permanent establishment
of the non-resident licence holder in Australia. [Protocol, item 3]
1.94 Where the person receiving payments for the use of a spectrum
licence (within the meaning of the Radiocommunications Act 1992) does
not have a permanent establishment in Australia, subsection 3(11A) of the
International Tax Agreements Act 1953 will operate so that the person is
taken to carry on business through a permanent establishment and the
payments will be taken to be attributable to a permanent establishment.
35
International Tax Agreements Amendment Bill (No. 1) 2007
Article 8 -- Ships and Aircraft
1.95 The main effect of this Article is that the right to tax profits from
the operation of ships or aircraft in international traffic, including a share
of profits attributable to participation in a pool service or other profit
sharing arrangement, is generally reserved to the country in which the
operator is a resident for tax purposes. [Article 8, paragraphs 1 and 5]
1.96 The profits covered consist in the first place of the profits
directly obtained by the enterprise from the transportation of passengers
or cargo by ships or aircraft (whether owned, leased or otherwise at the
disposal of the enterprise) that it operates in international traffic.
However, as international transport has evolved, shipping and air transport
enterprise invariably carry on a large variety of activities to facilitate, or
support their international operations. Consistent with the 2005 OECD
Model Commentary on Article 8, paragraph 1 also covers profits from
activities which are not directly connected with the operation of the
enterprise's ships or aircraft in international traffic but which are ancillary
to such operation.
1.97 Paragraph 2 reflects Australian treaty policy of reserving to the
source country the right to tax profits from internal traffic and profits from
other coastal and continental shelf activities, including non-transport
shipping and aircraft activities, within its own waters and airspace. Profits
derived directly or indirectly by a French enterprise from the operation of
ships or aircraft, to the extent that they relate to operations confined solely
to places in Australia, may thus be taxed in Australia. [Article 8,
paragraph 2]
1.98 As in the existing France treaty, the amount which will be
charged to tax in the source country from internal transport operations of
ships is limited to 5 per cent of the amount paid or payable (net of rebates)
in respect of carriage. [Article 8, paragraph 3]
1.99 However, the limit on the amount to be charged to tax will not
apply where such profits are attributable to a permanent establishment of
an enterprise situated in the source country. In these circumstances, the
profits may be taxed in the source country at ordinary rates under
paragraph 2. [Article 8, paragraph 4]
1.100 Australia's taxing rights are specifically preserved over profits
from the carriage by ships or aircraft of passengers or cargo (including
mail) where the passenger or cargo is shipped and discharged in Australia.
[Article 8, paragraph 6]
36
2006 Australia-France tax Convention
Example 1.1
A ship operated by a French enterprise, in the course of an
international voyage from Marseilles to Melbourne, makes a stop in
Perth to pick up cargo. Profits derived from the transport of the goods
loaded in Perth and discharged in Melbourne would be profits from
operations confined solely to places in Australia. Australia would
therefore have the right to tax the profits relating to such transport.
Five per cent of the amount paid in respect of the transport of those
goods would be deemed to be taxable income of the operator for
Australian tax purposes pursuant to Division 12 of Part III of the
ITAA 1936, and may be taxed in Australia in accordance with the
Article.
Example 1.2
A French enterprise operates sightseeing flights to observe whales in
the Southern Ocean. Passengers board the aircraft in Hobart and
disembark at the same airport later on the same day. These operations
would be regarded as operations confined solely to places in Australia,
notwithstanding that the aircraft passes through international airspace.
Australia would therefore have the right to tax the profits relating to
the carriage of these passengers.
1.101 Operations involving the use of ships or aircraft, such as
haulage, survey or dredging activities, or other activities relating to
exploration or extraction of natural resources that are undertaken in
Australia (including coastal waters, the continental shelf areas and
external territories) are also regarded as operations confined solely to
places in Australia.
Article 9 -- Associated Enterprises
Reallocation of profits
1.102 This Article deals with associated enterprises (such as parent
and subsidiary companies and companies under common control). It
authorises the reallocation of profits between related enterprises in
Australia and France on an arm's length basis where the commercial or
financial arrangements between the enterprises differ from those that
might be expected to operate between unrelated enterprises dealing
wholly independently with one another.
1.103 This Article would not generally authorise the rewriting of
accounts of associated enterprises where it can be satisfactorily
demonstrated that the transactions between such enterprises have taken
place on normal, open market commercial terms. Consistent with
Australia's recent treaty practice, the inclusion of the expression `dealing
37
International Tax Agreements Amendment Bill (No. 1) 2007
wholly independently with one another' in paragraph 1 recognises
dealings on a truly independent basis as the appropriate benchmark for
determining whether the transactions have taken place on normal, open
market commercial terms. [Article 9, paragraph 1]
1.104 The broad scheme of Australia's domestic law provisions
relating to international profit shifting arrangements under which profits
are shifted out of Australia, whether by transfer pricing or other means, is
to impose arm's length standards in relation to international dealings.
Where the Commissioner cannot ascertain the arm's length consideration,
it is deemed to be such an amount as the Commissioner determines.
1.105 Paragraph 2 of this Article specifically recognises the right of
each country to apply its domestic law relating to the determination of the
tax liability of a person (eg, Australia's Division 13 of the ITAA 1936) to
its own enterprises in cases where the available information is inadequate,
provided that such provisions are applied, so far as the information
available to the competent authority permits, consistently with the
principles of the Article. This reflects Australia's reservation to Article 9
(Associated Enterprises) of the OECD Model. [Article 9, paragraph 2]
Correlative adjustments
1.106 Where a reallocation of profits is made (either under this Article
or, by virtue of paragraph 2, under domestic law) so that the profits of an
enterprise of one country are adjusted upwards, a form of double taxation
would arise if the profits so reallocated continued to be subject to tax in
the hands of an associated enterprise in the other country. To avoid this
result, the other country -- if it considers the primary adjustment
justified -- will make an appropriate compensatory adjustment to the
amount of tax charged on the profits involved to relieve any such double
taxation.
1.107 It would generally be necessary for the affected enterprise to
apply to the competent authority of the country not initiating the
reallocation of profits for an appropriate compensatory adjustment to
reflect the reallocation of profits made by the other treaty partner country.
If necessary, the competent authorities of Australia and France will
consult with each other to determine the appropriate adjustment. [Article 9,
paragraph 3]
38
2006 Australia-France tax Convention
Article 10 -- Dividends
1.108 This Article allocates taxing rights in respect of dividends
flowing between Australia and France. The Article provides that:
· certain cross-border intercorporate dividends will be either
exempt or subject to a maximum 5 per cent rate of source
country tax;
· a maximum 15 per cent rate of source country tax may be
applied on all other dividends;
· dividends paid in respect of a holding which is effectively
connected with a permanent establishment are dealt with
under Article 7 (Business Profits); and
· extra-territorial application by either country of taxing rights
over dividend income is not permitted.
Permissible rate of source country taxation
Exemption for certain cross-border intercorporate dividends
1.109 No tax will be payable in the source country on dividends paid
to a company that is resident in the other country where:
· the recipient company holds directly at least 10 per cent of
the voting power of the company paying the dividends, or in
the case of France, the company holds directly at least
10 per cent of the capital of the company paying the
dividends; and
· the dividends are paid out of profits that have borne the
normal rate of company tax.
[Article 10, subparagraph 2(a)]
1.110 This Article allows both countries to tax other dividends flowing
between them but limits the rate of tax that the source country may
impose on dividends paid by companies that are residents of that country
under its domestic law to residents in the other country who are the
beneficial owners of the dividends. [Article 10, paragraphs 1 and 2]
Five per cent rate limit for certain cross-border intercorporate dividends
1.111 A rate limit of 5 per cent will apply for dividends paid in respect
of company shareholdings that do not qualify for the intercorporate
39
International Tax Agreements Amendment Bill (No. 1) 2007
dividend exemption under subparagraph 2(a) of this Article, but constitute
a direct interest (ie, voting interest in the case of Australia and capital
interest in the case of France) of at least 10 per cent in the company that
paid the dividends. This rate will apply to non-portfolio dividends that are
paid out of profits that have not borne the normal rate of company tax.
[Article 10, subparagraph 2(b)]
Fifteen per cent rate limit for all other dividends
1.112 In all other cases, the treaty provides that the source country will
generally limit its tax to 15 per cent of the gross amount of the dividend.
In the case of Australia, this will mean that the domestic rate of
withholding tax imposed on unfranked dividends will be reduced from
30 per cent to 15 per cent. [Article 10, subparagraph 2(c)]
1.113 Despite the provisions described above, the dividend
withholding tax exemption provided by Australia under its domestic law
for franked dividends paid to non-residents will continue to apply.
Profits that have borne the normal rate of company tax and Australia's
franking system
1.114 In the case of Australia, dividends paid out of profits that have
borne the normal rate of company tax will be dividends, or part of a
dividend, that is franked in accordance with Australia's franking
(imputation) credit rules. This will also be the case where a dividend is
paid by a member of a multiple entry consolidated (MEC) group to a
French company and the dividend is franked with imputation credits from
the MEC group consolidated franking account.
Future changes to either country's domestic tax treatment of dividend
1.115 If there is a material change to either country's general approach
to taxing dividends (eg, a change to Australia's domestic law
arrangements for franked dividends flowing overseas), the two countries
are obliged to consult with each other to consider whether any amendment
to paragraph 2 of Article 10 would be appropriate as a consequence of the
change to domestic law. [Article 10, paragraph 2]
Dividends effectively treated as business profits
1.116 The limitation on the tax of the country in which the dividend is
sourced does not apply to dividends derived by a resident of the other
country who has a permanent establishment in the source country from
which the dividends are derived, if the holding giving rise to the dividends
is effectively connected with that permanent establishment.
40
2006 Australia-France tax Convention
1.117 Where the holding is so effectively connected, the dividends are
to be treated as business profits and therefore subject to the full rate of tax
applicable in the country in which the dividend is sourced in accordance
with Article 7 (Business Profits). [Article 10, paragraph 4]
1.118 Franked and unfranked dividends paid by an Australian
company will be included in the assessable income of a non-resident
company or individual where the dividends are attributable to a permanent
establishment situated in Australia. Expenses incurred in deriving the
dividend income are allowable as a deduction from that income when
calculating the taxable income of the non-resident. Further, a
non-resident company or individual may be entitled to tax offsets in
respect of any franked dividends under Australia's domestic law.
Extra-territorial application precluded
1.119 The extra-territorial application by either country of taxing
rights over both dividend income and undistributed profits is precluded.
Broadly, one country (the first country) will not tax dividends paid by a
company resident solely in the other country, unless:
· the person deriving the dividends is a resident of the first
country; or
· the shareholding giving rise to the dividends is effectively
connected with a permanent establishment in the first
country.
1.120 For example, Australia may not tax dividends paid by a French
company to a resident of France out of profits derived from Australian
sources, unless the French shareholder has a permanent establishment in
Australia with which the holding is effectively connected. Similarly, a
country is precluded from imposing an undistributed profits tax on a
company which is a resident of the other country, even if those
undistributed profits arose in the first country. Australia does not impose
an undistributed profits tax.
1.121 These restrictions do not apply when the company is, for tax
purposes, a resident of both Australia and France under the respective
laws of the two countries. [Article 10, paragraph 5]
Definition of dividends
1.122 The term dividends in this Article means income from:
· shares or other rights which participate in profits and are not
debt-claims; and
41
International Tax Agreements Amendment Bill (No. 1) 2007
· other amounts that are subject to the same tax treatment as a
distribution or dividend by the laws of the country of which
the paying company is a resident.
1.123 The inclusion of `other amounts which are subjected to the same
taxation treatment as a distribution or dividend' within the definition is
consistent with the reservation lodged by France to Article 10 (Dividends)
of the OECD Model, which expands the definition to cover all income
subjected to the taxation treatment of distributions. This may include
certain interest payments that are treated as distributions under its
domestic law and are therefore subject to the Dividends Article in
preference to the Interest Article. This part of the definition also provides
that income from equity interests as determined under Australia's
debt-equity rules is included in the definition. [Article 10, paragraph 3]
Article 11 -- Interest
1.124 This Article allocates taxing rights in respect of interest flows
between Australia and France. The Article provides that:
· an exemption from source country tax generally applies to
certain cross-border interest flows to:
- the government, its monetary institutions or central
banks; or
- financial institutions;
· a maximum 10 per cent rate of source country tax may be
applied on all other interest income;
· interest paid on an indebtedness which is effectively
connected with a permanent establishment shall be subject to
Article 7 (Business Profits);
· interest payments are deemed to have an Australian source
(and may therefore be taxed in Australia) where:
- the interest is paid by an Australian resident to a French
resident; or
- the interest is paid by a non-resident to a French resident
and it is an expense of the payer in carrying on business
in Australia through a permanent establishment; and
42
2006 Australia-France tax Convention
· relief will be restricted to the gross amount of interest which
would be expected to be paid on an arm's length dealing
between independent parties.
Permissible rate of source country taxation
Ten per cent rate limit
1.125 This Article provides for interest income to be taxed by both
countries but requires the country in which the interest arises to generally
limit its tax to 10 per cent of the gross amount of the interest where a
resident of the other country is the beneficial owner of the interest.
[Article 11, paragraphs 1 and 2]
Exemptions for interest paid to government bodies
1.126 The exemption for interest paid to government bodies reflects
the principle of sovereign immunity and will apply to interest derived
from the investment of the Government's official reserve assets. Similar
exemptions apply in a number of Australia's tax treaties. [Article 11,
subparagraph 3(a)]
Exemptions for interest paid to financial institutions
1.127 The exemption for interest paid to financial institutions
recognises that the agreed 10 per cent withholding tax rate on gross
interest can be excessive given their cost of funds. The exemption will
also broadly align the treatment of interest paid to French financial
institutions with the Australian domestic law exemption for interest paid
on widely distributed arm's length corporate debenture issues
(section 128F of the ITAA 1936). [Article 11, subparagraph 3(b)]
1.128 The term financial institution means a bank or other enterprise
substantially raising debt finance in the financial markets or by taking
deposits at interest and using those funds in carrying on the business of
providing finance. It does not include a corporate treasury or a member of
a group that performs the financing services of the group. [Article 11,
subparagraph 3(b)]
1.129 The exemption will not be available for interest paid as part of
an arrangement involving back-to-back loans or other arrangement that is
economically equivalent and structured to have a similar effect. The
denial of the exemption for these back-to-back loan type arrangements is
directed at preventing related party and other debt from being structured
through financial institutions to gain access to a withholding tax
exemption. The exemption will only be denied for interest paid on the
43
International Tax Agreements Amendment Bill (No. 1) 2007
component of a loan that is considered to be back-to-back. [Article 11,
paragraph 4]
1.130 A back-to-back arrangement would include, for instance, a
transaction or series of transactions structured in such a way that:
· a French financial institution receives or is credited with an
item of interest arising in Australia; and
· the financial institution pays or credits, directly or indirectly,
all or substantially all of that interest (at any time or in any
form, including commensurate benefits) to another person
who, if it received the interest directly from Australia, would
not be entitled to similar benefits with respect to that interest.
1.131 However, a back-to-back arrangement would generally not
include a loan guarantee provided by a related party to a French financial
institution.
Definition of interest
1.132 The term interest is defined for the purposes of this Article to
include interest from:
· government securities;
· bonds and debentures;
· other forms of indebtedness; and
· income which is subjected to the same taxation treatment as
income from money lent by the law of the Contracting State
in which the income arises.
1.133 Penalty charges for late payment are specifically excluded from
definition of interest, consistent with the OECD Model. This provision is
unnecessary for Australian purposes because Australia's domestic law
does not treat penalty charges for late payments as interest. [Article 11,
paragraph 5]
Interest effectively treated as business profits
1.134 Interest derived by a resident of one country which is paid in
respect of an indebtedness which is effectively connected with a
permanent establishment of that person in the other country, will form
part of the business profits of that permanent establishment and be subject
to the provisions of Article 7 (Business Profits). Accordingly, the rate
44
2006 Australia-France tax Convention
limitation of 10 per cent and the exemption for financial institutions do
not apply to such interest in the country in which the interest is sourced.
[Article 11, paragraph 6]
Deemed source rules
1.135 The source rules which determine where interest arises for
purposes of the Article are set out in paragraph 7. They operate to allow
Australia to tax interest paid by a resident of Australia to a resident of
France that is the beneficial owner of that interest. Australia may also tax
interest paid by a non-resident, being interest which is beneficially owned
by a French resident, if it is an expense incurred by the payer of the
interest in carrying on a business in Australia through a permanent
establishment.
1.136 However, consistent with Australia's interest withholding tax
provisions, an Australian source is not deemed in respect of interest that is
an expense incurred by an Australian resident in carrying on a business
through a permanent establishment in France or outside both Australia
and France (ie, the permanent establishment is in a third country). In that
case, the interest is deemed to arise in the country in which the permanent
establishment is situated. [Article 11, paragraph 7]
1.137 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply.
Related persons
1.138 This Article includes a general safeguard against payments or
credits of excessive interest where a special relationship exists between
the persons associated with a loan transaction -- by restricting the amount
on which the 10 per cent source country tax rate limitation applies to an
amount of interest which might have been expected to have been agreed
upon if the parties to the loan agreement were dealing with one another at
arm's length. Any excess part of the interest remains taxable according to
the domestic law of each country but subject to the other Articles of the
tax Convention. [Article 11, paragraph 8]
1.139 Examples of cases where a special relationship might exist
include payments to a person (either individual or legal):
· who controls the payer (whether directly or indirectly);
· who is controlled by the payer; or
45
International Tax Agreements Amendment Bill (No. 1) 2007
· who is subordinate to a group having common interests with
the payer.
1.140 It also covers relationships of blood or marriage and, in general,
any community of interests.
Article 12 -- Royalties
1.141 This Article allocates taxing rights in respect of royalties paid or
credited between Australia and France. The Article provides that:
· a maximum 5 per cent rate of source country tax may be
levied on the gross amount of the royalties;
· royalties paid in respect of a right or property which is
effectively connected with a permanent establishment are
subject to Article 7 (Business Profits);
· equipment royalties are not included within the definition of
royalties and will be taxed in accordance with either Article 7
(Business Profits) or Article 8 (Ships and Aircraft);
· payments for spectrum licences are subject to Article 7
(Business Profits);
· royalties are deemed to have an Australian source (and may
therefore be taxed in Australia) where:
- the royalties are paid by an Australian resident to a
French resident; or
- the royalties are paid by a non-resident to a French
resident and are an expense of the payer in carrying on
business in Australia through a permanent
establishment; and
· relief will be restricted to the gross amount of royalties which
would be expected to be paid on an arm's length dealing
between independent parties.
Permissible rate of source country taxation
1.142 This Article in general allows both countries to tax royalty flows
but limits the tax of the country of source to 5 per cent of the gross
amount of royalties beneficially owned by residents of the other country.
[Article 12, paragraphs 1 and 2]
46
2006 Australia-France tax Convention
1.143 In the absence of a tax treaty, Australia taxes royalties paid to
non-residents at 30 per cent of the gross royalty.
1.144 The 5 per cent rate limitation does not apply to natural resource
royalties, which, in accordance with Article 6 (Income from Real
Property), remain taxable in the country of source without limitation of
the tax that may be imposed.
Definition of royalties
1.145 The definition of `royalties' in the France Convention reflects
most elements of the definition in Australia's domestic income tax law. It
includes payments for the supply of scientific, technical, industrial or
commercial know-how but not payments for services rendered, except as
provided for in subparagraph 3(c). The definition also includes payments
for the use of intellectual property stored on various mediums and used in
connection with television, radio or other broadcasting (eg, satellite, cable
and Internet broadcasting). [Article 12, paragraph 3]
1.146 Payments for the use of, or the right to use industrial,
commercial or scientific equipment, which are included in the definition
of royalties in the existing France treaty, are not included in the definition
under the France Convention. Such payments for equipment leasing will
either be treated as business profits under Article 7 (Business Profits) or
as profits from international transport operations (for certain leases of
ships and aircraft) under Article 8 (Ships and Aircraft). The exclusion of
payments for the use of equipment from the Royalties Article reflects
common international tax treaty practice and recognises that source
country taxation on a gross basis may be excessive given low profit
margins.
1.147 The definition does not include payments made for the use of
spectrum licences. Rather, Article 7 (Business Profits) applies to such
payments. [Protocol, item 3]
Payments for the supply of know-how versus payments for services
rendered
1.148 The OECD Model Commentary deals with the need to
distinguish these two types of payments in paragraph 11.3 of the
Commentary on Article 12. The Commentary cites the following criteria
as relevant for the purpose of making the distinction:
· Contracts for the supply of know-how concern information of
the kind described in paragraph 11 (of the Commentary) that
already exists or concern the supply of that type of
information after its development or creation and include
47
International Tax Agreements Amendment Bill (No. 1) 2007
specific provisions concerning the confidentiality of that
information.
· In the case of contracts for the provision of services, the
supplier undertakes to perform services which may require
the use, by that supplier, of special knowledge, skill and
expertise but not the transfer of such special knowledge, skill
or expertise to the other party.
· In most cases involving the supply of know-how, there would
generally be very little more which needs to be done by the
supplier under the contract other than to supply existing
information or reproduce existing material. On the other
hand, a contract for the performance of services would, in the
majority of cases, involve a very much greater level of
expenditure by the supplier in order to perform his
contractual obligations. For instance, the supplier, depending
on the nature of the services to be rendered, may have to
incur salaries and wages for employees engaged in
researching, designing, testing, drawing and other associated
activities or payments to sub-contractors for the performance
of similar services.
1.149 Payments for design, engineering or construction of plant or
building, feasibility studies, component design and engineering services
may generally be regarded as being in respect of a contract for services,
unless there is some provision in the contract for imparting techniques and
skills to the buyer.
1.150 In cases where both know-how and services are supplied under
the same contract, if the contract does not separately provide for payments
in respect of know-how and services, an apportionment of the two
elements of the contract may be appropriate.
1.151 Payments for services rendered are to be treated under Article 7
(Business Profits).
Image or sound reproduction or transmission
1.152 The royalty definition includes payments made for the use of, or
the right to use, motion picture films. It also covers payments for the use
of, or the right to use images or sounds, however reproduced or
transmitted, for use in connection with broadcasting. Such images or
sounds may be reproduced on any form of media, such as film, tape, CD
or DVD, or transmitted electronically, such as by satellite, cable or
Internet. Where the images or sounds are for use in connection with any
48
2006 Australia-France tax Convention
form of broadcasting, such as television, radio or web-casting, the
payments will constitute a royalty. [Article 12, subparagraph 3(d)]
Forbearance
1.153 Consistent with the existing France treaty and Australian tax
treaty practice, subparagraph 3(e) expressly treats as a royalty, amounts
paid or credited in respect of forbearance to grant to third persons, rights
to use property covered by this Article. This is designed to address
arrangements along the lines of those contained in Aktiebolaget Volvo v
Federal Commissioner of Taxation (1978) 8 ATR 747; 78 ATC 4316,
where instead of amounts being payable for the exclusive right to use the
property they were made for the undertaking that the right to use the
property will not be granted to anyone else. This provision ensures that
such payments are subject to tax as a royalty payment under the terms of
the Royalties Article. [Article 12, subparagraph 3(e)]
Other royalties effectively treated as business profits
1.154 As in the case of interest income, the withholding tax rate
limitation does not apply to royalties paid in respect of property or rights
which are effectively connected with a permanent establishment in the
country in which the income is sourced. Such income is subject to full
taxation under Article 7 (Business Profits). [Article 12, paragraph 4]
Deemed source rules
1.155 The source rules which determine where royalties arise for
purposes of this Article effectively correspond, in the case of Australia,
with the deemed source rule contained in section 6C (Source of royalty
income derived by a non-resident) of the ITAA 1936 for royalties paid to
non-residents of Australia. They broadly mirror the source rule for
interest income contained in paragraph 7 of Article 11 (Interest).
1.156 Consistent with Australia's royalty withholding tax provisions,
royalty payments that are an expense incurred by an Australian resident in
carrying on a business through a permanent establishment outside both
Australia and France (ie, the permanent establishment is in a third
country) will not be subject to tax in Australia. Those royalties are
deemed to be sourced in the country in which the permanent
establishment is situated. [Article 12, paragraph 5]
1.157 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply.
49
International Tax Agreements Amendment Bill (No. 1) 2007
Related persons
1.158 Where a special relationship exists between the payer and the
beneficial owner of the royalties, the 5 per cent source country tax rate
limitation will apply only to the extent that the royalties are not excessive.
Any excess part of the royalty remains taxable according to the domestic
law of each country but subject to the other Articles of this Convention.
1.159 Examples of special relationships have been provided in respect
of the corresponding paragraph in Article 11. [Article 12, paragraph 6]
Article 13 -- Alienation of Property
Taxing rights
1.160 This Article allocates between the respective countries taxing
rights in relation to income, profits or gains arising from the alienation of
real property and other items of property.
1.161 The reference to `income, profits or gains' in this Article is
designed to put beyond doubt that a gain from the alienation of property
which in Australia is income or a profit under ordinary concepts, will also
be taxed in accordance with this Article, rather than Article 7 (Business
Profits), together with relevant capital gains.
Real property
1.162 Income, profits or gains from the alienation of real property may
be taxed by the country in which the property is situated. For the purpose
of this Article, the term `real property' has the same meaning as it has
under paragraph 2 of Article 6. Where the property is situated is
determined in accordance with paragraph 7 of Article 6 (Income from
Real Property). [Article 13, paragraphs 1, 7 and 8]
Permanent establishment
1.163 Paragraph 2 deals with income, profits or gains arising from the
alienation of property (other than real property covered by paragraph 1)
forming part of the business assets of a permanent establishment of an
enterprise. It also applies where the permanent establishment itself (alone
or with the whole enterprise) is alienated. Such income, profits or gains
may be taxed in the country in which the permanent establishment is
situated. This corresponds to the rules for taxation of business profits
contained in Article 7 (Business Profits). [Article 13, paragraph 2]
50
2006 Australia-France tax Convention
Disposal of ships or aircraft
1.164 Income, profits or gains derived by a resident of a country from
the disposal of ships or aircraft operated by that resident in international
traffic, or of associated property (other than real property covered by
paragraph 1), are taxable only in that country. This rule corresponds to
the operation of Article 8 (Ships and Aircraft) in relation to profits from
the international operation of ships or aircraft. [Article 13, paragraph 3]
1.165 For the purposes of this Article, the term `international traffic'
does not include any transportation which commences at a place in a
country and returns to that place or another place in that country, after
travelling through international airspace or waters (eg, so-called `voyages
to nowhere' by cruise ships). [Article 3, subparagraph 1(l)]
Shares and other interests in land-rich entities
1.166 Paragraph 4 applies to situations involving the alienation of
shares or other interests in companies, and other entities, where the value
of the assets is principally attributable to the real property situated in the
other country. Income, profits or gains from alienation of such shares or
interests may be taxed by the country in which the real property is
situated. This paragraph complements paragraph 1 of this Article and is
designed to cover arrangements involving the effective alienation of
incorporated real property, or like arrangements.
1.167 This provision is in line with international practice and ensures
that capital gains on a non-resident's indirect, as well as direct, interests in
certain targeted assets are taxable in Australia. (Such treatment applies
whether the real property is held directly or indirectly through a chain of
interposed entities.) While not limited to chains of companies, or even
chains of entities, only some of which are companies, the example of
chains of companies is used to make clear that the corporate veil should
be lifted in examining direct or indirect ownership.
1.168 This provision responds to the tax planning opportunities
exposed by the decision of the Full Federal Court in the Commissioner of
Taxation v Lamesa Holdings BV (1997) 77 FCR 597. It is designed to
protect Australian taxing rights over income or gains on the alienation or
effective alienation of Australian real property (as defined) despite the
presence of interposed bodies corporate or other entities. [Article 13,
paragraph 4]
Preventing double taxation of departing residents
1.169 The purpose of paragraph 5 is to prevent double taxation of
capital gains of departing residents. A person who ceases to be a resident
51
International Tax Agreements Amendment Bill (No. 1) 2007
of Australia will generally trigger a tax liability on unrealised gains from
assets held, other than taxable Australian assets (gains from real property
and the sale of a permanent establishment in Australia or the assets of
such a permanent establishment). The departing Australian resident may
elect to either pay the Australian tax at the time of departure or to defer
tax on the unrealised gain until the actual disposal of the asset. A former
Australian resident who has been taxed on the unrealised gains upon
departure from Australia, and who becomes a French resident, may elect
to be treated for French taxation purposes as having, immediately before
ceasing to be a resident of Australia, alienated and reacquired the property
for an amount equal to its fair market value at that time. [Article 13,
paragraph 5]
Example 1.3
An Australian resident, Alison, owns a house in New Zealand which
was purchased in the year 2002 for $200,000 (this is the cost base of
the asset as Alison has not incurred any further expenditure which
should be taken into account in determining the cost base of the asset).
At the time Alison ceases to be an Australian resident, the market value
of the house is $300,000. Alison will therefore have an Australian
capital gains tax liability of $100,000 from the unrealised gain. Alison
pays the tax on this unrealised gain rather than defers payment of the
tax.
Alison later sells the house for $400,000, while a resident of France.
Paragraph 5 will allow Alison to elect to treat the original purchase
price as $300,000 and the time of acquisition as the time immediately
preceding the change of residence for French tax purposes. This will
mean that Alison will not be taxed in France on the gain that accrued
on the house during the period of Alison's residence in Australia.
[Article 13, paragraph 5]
Capital gains
1.170 This Article contains a sweep up provision which reserves the
right to tax any capital gains from the alienation of other types of property
to the country in which the person deriving the gains is a resident. These
would include, for example, gains from the disposal of shares or other
interests in an entity (other than a land-rich entity). Such gains derived by
Australian residents will be taxable only in Australia, regardless of where
the property is situated, and will not be taxed in France. The liability of
the Australian resident to taxation on such gains will be determined in
accordance with Australia's domestic law. [Article 13, paragraph 6]
52
2006 Australia-France tax Convention
Article 14 -- Income from Employment
Basis of taxation
1.171 This Article generally provides the basis upon which the
remuneration of visiting employees is to be taxed. However this Article
does not apply in respect of income that is dealt with separately in:
· Article 15 (Directors' Fees);
· Article 16 (Entertainers and Sportspersons);
· Article 17 (Pensions and Annuities); and
· Article 18 (Government Service).
1.172 Generally, remuneration derived by a resident of one country
from employment exercised in the other country may be taxed in that
other country. However, subject to specified conditions, there is a
conventional provision for exemption from tax in the country being
visited where visits of only a short-term nature are involved. [Article 14,
paragraphs 1 and 2]
Short-term visit exemption
1.173 The conditions for this exemption are that:
· the period of the visit or visits does not exceed, in the
aggregate, 183 days in any 12-month period commencing or
ending in the fiscal year of the visited country;
· the remuneration is paid by, or on behalf of, an employer
who is a resident of the same country as the employee; and
· the remuneration is not borne by a permanent establishment
which the employer has in the country being visited.
1.174 Where all of these conditions are met, the remuneration so
derived will be liable to tax only in the country of residence of the
recipient. [Article 14, paragraph 2]
1.175 Where a short-term visit exemption is not applicable,
remuneration derived by a resident of Australia from employment in
France may be taxed in France. However, this Article does not allocate
sole taxing rights to France in that situation. [Article 14, paragraph 1]
53
International Tax Agreements Amendment Bill (No. 1) 2007
1.176 Accordingly, Australia would also be entitled to tax that
remuneration in accordance with the general rule of the ITAA 1997 that a
resident of Australia remains subject to tax on worldwide income.
However, in accordance with Article 23 (Elimination of Double Taxation)
Australia would in this situation be required to relieve the double taxation.
1.177 Although Article 23 provides for the double tax relief to be
provided by Australia to be in the form of the grant of a credit against the
Australian tax for the French tax paid, the `exemption with progression'
method of providing double tax relief in relation to employment income
derived in the situation described would normally be applicable in
practice pursuant to the foreign service income provisions of
section 23AG of the ITAA 1936. This method exempts the income from
foreign employment from tax in Australia, but takes into account the
foreign earnings when calculating the Australian tax on other assessable
income the person has derived.
Employment on a ship or aircraft
1.178 Income from an employment exercised aboard a ship or aircraft
operated in international traffic may be taxed in the country of which the
enterprise operating the ship or aircraft is a resident. [Article 14, paragraph 3]
1.179 For the purposes of this Article, the term `international traffic'
does not include any transportation which commences at a place in a
country and returns to that place or another place in that country,
notwithstanding that the vessel travels through international waters
(eg, so-called `voyages to nowhere' by cruise ships). [Article 3,
subparagraph 1(l)]
Article 15 -- Directors' Fees
1.180 This Article relates to remuneration received by a resident of
one country in the person's capacity as a director of a company which is a
resident of the other country. To avoid potential practical difficulties in
such cases of ascertaining in which country a director's services are
performed, and consequently where the remuneration is to be taxed, the
Article provides that directors' fees and similar payments may be taxed in
the country of residence of the company. [Article 15]
Article 16 -- Entertainers and Sportspersons
Personal activities
1.181 Under this Article, income derived by visiting entertainers and
sportspersons from their personal activities as such may be taxed in the
54
2006 Australia-France tax Convention
country in which the activities are exercised, irrespective of the duration
of the visit. The term `entertainer' is intended to have a broad meaning
and would include, for example, actors and musicians as well as other
performers whose activities have an entertainment character, such as
comedians, talk-show hosts, participants in chess tournaments or racing
drivers. The application of this Article extends to income generated from
promotional and associated kinds of activities engaged in by the
entertainer or sportsperson while present in the visited country. [Article 16,
paragraph 1]
Safeguard
1.182 Paragraph 2 is designed to ensure that income in respect of
personal activities exercised by an entertainer or sportsperson, where
derived by another person (eg, a separate enterprise which formally
provides the entertainer's or sportsperson's services), may be taxed in the
country in which the entertainer or sportsperson performs, whether or not
that other person has a permanent establishment in that country. [Article 16,
paragraph 2]
Article 17 -- Pensions and Annuities
1.183 Pensions (not including government pensions) and annuities (the
term `annuity' as used in this Article is defined in paragraph 2) are taxable
only by the country of which the recipient is a resident. The application
of this Article extends to pensions and annuity payments made to
dependants, for example, a widow, widower or children of the person in
respect of whom the pension or annuity entitlement accrued where, upon
that person's death, such entitlement has passed to that person's
dependants. [Article 17, paragraphs 1 and 2]
War service pensions
1.184 Paragraph 3 reflects the intended operation of paragraph 3 of
Article 17 of the existing France treaty, and ensures that any pension or
allowance paid by a country in respect of war service, or in respect of
wounds, disabilities or death caused by war, that is exempt from tax in
that country will also be exempt in the other country. [Article 17,
paragraph 3]
Eligible termination payments
1.185 Lump sum payments on the termination of employment are not
considered to be pensions and are not covered by this Article. Article 20
(Other Income) applies to such payments.
55
International Tax Agreements Amendment Bill (No. 1) 2007
Contributions to foreign pension schemes
1.186 Paragraph 4 of this Article broadly continues the treatment
provided under paragraph 5 of Article 17 of the existing France treaty. It
provides that each country is required to treat contributions of a resident
employee to a pension scheme in the other country in the same way as
contributions made to a recognised pension scheme are treated. However,
this provision will only apply where:
· immediately before commencing employment activities in
the country, the individual was not a resident of that country,
and was participating in the foreign pension scheme; and
· the pension scheme is accepted by the competent authority of
that country as generally corresponding to a recognised
pension scheme for tax purposes.
[Article 17, subparagraph 4(a)]
1.187 The term `pension scheme', for the purposes of
subparagraph 4(a), means an arrangement in which the individual
participates in order to secure retirement benefits payable in respect of the
relevant employment services. A pension scheme is recognised for tax
purposes in a country if the contributions to the scheme would qualify for
tax relief in that country. [Article 17, subparagraph 4(b)]
1.188 Paragraph 4 has little operation in Australia, since employee
contributions to pension schemes generally do not qualify for tax relief in
Australia. The provision does not extend to contributions on behalf of
employees, such as employer contributions, or to contributions by
self-employed individuals.
Article 18 -- Government Service
Salary and wage income
1.189 Salary and wage type income, other than government service
pensions or annuities, paid to an individual for services rendered to a
government (including a political subdivision, statutory body or local
authority) of one of the countries, is to be taxed only in that country.
However, such remuneration will be taxable only in the other country if:
· the services are rendered in that other country; and
56
2006 Australia-France tax Convention
· the recipient is a resident of, and a national or citizen of, that
other country, and is not also a national or citizen of the
paying country.
1.190 The term `statutory body' is not defined in the France
Convention. In Australia, a statutory body would include an entity
incorporated for public purposes by a law of Australia, as well as an entity
which is entrusted by a law of Australia with functions to be performed in
the public interest or for a public purpose. [Article 18, paragraph 1]
Government pensions
1.191 Any pension paid by, or out of funds created by, a government
(including a political subdivision, statutory body or local authority) of one
of the countries to an individual in respect of services rendered to that
government, is to be taxed only in that country. However, such pension
will be taxable only in the other country if the individual is a resident of,
and a national or citizen of, that other country and is not also a national or
citizen of the first mentioned country. [Article 18, paragraph 2]
Business income
1.192 Remuneration or pensions paid in respect of services rendered in
connection with a trade or business carried on by any governmental
authority referred to in paragraph 1 or 2 of this Article is excluded from
the scope of the Article. Such remuneration will remain subject to the
provisions of Article 14 (Income from Employment), Article 15
(Directors' Fees), Article 16 (Entertainers and Sportspersons) or
Article 17 (Pensions and Annuities). [Article 18, paragraph 3]
1.193 Where a statutory body of a country carries on activities that are
not primarily supported by public funds of that country (including public
funds of its political subdivisions or local authorities), such activities will
be regarded as business activities of that body for purposes of this Article.
Salaries, wages, pensions etc paid in respect of services rendered in
connection with such activities are excluded from the scope of the Article.
[Protocol, item 4]
Article 19 -- Students
Exemption from tax
1.194 This Article applies to students who are temporarily present in
one of the countries solely for the purpose of their education if the
students are, or immediately before the visit were, resident in the other
country. In these circumstances, payments from abroad received by the
57
International Tax Agreements Amendment Bill (No. 1) 2007
students solely for their maintenance or education will be exempt from tax
in the country visited. This will apply even though the student may
qualify for tax purposes as a resident of the country visited during the
period of their visit.
1.195 The exemption from tax provided by the visited country is
treated as extending to payments received by the student for the
maintenance of dependent family members who have accompanied the
student to the visited country.
Employment income
1.196 Where, however, a student from France who is visiting Australia
solely for educational purposes undertakes any employment in Australia,
for example:
· undertakes some part-time work with a local employer; or
· during a semester break undertakes work with a local
employer,
the income earned by that student as a consequence of that employment
may, as provided for in Article 14 (Income from Employment), be subject
to tax in Australia. In this situation, the payments received from abroad
for the student's maintenance or education will not, however, be taken
into account in determining the tax payable on the employment income
that is subject to tax in Australia. No Australian tax would be payable on
the employment income if the student qualifies as a resident of Australia
during the visit and the taxable income of the student (excluding
maintenance payments received from abroad) does not exceed the tax-free
threshold applicable to Australian residents for income tax purposes.
Article 20 -- Other Income
Allocation of taxing rights
1.197 This Article provides rules for the allocation between the two
countries of taxing rights with respect to items of income not dealt with in
the preceding Articles of the France Convention. The scope of the Article
is not confined to such items of income arising in one of the countries --
it extends also to income from sources in a third country.
1.198 Broadly, such income derived by a resident of one country is to
be taxed only in the country of residence unless it is from sources in the
other country, in which case the income may also be taxed in the other
58
2006 Australia-France tax Convention
country. This is consistent with Australia's reservation to Article 21
(Other Income) of the OECD Model. [Article 20, paragraphs 1 and 3]
1.199 Where the income may be taxed in both countries in accordance
with this provision, the country of residence of the recipient of the income
is obliged by Article 23 (Elimination of Double Taxation) to provide
double taxation relief.
1.200 This Article does not apply to income (other than income from
real property as defined in paragraph 2 of Article 6 (Income from Real
Property)) where the right or property in respect of which the income is
paid is effectively connected with a permanent establishment which a
resident of one country has in the other country. In such a case, Article 7
(Business Profits) will apply. [Article 20, paragraph 2]
Article 21 -- Source of Income
Deemed source
1.201 This Article effectively deems income, profits or gains derived
by a resident of a country which, in accordance with the France
Convention, may be taxed in the other country, to have a source in that
other country. It therefore avoids any difficulties arising under domestic
law source rules in respect of the exercise by Australia of the taxing rights
allocated to Australia by the France Convention over income or gains
derived by residents of France. [Article 21, paragraph 1]
1.202 Paragraph 2 has a broadly similar purpose as that of paragraph 1
of this Article. Like the corresponding provision in the existing France
treaty, paragraph 2 deems profits which are included as profits of an
enterprise of a country under paragraph 1 of Article 9 (Associated
Enterprises) to be income of that enterprise derived from sources in that
country for the purposes of taxation of the enterprise. [Article 21,
paragraph 2]
Source of income -- double taxation relief
1.203 Paragraph 3 of this Article deems income, profits or gains of a
resident of one country to arise in the other country if those amounts are
taxable in the other country under the treaty. The paragraph applies for
the purposes of Article 23 (Elimination of Double Taxation) and for the
purposes of the domestic tax laws of the country in which the recipient of
the income is resident. [Article 21, paragraph 3]
1.204 This provision is variously included in a specific Source of
Income Article, such as Article 21 of this treaty, or in the Elimination of
59
International Tax Agreements Amendment Bill (No. 1) 2007
Double Taxation Article of Australia's tax treaties. It is intended to
ensure that where an item of income, profit or gain is taxable in both
countries, double taxation relief will be given by the recipient's country of
residence in accordance with Article 23, regardless of whether the amount
may be regarded as having a source in the country of residence under its
ordinary source rules. In this way, income, profits or gains derived by a
resident of Australia, which is taxable by France under this Convention,
will be treated as foreign income for the purposes of the ITAA 1936 and
the ITAA 1997, including the foreign tax credit provisions of the ITAA
1936. [Article 21, paragraph 3]
Article 22 -- Rules of Taxation
1.205 This Article, like its counterpart in the existing France treaty, is
complementary to the provisions of Article 9 (Associated Enterprises) of
the treaty which apply where related enterprises are not dealing on an
arm's length basis. Paragraph 2 of Article 9 allows recourse to relevant
domestic laws only if the information available to the competent authority
of a Contracting State is inadequate to determine properly attributable
profits. This Article permits a wider recourse to the domestic law in other
cases of non-arm's length dealings.
1.206 This Article operates so that nothing in the treaty prevents either
country from applying its domestic law to tax residents of Australia or
France on those profits which might otherwise have been expected to have
accrued to the resident had the transaction between the Australian resident
and the French resident been conducted at arm's length. [Article 22]
Article 23 -- Elimination of Double Taxation
1.207 Double taxation does not arise in respect of income flowing
between Australia and France:
· where the terms of the tax treaty provide for the income to be
taxed only in one country; or
· where the domestic taxation law of one of the countries
exempts the income from its tax.
1.208 It is necessary, however, to prescribe a method for relieving
double taxation for other classes of income which, under the terms of the
tax treaty, remain subject to tax in both countries. In accordance with
international practice, Australia's tax treaties provide for double tax relief
to be provided by the country of residence of the taxpayer by way of a
credit basis of relief against its tax for the tax of the country of source.
This Article also reflects that approach.
60
2006 Australia-France tax Convention
Australian method of relief
1.209 This Article requires Australia to provide Australian residents a
credit against their Australian tax liability for French tax paid in
accordance with the France Convention on income derived from French
sources which are taxable in Australia. The term `income' in this context
is intended to have a broad meaning and includes items of profit or gains
which are dealt with under the income tax law. [Article 23, paragraph 1]
1.210 Australia's general foreign tax credit system, together with the
terms of this Article and of the France Convention generally, will form the
basis of Australia's arrangements for relieving a resident of France from
double taxation on income or gains arising from sources in France.
1.211 Accordingly, effect is to be given to the tax credit relief
obligation imposed on Australia by paragraph 1 of this Article by
application of the general foreign tax credit provisions (Division 18 of
Part III) of the ITAA 1936.
1.212 Notwithstanding the credit basis of relief provided for by
paragraph 1 of this Article in relation to salary and wages and like
remuneration derived by a resident of Australia during a continuous
period of foreign service (as defined in subsection 23AG(7) of the
ITAA 1936) in France, the exemption with progression method of relief
will be applicable.
1.213 Dividends and branch profits derived from France by an
Australian resident company that are exempt from Australian tax under
the foreign source income measures (eg, sections 23AH and 23AJ of the
ITAA 1936) will continue to qualify for exemption from Australian tax
under those provisions. As double taxation does not arise in these cases,
the credit form of relief will not be relevant.
French relief
1.214 In the case of a resident of France who is taxed in France on
income which is taxable in Australia under this Convention, this Article
requires France to allow the French resident a credit, rather than a
deduction, against the French tax.
1.215 The amount of the tax credit will depend on the type of income.
In the case of income other than that listed below, the tax credit will be
equal to the amount of the French tax attributable to such income. This
provision will only apply in relation to income that has been subjected to
Australian tax. In effect, no French tax will be payable on such income.
[Article 23, sub-subparagraph 2(a)(i)]
61
International Tax Agreements Amendment Bill (No. 1) 2007
1.216 The amount of the tax credit in the case of income listed below
will be equal to the amount of tax paid in Australia in accordance with
this Convention. However, the amount of the tax credit shall not exceed
the amount of French tax attributable to that income. The income to
which this tax credit applies is income referred to in the following
provisions of this Convention:
· Article 7 (Business Profits) and paragraph 2 of Article 13
(Alienation of Property), in relation to income that is subject
to the corporation tax;
· Article 10 (Dividends);
· Article 11 (Interest);
· Article 12 (Royalties);
· paragraph 1 of Article 13 (Alienation of Property);
· paragraph 3 of Article 14 (Income from Employment);
· Article 15 (Directors' Fees);
· Article 16 (Entertainers and Sportspersons); and
· Article 20 (Other Income).
[Article 22, sub-subparagraph 2(a)(ii)]
1.217 As France generally operates a territorial tax system corporation
tax arises on foreign source profits only in circumstances where a group
of French resident companies elect to include in their assessable income
the profits from their foreign operations. In these circumstances business
profits will be subject to the corporation tax and a credit will only be
allowed for the amount of Australian tax paid by the permanent
establishment in Australia of a member of the group of companies.
1.218 The term the amount of French tax attributable to such
income, as used in paragraph 2 of this Article, means:
· where the tax on that income is calculated by applying a
proportional rate, the amount of the net income multiplied by
the rate which actually applies to that income; and
· where the tax on that income is calculated by applying a
progressive scale, the amount of the net income multiplied by
the rate resulting from the ratio of tax actually payable on the
62
2006 Australia-France tax Convention
total net income taxable in accordance with French law to the
amount of that total net income.
Article 24 -- Mutual Agreement Procedure
Consultation on specific cases
1.219 This Article provides for consultation between the competent
authorities of the two countries with a view to reaching a solution in cases
where a person is able to demonstrate actual or potential imposition of
taxation contrary to the provisions of the France Convention. [Article 24,
paragraph 2]
1.220 A person wishing to use this procedure may present a case to the
competent authority of the country of which the person is a resident.
Presentation of a case by a person to a competent authority does not
deprive them of access to, or affect their rights in relation to, other legal
remedies available under the domestic laws of the countries. [Article 24,
paragraph 1]
1.221 If the person's claim seems to the competent authority to which
a case has been presented to be justified, and that competent authority is
not itself able to solve the problem, then the competent authority is
required to seek to resolve the case by mutual agreement with the
competent authority of the other country, with a view to avoiding taxation
not in accordance with the Convention. [Article 24, paragraph 2]
1.222 If, after consideration by the competent authorities, a solution is
reached, it shall be implemented in accordance with the provisions of the
Article.
Time limits
Presentation of the case
1.223 A taxpayer seeking to use this procedure must present the case
to the competent authority of the country in which the taxpayer is a
resident within three years from the first notification of the action
resulting in taxation not in accordance with the provisions of the treaty.
This time limit overrides any time limits that may operate under the
domestic law of the country. [Article 24, paragraph 1]
Implementation of a solution
1.224 The solution reached by mutual agreement between the
competent authorities of the relevant countries shall be implemented
notwithstanding any time limits in the domestic laws of the tax
63
International Tax Agreements Amendment Bill (No. 1) 2007
Convention countries. This allows the competent authorities the
flexibility to reach a satisfactory solution and avoids problems that might
arise where each country has a different time limit in their domestic law.
[Article 24, paragraph 2]
Consultation on general problems
1.225 This Article also authorises consultation between the competent
authorities of the two countries for the purpose of resolving any
difficulties that arise regarding the interpretation or application of the
Convention and to give effect to it. This may allow, for example, the
competent authorities to agree to apply an agreed solution to a broader
range of taxpayers, notwithstanding that the original uncertainty may have
arisen in connection with an individual case that comes under the
procedure outlined in paragraphs 1 and 2 of this Article.
1.226 This Article specifically allows the competent authorities to
consult with the aim of agreeing to the same allocation of income between
associated enterprises mentioned in Article 9 (Associated Enterprises).
This additional sentence (which is not included in most of Australia's
treaties) is included merely for increased clarity and is not intended to
suggest that such consultation would not be permitted under the mutual
agreement procedure in the absence of such specification.
1.227 Paragraph 3 of this Article also enables the competent
authorities to deal with cases of double taxation that do not come within
the scope of the France Convention. [Article 24, paragraph 3]
Methods of communication between competent authorities
1.228 The competent authorities are permitted to communicate directly
with each other without having to go through diplomatic channels. This
may be done by letter, facsimile transmission, telephone, direct meetings
or any other convenient means. [Article 24, paragraph 4]
General Agreement on Trade in Services (GATS) dispute resolution
process
1.229 Paragraph 5 of this Article deals with disputes that may be
brought before the World Trade Organisation Council for Trade in
Services under the dispute resolution processes of the GATS. [Article 24,
paragraph 5]
Background
1.230 Australia and France are both parties to the GATS. Article XVII
(National Treatment) of the GATS requires a party to accord the same
64
2006 Australia-France tax Convention
treatment to services and service suppliers of other parties as it accords to
its own like services and service suppliers.
1.231 Articles XXII (Consultation) and XXIII (Dispute Settlement and
Enforcement) of the GATS provide for discussion and resolution of
disputes. Where a measure of another party falls within the scope of a tax
treaty, paragraph 3 of Article XXII (Consultation) provides that the other
party to the tax treaty may not invoke Article XVII (National Treatment).
However, if there is a dispute as to whether a measure actually falls within
the scope of a tax treaty, either country may take the matter to the Council
on Trade in Services for referral to binding arbitration.
1.232 Notwithstanding paragraph 3 of Article XXII (Consultation) of
the GATS, Australia and France have agreed that the consent of both
countries is required before a dispute as to whether a measure falls within
the scope of this Convention may be brought before the Council on Trade
in Services. This is seen as the most effective way of dealing with such
disputes, and avoids difficult questions as to when a disputed issue falls
within the dispute resolution mechanism of this Convention or of the
GATS dispute.
1.233 This provision is based, in all essential respects, on an
OECD Model Commentary recommendation, and is common in recent
international treaty practice. [Article 24, paragraph 5]
Article 25 -- Exchange of Information
1.234 The France Convention aligns the information exchange
provisions to the 2005 OECD standard. The Article differs from the
previous approach in the following ways:
· the scope is expanded to a wider range of taxes;
· the new provision clarifies that the Commissioner is obliged
to obtain information for French tax authorities regardless of
whether Australia has a domestic tax interest in the
information sought; and
· bank secrecy laws do not limit the exchange of information.
Foreseeably relevant information
1.235 Article 25 authorises and limits the exchange of information by
the two competent authorities to information foreseeably relevant to the
administration or enforcement of the relevant taxes. The exchange of
information is not restricted by Article 1 (Persons Covered) of the
65
International Tax Agreements Amendment Bill (No. 1) 2007
Convention, and may therefore cover persons who are not residents of
Australia or France.
1.236 The standard of foreseeable relevance is intended to ensure that
information may be exchanged to the widest possible extent. However,
competent authorities are not entitled to request information from the
other country which is unlikely to be relevant to the tax affairs of a
taxpayer, or to the administration and enforcement of tax laws. [Article 25,
paragraph 1]
1.237 The change in wording from that used in the corresponding
Article of the existing France treaty to a `foreseeably relevant' standard
reflects the wording in Article 26 of the OECD Model and no difference
in effect is intended.
Taxes to which this Article applies
1.238 Under the corresponding Article in the existing France treaty,
the information that could be requested and obtained between the two
countries was limited to information in relation to taxes to which the
treaty applied (generally income taxes).
1.239 Under this Convention, the range of taxes for which information
may be exchanged has been expanded. The Australian competent
authority can now request and obtain information concerning all federal
taxes administered by the Commissioner from their counterpart in France.
This means, for example, that information concerning Australian indirect
taxes (ie, the GST) may be requested and obtained from France.
1.240 Similarly, in the case of France, the French competent authority
can now request and obtain information concerning taxes of every kind
and description imposed under its tax laws, from the Australian competent
authority to the extent that the requested information relates to taxes
administered by the Commissioner.
Use of exchanged information
1.241 The purposes for which the exchanged information may be used
and the persons to whom it may be disclosed are restricted consistent with
the former Article and the approach taken in the OECD Model. Any
information received by a country must be treated as secret in the same
manner as information obtained under the domestic law of that country
and can only be disclosed to the persons identified in paragraph 2 of the
Article. [Article 25, paragraph 2]
66
2006 Australia-France tax Convention
No domestic tax interest required
1.242 When requested, a country is required to obtain information in
the same manner as if it were administering its domestic tax system,
notwithstanding that the country may not require the information for its
own purposes. Australia would recognise this obligation to obtain
relevant information for treaty partner countries, even in the absence of an
explicit provision to this effect. [Article 25, paragraph 4]
Limitations
1.243 The country requested to provide information under this Article
is not required to do so where:
· it would be required to carry out administrative procedures
incompatible with its own law or the domestic law and
administrative practice, of either Australia or France; or
· such information is not obtainable under the domestic law or
in the normal course of administration by the competent
authority in either Australia or France. Australia is not
obliged, for example, to use police powers to obtain
information requested by France, although information
gathered in that way which is already in the possession of the
Commissioner may be exchanged.
[Article 25, subparagraphs 3(a) and (b)]
1.244 Also, in no case is the country receiving the request obliged to
supply information under this Article that would:
· disclose any trade, business, industrial, commercial or
professional secret or trade process; or
· be contrary to public policy.
[Article 25, subparagraph 3(c)]
Information held by banks, other financial institutions, nominees etc
1.245 This paragraph ensures that paragraph 3 of this Article cannot be
used to prevent the supply of information solely because the information
is held by banks, other financial institutions, nominees etc. The inclusion
of this paragraph in the France Convention should not be interpreted as
suggesting the corresponding Article of the existing France treaty did not
cover the exchange of such information. Inclusion of paragraph 5 merely
clarifies Australia's current treaty practice, and reflects recent changes to
67
International Tax Agreements Amendment Bill (No. 1) 2007
Article 26 (Exchange of Information) of the OECD Model. [Article 25,
paragraph 5]
Article 26 -- Assistance in Recovery
Assistance in the collection of taxes
1.246 Article 26 (Assistance in Recovery) authorises and requires
Australia and France to provide assistance to each other in the collection
of revenue claims. This assistance is not to be restricted by the terms of
Article 1 (Personal Scope) of the treaty. Assistance must therefore be
provided as regards a revenue claim owed to either country by any person,
whether or not a resident of Australia or France. The form of the
assistance is set out in paragraphs 3 and 4 of this Article. [Article 26,
paragraph 1]
1.247 The term revenue claim is defined for the purposes of this
Article to mean an amount owed in respect of taxes referred to in Article 2
(Taxes Covered) of the treaty. A revenue claim may cover any French
tax, or any Australian federal tax administered by the Commissioner, but
only insofar as the imposition of such taxes is not contrary to this treaty or
any other instrument in force between Australia and France. It also
applies to interest, administrative penalties and costs of collection or
conservancy related to such amount. [Article 26, paragraph 2]
1.248 This Article will apply from the date agreed in an exchange of
notes through the diplomatic channel. [Article 30, subparagraph 1(d)]
Enforceable revenue claims
1.249 Assistance in collection will only be provided by Australia in
relation to a revenue claim that is enforceable in France. Similarly,
France is not required to provide assistance in collection in respect of an
Australian revenue claim that is not enforceable in Australia. A revenue
claim will be enforceable where the requesting country has the right,
under its domestic law, to collect the revenue claim. Further, the revenue
claim must be owed by a person who, at that time, under the law of that
country, has no administrative or judicial rights to prevent its collection.
1.250 Paragraph 3 of this Article regulates the way in which the
revenue claim of the requesting country is to be collected by the requested
country. Other than in relation to time limits and priority (see
paragraphs 1.254 and 1.255), the requested country is required to collect
the revenue claim as though it were its own revenue claim. This
obligation applies even if, at that time, the requested country has no need
to undertake collection actions related to that taxpayer for its own tax
purposes. [Article 26, paragraph 3]
68
2006 Australia-France tax Convention
1.251 Where a request from France concerns a tax that does not exist
in Australia, Australia will follow the procedure applicable to a claim for
a similar Australian tax or any other appropriate procedure if no similar
tax exists.
Measures of conservancy
1.252 Paragraph 4 of this Article enables Australia or France to request
the other country to take measures of conservancy even where it cannot
yet ask for assistance in collection, such as where the revenue claim is not
yet enforceable or when the debtor still has the right to prevent its
collection. An example of a conservancy measure is the seizure or the
freezing of assets before final judgment to guarantee that the assets will
still be available when collection can subsequently take place.
1.253 If requested to do so by France, Australia is required to take
measures of conservancy in respect of the revenue claim in accordance
with the provisions of Australian law as if the revenue claim were an
Australian revenue claim. Although Australia does not have specific
conservancy measures, the Commissioner may apply for a Mareva
injunction, which would prevent the taxpayer and the taxpayer's
associates from dealing with certain assets. [Article 26, paragraph 4]
Time limits
1.254 Paragraph 5 of this Article provides that the requested country's
domestic law time limitations beyond which a revenue claim cannot be
enforced or collected do not apply to a revenue claim in respect of which
the other country has made a request for assistance in collection. Rather,
the time limits of the requesting country apply. [Article 26, paragraph 5]
Priority of claims
1.255 Paragraph 5 of this Article also provides that any rules of
Australia and France which give priority to tax debts over the claims of
other creditors do not apply to a revenue claim of the other country. This
restriction applies regardless of the fact that the requested country must
generally treat the claim as its own revenue claim.
1.256 The words `by reason of its nature as such' in paragraph 5
indicate that any time limits and priority rules to which the paragraph
applies are only those that are specific to unpaid taxes. Consequently,
paragraph 5 does not prevent the application of general rules concerning
time limits or priority which would apply to all debts, such as rules giving
priority to a claim by reason of that claim having arisen or having been
registered before another one. [Article 26, paragraph 5]
69
International Tax Agreements Amendment Bill (No. 1) 2007
Restriction on judicial and administrative proceedings
1.257 Paragraph 6 of this Article ensures that any legal or
administrative objection concerning the existence, validity or the amount
of a revenue claim of the requesting country is to be exclusively dealt with
in that country. For example, no legal or administrative proceedings, such
as a request for judicial review, may be initiated in Australia with respect
to the existence, validity or amount of a French revenue claim. [Article 26,
paragraph 6]
Change in circumstances
1.258 Paragraph 7 of this Article deals with the situation where the
conditions in paragraph 3 or 4 are no longer satisfied after a request for
assistance has been made, but before the revenue claim has been collected
and remitted by the requested country. An example of such a situation
would be where a request for assistance in collection has been made by
France, but the revenue claim ceases to be enforceable in France prior to
its collection by Australia.
1.259 Where the relevant conditions in paragraph 3 or 4 of this Article
are no longer satisfied, paragraph 7 requires the competent authority of
the requesting country to promptly notify the competent authority of the
requested country of that fact.
1.260 Following such notification, the requested country has the
option to ask the requesting country to either suspend or withdraw its
request for assistance. If the request is suspended, the suspension applies
until such time as the requesting country informs the other country that
the conditions necessary for making a request as regards the revenue
claim are again satisfied or that it withdraws its request. [Article 26,
paragraph 7]
Limitations
1.261 Paragraph 8 of this Article contains certain limitations to the
obligations imposed on the country which receives a request for
assistance. The requested country is permitted to refuse the request for
assistance where those limitations apply.
1.262 The first limitation is that the requested country is not required
to exceed the bounds of its own domestic laws and administrative practice
or those of the other country in fulfilling its obligations under the Article.
[Article 26, subparagraph 8(a)]
1.263 However, subparagraph 8(a) of this Article does not prevent
Australia from applying administrative measures to collect a French
70
2006 Australia-France tax Convention
revenue claim, even though invoked solely to provide assistance in the
collection of French taxes.
1.264 Subparagraph 8(b) limits the application of this Article where it
would require the carrying out of measures that are contrary to public
policy, such as where providing assistance may affect the vital interests of
the country itself. [Article 26, subparagraph 8(b)]
1.265 The third limitation provides that neither country is obliged to
satisfy a request for assistance if the other country has not pursued all
reasonable measures of collection or conservancy that are available under
its own laws or administrative practice. [Article 26, subparagraph 8(c)]
1.266 Under subparagraph 8(d) of this Article either country may
reject a request for assistance on the basis of practical administrative
considerations such as when the costs of recovering a revenue claim
would exceed the amount of the revenue claim itself. [Article 26,
subparagraph 8(d)]
1.267 The final limitation allows either country to refuse to provide
assistance if it considers that the taxes with respect to which assistance is
requested are imposed contrary to generally accepted taxation principles.
[Article 26, subparagraph 8(e)]
Article 27 -- Diplomatic and Consular Privileges
1.268 The purpose of this Article is to ensure that the provisions of the
tax treaty do not result in members of diplomatic missions, permanent
missions and consular posts receiving less favourable treatment than that
to which they are entitled in accordance with international conventions.
Such persons are entitled, for example, to certain fiscal privileges under
the Diplomatic Privileges and Immunities Act 1967 and the Consular
Privileges and Immunities Act 1972 which reflect Australia's international
diplomatic and consular obligations. [Article 27, paragraph 1]
1.269 Paragraph 2 of this Article ensures that international
organisations, and organs or officials of such organisations, who are liable
to tax in Australia and France only to the extent income is sourced in
those jurisdictions, shall not benefit from this Convention. Further,
members of a diplomatic mission or consular post of a country other than
Australia or France, who are located in Australia or France are only
entitled to the benefits of this treaty if they are treated in the same way as
residents of either Australia or France for income taxation purposes, that
is, they are generally taxable on their worldwide income. [Article 27,
paragraph 2]
71
International Tax Agreements Amendment Bill (No. 1) 2007
Article 28 -- Miscellaneous
1.270 This Article will operate to ensure that Australian citizens who
reside temporarily in France will not be subject to the French capital tax
(l'impôt de solidarité sur la fortune) on property that is situated outside
France.
1.271 Property located outside France that the individual owns on
1 January in each of the five calendar years following that in which the
individual becomes a resident of France will not be included in the basis
on which the capital tax in France is calculated.
1.272 Where that individual ceases to be a resident of France for a
period of at least three years, they will be entitled to claim the benefit of
the exemption under this Article for a further five years in relation to
property the individual owns that is situated outside France.
1.273 This provision will not apply to Australian citizens who are also
French nationals. [Article 28]
Example 1.4
Ken, an Australian citizen, moves to France to live and work for a
period of four years. During that time, Ken owns real property in
Sydney that he purchased prior to moving to France. As Ken is not a
French national, and is a French resident for less than five years, he
will not be subject to French capital tax in respect of his real property
in Sydney.
Article 29 -- Partnerships
1.274 The purpose of this Article is to ensure that Australian and
French resident partners of certain partnerships are entitled to receive
benefits under the France Convention. The Article is included in the
France Convention in response to France's Observation on the
OECD Model Commentary on Article 1 (Persons Covered) which notes
that France would not consider members of a partnership that is treated as
fiscally transparent as being entitled to treaty benefits in the absence of
specific provisions in the treaty to that effect.
1.275 This Article complements paragraph 5 of Article 4 (Residence)
in which the term resident of a Contracting State is deemed to include
any partnership or group of persons that has its place of effective
management in France and all its members are personally liable to tax
pursuant to the French domestic laws in respect of their share of the
profits of that partnership or group of persons.
72
2006 Australia-France tax Convention
1.276 Article 1 (Persons Covered) provides that only persons who are
residents of Australia or France are entitled to the benefits of the France
Convention. The fact that certain partnerships are to be treated as
residents of France means that partners in those partnerships may no
longer be entitled to the benefits of the tax Convention in relation to their
share of the income, profits or gains of the partnerships as they will be
treated as deriving those amounts indirectly through the partnership.
Australian partnerships
1.277 Paragraph 1 of this Article deals with partnerships or similar
entities that have their place of effective management in Australia and that
are treated as fiscally transparent in Australia (ie, partnerships other than
corporate limited partnerships).
1.278 The paragraph operates to ensure that an Australian resident
partner of an Australian partnership is entitled to benefits under the France
Convention relating to the partner's share of income, profits or gains of
the partnership arising in France, such as lower rates of withholding tax.
This is achieved by treating the partner's share of the partnership's
income, profits or gains arising in France as though the partner had
derived such amounts directly. France would not do this in the absence of
this provision, that is, France would not treat the partnership as being
transparent. [Article 29, subparagraph 1(a)]
1.279 A partner of the Australian partnership who is a resident of
France is also entitled to tax treaty benefits in relation to the partner's
share of the partnership's income, profits or gains arising in Australia as
though the partner had derived such amounts directly. Thus withholding
tax limits in the France Convention will apply to a French resident
partner. [Article 29, sub-subparagraph 1(b)(i)]
1.280 This same treatment of the French partner extends to income,
profits or gains arising in France. However, where such amounts are
taxed in Australia, they will be deemed to have an Australian source for
the purposes of paragraph 2 of Article 23 (Elimination of Double
Taxation). This provision is largely unnecessary given that Australia only
taxes the non-resident partners in a partnership based on their share of the
partnership profits from sources in Australia. It would, however, apply to
income, profits or gains arising in France but attributable to a permanent
establishment of the French partner in Australia. [Article 29,
sub-subparagraph 1(b)(ii)]
Third country partnerships
1.281 Paragraph 2 of this Article operates to ensure that an Australian
or French resident who is a partner in a partnership that has its place of
73
International Tax Agreements Amendment Bill (No. 1) 2007
effective management in a country other than Australia or France receives
benefits under this tax treaty on their share of the partnership income,
profits or gains arising in Australia or France. The partner may receive
such treatment where the partnership is treated as fiscally transparent in
the third country and where the partner's country of residence treats the
partner's share of the income, profits or gains of the partnership as though
those amounts had been derived directly by the partner.
Diagram 1.1
Third State
Partnership
Australian
French source
Partner
Tax Convention income
Obtains treaty benefits
1.282 The partner's entitlement to tax treaty benefits relating to their
share of the income, profits or gains of the third country partnership is
subject to the following conditions:
· there are not contrary provisions in a tax treaty between
either Australia or France and the third country;
· the partner's share of the income, profits or gains of the
partnership is taxed in the same manner (including the nature
or source of those amounts and the time when those amounts
are taxed) as it would be taxed had those amounts been
derived by the partner directly; and
· information relating to the partnership or partners may be
exchanged between the country where the income arises
(either Australia or France) and the third country under a tax
treaty between the relevant countries.
[Article 29, paragraph 2]
1.283 Paragraph 3 of this Article makes clear that a partner's share of
the income, profits or gains which are attributable to a permanent
establishment of the partnership may be taxed in the country in which the
permanent establishment is situated. This is achieved by deeming that
those amounts have a source in the country in which the permanent
establishment is situated. This provision allows France to treat income
attributable to the permanent establishment of a transparent Australian or
third State partnership as arising in France for the purpose of taxing the
74
2006 Australia-France tax Convention
partners under paragraphs 1 and 2. This could include Australian and
third State sourced profits where they are attributable to the partnership's
French permanent establishment. [Article 29, paragraph 3]
1.284 Paragraph 4 of this Article seeks to address possible
implications of the decision in Padmore v Inland Revenue Commissioners
(1989) Simon's Tax Cases 493 by ensuring that Australia is not prevented
from taxing an Australian resident partner on their share of the income,
profits or gains of a partnership which is treated as a resident of France
under the treaty.
1.285 Paragraph 4 clarifies that where a partnership or other group of
persons is subject to tax as a resident of France and income, profits or
gains of that partnership are relieved from tax in Australia under the
treaty, Australia may nevertheless tax any Australian resident partner on
their share of the partnership income, profits or gains. However,
Australia, as the country of residence of the partner, is required under
Article 23 (Elimination of Double Taxation) to provide relief for tax
imposed on those amounts in France. For this purpose, the income,
profits or gains are deemed to have a source in France. [Article 29,
paragraph 4]
Diagram 1.2
Dividends from Australia
French partnership
(société de personnes)
Partner of the French partnership who is
an Australian resident. Could be a
company or individual.
In this example, income arising in Australia is paid to a French
partnership of which an Australian resident is a partner. Australia
would be required to provide treaty benefits in respect of dividends,
interest and royalties flowing to the French resident partnership. The
Australian resident partner remains subject to Australian tax on their
share of the dividends, interest and royalties and a credit allowed for
any additional tax that the French may impose on the dividends,
interest or royalties in the hands of the partnership.
1.286 In the case of dividends, interest and royalties arising in France
and paid to a French resident partnership with an Australian resident
partner, the income will not, as is the case under the existing France
75
International Tax Agreements Amendment Bill (No. 1) 2007
treaty, benefit from the rates of withholding provided in this Convention.
The result obtains, even though under Australian law the Australian
resident partner would have been so entitled on the basis that a partnership
is treated as transparent. Under the France Convention, the French
partnership is treated as a resident of France, so that the income is
regarded as French sourced income derived by a French resident.
Diagram 1.3
Dividends from France
French partnership
(société de personnes)
Partner of the French partnership who is
an Australian resident. Could be a
company or individual.
Article 30 -- Entry into Force
Date of entry into force
1.287 This Article provides for the entry into force of the France
Convention. The treaty will enter into force on the first day of the second
month following the date on which diplomatic notes are received
notifying that the domestic processes to give the France Convention the
force of law in the respective countries has been completed. In Australia,
enactment of the legislation giving the force of law in Australia to the
France Convention along with tabling the treaty in Parliament are
prerequisites to the exchange of diplomatic notes. [Article 30, paragraph 1]
Date of application for Australian taxes
1.288 Once it enters into force the France Convention will apply in
Australia in respect of withholding tax on income that is derived by a
non-resident on or after 1 January next following the date on which the
treaty enters into force. [Article 30, sub-subparagraph 1(a)(i)]
1.289 The France Convention will first apply to other Australian taxes
on income, profits or gains of the Australian year of income beginning on
or after 1 July in the calendar year next following the date on which the
treaty enters into force.
1.290 Where a taxpayer has adopted an accounting period ending on a
date other than 30 June, the accounting period that has been substituted
76
2006 Australia-France tax Convention
for the year of income beginning on 1 July in the calendar year next
following the date on which the France Convention enters into force will
be the relevant year of income for the purposes of the application of such
Australian tax. [Article 30, sub-subparagraph 1(a)(ii)]
Date of application in France
1.291 In France, the France Convention will first apply in respect of
taxes on income withheld at source for amounts that are taxable after the
calendar year in which the treaty enters into force. [Article 30,
sub-subparagraph 1(b)(i)]
1.292 The treaty will first have effect, in relation to taxes on income
that are not withheld at source, for income relating to any calendar year or
accounting period beginning after the calendar year in which the treaty
enters into force. [Article 30, sub-subparagraph 1(b)(ii)]
1.293 The treaty will first have effect, in relation to other taxes, for
taxation where the taxable event occurs after the calendar year in which
the treaty enters into force. [Article 30, sub-subparagraph 1(b)(iii)]
Exchange of information application date
1.294 Article 25 (Exchange of Information) will first apply from the
date of entry into force of the treaty. It applies to requests for exchange of
information, in respect of taxes of every kind and description imposed
under the federal tax laws administered by the Commissioner, received on
or after that date. However, a request for information may relate to the
income tax affairs of a taxpayer that may predate entry into force of the
Convention. [Article 30, subparagraph 1(c)]
Assistance in recovery date of application
1.295 Article 26 (Assistance in Recovery) will first have effect from
the date to be agreed in an exchange of notes between Australia and
France. [Article 30, subparagraph 1(d)]
Termination of the existing France treaty as amended by the Protocol
1.296 The existing France treaty and the Airline Profits Agreement
shall cease to have effect from the dates on which the France Convention
commences to have application for the respective taxes. [Article 30,
paragraph 2]
77
International Tax Agreements Amendment Bill (No. 1) 2007
Transitional arrangements for visiting professors and teachers
1.297 At the date of entry into force of the new treaty, an individual
who is entitled to benefits under Article 19 of the existing France treaty,
as amended by the 1989 Protocol, shall continue to have access to the
benefit provided for a limited period.
1.298 To qualify for the exemption under Article 19 of the existing
France treaty for remuneration from specified teaching activities, the visit
must be for a period not exceeding two years. This effectively limits
these transitional arrangements to a maximum of two years from the date
of entry into force of the new treaty. The actual period that a particular
individual will qualify for the exemption will depend on their
circumstances and the date they became eligible for the exemption under
Article 19 of the existing France treaty. [Article 30, paragraph 3]
Article 31 -- Termination
1.299 The France Convention is to continue in effect indefinitely.
However, either country may give written notice of termination of the
France Convention through the diplomatic channel at least six months
before the end of any calendar year beginning after the expiration of
five years from the date of its entry into force. [Article 31]
Cessation in Australia
1.300 In the event of either country terminating the France
Convention, the treaty would cease to be effective in Australia for the
purposes of:
· withholding tax on income derived by a non-resident in
relation to income derived on or after 1 January in the
calendar year next following that in which the notice of
termination is given; and
· other Australian taxes in relation to income, profits or gains
in the Australian year of income commencing on or after
1 July in the calendar year next following that in which the
notice of termination is given.
[Article 31, subparagraph (a)]
78
2006 Australia-France tax Convention
Cessation in France
1.301 The Convention would correspondingly cease to be effective in
France for the purposes of:
· taxes on income withheld at source for amounts taxable after
the calendar year in which the notice of termination is given;
· taxes on income that are not withheld at source, for income
relating to any calendar year or accounting period beginning
after the calendar year in which the notice of termination is
given; and
· other French taxes when the taxable event occurs after the
calendar year in which the notice of termination is given.
[Article 31, subparagraph (b)]
79
Chapter 2
2006 Australia-Norway tax Convention
Outline of chapter
2.1 Schedule 2 amends the International Tax Agreements Act 1953.
This chapter explains the rules that apply in the 2006 Australia-Norway
tax Convention.
Context of amendments
2.2 The Convention between Australia and the Kingdom of Norway
for the Avoidance of Double Taxation with respect to Taxes on Income
and the Prevention of Fiscal Evasion (referred to as `the Convention',
however, for the remainder of this chapter, referred to as the `Norway
Convention') was signed in Canberra on 8 August 2006.
2.3 Once in force the Norway Convention will replace the
Convention between Australia and the Kingdom of Norway for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income and on Capital, and its associated Protocol,
signed in 1982 (the existing Norway treaty).
Summary of new law
Main features of the new Convention
2.4 The main features of the Norway Convention are as follows:
· Income from real property may be taxed in full by the
country in which the property is situated. Income from real
property for these purposes includes natural resource
royalties [Article 6].
· Business profits (including income derived from furnishing
of services) are generally to be taxed only in the country of
residence of the recipient unless they are derived by a
resident of one country through a branch or other prescribed
81
International Tax Agreements Amendment Bill (No. 1) 2007
permanent establishment in the other country, in which case
that other country may tax the profits. These rules also apply
to business trusts [Article 7].
· Profits derived from the operation of ships and aircraft in
international traffic are generally to be taxed only in the
country of residence of the operator [Article 8].
· Profits of associated enterprises may be taxed on the basis of
dealings at arm's length [Article 9].
· Dividends, interest and royalties may generally be taxed in
both countries, but there are limits on the tax that the country
in which the dividend, interest or royalty is sourced may
charge on such income flowing to residents of the other
country who are the beneficial owners of the income
[Articles 10 to 12].
· In the case of dividends:
- no source country tax is payable on intercorporate
dividends where the dividend recipient is a company
that holds directly at least 80 per cent of the voting
power of the company paying the dividend, subject to
certain conditions [Article 10, paragraph 3];
- a 5 per cent rate limit applies to other intercorporate
dividends where the dividend recipient is a company
that holds directly at least 10 per cent of the voting
power of the company paying the dividend [Article 10,
subparagraph 2(a)]; and
- a 15 per cent limitation applies to all other dividends
[Article 10, subparagraph 2(b)].
· The dividend rate limits apply to both franked and unfranked
dividends.
· Source country taxation on interest is limited to 10 per cent
[Article 11, paragraph 2]. However, exemptions from source
country taxation have been provided for interest paid to:
- certain government bodies [Article 11, subparagraph 3(a)]; and
- financial institutions [Article 11, subparagraph 3(b)].
82
2006 Australia-Norway tax Convention
· The rate limit on source country taxation of royalties is
5 per cent [Article 12, paragraph 2].
· The definition of royalty has also been amended to include
payments or credits in respect of the use of, or right to use,
some or all of the radiofrequency spectrum specified in a
spectrum licence and to exclude payments or credits in
respect of the use of, or right to use, industrial, commercial or
scientific equipment [Article 12, paragraph 3].
· Income, profits or gains from the alienation of real property
may be taxed in full by the country in which the property is
situated. Subject to that rule and other specific rules in
relation to business assets and shares or other interests in land
rich entities (which may be taxed in full by the country in
which the property is situated), all other capital gains will be
taxable only in the country of residence [Article 13].
· Income from employment, that is, employee's remuneration,
will generally be taxable in the country where the services
are performed. However, where the services are performed
during certain short visits to one country by a resident of the
other country, the income will be exempt in the country
visited [Article 14].
· Directors' remuneration may be taxed in the country in
which the company of which the person is a director is
resident for tax purposes [Article 15].
· Income derived by entertainers and sportspersons may
generally be taxed by the country in which the activities are
performed. However, if the visit is mainly supported by
public funds of the other country, the income is taxable only
in the country of which the person is a resident [Article 16].
· Pensions and annuities will generally be taxed only in the
country of residence of the recipient. Some public service
pensions may be taxed only by the paying country.
[Articles 17 and 18].
· Income from government service (including government
service pensions) will generally be taxed only in the country
that pays the remuneration. However, the remuneration shall
only be taxed in the other country where the services are
rendered in that other country by a resident of that other
country who is a national of that other country or did not
83
International Tax Agreements Amendment Bill (No. 1) 2007
become a resident of that other country for the purpose of
rendering the services [Article 18].
· Payments made from abroad to visiting students for the
purposes of their maintenance or education will be exempt
from tax in the country visited [Article 19].
· Income (including certain employment income) from
offshore activities relating to exploration or exploitation of
natural resources will generally be taxed by the country in
which the activities are performed. However, where the
activities are carried on during certain short visits to one
country by a resident of the other country, the income will be
exempt in the country visited [Article 20].
· Other income (ie, income not dealt with by other Articles)
derived by a resident of one country from sources in the other
country may generally be taxed in both countries, with the
country of residence of the recipient providing double tax
relief [Article 21].
· Source rules in the Norway Convention prescribe for
domestic law and treaty purposes, the source of income or
profits derived by a resident of one country which may be
taxed in the other country [Article 22].
· Double taxation relief for income which, under the Norway
Convention, may be taxed by both countries, is required to be
provided by the country of which the taxpayer is a resident
under the terms of the Convention as follows:
- in Australia, by allowing a credit for the Norwegian tax
against Australian tax payable on income derived by a
resident of Australia from sources in Norway [Article 23,
paragraph 1]; and
- in Norway, by allowing a deduction against Norwegian
tax for the Australian tax paid on income derived by a
resident of Norway from sources in Australia [Article 23,
paragraph 2].
· In the case of Australia, effect will be given to the double tax
relief obligations arising under the Norway Convention by
application of the general foreign tax credit provisions of
Australia's domestic law, or the relevant exemption
provisions of that law where applicable.
84
2006 Australia-Norway tax Convention
· Rules in the new treaty will protect nationals from tax
discrimination in the other country and will give them private
rights of appeal. However, the Article does not preclude
either country from applying its anti-avoidance rules
(including thin capitalisation, transfer pricing and controlled
foreign companies measures), rebates or credits for dividends
paid by resident companies, research and development
concessions, consolidation rules or capital gains deferral
rules [Article 24].
· Consultation and exchange of information between the two
taxation authorities is authorised by the Norway Convention.
The Convention authorises and requires Australia to
exchange information where the information relates to taxes
administered by the Commissioner of Taxation
(Commissioner) [Articles 25 and 26].
· The Norway Convention ensures the integrity of the tax
system by providing for mutual assistance in the collection of
tax debts. This will allow the Australian Taxation Office, in
certain circumstances, to seek assistance from the Norwegian
tax authorities to collect Australian taxation debts [Article 27].
Comparison of key features of new law and current law
New law Current law
Not applicable
Updates all Articles, having regard to
Australian, Norwegian and
Organisation for Economic
Co-operation and Development
(OECD) tax treaty developments
since the existing Norway treaty
arrangements were entered into.
85
International Tax Agreements Amendment Bill (No. 1) 2007
New law Current law
Extends the coverage of the Norway In the case of Australia, the taxes to
Convention to Australian tax on which all Articles of the existing
capital gains and updates the list of Norway treaty apply are:
taxes to which the new treaty · the income tax; and
arrangements apply. In the case of
· any identical or substantially
Australia, these taxes are:
similar taxes imposed under the
· the income tax; federal law of Australia.
· the resource rent tax; and
· any identical or substantially
similar taxes imposed under the
federal law of Australia.
However, a broader range of taxes
apply to certain Articles. In the case
of Australia, the taxes are:
· taxes of every kind and
description for Article 24
(Non-discrimination); and
· all federal taxes administered
by the Commissioner for
Article 26 (Exchange of
Information) and Article 27
(Assistance in Collection of
Taxes).
Updates the meaning of `permanent A building site constitutes a
establishment' in Article 5. In permanent establishment where the
particular, under the new Convention project lasts for more than
an enterprise is deemed to have a 12 months. In addition, an enterprise
permanent establishment if: is deemed to have a permanent
establishment if:
· it has a building site etc
· it carries on supervisory
(including connected
supervisory activities) which activities for more than
lasts more than six months; 12 months in connection with a
building site; or
· it furnishes services within a
· substantial equipment is being
country for a period or periods
aggregating more than used in that country by for or
six months within any under contract.
12-month period; or
· it maintains substantial
equipment for rental or other
purposes for more than
six months.
No equivalent.
Broadens the meaning of `real
property' in Article 6 to include
exploration for natural resources.
86
2006 Australia-Norway tax Convention
New law Current law
Aligns the treatment of income from Income from independent personal
independent personal services to the services is treated under the previous
OECD standard under Article 7 international standard in Article 14
(Business Profits). It also clarifies (Independent Personal Services).
the application of this Article to
business trusts.
Reduces the rate of dividend The rate of dividend withholding tax
withholding tax to: is limited to 15 per cent.
· zero for dividends on
non-portfolio holdings of more
that 80 per cent, subject to
certain conditions; and
· Five per cent for other
non-portfolio holdings.
No equivalent.
Reduces the rate of interest
withholding tax from 10 per cent to
zero where interest is derived by a
financial institution.
Reduces the rate of royalty The rate of royalty withholding tax is
withholding tax to 5 per cent of the limited to 10 per cent of the gross
gross royalty payment and extends payment.
the meaning of royalty to include
spectrum licences. Leasing of
industrial, commercial or scientific
equipment will no longer constitute a
royalty.
Limited coverage.
Includes a comprehensive Alienation
of Property Article which allocates
taxing rights over capital gains.
Provides that pensions (other than All pensions currently taxable only
Government service pensions) will in the country of residence of the
be taxable only in the State of recipient.
residence of the recipient.
Government service pensions
(including any national insurance
element of such a pension) will be
taxable only in the State which
created the fund out of which the
pension is paid and to which the
services were rendered unless the
recipient is a resident and national of
the other State.
87
International Tax Agreements Amendment Bill (No. 1) 2007
New law Current law
Provides for a shared taxing right in Exclusive taxing right in the country
respect of salary, wages and other where offshore activities are
similar remuneration arising from performed, provided the employment
employment covered by the Offshore is carried on in that country for more
Activities Article. However, the than 30 days.
State of residence of the employee
will have the sole taxing right if the
employment is carried out offshore
for an employer who is not a resident
of the State in which the offshore
employment is carried out and the
employment offshore does not
exceed a period or periods
aggregating 30 days in the year of
income of that State.
No equivalent. Article 24 (Capital) dealing with
various types of capital assets held
by Australians in Norway.
No Non-discrimination Article.
Includes a comprehensive Article
preventing discrimination in relation
to tax laws (Article 24
(Non-discrimination)).
Closely aligns Article 26 (Exchange The existing rules apply to a
of Information) to the 2005 OECD narrower range of taxes.
standard. The effect of the changes
is to expand the range of taxes to
which the Article applies and to
clarify that bank secrecy laws do not
limit the exchange of information.
No equivalent.
Includes a new Article 27 (Assistance
in Collection of Taxes) which
authorises and requires Australia and
Norway to provide assistance to each
other in collection of cross-border tax
debts.
Detailed explanation of new law
Article 1 -- Persons Covered
Scope
2.5 This Article establishes the scope of the application of the
Norway Convention by providing for it to apply to persons (defined to
include individuals, companies and any other body of persons) who are
88
2006 Australia-Norway tax Convention
residents of one or both of the countries. It generally precludes
extra-territorial application of the treaty. [Article 1]
2.6 The Norway Convention also applies to third country residents
in relation to the Non-discrimination Article (Article 24) in its application
to nationals of one of the treaty countries, the Mutual Agreement
Procedure Article (Article 25) so far as the person is a national of one of
the treaty countries and in relation to the exchange of information under
the Exchange of Information Article (Article 26).
2.7 The application of the Norway Convention to persons who are
dual residents (ie, residents of both countries) is dealt with in Article 4
(Residence).
Article 2 -- Taxes Covered
Taxes covered
2.8 Article 2 specifies the existing taxes of each country to which
the Norway Convention applies. These are, in the case of Australia:
· the Australian income tax (including that imposed on capital
gains); and
· the resource rent tax in respect of offshore petroleum
projects.
2.9 The new treaty extends the operation of the treaty to Australian
tax on capital gains, which are not covered in the existing Norway treaty.
2.10 Although Australia considers the resource rent tax to be
encompassed by the term `income tax', a specific reference to this has
been included in the Norway Convention to put beyond doubt that it is a
tax covered. [Article 2, sub-subparagraph 1(a)(ii)]
2.11 As with the existing Norway treaty, the Norway Convention
generally does not cover Australia's goods and services tax (GST), wool
tax and levies, customs duties, state taxes and duties and estate tax and
duties. However, federal taxes administered by the Commissioner are
covered for the purposes of the Exchange of Information and Assistance in
the Collection of Taxes Articles while all taxes are covered for the
purposes of the Non-discrimination Article. [Article 2, paragraphs 3 and 4]
2.12 It is specifically stated in paragraphs 1 and 2 of this Article that
the Norway Convention applies only to taxes imposed under the federal
law of Australia. This is to ensure that, except with respect to
89
International Tax Agreements Amendment Bill (No. 1) 2007
non-discrimination, the Norway Convention does not bind Australian
states and territories and applies only to federal taxes. [Article 2,
subparagraph 1(a) and paragraphs 2 and 3]
2.13 For Norway, the tax treaty applies to:
· the tax on general income;
· the national tax on personal income;
· the special tax on petroleum income;
· the resource rent tax on income from production of
hydro-electric power;
· the withholding tax on dividends; and
· the tax on remuneration to non-resident artistes, etc.
[Article 2, subparagraph 1(b)]
Identical or substantially similar taxes
2.14 The application of the Norway Convention will be automatically
extended to any identical or substantially similar taxes which are
subsequently imposed by either country in addition to, or in place of, the
existing taxes. The competent authorities (ie, the Commissioner in
Australia and the Minister for Finance or an authorised representative of
the Minister in Norway, or their authorised representatives) are required to
notify each other in the event of a significant change in the taxation law of
the respective countries. [Article 2, paragraph 2]
Special provisions
2.15 Paragraphs 3 and 4 specify the taxes to which Article 24
(Non-discrimination), Article 26 (Exchange of Information) and
Article 27 (Assistance in the Collection of Taxes) will apply. The taxes to
which these Articles apply are:
· Article 24, all taxes including sub-national taxes such as
those imposed by the Australian states or local governments
[Article 2, paragraph 3].
· Articles 26 and 27, in the case of Australia, all federal taxes
administered by the Commissioner, and in the case of
Norway, all taxes [Article 2, paragraph 4].
90
2006 Australia-Norway tax Convention
Article 3 -- General Definitions
Definition of Australia
2.16 As with Australia's other modern tax treaties, `Australia' is
defined to include certain external territories and areas of the continental
shelf. By reason of this definition, Australia preserves its taxing rights,
for example, over mineral exploration and mining activities carried on by
non-residents on the seabed and subsoil of the relevant continental shelf
areas (under section 6AA of the Income Tax Assessment Act 1936
(ITAA 1936), certain sea installations and offshore areas are to be treated
as part of Australia). [Article 3, subparagraph 1(a)]
Definition of Norway
2.17 For all practical purposes the definition remains unchanged from
that in the existing Norway treaty. `Norway' is defined to include the area
over which Norway may exercise rights with respect to the seabed and
subsoil and their natural resources under international law, but excludes
the territories of Svalbard and Jan Mayen, as well as the Norwegian
dependencies `biland'. [Article 3, subparagraph 1(b)]
Definition of company
2.18 The definition of `company' in the Norway Convention accords
with Australia's tax treaty practice.
2.19 The Australian tax law treats certain trusts (public unit trusts and
public trading trusts) and corporate limited partnerships (limited liability
partnerships) as companies for income tax purposes. These trusts and
partnerships are included as companies for the purposes of the tax treaty.
[Article 3, subparagraph 1(g)]
Definition of international traffic
2.20 In this Convention, this term is of relevance for taxation of
profits from shipping and air transport operations (Article 8 (Shipping and
Air Transport)), income, profits or gains from the alienation of ships and
aircraft (paragraph 3 of Article 13 (Alienation of Property)) and wages of
crew (paragraphs 3 and 4 of Article 14 (Income from Employment)).
2.21 The definition of `international traffic', covers international
transport by a ship or aircraft operated by an enterprise of one country, as
well as domestic transport within that country. However, it does not
include transport where the ship or aircraft is operated solely between
places in the other country, that is, where the place of departure and the
place of arrival of the ship or aircraft are both in that other country,
91
International Tax Agreements Amendment Bill (No. 1) 2007
irrespective of whether any part of the transport occurs in international
waters. For example, a `voyage to nowhere' which begins and ends in
Sydney on a ship operated by a Norwegian enterprise would not come
within the definition of international traffic, even if the ship travels
through international waters in the course of the cruise. [Article 3,
subparagraph 1(k)]
Definition of national
2.22 The Norway Convention defines `national' by reference to an
individual's nationality or citizenship. A company will be a national if the
company derives its status as a company from the laws of one of the
countries, that is where it is incorporated. [Article 3, subparagraph 1(l)]
2.23 The concept of nationality is used in subparagraph (b) of
paragraph (3) of Article 4 (Residence), Article 18 (Government Service)
and Article 24 (Non-discrimination).
Definition of person
2.24 The definition of `person' includes individuals, companies and
any other body of persons. This includes a partnership (as a body of
persons). [Article 3, subparagraph 1(m)]
Definition of tax
2.25 For the purposes of the Norway Convention, the term `tax' does
not include any amount of penalty or interest imposed under the
respective domestic tax law of the two countries. This is important in
determining a taxpayer's entitlement to a foreign tax credit under the
double tax relief provisions of Article 23 (Methods of Elimination of
Double Taxation) of the Convention.
2.26 In the case of a resident of Australia, any penalty or interest
component of a liability determined under the domestic taxation law of
Norway with respect to income that Norway is entitled to tax under the
Norway Convention, would not be a creditable `Norwegian tax' for the
purposes of paragraph 1 of Article 23 (Methods of Elimination of Double
Taxation). This is in keeping with the meaning of `foreign tax' in
subsection 6AB(2) of the ITAA 1936. Accordingly, such a penalty or
interest liability would be excluded from calculations when determining
the Australian resident taxpayer's foreign tax credit entitlement under
paragraph 1 of Article 23 (pursuant to Division 18 of Part III of the
ITAA 1936 -- Credits in respect of foreign tax). [Article 3,
subparagraph 1(n)]
92
2006 Australia-Norway tax Convention
Definition of `recognised stock exchange'
2.27 The term is used in relation to setting the appropriate
withholding tax limits in Article 10 (Dividends). No withholding tax will
apply to a dividend paid from an Australian resident company to a
Norwegian resident company which holds 80 per cent of the voting power
of the paying company where its principal class of shares is listed and
regularly traded on a recognised stock exchange.
2.28 The stock exchanges that are recognised are the Australian
Securities Exchange and any other Australian stock exchange recognised
as such under Australian law, the Oslo Stock Exchange and any other
Norwegian stock exchange recognised as such under Norwegian law and
any other stock exchanges agreed to by the competent authorities under
the Norway Convention. [Article 3, subparagraph 1(o)]
Terms not specifically defined
2.29 Where a term is not specifically defined within this Convention,
that term (unless used in a context that requires otherwise) is to be taken
to have the same interpretative meaning as it has under the domestic
taxation law of the country applying the Norway Convention at the time
of its application. In that case the term's meaning under the taxation law
of the country will have precedence over the meaning it may have under
other domestic laws.
2.30 The same term may have a differing meaning and a varied scope
within different Acts relating to specific taxation measures. For example,
GST definitions are sometimes broader than income tax definitions. The
definition more specific to the type of tax should be applied in such cases.
For example, where the matter subject to interpretation is an income tax
matter, but definitions exist in either the ITAA 1936 or the Income Tax
Assessment Act 1997 (ITAA 1997) and the A New Tax System (Goods and
Services Tax) Act 1999 (GST Act), the income tax definition would be the
relevant definition to be applied.
2.31 If a term is not defined in the Norway Convention, but has an
internationally understood meaning in tax treaties and a meaning under
the domestic law, the context would normally require that the
international meaning be applied. [Article 3, paragraph 2]
93
International Tax Agreements Amendment Bill (No. 1) 2007
Article 4 -- Residence
Residential status
2.32 This Article sets out the basis by which the residential status of a
person is to be determined for the purposes of the Norway Convention.
Residential status is one of the criteria for determining each country's
taxing rights and is a necessary condition for the provision of relief under
the Convention. In the case of Australia, the concept of who is a resident
is determined according to Australia's taxation law. In the case of
Norway, residence is determined by reference to criteria such as domicile,
residence, place of management and other similar criteria. [Article 4,
paragraph 1]
Residency of Governments and tax-exempt entities
2.33 The Article specifically provides that the government, a political
subdivision or a local authority of a country are residents for the purposes
of the Norway Convention. This means that the Federal Government, the
State Governments and local councils will be residents for the purpose of
the Convention. This does not necessarily mean that income, profits or
gains derived by these bodies from sources in Norway will be subject to
tax in Norway as sovereign immunity principles may apply. [Article 4,
paragraph 1]
2.34 The OECD Model Tax Convention on Income and on Capital
(OECD Model) Commentary makes it clear that it has always been the
understanding of member countries that the OECD Model applied to treat
governments as residents even in the absence of an express reference to
that effect.
Special residency rules
2.35 Paragraph 2 specifies that a person is not a resident of a country
(for purposes of the Norway Convention) if that person is liable to tax in
that State in respect only of income from sources in that State.
2.36 This paragraph deals with a person who may be considered to be
a resident of a State according to its domestic laws but is only liable to
taxation on income from sources in that State, such as, foreign
diplomatic and consular staff. In the Australian context, this means that
Norfolk Island residents who are generally subject to Australian tax on
Australian source income only, will not be residents of Australia for the
purposes of the Norway Convention. Accordingly, Norway will not have
to forgo tax in accordance with the Norway Convention on income
derived by residents of Norfolk Island from sources in Norway (which
will not be subject to Australian tax). [Article 4, paragraph 2]
94
2006 Australia-Norway tax Convention
Dual residents
2.37 This Article also includes a set of tie-breaker rules for
determining how residency is to be allocated to one or other of the
countries for the purposes of the Norway Convention if a taxpayer,
whether an individual, a company or other taxable unit, qualifies as a dual
resident, that is, as a resident of both countries in accordance with
paragraph 1 of the Article.
2.38 The tie-breaker rules for individuals apply certain tests, in a
descending hierarchy, for determining the residential status (for the
purposes of the Norway Convention) of an individual who is a resident of
both countries. These rules, in order of application, are:
· If the individual has a permanent home available to them in
only one of the countries, the person is deemed to be a
resident solely of that country for the purposes of the Norway
Convention.
· If the individual has a permanent home available in both
countries or in neither, then the person's residential status
takes into account the person's personal or economic
relations with Australia and Norway, and the person is
deemed for the purposes of the Convention to be a resident
only of the country with which the person has the closer
personal and economic relations.
· Residency will be determined on the basis of an individual's
citizenship or nationality where the foregoing test is not
determinative.
· If the individual is a national (as defined) of both countries or
of neither, the competent authority will endeavour to resolve
the question of treaty residence by mutual agreement.
[Article 4, paragraph 3]
2.39 A dual resident remains, however, in relation to Australia, a
resident for the purposes of Australian domestic law. Accordingly that
person remains liable to tax in Australia as a resident, insofar as the
Norway Convention allows.
2.40 Where a non-individual (such as a body corporate) is a resident
of both countries in accordance with paragraph 1, the entity will be
deemed for the purposes of the Norway Convention to be a resident of the
country in which its place of effective management is situated. [Article 4,
paragraph 4]
95
International Tax Agreements Amendment Bill (No. 1) 2007
Limitation of relief
2.41 The treaty provides that where an individual is a temporary
resident of a country and is, for that reason, exempt from tax in that
country on certain income or gains in that country, then the other country
will not be required to provide any relief specified in the treaty in respect
of such income or gains. [Article 4, paragraph 5]
Article 5 -- Permanent Establishment
Role and definition
2.42 The application of various provisions of the Norway Convention
(principally Article 7 (Business Profits)) is dependent upon whether a
person who is a resident of one country carries on business through a
permanent establishment in the other country, and if so, whether income
derived by that person is attributable to, or assets of that person are
effectively connected with, that permanent establishment.
2.43 The definition of the term `permanent establishment' in this
Article corresponds generally with definitions of the term in Australia's
more recent tax treaties. The term also fully encompasses the concept of
`fixed base', which is used in the existing Norway treaty in a separate
Article dealing with independent personal services. In this regard the
following notes reflect agreement reached during negotiation of the
Norway Convention:
`In relation to Article 5 Permanent Establishment, and Article 7 Business Profits,
it was agreed that `permanent establishment' as defined fully encompasses the
concept of a `fixed base' previously used in Article 14 Independent Personal
Services of the existing Norway treaty.'
As such services will now be dealt with under Article 7 (Business Profits),
it is intended that places that constitute a fixed base for purposes of the
existing Norway treaty would come within the meaning of permanent
establishment for purposes of the new treaty.
Meaning of permanent establishment
2.44 The primary meaning of permanent establishment is expressed
as being a fixed place of business through which the business of an
enterprise is wholly or partly carried on. To be a permanent establishment
within the primary meaning of that term, the following requirements must
be met:
· there must be a place of business;
96
2006 Australia-Norway tax Convention
· the place of business must be fixed (both in terms of physical
location and in terms of time); and
· the business of the enterprise must be carried on through this
fixed place.
[Article 5, paragraph 1]
2.45 Other paragraphs of this Article elaborate on the meaning of the
term by giving examples (by no means intended to be exhaustive) of what
may constitute a permanent establishment -- for example:
· an office;
· a factory; or
· an agricultural property.
2.46 Consistent with Australia's modern treaty practice, the definition
also extends to places relating to the exploitation of and exploration for
natural resources.
2.47 As paragraph 2 of this Article is subordinate to paragraph 1, the
examples listed will only constitute a permanent establishment if the
primary definition in paragraph 1 is satisfied. [Article 5, paragraph 2]
Agricultural, pastoral or forestry activities
2.48 Most of Australia's tax treaties include as a permanent
establishment an agricultural, pastoral or forestry property. This reflects
Australia's policy of retaining taxing rights over exploitation of Australian
land for the purposes of primary production. This approach ensures that
the arm's length profits test provided for in Article 7 (Business Profits)
applies to the determination of profits derived from these activities. This
position is also reflected in this Convention. [Article 5, subparagraph 2(g)]
Deemed permanent establishment
Building site or construction or installation project
2.49 Under paragraph 3, an enterprise is deemed to have a permanent
establishment and to be carrying on business through that permanent
establishment in a country if it has a building site or construction or
installation project in that country which exists for more than six months.
[Article 5, subparagraph 3(a)]
97
International Tax Agreements Amendment Bill (No. 1) 2007
Supervisory and consultancy activities
2.50 Supervisory and consultancy activities carried on for more than
six months in connection with a building site or a construction or
installation project are deemed to constitute a permanent establishment.
This provision broadly aligns with Australia's reservation to Article 5
(Permanent Establishment) of the OECD Model.
2.51 The term `building site or construction or installation project'
includes not only the construction of buildings but also the construction of
roads, bridges or canals, the renovation (involving more than mere
maintenance or redecoration) of buildings, roads, bridges or canals, the
laying of pipelines and excavating and dredging. Planning and
supervision are considered part of the building site if carried out by the
construction contractor. However, planning and supervision carried out
by another unassociated enterprise will not be taken into account in
determining whether the construction contractor has a permanent
establishment in Australia. [Article 5, subparagraph 3(a)]
Anti-avoidance provision
2.52 Given that subparagraph 3(a) contains certain time-frames, an
anti avoidance rule is included to ensure that where associated enterprises
carry on substantially the same activities, the periods will be aggregated in
determining whether the enterprises have a permanent establishment in
the country in which the activities are being carried on. Activities will be
regarded as connected where, for example, different stages of a single
project are carried out by different subsidiaries within a group of
companies.
2.53 Paragraph 4 is an anti-avoidance measure aimed at counteracting
contract splitting for the purposes of avoiding the application of the
permanent establishment rules.
2.54 The Norway Convention provides that an enterprise shall be
deemed to be associated with another enterprise if one enterprise is
controlled directly or indirectly by the other or if both are controlled
directly or indirectly by a third person or persons. It also provides that a
period of concurrent activities by such associated enterprises is only
counted as one period for aggregation purposes. [Article 5, paragraph 4]
Furnishing of services
2.55 An enterprise will be deemed to have a permanent establishment
where it undertakes service activities, including the provision of
consultancy services, where those activities continue (for the same or a
connected project) within a country for a period or periods aggregating
98
2006 Australia-Norway tax Convention
more than six months within any 12 month period. [Article 5,
subparagraph 3(b)]
Substantial equipment
2.56 Under subparagraph 3(c), an enterprise shall be deemed to have
a permanent establishment if it has substantial equipment in a country for
rental or other purposes for longer than six months, unless the equipment
is leased under a `hire-purchase' agreement. Under Australian law, the
lessee under a `hire-purchase' agreement (a lease accompanied by certain
lessee purchase options or rights) is broadly treated for tax purposes as the
owner of the leased property.
2.57 This provision reflects Australia's reservation to the
OECD Model concerning the use of substantial equipment. Australia's
experience is that the permanent establishment provision in the
OECD Model may be inadequate to deal with high value mobile
activities.
2.58 The meaning of the term `substantial' depends on the relevant
facts and circumstances of each individual case. However, some
examples of substantial equipment would include:
· large industrial earthmoving equipment or construction
equipment used in road building, dam building or
powerhouse construction;
· manufacturing or processing equipment used in a factory;
· oil and drilling rigs, platforms and other structures used in
the petroleum/mining industry; and
· grain harvesters and other large agricultural machinery.
2.59 For the purposes of the Norway Convention the enterprise is
deemed to carry on business through the substantial equipment permanent
establishment. [Article 5, subparagraph 3(c)]
Manufacturing or processing on behalf of others
2.60 Subparagraph 3(d) is consistent with another of Australia's
reservations to the OECD Model. It deals with situations where a person
acts on behalf of another in manufacturing or processing that other
person's goods. An example is the situation where a mineral plant refines
minerals at cost, so that the plant operations produce no Australian profits.
Title to the refined product remains with the mining consortium and
profits on sale are realised mainly outside of Australia.
99
International Tax Agreements Amendment Bill (No. 1) 2007
2.61 Subparagraph 3(d) deems such a plant to be a permanent
establishment because the manufacturing or processing activity (which
gives the processed minerals their real value) is conducted in Australia,
and therefore Australia should have taxing rights over the business profits
arising from the sale of the processed minerals to the extent that they are
attributable to the processing activity carried on in Australia. This
subparagraph prevents an enterprise which carries on substantial
manufacturing or processing activities in a country through an
intermediary from claiming that it does not have a permanent
establishment in that country.
2.62 This subparagraph is in the existing Norway treaty. The
inclusion of this subparagraph is insisted upon by Australia in its tax
treaties and is consistent with Australia's policy of retaining taxing rights
over profits from manufacturing or processing on behalf of others
including, importantly, in the exploitation of Australia's mineral
resources. [Article 5, subparagraph 3(d)]
Preparatory and auxiliary activities
2.63 Certain activities do not generally give rise to a permanent
establishment (eg, the use of facilities solely for storage, display or
delivery).
2.64 Generally these activities are of a preparatory or auxiliary
character and are unlikely to give rise to substantial profits. The
necessary economic link between the activities of the enterprise and the
country in which the activities are carried on does not exist in these
circumstances.
2.65 Unlike the OECD Model, which provides that the listed
activities are deemed not to constitute a permanent establishment, the
Norway Convention provides that an enterprise will not be deemed to
have a permanent establishment merely by reason of such activities. This
is to prevent the situation where enterprises structure their business so that
most of their activities fall within the exceptions when, viewed as a
whole, the activities ought to be regarded as a permanent establishment.
2.66 Another feature consistent with Australia's tax treaty practice is
that subparagraph 4(f) of Article 5 (Permanent Establishment) of the
OECD Model -- dealing with combinations of the activities of the kind
referred to in subparagraphs 5(a) to 5(e) of this treaty -- is not included.
Australia does not consider that an enterprise undertaking multiple
functions of the kind indicated in subparagraphs 5(a) to 5(e) would
generally be regarded as only engaged in preparatory or auxiliary
activities. [Article 5, paragraph 5]
100
2006 Australia-Norway tax Convention
Dependent agents
2.67 Paragraph 6 reflects Australia's tax treaty practice in relation to
a person who acts on behalf of an enterprise of another country of
deeming that person to constitute a permanent establishment if that person
has and habitually exercises an authority to conclude contracts on behalf
of the enterprise.
2.68 Consideration ought to be given to all the relevant facts and
circumstances in determining whether a person has authority or not to
conclude contracts. In this regard the following notes reflect agreement
reached during negotiation of the Norway Convention with regard to this
provision:
`With respect to paragraph 6 of Article 5 Permanent Establishment, it was agreed
that a person who substantially negotiates the essential parts of a contract on
behalf of an enterprise will be regarded as exercising an authority to conclude
contracts on behalf of that enterprise within the meaning of this provision, even if
the contract is subject to final approval or formal signature by another person.'
2.69 Activities of a dependent agent will not give rise to a permanent
establishment where that agent's activities are limited to the preparatory
and auxiliary activities mentioned in paragraph 5. [Article 5, paragraph 6]
Independent agents
2.70 Business carried on through an independent agent will not, of
itself, give rise to a permanent establishment, provided that the
independent agent is acting in the ordinary course of that agent's business
as such an agent. [Article 5, paragraph 7]
Subsidiary companies
2.71 Generally, a subsidiary company will not be a permanent
establishment of its parent company. A subsidiary, being a separate legal
entity, would not usually be carrying on the business of the parent
company but rather its own business activities. However, a subsidiary
company gives rise to a permanent establishment if the subsidiary permits
the parent company to operate from its premises such that the tests in
paragraph 1 of Article 5 are met, or acts as an agent of the parent
company such that a dependent agent permanent establishment is
constituted. [Article 5, paragraph 8]
101
International Tax Agreements Amendment Bill (No. 1) 2007
Other Articles
2.72 The principles set down in this Article are also to be applied in
determining whether a permanent establishment exists in a third country
or whether an enterprise of a third country has a permanent establishment
in Australia (or Norway) when applying the source rule contained in:
· paragraph 7 of Article 11 (Interest); and
· paragraph 5 of Article 12 (Royalties).
[Article 5, paragraph 9]
Article 6 -- Income from Real Property
Where income from real property is taxable
2.73 This Article provides that the income of a resident of one
country from real property may be taxed by the country in which the real
property is situated. Thus, income from real property in Australia will be
subject to Australian tax laws. [Article 6, paragraph 1]
Definition
2.74 Income from `real property' (which is primarily defined as
having the meaning which it has under the domestic law of the country
where the property is situated) also extends, in the case of Australia, to
income from:
· the direct use, letting or use of any form of real property, a
lease of land and any other interest in or over land (including
exploration and mining rights); and
· royalties and other payments relating to the exploration for or
exploitation of mines or quarries or other natural resources or
rights in relation thereto.
2.75 In the case of Norway, the definition generally follows the
OECD Model definition of `immovable property' and includes:
· property accessory to real property;
· rights to which the provisions of the general law respecting
landed property apply including direct use, letting or any
other use of such property;
102
2006 Australia-Norway tax Convention
· usufruct of real property (generally, a right to use property
without degrading it and to retain any profits derived from
it); and
· royalties and other payments relating to the exploitation of
mines or quarries or other natural resources, or rights in
relation thereto.
2.76 Ships and aircraft are excluded from the definition of real
property. Therefore this Article does cover income from their use.
[Article 6, paragraph 2]
Deemed situs
2.77 Under Australian law the place where an interest in land, such as
a lease, is situated (situs) is not necessarily where the underlying property
is situated. This paragraph puts the situation of the interest or right
beyond doubt by deeming the situs to be where the underlying real
property over which the lease or right is granted is situated or where any
exploration may take place. [Article 6, paragraph 3]
Real property of an enterprise
2.78 Paragraph 5 extends the application of this Article to income
derived from the use or exploitation of real property of an enterprise.
2.79 Accordingly, this Article (when read with Article 7
(Business Profits)) ensures that the country in which the real property is
situated may impose tax on the income derived from that property by an
enterprise of the other country, irrespective of whether or not that income
is attributable to a permanent establishment of such an enterprise situated
in the first-mentioned country. [Article 6, paragraph 5]
Article 7 -- Business Profits
2.80 This Article is concerned with the taxation by one country of
business profits derived by an enterprise that is a resident of the other
country.
2.81 The taxing of these profits depends on whether they are
attributable to the carrying on of a business through a permanent
establishment in that country. If a resident of one country carries on
business through a permanent establishment (as defined in Article 5
(Permanent Establishment)) in the other country, the country in which the
permanent establishment is situated may tax the profits of the enterprise
that are attributable to that permanent establishment. [Article 7, paragraph 1]
103
International Tax Agreements Amendment Bill (No. 1) 2007
2.82 If an enterprise which is a resident of one country derives
business profits in the other country other than profits attributable to a
permanent establishment in that other country, the general principle of this
Article is that the enterprise will not be liable to tax in the other country
on such business profits (except where paragraph 7 of this Article applies
-- see the explanation in paragraphs 2.88 and 2.89).
Determination of business profits
2.83 Profits of a permanent establishment are to be determined for the
purposes of this Article on the basis of arm's length dealings. The
provisions in the Norway Convention correspond to international practice
and the comparable provisions in Australia's other tax treaties. [Article 7,
paragraphs 2 and 3]
2.84 In respect of paragraph 3, no deductions are allowed in respect
of expenses which would not be deductible if the permanent establishment
were an independent enterprise which incurred the expense. [Article 7,
paragraph 3]
2.85 No profits are to be attributed to a permanent establishment
merely because it purchases goods or merchandise for the enterprise.
Accordingly, profits of a permanent establishment will not be increased
by adding to them any profits attributable to the purchasing activities
undertaken for the head office. It follows, of course, that any expenses
incurred by the permanent establishment in respect of those purchasing
activities will not be deductible in determining the taxable profits of the
permanent establishment. [Article 7, paragraph 5]
Inadequate information
2.86 The domestic law of the country in which the permanent
establishment is situated (eg, Australia's Division 13 of Part III of the
ITAA 1936) may be applied to determine the tax liability of a person,
consistently with the principles of the Article. This is of particular
relevance where, due to inadequate information, the correct amount of
profits attributable on the arm's length principle basis to a permanent
establishment cannot be determined, or can only be ascertained with
extreme difficulty. This is of particular relevance, where there is no data
available or the available data is not of sufficient quality to rely on the
traditional transaction methods for the attribution of arm's length profits.
Paragraph 4 explicitly recognises the right of each country to apply its
domestic law in these circumstances. This is consistent with Australia's
reservation to Article 7 (Business Profits) of the OECD Model. [Article 7,
paragraph 4]
104
2006 Australia-Norway tax Convention
Method of determining profits attributed to a permanent establishment
2.87 This paragraph follows the OECD Model and has been inserted
at the request of Norway to lay down clearly in the treaty that a method of
allocation once used should not be changed merely because in a particular
year a more favourable result is produced under a different method. It
also provides assurances of continuous and consistent tax treatment for
business dealings through branches between the two countries, unless
there is good and sufficient reason to change. [Article 7, paragraph 6]
Profits dealt with under other Articles
2.88 Where income or gains are specifically dealt with under other
Articles of the Norway Convention, the effect of those particular Articles
is not overridden by this Article.
2.89 This provision lays down the general rule of interpretation that
categories of income or gains which are the subject of other Articles of the
Norway Convention (eg, Article 8 (Shipping and Air Transport),
Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties) and
Article 13 (Alienation of Property)) are to be treated in accordance with
the terms of those Articles (except where otherwise provided, for
example, by paragraph 5 of Article 10 (Dividends) where the asset in
respect of which the income is paid is effectively connected with a
permanent establishment). [Article 7, paragraph 7]
Insurance with nonresidents
2.90 Each country has the right to continue to apply any provisions in
its domestic law relating to the taxation of income from insurance, other
than life insurance. However, if the relevant law in force in either country
at the date of signature of the treaty is subsequently varied (otherwise than
in minor respects so as not to affect its general character), the countries
must consult with each other with a view to agreeing to any amendment of
this paragraph that may be appropriate. An effect of this paragraph is to
preserve, in the case of Australia, the application of Division 15 of Part III
of the ITAA 1936 (Insurance with Non-residents). This is consistent with
Australia's reservation to Article 7 (Business Profits) of the
OECD Model. [Article 7, paragraph 8]
Trust beneficiaries
2.91 The principles of this Article will apply to profits which under
the Norway Convention fall to be taxed under this Article and which are
derived by a resident of one of the countries (directly or through one or
more interposed trust estates) as a beneficiary of a trust estate other than a
105
International Tax Agreements Amendment Bill (No. 1) 2007
trust estate which is treated as a company for tax purposes. [Article 7,
paragraph 9]
2.92 In accordance with this provision, Australia has the right to tax a
share of business profits, originally derived by a trustee of a trust estate
(other than a trust estate that is treated as a company for tax purposes)
from the carrying on of a business through a permanent establishment in
Australia, to which a resident of Norway is beneficially entitled under the
trust estate. Article 7 paragraph 9 ensures that such business profits will
be subject to tax in Australia where, in accordance with the principles set
out in Article 5 (Permanent Establishment), the trustee of the relevant
trust estate has a permanent establishment in Australia in relation to that
business. The principles of this paragraph will also apply where relevant
to other Articles of the Norway Convention, such as Article 13
(Alienation of Property) in its application to income profits or gains
arising from the alienation of the assets of a permanent establishment or
the permanent establishment itself.
Article 8 -- Shipping and Air Transport
Profits from international traffic
2.93 The main effect of this Article is that the right to tax profits from
the operation of ships or aircraft in international traffic, including a share
of profits attributable to participation in a pool, a joint business, an
international operating agency or the Norwegian partner of the air
consortium Scandinavian Airline System (SAS), is generally reserved to
the country in which the operator is a resident for tax purposes. [Article 8,
paragraphs 1, 3 and 5]
2.94 The profits covered consist in the first place of the profits
directly obtained by the enterprise from the transportation of passengers
or cargo by ships or aircraft (whether owned, leased or otherwise at the
disposal of the enterprise) that it operates in international traffic.
However, as international transport has evolved, shipping and air transport
enterprises invariably carry on a large variety of activities to facilitate, or
support their international operations. Consistent with the 2005 OECD
Model Commentary on Article 8, paragraph 1 also covers profits from
activities directly connected with such operations as well as profits from
activities which are not directly connected with the operation of the
enterprise's ships or aircraft in international traffic but which are ancillary
to such operation.
Internal traffic
2.95 Paragraph 2 reflects Australia's treaty policy of reserving to the
source country the right to tax profits from internal traffic and profits from
106
2006 Australia-Norway tax Convention
other coastal and continental shelf activities, including non-transport
shipping and aircraft activities, within its own waters and airspace. Profits
derived directly or indirectly by a Norwegian enterprise from the
operation of ships or aircraft, to the extent that they relate to operations
confined solely to places in Australia, may thus be taxed in Australia.
[Article 8, paragraph 2]
2.96 Australia's taxing rights are specifically preserved over profits
from the carriage by ships or aircraft of passengers or cargo (including
mail) where the passenger or cargo is shipped and discharged in Australia.
[Article 8, paragraph 4]
Example 2.1
A ship operated by a Norwegian enterprise, in the course of an
international voyage from Bergen to Melbourne, makes a stop in Perth
to pick up cargo. Profits derived from the transport of the goods
loaded in Perth and discharged in Melbourne would be profits from
operations confined solely to places in Australia. Australia would
therefore have the right to tax the profits relating to such transport.
Five per cent of the amount paid in respect of the transport of those
goods would be deemed to be taxable income of the operator for
Australian tax purposes pursuant to Division 12 of Part III of the
ITAA 1936.
Example 2.2
A Norwegian enterprise operates sightseeing flights to observe whales
in the Southern Ocean. Passengers board the aircraft in Hobart and
disembark at the same airport later on the same day. These operations
would be regarded as operations confined solely to places in Australia,
notwithstanding that the aircraft passes through international airspace.
Australia would therefore have the right to tax the profits relating to
the carriage of these passengers.
2.97 Operations involving the use of ships or aircraft, such as
haulage, survey or dredging activities, or other activities that are
undertaken in Australia are also regarded as operations confined solely to
places in Australia.
2.98 Exclusive residence country taxation will also apply to profits
from the use, maintenance and rental of containers used for the transport
of goods or merchandise, provided the rental or use is directly connected
or ancillary to the operation by the enterprise of ships or aircraft in
international traffic. The following notes reflect the agreement reached
during renegotiation of the Norway Convention with regard to the
application of the Article to containers:
107
International Tax Agreements Amendment Bill (No. 1) 2007
`With reference to Article 8 Shipping and Air Transport, the delegations agreed
that profits from the operation of ships or aircraft in international traffic will
include profits of an enterprise from the use, maintenance or rental of containers
used for the transport of goods or merchandise, provided the rental or use is
directly connected or ancillary to the operation by that enterprise of ships or
aircraft in international traffic.'
Article 9 -- Associated Enterprises
Reallocation of profits
2.99 This Article deals with associated enterprises (such as parent
and subsidiary companies and companies under common control). It
authorises the reallocation of profits between related enterprises in
Australia and Norway on an arm's length basis where the commercial or
financial arrangements between the enterprises differ from those that
might be expected to operate between unrelated enterprises dealing
wholly independently with one another.
2.100 This Article would not generally authorise the rewriting of
accounts of associated enterprises where it can be satisfactorily
demonstrated that the transactions between such enterprises have taken
place on normal, open market commercial terms. Consistent with
Australia's recent treaty practice, the inclusion of the expression `dealing
wholly independently with one another' in paragraph 1 recognises
dealings on a truly independent basis as the appropriate benchmark for
determining whether the transactions have taken place on normal, open
market commercial terms. [Article 9, paragraph 1]
2.101 The broad scheme of Australia's domestic law provisions
relating to international profit shifting arrangements under which profits
are shifted out of Australia, whether by transfer pricing or other means, is
to impose arm's length standards in relation to international dealings.
Where the Commissioner cannot ascertain the arm's length consideration,
it is deemed to be such an amount as the Commissioner determines.
2.102 Paragraph 2 of this Article specifically recognises the right of
each country to apply its domestic law relating to the determination of the
tax liability of a person (eg, Australia's Division 13 of the ITAA 1936) to
its own enterprises, including in cases where the available information is
inadequate, provided that such provisions are applied, so far as it is
practicable to do so, consistently with the principles of the Article. This is
of particular relevance where there is no data available or the available
data is not of sufficient quality to rely on the traditional transaction
methods for the attribution of arm's length profits. This reflects
Australia's reservation to Article 9 (Associated Enterprises) of the
OECD Model. [Article 9, paragraph 2]
108
2006 Australia-Norway tax Convention
Correlative adjustments
2.103 Where a reallocation of profits is made (either under this Article
or, by virtue of paragraph 2, under domestic law) so that the profits of an
enterprise of one country are adjusted upwards, a form of double taxation
would arise if the profits so reallocated continued to be subject to tax in
the hands of an associated enterprise in the other country. To avoid this
result, the other country -- if it considers the adjustment justified -- will
make an appropriate compensatory adjustment to the amount of tax
charged on the profits involved to relieve any such double taxation.
2.104 During negotiation of the Norway Convention, negotiators
reached the following agreement:
`For purposes of paragraph 3 of Article 9 Associated Enterprises, negotiators for
Australia and Norway agreed that an adjustment will be justified where a State
agrees that the adjustment made by the other State in accordance with
paragraph 1 of that Article is justified both in principle and as regards the amount,
except in cases involving fraud, gross negligence or wilful default on the part of
one or both of the enterprises.'
2.105 Where fraud, gross negligence or wilful default on the part of
one or both enterprises is involved, compensatory adjustments are not
required.
2.106 It would generally be necessary for the affected enterprise to
apply to the competent authority of the country not initiating the
reallocation of profits for an appropriate compensatory adjustment to
reflect the reallocation of profits made by the other treaty partner country.
If necessary, the competent authorities of Australia and Norway will
consult with each other to determine the appropriate adjustment. [Article 9,
paragraph 3]
Article 10 -- Dividends
2.107 This Article allocates taxing rights in respect of dividends
flowing between Australia and Norway. The Article provides that:
· certain cross-border intercorporate dividends will be either
exempt or subject to a maximum 5 per cent rate of source
country tax;
· a maximum 15 per cent rate of source country tax may be
applied on all other dividends;
109
International Tax Agreements Amendment Bill (No. 1) 2007
· dividends paid in respect of a holding which is effectively
connected with a permanent establishment are to be dealt
with under Article 7 (Business Profits); and
· extra-territorial application by either country of taxing rights
over dividend income is not permitted.
2.108 However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
Permissible rate of source country taxation
Exemption for certain cross-border intercorporate dividends
2.109 No tax will be payable in the source country on dividends paid
to a company that is the beneficial owner of those dividends and is
resident in the other country where:
· the recipient company holds 80 per cent or more of the
voting power of the company paying the dividend; and
· satisfies a 12-month holding requirement at the time of the
declaration of the dividend in relation to the shares in respect
of which the dividend is payable.
[Article 10, paragraph 3]
2.110 To qualify for the exemption, the company that is the beneficial
owner of the dividends must either be:
· a company that has its principal class of shares;
- listed on specified Australian or Norwegian stock
exchanges; and
- regularly traded on one or more recognised
stock exchanges (as defined under Article 3
(General Definitions) of the treaty); or
· a company that is owned either directly or indirectly by such
a company.
2.111 Dividends which are beneficially owned by a company that does
not meet the conditions in the previous paragraph will also be exempt
from tax in the source country if the competent authority of that country
determines, in accordance with its domestic law, that the recipient
company was established, acquired, or maintained for reasons other than
110
2006 Australia-Norway tax Convention
obtaining benefits under the treaty. Before concluding that a company is
not entitled to benefits under this subparagraph (eg, because the
arrangements had a principal purpose of obtaining such benefits), the
competent authority is required to consult with the competent authority of
that company's country of residence. [Article 10, subparagraphs 3(a) to (c)]
2.112 For the purpose of the above tests, a recognised stock exchange
includes:
· in Australia's case, the Australian Securities Exchange or any
other Australian stock exchange recognised under Australian
domestic law; and
· in Norway, the Oslo Stock Exchange or any other stock
exchange recognised under Norwegian domestic law.
2.113 Under sub-subparagraph 1(o)(iii) of Article 3
(General Definitions), provision has been made to allow the competent
authorities to reach agreement that other stock exchanges constitute a
recognised stock exchange for the purpose of the treaty. [Article 3,
sub-subparagraph 1(o)(iii)]
Five per cent rate limit on source country tax of certain cross-border
intercorporate dividends
2.114 This Article allows both countries to tax other dividends flowing
between them but limits the rate of tax that the country of source may
impose on dividends paid by companies that are residents of that country
under its domestic law to residents in the other country who are the
beneficial owners of the dividends. [Article 10, paragraphs 1 and 2]
2.115 A rate limit of 5 per cent will apply for dividends paid in respect
of shareholdings of companies (other than partnerships) that do not
qualify for the intercorporate dividend exemption under paragraph 3 of
this Article, but constitute a direct voting interest of at least 10 per cent.
[Article 10, subparagraph 2(a)]
111
International Tax Agreements Amendment Bill (No. 1) 2007
2.116 In relation to the exclusion of partnerships that are taxed like
companies from the benefit of the source country tax rate limitation the
following note reflects agreement reached during negotiation of the
Norway Convention with respect to the treatment of Australian limited
liability partnerships (corporate limited partnerships):
`With respect to paragraph 2(a) of Article 10, the two delegations noted that
under Australian taxation law, Australian corporate limited partnerships are
effectively treated as companies for tax purposes and that a reference to a
partnership does not include a reference to a limited partnership. It is therefore
understood that the reference to a partnership in paragraph 2(a) does not apply to
such corporate limited partnerships.'
Fifteen per cent rate limit for all other dividends
2.117 In all other cases, the treaty provides that the source country will
generally limit its tax to 15 per cent of the gross amount of the dividend.
In the case of Australia, this will mean that the domestic rate of
withholding tax imposed on unfranked dividends will be reduced from
30 per cent to 15 per cent. [Article 10, subparagraph 2(b)]
2.118 Despite the provisions described above, the dividend
withholding tax exemption provided by Australia under its domestic law
for franked dividends paid to non-residents will continue to apply.
Future changes to either country's domestic tax treatment of dividends
2.119 If there is a material change to either country's general approach
to taxing dividends (eg, a change to Australia's domestic law
arrangements for franked dividends flowing overseas), the two countries
are obliged to consult with each other to consider whether any amendment
to paragraphs 2 and 3 of this Article would be appropriate as a
consequence of the change to domestic law. [Article 10, paragraph 2]
Dividends effectively treated as business profits
2.120 The limitation on the tax of the country in which the dividend is
sourced does not apply to dividends derived by a resident of the other
country who has a permanent establishment in the source country from
which the dividends are derived, if the holding giving rise to the dividends
is effectively connected with that permanent establishment.
2.121 Where the holding is so effectively connected, the dividends are
to be treated as business profits and therefore subject to the full rate of tax
applicable in the country in which the dividend is sourced in accordance
with the provisions of Article 7 (Business Profits).
112
2006 Australia-Norway tax Convention
2.122 Franked and unfranked dividends paid by an Australian
company will be included in the assessable income of a non-resident
company or individual where the dividends are attributable to a permanent
establishment situated in Australia. Expenses incurred in deriving the
dividend income are allowable as a deduction from that income when
calculating the taxable income of the non-resident. Further, a
non-resident company or individual may be entitled to tax offsets in
respect of any franked dividends under Australia's domestic law.
[Article 10, paragraph 5]
Extraterritorial application precluded
2.123 The extra-territorial application by either country of taxing
rights over dividend income is precluded. Broadly, one country (the first
country) will not tax dividends paid by a company resident solely in the
other country, unless:
· the person deriving the dividends is a resident of the first
country; or
· the shareholding giving rise to the dividends is effectively
connected with a permanent establishment in the first
country.
2.124 For example, Australia may not tax dividends paid by a
Norwegian company to a resident of Norway out of profits derived from
Australian sources, unless the Norwegian shareholder has a permanent
establishment in Australia with which the holding is effectively
connected.
2.125 These restrictions do not apply when the company is, for tax
purposes, a resident of both Australia and Norway under the respective
laws of the two countries. [Article 10, paragraph 6]
Definition of dividends
2.126 The term dividends in this Article means income from:
· shares or other rights which participate in profits and are not
debt-claims; and
· other amounts that are subject to the same taxation treatment
as income from shares in the country of which the
distributing company is resident.
[Article 10, paragraph 4]
113
International Tax Agreements Amendment Bill (No. 1) 2007
Limitation of benefits
2.127 The source country rate limits and exemptions available under
this Article will not apply where a creation or assignment of shares or
other rights in respect of which dividends are paid, has been made with
the main objective of, or one of the main objectives of, accessing the relief
otherwise available under this Article. [Article 10, paragraph 7]
Article 11 -- Interest
2.128 This Article allocates taxing rights in respect of interest flows
between Australia and Norway. The Article provides that:
· an exemption from source country tax applies to certain
cross-border interest flows to:
- the government, its monetary institutions or central
banks; or
- financial institutions;
· a maximum 10 per cent rate of source country tax may be
applied on all other interest income;
· interest paid on an indebtedness which is effectively
connected with a permanent establishment shall be subject to
Article 7 (Business Profits);
· interest payments are deemed to have an Australian source
(and may therefore be taxed in Australia) where:
- the interest is paid by an Australian resident to a
Norwegian resident; or
- the interest is paid by a non-resident to a Norwegian
resident and it is an expense of the payer in carrying on
business in Australia through a permanent
establishment;
· relief will be restricted to the gross amount of interest which
would be expected to be paid on an arm's length dealing
between independent parties.
2.129 However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
114
2006 Australia-Norway tax Convention
Permissible rate of source country taxation
Ten per cent rate limit
2.130 This Article provides for interest income to be taxed by both
countries but requires the country in which the interest arises to generally
limit its tax to 10 per cent of the gross amount of the interest where a
resident of the other country is the beneficial owner of the interest.
[Article 11, paragraphs 1 and 2]
Exemptions for interest paid to the Government
2.131 The exemption for interest paid to the Australian and Norwegian
Governments reflects the principle of sovereign immunity and will apply
to interest derived from the investment of the Government's official
reserve assets. Similar exemptions apply in a number of Australia's tax
treaties. [Article 11, subparagraph 3(a)]
Exemptions for interest paid to financial institutions
2.132 The exemption for interest paid to financial institutions
recognises that the agreed 10 per cent withholding tax rate on gross
interest can be excessive given their cost of funds. The exemption will
also broadly align the treatment of interest paid to Norwegian financial
institutions with the Australian domestic law exemption for interest paid
on widely distributed arm's length corporate debenture issues
(section 128F of the ITAA 1936). [Article 11, subparagraph 3(b)]
2.133 The term financial institution means a bank or other enterprise
substantially raising debt finance in the financial markets or by taking
deposits at interest and using those funds in carrying on the business of
providing finance. It does not include a corporate treasury or a member of
a group that performs the financing services of the group. [Article 11,
subparagraph 3(b)]
2.134 The exemption will not be available for interest paid as part of
an arrangement involving back-to-back loans or other arrangement that is
economically equivalent and structured to have a similar effect. The
denial of the exemption for these back-to-back loan type arrangements is
directed at preventing related party and other debt from being structured
through financial institutions to gain access to a withholding tax
exemption. The exemption will only be denied for interest paid on the
component of a loan that is considered to be back-to-back. [Article 11,
paragraph 4]
115
International Tax Agreements Amendment Bill (No. 1) 2007
2.135 A back-to-back arrangement would include, for instance, a
transaction or series of transactions structured in such a way that:
· a Norwegian financial institution receives or is credited with
an item of interest arising in Australia; and
· the financial institution pays or credits, directly or indirectly,
all or substantially all of that interest (at any time or in any
form, including commensurate benefits) to another person
who, if it received the interest directly from Australia, would
not be entitled to similar benefits with respect to that interest.
2.136 However, a back-to-back arrangement would generally not
include a loan guarantee provided by a related party to a Norwegian
financial institution.
Definition of interest
2.137 The term interest is defined for the purposes of this Article to
include interest from:
· government securities;
· bonds and debentures;
· any other forms of indebtedness; and
· income which is subjected to the same taxation treatment as
income from money lent by the law of the Contracting State
in which the income arises.
[Article 11, paragraph 5]
Interest effectively treated as business profits
2.138 Interest derived by a resident of one country which is paid in
respect of an indebtedness which is effectively connected with a
permanent establishment of that person in the other country, will form
part of the business profits of that permanent establishment and be subject
to the provisions of Article 7 (Business Profits). Accordingly, the rate
limitation of 10 per cent and the exemption for financial institutions do
not apply to such interest in the country in which the interest is sourced.
[Article 11, paragraph 6]
116
2006 Australia-Norway tax Convention
Deemed source rules
2.139 The source rules which determine where interest arises for
purposes of the Article are set out in paragraph 7. They operate to allow
Australia to tax interest paid by a resident of Australia to a resident of
Norway who is the beneficial owner of that interest. Australia may also
tax interest paid by a non-resident, being interest which is beneficially
owned by a Norwegian resident, if it is an expense incurred by the payer
of the interest in carrying on a business in Australia through a permanent
establishment.
2.140 However, consistent with Australia's interest withholding tax
provisions, an Australian source is not deemed in respect of interest that is
an expense incurred by an Australian resident in carrying on a business
through a permanent establishment outside both Australia and Norway
(ie, the permanent establishment is in a third country). In that case the
interest is deemed to arise in the country in which the permanent
establishment is situated. [Article 11, paragraph 7]
2.141 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply. [Article 5, paragraph 9]
Related persons
2.142 This Article includes a general safeguard against payments of
excessive interest where a special relationship exists between the persons
associated with a loan transaction -- by restricting the amount on which
the 10 per cent source country tax rate limitation applies to an amount of
interest which might have been expected to have been agreed upon if the
parties to the loan agreement were dealing with one another at arm's
length. Any excess part of the interest remains taxable according to the
domestic law of each country but subject to the other Articles of the tax
treaty. [Article 11, paragraph 8]
2.143 Examples of cases where a special relationship might exist
include payments to a person (either individual or legal):
· who controls the payer (whether directly or indirectly);
· who is controlled by the payer; or
· who is subordinate to a group having common interests with
the payer.
2.144 It also covers relationships of blood or marriage and, in general,
any community of interests.
117
International Tax Agreements Amendment Bill (No. 1) 2007
Limitation of benefits
2.145 The source country rate limit and exemptions available under
this Article will not apply where a creation or assignment of the
indebtedness in respect of which interest paid has been made with the
main objective, or one of the main objectives, of accessing the relief
otherwise available under this Article. [Article 11, paragraph 9]
Article 12 -- Royalties
2.146 This Article allocates taxing rights in respect of royalties paid or
credited between Australia and Norway. The Article provides that:
· a maximum 5 per cent rate of source country tax may be
levied on the gross amount of the royalties;
· royalties paid in respect of a right or property which is
effectively connected with a permanent establishment are
subject to Article 7 (Business Profits);
· equipment royalties are not included within the definition of
royalties and will be taxed in accordance with either Article 7
(Business Profits) or Article 8 (Shipping and Air Transport);
· royalties include payments for spectrum licences;
· royalties are deemed to have an Australian source (and may
therefore be taxed in Australia) where:
- the royalties are paid by an Australian resident to a
Norwegian resident; or
- the royalties are paid by a non-resident to a Norwegian
resident and are an expense of the payer in carrying on
business in Australia through a permanent
establishment; and
· relief will be restricted to the gross amount of royalties which
would be expected to be paid on an arm's length dealing
between independent parties.
2.147 However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
118
2006 Australia-Norway tax Convention
Permissible rate of source country taxation
2.148 This Article in general allows both countries to tax royalty flows
but limits the tax of the country of source to 5 per cent of the gross
amount of royalties beneficially owned by residents of the other country.
[Article 12, paragraphs 1 and 2]
2.149 In the absence of a tax treaty, Australia taxes royalties paid to
non-residents at 30 per cent of the gross royalty.
2.150 The 5 per cent rate limitation does not apply to natural resource
royalties, which, in accordance with Article 6 (Income from Real
Property), remain taxable in the country of source without limitation of
the tax that may be imposed.
Definition of royalties
2.151 The definition of `royalties' in the Norway Convention reflects
most elements of the definition in Australia's domestic income tax law. It
includes payments for the supply of scientific, technical, industrial or
commercial know-how but not payments for services rendered, except as
provided for in subparagraph 3(c). The definition also includes payments
for the use of intellectual property stored on various mediums and used in
connection with television, radio or other broadcasting (eg, satellite, cable
and Internet broadcasting). [Article 12, paragraph 3]
2.152 Payments for the use of, or the right to use industrial,
commercial or scientific equipment, which are included in the definition
of royalties in the existing Norway treaty, are not included in the
definition under the Norway Convention. Such payments for equipment
leasing will either be treated as business profits under Article 7
(Business Profits) or as profits from international transport operations (for
certain leases of ships, aircraft and containers) under Article 8 (Shipping
and Air Transport). The exclusion of payments for the use of equipment
from the Royalties Article reflects common international tax treaty
practice and recognises that source country taxation on a gross basis may
be excessive given low profit margins.
119
International Tax Agreements Amendment Bill (No. 1) 2007
Payments for the supply of know-how versus payments for services
rendered
2.153 The OECD Model Commentary deals with the need to
distinguish these two types of payments at paragraph 11.3 of the
Commentary on Article 12. The Commentary cites the following criteria
as relevant for the purpose of making the distinction:
· Contracts for the supply of know-how concern information of
the kind described in paragraph 11 (of the Commentary) that
already exists or concern the supply of that type of
information after its development or creation and include
specific provisions concerning the confidentiality of that
information.
· In the case of contracts for the provision of services, the
supplier undertakes to perform services which may require
the use, by that supplier, of special knowledge, skill and
expertise but not the transfer of such special knowledge, skill
or expertise to the other party.
· In most cases involving the supply of know-how, there would
generally be very little more which needs to be done by the
supplier under the contract other than to supply existing
information or reproduce existing material. On the other
hand, a contract for the performance of services would, in the
majority of cases, involve a very much greater level of
expenditure by the supplier in order to perform their
contractual obligations. For instance, the supplier, depending
on the nature of the services to be rendered, may have to
incur salaries and wages for employees engaged in
researching, designing, testing, drawing and other associated
activities or payments to sub-contractors for the performance
of similar services.
2.154 Payments for design, engineering or construction of plant or
building, feasibility studies, component design and engineering services
may generally be regarded as being in respect of a contract for services,
unless there is some provision in the contract for imparting techniques and
skills to the buyer.
2.155 In cases where both know-how and services are supplied under
the same contract, if the contract does not separately provide for payments
in respect of know-how and services, an apportionment of the two
elements of the contract may be appropriate.
120
2006 Australia-Norway tax Convention
2.156 Payments for services rendered are to be treated under
Article 7 (Business Profits).
Image or sound reproduction or transmission
2.157 The royalty definition includes payments made for the use of, or
the right to use, motion picture films. It also covers payments for the use
of, or the right to use images or sounds, however reproduced or
transmitted, for use in connection with broadcasting. Such images or
sounds may be reproduced on any form of media, such as film, tape, CD
or DVD, or transmitted electronically, such as by satellite, cable or
Internet. Where the images or sounds are for use in connection with any
form of broadcasting, such as television, radio or web-casting, the
payments will constitute a royalty. [Article 12, subparagraph 3(d)]
Spectrum licences
2.158 Under the Norway Convention payments made for the use of, or
right to use, radiofrequency spectrum are treated as royalties. This
provision preserves Australia's ability to tax payments for the use in
Australia of any part of the radiofrequency spectrum (within the meaning
of the Radiocommunications Act 1992) specified in such a licence.
[Article 12, subparagraph 3(e)]
Forbearance
2.159 Consistent with the existing Norway treaty and Australian tax
treaty practice, subparagraph 3(f) expressly treats as a royalty, amounts
paid or credited in respect of forbearance to grant to third persons, rights
to use property covered by this Article. This is designed to address
arrangements along the lines of those contained in Aktiebolaget Volvo v
Federal Commissioner of Taxation (1978) 8 ATR 747; 78 ATC 4316,
where instead of amounts being payable for the exclusive right to use the
property they were made for the undertaking that the right to use the
property will not be granted to anyone else. This provision ensures that
such payments are subject to tax as a royalty payment under the terms of
the Royalties Article. [Article 12, subparagraph 3(f)]
Other royalties effectively treated as business profits
2.160 As in the case of interest income, the withholding tax rate
limitation does not apply to royalties paid in respect of property or rights
which are effectively connected with a permanent establishment in the
country in which the income is sourced. Such income is subject to full
taxation under Article 7 (Business Profits). [Article 12, paragraph 4]
121
International Tax Agreements Amendment Bill (No. 1) 2007
Deemed source rules
2.161 The source rules which determine where royalties arise for
purposes of this Article effectively correspond, in the case of Australia,
with the deemed source rule contained in section 6C (source of royalty
income derived by a non-resident) of the ITAA 1936 for royalties paid to
non-residents of Australia. They broadly mirror the source rule for
interest income contained in paragraph 7 of Article 11 (Interest).
2.162 Consistent with Australia's royalty withholding tax provisions,
royalty payments that are an expense incurred by an Australian resident in
carrying on a business through a permanent establishment outside both
Australia and Norway (ie, the permanent establishment is in a third
country) will not be subject to tax in Australia. Those royalties are
deemed to be sourced in the country in which the permanent
establishment is situated. [Article 12, paragraph 5]
2.163 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply. [Article 5, paragraph 9]
Related persons
2.164 Where a special relationship exists between the payer and the
beneficial owner of the royalties, the 5 per cent source country tax rate
limitation will apply only to the extent that the royalties are not excessive.
Any excess part of the royalty remains taxable according to the domestic
law of each country but subject to the other Articles of the Norway
Convention.
2.165 Examples of special relationships have been provided in respect
of the corresponding paragraph in Article 11. [Article 12, paragraph 6]
Limitation of benefits
2.166 The source country rate limit available under this Article will
not apply where a creation or assignment of the rights in respect of which
royalties paid or credited has been made with the main objective, or one
of the main objectives of accessing the relief available under this Article.
[Article 12, paragraph 7]
122
2006 Australia-Norway tax Convention
Article 13 -- Alienation of Property
Taxing rights
2.167 This Article allocates between the respective countries taxing
rights in relation to income, profits or gains arising from the alienation of
real property and other items of property.
2.168 The reference to `income, profits or gains' in this Article is
designed to put beyond doubt that a gain from the alienation of property
which in Australia is income or a profit under ordinary concepts, will also
be taxed in accordance with this Article, rather than Article 7
(Business Profits), together with relevant capital gains.
Real property
2.169 Income, profits or gains from the alienation of `real property'
may be taxed by the country in which the property is situated. For the
purpose of this Article, the term `real property' has the same meaning as it
has under paragraph 2 of Article 6. Where the property is situated is
determined in accordance with paragraph 3 of Article 6 (Income from
Real Property). [Article 13, paragraph 1]
Permanent establishment
2.170 Paragraph 2 deals with income, profits or gains arising from the
alienation of property (other than real property covered by paragraph 1)
forming part of the business assets of a permanent establishment of an
enterprise. It also applies where the permanent establishment itself (alone
or with the whole enterprise) is alienated. Such income, profits or gains
may be taxed in the country in which the permanent establishment is
situated. This corresponds to the rules for taxation of business profits
contained in Article 7 (Business Profits). [Article 13, paragraph 2]
Disposal of ships or aircraft
2.171 Income, profits or gains derived by a resident of a country from
the disposal of ships or aircraft operated by that resident in international
traffic, or of associated property (other than real property covered by
paragraph 1), are taxable only in that country. This rule corresponds to
the operation of Article 8 (Ships and Air Transport) in relation to profits
from the international operation of ships or aircraft. [Article 13, paragraph 3]
2.172 For the purposes of this Article, the term `international traffic'
does not include any transportation which commences at a place in a
country and returns to another place in that country, after travelling
123
International Tax Agreements Amendment Bill (No. 1) 2007
through international airspace or waters (eg, so-called `voyages to
nowhere' by cruise ships). [Article 3, subparagraph 1(k)]
Shares and other interests in land-rich entities
2.173 Paragraph 4 applies to situations involving the alienation of
shares or other interests in companies and other entities, where more than
50 per cent of the value of the assets of that company or other entity is
derived, whether directly or indirectly through one or more other
interposed entities, from real property situated in the other country.
Income, profits or gains from alienation of such shares or interests may be
taxed by the country in which the real property is situated. This paragraph
complements paragraph 1 of this Article and is designed to cover
arrangements involving the effective alienation of incorporated real
property, or like arrangements.
2.174 This provision is in line with international practice and ensures
that capital gains on a non-resident's indirect, as well as direct, interests in
certain targeted assets are taxable by Australia. (Such treatment applies
whether the real property is held directly or indirectly through a chain of
interposed entities.) While not limited to chains of companies, or even
chains of entities, only some of which are companies, the example of
chains of companies is used to make clear that the corporate veil should
be lifted in examining direct or indirect ownership.
2.175 This provision responds to the tax planning opportunities
exposed by the decision of the Full Federal Court in the Commissioner of
Taxation v Lamesa Holdings BV (1997) 77 FCR 597. It is designed to
protect Australian taxing rights over income or gains on the alienation or
effective alienation of Australian real property (as defined) despite the
presence of interposed bodies corporate or other entities. [Article 13,
paragraph 4]
Capital gains
2.176 This Article contains a sweep up provision which reserves the
right to tax any capital gains from the alienation of other types of property
to the country in which the person deriving the gains is a resident. These
would include, for example, gains from the disposal of shares or other
interests in an entity (other than a land-rich entity). Such gains derived by
Australian residents will be taxable only in Australia, regardless of where
the property is situated, and will not be taxed in Norway. The liability of
the Australian resident to taxation on such gains will be determined in
accordance with Australia's domestic law. [Article 13, paragraph 5]
124
2006 Australia-Norway tax Convention
Article 14 -- Income from Employment
Basis of taxation
2.177 This Article generally provides the basis upon which the
remuneration of visiting employees is to be taxed. However this Article
does not apply in respect of income dealt with separately in:
· Article 15 (Directors' Fees);
· Article 16 (Entertainers and Sportspersons);
· Article 17 (Pensions and Annuities); and
· Article 18 (Government Service).
2.178 Generally, salaries, wages and similar remuneration derived by a
resident of one country from an employment exercised in the other
country may be taxed in that other country. However, subject to specified
conditions, there is a conventional provision for exemption from tax in the
country being visited where visits of only a short-term nature are
involved. [Article 14, paragraphs 1 and 2]
2.179 The following notes reflect agreements reached during the
renegotiation of the Norway Convention with regard to the meaning of the
term `employer':
`For purposes of paragraph 2 of Article 14 Income from Employment, the two
delegations agreed that the term "employer" refers to the person having the rights
on the work produced and bearing the relative responsibility and risks. In this
context, the substance of any labour hire arrangement will prevail over the form.
Where an intermediary hirer is involved, such as in cases of international hiring
out of labour, the employer for purposes of paragraph 2 will be determined
having regard to whether the functions of employer were exercised mainly by the
hirer or by the user of the labour. Relevant factors that may lead to a conclusion
that the user, and not the hirer, is the employer include:
· the hirer does not bear the responsibility or risk for the results
produced by the employee's work;
· the authority to instruct the worker lies with the user;
· the work is performed at a place which is under the control and
responsibility of the user;
125
International Tax Agreements Amendment Bill (No. 1) 2007
· the remuneration to the hirer is calculated on the basis of the time
utilised, or there is in other ways a connection between this
remuneration and wages received by the employee;
· tools and materials are essentially put at the employee's disposal by
the user;
· the number and qualifications of the employees are not solely
determined by the hirer.'
Short-term visit exemption
2.180 The conditions for the exemption for short-term visits are that:
· the period of the visit or visits does not exceed, in the
aggregate, 183 days in any 12-month period commencing or
ending in the year of income of the visited country;
· the remuneration is paid by, or on behalf of, an employer
who is a resident of the same country as the employee; and
· the remuneration is not borne by a permanent establishment
which the employer has in the country being visited.
2.181 Where all of these conditions are met, the remuneration so
derived will be liable to tax only in the country of residence of the
recipient. [Article 14, paragraph 2]
2.182 Where a short-term visit exemption is not applicable,
remuneration derived by a resident of Australia from employment in
Norway may be taxed in Norway. However, this Article does not allocate
sole taxing rights to Norway in that situation.
2.183 Accordingly, Australia would also be entitled to tax that
remuneration in accordance with the general rule of the ITAA 1997 that a
resident of Australia remains subject to tax on worldwide income.
However, in accordance with Article 23 (Methods of Elimination of
Double Taxation) Australia would be required to in this situation relieve
the double taxation.
2.184 Although Article 23 provides for the double tax relief to be
provided by Australia to be in the form of the grant of a credit against the
Australian tax for the Norwegian tax paid, the exemption with progression
method of providing double tax relief in relation to employment income
derived in the situation described would normally be applicable in
practice pursuant to the foreign service income provisions of
section 23AG of the ITAA 1936. This method exempts the income from
126
2006 Australia-Norway tax Convention
foreign employment from tax in Australia, but takes into account the
foreign earnings when calculating the Australian tax on other assessable
income the person has derived.
Employment on a ship or aircraft
2.185 Income from an employment exercised aboard a ship or aircraft
operated in international traffic may be taxed in the country of which the
enterprise operating the ship or aircraft is a resident.
2.186 However, income derived in respect of employment exercised
aboard either:
· a ship registered in the Norwegian International Ships'
register; or
· a Scandinavian Airlines System (SAS) aircraft,
may be taxed only in the country of which the employee is resident.
[Article 14, paragraphs 3 and 4]
Article 15 -- Directors' Fees
2.187 This Article relates to remuneration received by a resident of
one country in the person's capacity as a member of a board of directors,
or of a body which performs a similar role to that of a board of directors,
of a company which is a resident of the other country. To avoid
difficulties in such cases of ascertaining in which country a director's
services are performed, and consequently where the remuneration is to be
taxed, the article provides that directors' fees and similar payments may
be taxed in the country of residence of the company. [Article 15]
Article 16 -- Entertainers and Sportspersons
Personal activities
2.188 Under this Article, income derived by visiting entertainers and
sportspersons from their personal activities as such may be taxed in the
country in which the activities are exercised, irrespective of the duration
of the visit. The term `entertainer' is intended to have a broad meaning
and would include, for example, actors and musicians as well as other
performers whose activities have an entertainment character, such as
comedians, talk-show hosts, participants in chess tournaments or racing
drivers. The application of this Article extends to income generated from
promotional and associated kinds of activities engaged in by the
127
International Tax Agreements Amendment Bill (No. 1) 2007
entertainer or sportsperson while present in the visited country. [Article 16,
paragraph 1]
Safeguard
2.189 Paragraph 2 is designed to ensure that income in respect of
personal activities exercised by an entertainer or sportsperson, where
derived by another person (eg, a separate enterprise which formally
provides the entertainer's or sportsperson's services), may be taxed in the
country in which the entertainer or sportsperson performs, whether or not
that other person has a permanent establishment in that country. [Article 16,
paragraph 2]
Government supported events
2.190 Consistent with the existing Norway treaty, paragraph 3
excludes from the scope of paragraphs 1 and 2 income derived by
entertainers or sportspersons from activities performed in a country where
the event is wholly or mainly supported by government funds of the other
country. In such a case, the income is taxable only in the country of
which the entertainer or sportsperson is a resident. [Article 16, paragraph 3]
Article 17 -- Pensions and Annuities
2.191 Pensions (not including government service pensions) and
annuities (the term `annuity' as used in this Article is defined in
paragraph 2) are taxable only by the country of which the recipient is a
resident. The application of this Article extends to pensions and annuity
payments made to dependants, for example, a widow, widower or children
of the person in respect of whom the pension or annuity entitlement
accrued where, upon that person's death, such entitlement has passed to
that person's dependants. [Article 17, paragraphs 1 and 2]
Eligible termination payments
2.192 Lump sum payments on the termination of employment are not
considered to be pensions and are not covered by this Article. Article 21
(Other Income) applies to such payments.
Alimony payments
2.193 Consistent with the existing Norway treaty, the taxing right in
respect of alimony and other maintenance payments is allocated solely to
the country of residence of the payer. The purpose of this paragraph is to
remove any possibility of double taxation of such payments arising by
reason of the treatment accorded such payments under the respective
domestic law of the two countries. In the case of Australia, those
128
2006 Australia-Norway tax Convention
payments will generally remain exempt from Australian tax under the
ITAA 1936 and the ITAA 1997 in the hands of the recipient and
non-deductible to the payer. [Article 17, paragraph 3]
Article 18 -- Government Service
Salary and wage income
2.194 Salary and wage type income, other than government service
pensions or annuities, paid to an individual for services rendered to a
government (including a political subdivision or local authority) of one of
the countries, is to be taxed only in that country. However, such
remuneration will be taxable only in the other country if:
· the services are rendered in that other country;
· the recipient is a resident of, and a national of, that other
country; and
· the recipient did not become a resident of that other country
solely for the purpose of rendering the services.
[Article 18, paragraph 1]
Government service pensions
2.195 Similarly, any pension (including, in the case of Norway, any
national insurance element of that pension) paid to an individual in respect
of services rendered to a government (including a political subdivision or
local authority) of one of the countries, is to be taxed only in that country.
However, such pensions will be taxable only in the other country if the
recipient is both a resident and a national of that country. [Article 18,
paragraph 2]
Business income
2.196 Remuneration or pensions in respect of services rendered in
connection with a business carried on by any governmental authority
referred to in paragraph 1 or 2 of this Article is excluded from the scope
of the Article. Such remuneration will remain subject to the provisions of
Article 14 (Income from Employment), Article 15 (Directors' Fees) or
Article 16 (Entertainers and Sportspersons) or Article 17 (Pensions or
Annuities). [Article 18, paragraph 3]
129
International Tax Agreements Amendment Bill (No. 1) 2007
Article 19 -- Students
Exemption from tax
2.197 This Article applies to students who are temporarily present in
one of the countries solely for the purpose of their education if the
students are, or immediately before the visit were, resident in the other
country. In these circumstances, payments from abroad received by the
students solely for their maintenance or education will be exempt from tax
in the country visited. This will apply even though the student may
qualify for tax purposes as a resident of the country visited during the
period of their visit.
2.198 The exemption from tax provided by the visited country is
treated as extending to payments received by the student for the
maintenance of dependent family members who have accompanied the
student to the visited country.
Employment income
2.199 Where, however, a student from Norway who is visiting
Australia solely for educational purposes undertakes any employment in
Australia, for example:
· undertakes some part-time work with a local employer; or
· during a semester break undertakes work with a local
employer,
the income earned by that student as a consequence of that employment
may, as provided for in Article 14 (Income from Employment), be subject
to tax in Australia. In this situation, the payments received from abroad
for the student's maintenance or education will not, however, be taken
into account in determining the tax payable on the employment income
that is subject to tax in Australia. No Australian tax would be payable on
the employment income if the student qualifies as a resident of Australia
for tax purposes during the visit and the taxable income of the student
does not exceed the tax-free threshold applicable to Australian residents
for income tax purposes.
Article 20 -- Offshore Activities
2.200 This Article largely reflects the Offshore Activities Article in the
existing Norway treaty and gives both countries broad taxing rights over
income from offshore activities in connection with exploration for, or
exploitation of, natural resources.
130
2006 Australia-Norway tax Convention
Relationship to other Articles
2.201 The Offshore Activities Article governs the taxation treatment to
apply to activities undertaken in either country's territorial waters or on
either country's continental shelf. Where activities fall within the
provisions of the Article, this Article will apply over other provisions of
the Convention where taxation of the income arising from those activities
differs from the result that applies under Article 20 (eg, Article 5
(Permanent Establishment) and Article 14 (Income from Employment)).
[Article 20, paragraph 1]
Deemed permanent establishment and carrying on of business
2.202 A person who is resident in one country and who is carrying on
offshore activities in the other country is deemed in relation to the
activities to be carrying on business in the other country through a
permanent establishment in the other country, where the activities are
carried on for a period or periods of more than 30 days in any 12-month
period.
2.203 The provision ensures that an enterprise engaged in the
exploration for, or exploitation of, natural resources will be treated as
having a permanent establishment where, for example, it operates a
drilling rig or carries on activities on such a rig, in circumstances where it
may not satisfy the definition of permanent establishment contained in
Article 5 (Permanent Establishment). The provision reflects the
importance Australia and Norway place on being able to tax the
substantial profits that can flow from offshore activities in the resources
sector. [Article 20, paragraph 2]
2.204 The scope of the Article is confined to activities connected with
the exploration or exploitation of the seabed or subsoil of the territorial
sea and continental shelf of both countries or to the exploration or
exploitation of the natural resources of the seabed or subsoil. For the
purpose of this Article the term `natural resources' is not defined and it
would accordingly be interpreted having regard to the rules in paragraph 2
of Article 3 (General Definitions). Natural resource is, in the case of
Australia, defined under the ITAA 1936 as meaning `minerals or any
other non-living resource of the land, sea-bed or sea'.
Exception to the deemed permanent establishment rule
2.205 Offshore activities will not be deemed to constitute the carrying
on of a business through a permanent establishment where the period or
periods during which the activities are carried on do not in aggregate
exceed 30 days in any 12-month period commencing or ending in the year
of income of the country in which the activities are carried out.
131
International Tax Agreements Amendment Bill (No. 1) 2007
2.206 The Article includes an anti-avoidance rule, similar to that in
paragraph 4 of Article 5 (Permanent Establishment), aimed at countering
contract-splitting by related enterprises. This rule ensures that, where
associated enterprises carry on substantially the same activities in a
country, the periods will be aggregated in determining whether the
enterprises have a permanent establishment in the country in which the
activities are being carried on.
2.207 As with paragraph 4 of Article 5, concurrent activities of the
enterprise and its associates are only counted once, and enterprises are
deemed to be associated for the purposes of this paragraph if one is
controlled directly or indirectly by the other or if both are controlled
directly or indirectly by the same third person or persons. [Article 20,
paragraph 3]
Offshore employment income
2.208 Residents of one country who are employed in offshore
activities may be taxed in both countries if the employment is exercised
offshore in the other country for an aggregate period in excess of 30 days
in any 12-month period beginning or ending in the income year of the
country in which the employment is exercised. [Article 20, paragraph 4]
2.209 The country of which the employee is a resident will provide a
credit for tax paid in the country in which the employment is performed in
accordance with Article 23 (Methods of Elimination of Double Taxation).
In Australia, the provisions of section 23AG will apply to exempt from
Australian tax income of a resident from employment that occurs over a
continuous period of 91 days or more. In cases where the continuous
period or periods is less than 91 days a credit will be allowed by Australia
for Norwegian tax on offshore activities employment income against the
Australian tax paid on such income.
2.210 No source country tax will be payable by an employee resident
in one country and employed in offshore activities exercised in the other if
the employee exercises the employment in the other country for a period
or periods of 30 days or less and the employer is resident outside the other
country. This is measured in the same way as for business activities (see
paragraph 2.205). In these circumstances the employee's remuneration
will be subject to tax only in the country of which the employee is a
resident.
132
2006 Australia-Norway tax Convention
Article 21 -- Other Income
Allocation of taxing rights
2.211 This Article provides rules for the allocation between the two
countries of taxing rights with respect to items of income not dealt with in
the preceding Articles of the Norway Convention. The scope of the
Article is not confined to such items of income arising in one of the
countries -- it extends also to income from sources in a third country.
2.212 Broadly, such income derived by a resident of one country is to
be taxed only in the country of residence unless it is from sources in the
other country, in which case the income may also be taxed in the other
country. This is consistent with Australia's reservation to Article 21
(Other Income) of the OECD Model. [Article 21, paragraphs 1 and 3]
2.213 Where the income may be taxed in both countries in accordance
with this provision, the country of residence of the recipient of the income
is obliged by Article 23 (Methods of Elimination of Double Taxation) to
provide double taxation relief.
2.214 This Article does not apply to income (other than income from
real property as defined in paragraph 2 of Article 6 (Income from Real
Property) where the right or property in respect of which the income is
paid is effectively connected with a permanent establishment which a
resident of one country has in the other country. In such a case, Article 7
(Business Profits) will apply. [Article 21, paragraph 2]
Article 22 -- Source of Income
Deemed source
2.215 This Article effectively deems income, profits or gains derived
by a resident of a country which, in accordance with the Norway
Convention, may be taxed in the other country, to have a source in that
other country. It therefore avoids any difficulties arising under domestic
law source rules in respect of the exercise by Australia of the taxing rights
allocated to Australia by the Convention over income derived by residents
of Norway. [Article 22, paragraph 1]
Source of income -- double taxation relief
2.216 Paragraph 2 of this Article deems income, profits or gains of a
resident of one country to arise in the other country if those amounts are
taxable in the other country under the treaty. The paragraph applies for
the purposes of Article 23 (Methods of Elimination of Double Taxation)
133
International Tax Agreements Amendment Bill (No. 1) 2007
and for the purposes of the domestic tax laws of the country in which the
recipient of the income is resident. [Article 22, paragraph 2]
2.217 This provision is variously included in Article 21 (Source of
Income) or Article 22 (Elimination of Double Taxation) of Australia's tax
treaties. It is intended to ensure that where an item of income, profit or
gain is taxable in both countries, double taxation relief will be given by
the recipient's country of residence in accordance with Article 23,
regardless of whether the amount would be regarded as having a source in
the country of residence under its ordinary source rules. In this way,
income, profits or gains derived by a resident of Australia, which is
taxable by Norway under this Convention, will be treated as being foreign
income for the purposes of the ITAA 1936 and the ITAA 1997, including
the foreign tax credit provisions of the ITAA 1936.
Article 23 -- Methods of Elimination of Double Taxation
2.218 Double taxation does not arise in respect of income flowing
between Australia and Norway:
· where the terms of the tax treaty provide for the income to be
taxed only in one country; or
· where the domestic taxation law of one of the countries
exempts the income from its tax.
Tax credit
2.219 It is necessary, however, to prescribe a method for relieving
double taxation for other classes of income, profits or gains which, under
the terms of the tax treaty, remain subject to tax in both countries. In
accordance with international practice, Australia's tax treaties provide for
double tax relief to be provided by the country of residence of the
taxpayer by way of a credit basis of relief against its tax for the tax of the
country of source. This Article also reflects that approach.
Australian method of relief
2.220 This Article requires Australia to provide Australian residents a
credit against their Australian tax liability for Norwegian tax paid in
accordance with the Norway Convention on income derived from
Norwegian sources which are taxable in Australia. The term `income' in
this context is intended to have a broad meaning and includes items of
profit or gains which are dealt with under the income tax law. [Article 23,
paragraph 1]
134
2006 Australia-Norway tax Convention
2.221 Australia's general foreign tax credit system, together with the
terms of this Article and of the Norway Convention generally, will form
the basis of Australia's arrangements for relieving a resident of Norway
from double taxation on income, profits or gains arising from sources in
Norway.
2.222 Accordingly, effect is to be given to the tax credit relief
obligation imposed on Australia by paragraph 1 of this Article by
application of the general foreign tax credit provisions (Division 18 of
Part III) of the ITAA 1936.
2.223 Notwithstanding the credit basis of relief provided for by
paragraph 1 of this Article, in relation to salary and wages and like
remuneration derived by a resident of Australia during a continuous
period of foreign service (as defined in subsection 23AG(7) of the
ITAA 1936) in Norway, the exemption with progression method of relief
will be applicable.
2.224 Dividends and branch profits derived from Norway by an
Australian resident company that are exempt from Australian tax under
the foreign source income measures (eg, sections 23AH or 23AJ of the
ITAA 1936) will continue to qualify for exemption from Australian tax
under those provisions. As double taxation does not arise in these cases,
the credit form of relief will not be relevant.
Norwegian relief
2.225 In the case of a resident of Norway who is taxable in Norway on
income which is also taxable in Australia under this Convention, this
Article requires Norway to allow the Norwegian resident a deduction for
the amount of Australian tax paid on that income. The deduction shall not
exceed that part of the Norwegian tax which is attributable to the income
that is taxable in Australia. [Article 23, subparagraph 2(a)]
2.226 In the case of income derived by a resident of Norway, which is
exempted in Norway under the Norway Convention, Norway may
nevertheless include such income in the tax base, but shall allow the
Norwegian resident a deduction from Norwegian tax for the amount of
Norwegian tax attributable to that income. [Article 23, subparagraph 2(b)]
Article 24 -- Non-discrimination
2.227 The Norway Convention includes rules to prevent tax
discrimination. The Australian tax system is generally
non-discriminatory. However, for clarity the Article provides that certain
pillars of the Australia tax system should not be seen as coming within the
135
International Tax Agreements Amendment Bill (No. 1) 2007
Article's terms. The measures identified can be characterised as being an
integral part of today's administration of Australia's economic and tax
policy and the collection of its taxes. As such it has been recognised that
the measures carved out do not offend the spirit or intendment of a
Non-discrimination Article based on the OECD Model Article 24
(Non-discrimination).
Discrimination based on nationality
2.228 This Article prevents discrimination on the grounds of
nationality by providing that nationals of one country may not be less
favourably treated than nationals of the other country in the same
circumstances. [Article 24, paragraph 1]
2.229 The discrimination that the Article precludes applies to both
taxation and any requirement connected therewith. Accordingly,
discrimination in the administration of the tax law is also generally
precluded.
2.230 The term national is defined in Article 3 (General Definitions)
of the Norway Convention and covers both individuals who have the
nationality or citizenship of one country or the other, and companies
which `derive their status as such from the laws in force in that
Contracting State'. Accordingly, a company that is incorporated in
Australia would be a national of Australia while a company that is
incorporated or otherwise constituted under a law of Norway would be a
national of Norway for the purposes of this paragraph. [Article 3,
subparagraph 1(l)]
The meaning of `in the same circumstances' and `in particular with
respect to residence'
2.231 The expression `in the same circumstances' refers to persons
who, from the point of the application of the ordinary taxation laws and
regulations, are in substantially similar circumstances both in law and in
fact.
2.232 Where a person operates in an industry that is subject to
government regulation such as prudential oversight, another person
operating in the same industry but not subject to the same oversight,
would not be in the same circumstances.
2.233 The inclusion of the further clarification `in particular with
respect to residence' makes clear that the residence of the taxpayer is one
of the factors that are relevant in determining whether taxpayers are
placed in similar circumstances. Therefore, different treatment accorded
to a Norwegian resident compared to an Australian resident will not
136
2006 Australia-Norway tax Convention
constitute discrimination for purposes of this Article. A potential breach
of paragraph 1 of this Article only arises if two persons who are residents
of the same country are treated differently solely by reason of one being a
national of Australia and the other a national of Norway.
The meaning of `other' or `more burdensome'
2.234 The words `more burdensome' taxation refer to the quantum of
taxation while `other' taxation may refer to some form of income tax
other than the form of income tax to which a national of the country is
subject (Woodend Rubber Co. v Commissioner of Inland Revenue [1971]
A.C. 321 at 332).
2.235 The phrase is also applicable to administrative or compliance
requirements that a taxpayer may be called upon to meet where those
requirements differ based on nationality grounds.
Non-residents of Australia/Norway
2.236 Unlike paragraph 1 of Article 24 (Non-discrimination) of the
OECD Model, paragraph 1 of this Article does not apply to persons who
are not residents of either Australia or Norway. It follows that residents
of third countries cannot seek the benefits of this provision. The provision
also does not extend to residents of either country who are not nationals
(as defined in Article 3 (General Definitions)) of either country.
Non-discrimination and permanent establishments
2.237 Paragraph 2 of this Article provides that the tax on permanent
establishments of enterprises of the other country shall not be levied less
favourably than on the country's own enterprises carrying on the same
activities in similar circumstances. This provision applies to all residents
of a treaty country, irrespective of their nationality, who have a permanent
establishment in the other country. [Article 24, paragraph 2]
2.238 Paragraph 2 of this Article contains the additional proviso that,
for this paragraph to apply, the enterprises of both countries must be
`in similar circumstances'. Therefore, the comparison must be made
between a permanent establishment and local enterprises which are not
only carrying on the same activities but are also carrying on those
activities `in similar circumstances'. This is to address situations where
resident and non-resident enterprises may be carrying on the same
activities but the circumstances in which they do so are very different.
For example, one may be conducting dealings on a non-arm's length basis
and the other on an arm's length basis. The provision recognises that
appropriate differences in taxation treatment are not precluded because of
the differing circumstances.
137
International Tax Agreements Amendment Bill (No. 1) 2007
2.239 Permanent establishments of non-resident enterprises may be
treated differently from resident enterprises as long as the treatment does
not result in more burdensome taxation for the former than for the latter.
That is, a different mode of taxation may be adopted with respect to
non-resident enterprises, to take account of the fact that they often operate
in different conditions to resident enterprises. The provision would not
affect, for example, domestic law provisions that tax a non-resident by
withholding, provided that calculation of the tax payable is not greater
than that applying to a resident taxpayer.
Deductions paid to non-residents
2.240 Paragraph 3 of this Article requires the treaty partner countries
to allow the same deductions for interest, royalties and other
disbursements paid to residents of the other country as it does for such
payments to its own residents. However, the paragraph allows the treaty
countries to reallocate profits between related enterprises on an arm's
length basis under Article 9 (Associated Enterprises) and to limit
deductions in accordance with paragraph 8 of Article 11 (Interest), and
paragraph 6 of Article 12 (Royalties). [Article 24, paragraph 3]
Companies owned or controlled abroad
2.241 Paragraph 4 of this Article prevents a country from giving less
favourable treatment to an enterprise, the capital of which is owned or
controlled, wholly or partly, directly or indirectly, by one or more
residents of the other country. That is, Australian companies owned or
controlled by Norwegian residents may not be given other or more
burdensome treatment than locally owned or controlled Australian
companies. [Article 24, paragraph 4]
2.242 Differential tax treatment based on residency is not affected by
this paragraph. Nor does the paragraph require the same treatment of
non-resident shareholders in the company as resident shareholders.
Accordingly, there is no obligation under this provision or any other
provision of the Article to allow imputation credits to non-resident
shareholders.
Exclusions
2.243 Non-resident individuals do not have to be granted the personal
allowances, reliefs or reductions available to residents of the tax treaty
countries. [Article 24, paragraph 5]
2.244 This means that Australia will continue to be able to grant to
resident individuals rebates such as the dependent spouse rebate that are
not available to non-residents.
138
2006 Australia-Norway tax Convention
2.245 Unlike paragraph 3 of Article 24 (Non-discrimination) of the
OECD Model, paragraph 5 of this Article is not just limited to those
benefits conferred by a country relating to civil status or family
responsibilities of the individual. For Australian tax purposes, it also
extends, for example, to the tax-free threshold which may be considered
not to be based either on civil status or family responsibilities.
2.246 Paragraph 6 of this Article excludes from the operation of the
Article certain provisions of the law of both countries that are important
for purposes of economic regulation and integrity of the tax system.
Although most are generally recognised by the international community
as not being discriminatory, the specific exclusion of these provisions will
ensure that they can continue to operate for their intended purpose. The
provisions of the law of Australia and Norway to be excluded are those
that:
· prevent the avoidance or evasion of taxes;
· defer tax where an asset is transferred out of the jurisdiction;
· provide for consolidation of group entities;
· do not allow tax rebates or credits in relation to dividends
paid by a company;
· provide for deductions for research and development
expenditure; or
· are agreed in an Exchange of Notes between the two
Governments to be unaffected by the Article.
[Article 24, paragraph 6]
Avoidance or evasion provisions
2.247 Subparagraph 6(a) of this Article ensures that the operation of
domestic measures to combat avoidance and evasion is not affected by
this Article. Paragraph 7 of this Article provides that the reference to laws
designed to prevent avoidance or evasion of taxes includes thin
capitalisation, dividend stripping, transfer pricing, controlled foreign
company, transferor trust and foreign investment fund provisions, and
collection measures including conservancy. Although it is commonly
accepted by most OECD member countries that such provisions do not
contravene Non-discrimination Articles, this outcome is specifically
provided for in this Convention by the exclusion of such rules from the
operation of this Article. [Article 24, subparagraph 6(a) and paragraph 7]
139
International Tax Agreements Amendment Bill (No. 1) 2007
2.248 The enforcement and operation of the various aspects of the
withholding tax provisions relating to non-residents are preserved by the
operation of subparagraph 6(a) and paragraph 7 of this Article. For
example, section 221YRA (Recovery of amounts by the Commissioner)
of the ITAA 1936 provides that where interest or royalties are paid to a
non-resident and the payer fails to deduct withholding tax that the interest
or royalty cannot be claimed as a deduction. No similar measure exists in
relation to payments from a resident to another resident.
Capital gains roll-over relief
2.249 This Article will not affect the operation of any provision of
domestic tax legislation which does not permit the deferral of tax arising
on the transfer of an asset where the transfer of the asset by the transferee
would take the asset beyond the taxing jurisdiction of the country.
[Article 24, subparagraph 6(b)]
2.250 Under Australia's domestic tax legislation permanent
establishments generally enjoy the same tax treatment as resident
enterprises. However, roll-over relief is denied to a permanent
establishment where an asset with the necessary connection with Australia
is transferred to a non-resident if the asset is not an asset with the
necessary connection with Australia in the hands of the transferee.
Subparagraph 6(b) ensures that Australia will be able to continue to deny
roll-over relief in these circumstances.
Consolidation
2.251 Domestic law rules which provide for single entity treatment of
a group of entities are excluded from the operation of this Article,
provided that there is no discrimination regarding access to consolidation
treatment between Australian resident companies on the basis of
ownership of the company.
2.252 Australia's consolidation measures are restricted to
wholly-owned Australian resident groups. The Article will not apply to
these measures, with the result that domestic law provisions continue to
operate to preclude permanent establishments of non-resident companies
from consolidating with resident entities that may be wholly-owned by a
non-resident. [Article 24, subparagraph 6(c)]
Rebates or credits paid by a company
2.253 Domestic law rules of either country which allow an
intercorporate dividend rebate or credit are excluded from the operation of
this Article. In relation to credits, Australia does not permit non-residents
to offset imputation credits against their Australian source income, or to
140
2006 Australia-Norway tax Convention
seek a refund of any excess imputation credits. Subparagraph 6(d)
ensures that this Article does not operate to preclude this treatment.
[Article 24, subparagraph 6(d)]
Research and development expenditure
2.254 The domestic law research and development provisions are
excluded from the operation of this Article. It follows that Australia will
be able to continue to apply its domestic law rules concerning access to
concessions in respect of research and development expenditure.
Currently, these concessions are only available to companies that are
incorporated in Australia. [Article 24, subparagraph 6(e)]
Power to carry out an Exchange of Notes
2.255 Subparagraph 6(f) of this Article provides a mechanism for the
two Governments to exclude other provisions of domestic law from the
operation of the Article. The two countries may agree in an Exchange of
Notes that other domestic law provisions will not be affected by the
requirements of the Article. [Article 24, subparagraph 6(f)]
Taxes to which the Non-discrimination Article applies
2.256 In the case of Australia, the relevant taxes are primarily the
income tax (including the petroleum resource rent tax and tax on capital
gains) and the GST and fringe benefits tax. The provisions of this Article
also apply to taxes imposed by the Australian states and territories (see
also commentary to Article 2 (Taxes Covered)).
2.257 In the case of Norway, the relevant taxes are primarily the tax on
general income, the tax on personal income, the special tax on petroleum
income, the resource rent tax on income from production of hydro-electric
power, the withholding tax on dividends and the tax on remuneration to
non-resident artistes, etc.
More favourable treatment
2.258 Nothing in this Article prevents either country from treating
residents of the other country more favourably than its own residents.
Article 25 -- Mutual Agreement Procedure
Consultation on specific cases
2.259 This Article provides for consultation between the competent
authorities of the two countries with a view to reaching a solution in cases
where a person is able to demonstrate actual or potential imposition of
141
International Tax Agreements Amendment Bill (No. 1) 2007
taxation contrary to the provisions of the Norway Convention. [Article 25,
paragraph 2]
2.260 A person wishing to use this procedure may present a case to the
competent authority of the country of which the person is a resident. If
the case comes under paragraph 1 of Article 24 (Non-discrimination) of
this Convention, the person must present a case to the competent authority
of the country of which the person is a national.
2.261 Presentation of a case by a person to a competent authority must
be made within three years of the first notification of the action which the
taxpayer considers gives rise to taxation not in accordance with the
Norway Convention. Presentation of a case does not deprive the person
of access to, or affect their rights in relation to, other legal remedies
available under the domestic laws of the countries. [Article 25, paragraph 1]
2.262 If the person's claim seems to the competent authority to which
the case has been presented to be justified, and that competent authority is
not itself able to solve the problem, then the competent authority is
required to seek to resolve the case by mutual agreement with the
competent authority of the other country, with a view to avoiding taxation
not in accordance with the treaty. [Article 25, paragraph 2]
2.263 If, after consideration by the competent authorities, a solution is
reached, it shall be implemented in accordance with the provisions of the
Article.
Implementation of a solution
2.264 The solution reached by mutual agreement between the
competent authorities of the relevant countries shall be implemented
notwithstanding any time limits in the domestic laws of the tax treaty
countries. This allows the competent authorities the flexibility to reach a
satisfactory solution and avoids problems that might arise where each
country has a different time limit in their domestic law. [Article 25,
paragraph 2]
Consultation on general problems
2.265 This Article also authorises consultation between the competent
authorities of the two countries for the purpose of resolving any
difficulties that arise regarding the interpretation or application of the
treaty and to give effect to it. This may allow, for example, the competent
authorities to agree to apply an agreed solution to a broader range of
taxpayers, notwithstanding that the original uncertainty may have arisen
in connection with an individual case that comes under the procedure
outlined in paragraphs 1 and 2 of this Article.
142
2006 Australia-Norway tax Convention
2.266 Paragraph 3 of this Article also enables the competent
authorities to deal with cases of double taxation that do not come within
the scope of the Norway Convention. [Article 25, paragraph 3]
Methods of communication between competent authorities
2.267 The competent authorities are permitted to communicate directly
with each other without having to go through diplomatic channels. This
may be done by letter, facsimile transmission, telephone, direct meetings
or any other convenient means. [Article 25, paragraph 4]
General Agreement on Trade in Services (GATS) dispute resolution
process
2.268 Paragraph 5 of this Article deals with disputes that may be
brought before the World Trade Organisation Council for Trade in
Services under the dispute resolution processes of the GATS. [Article 25,
paragraph 5]
Background
2.269 Australia and Norway are both parties to the GATS.
Article XVII (National Treatment) of the GATS requires a party to accord
the same treatment to services and service suppliers of other parties as it
accords to its own like services and service suppliers.
2.270 Articles XXII (Consultation) and XXIII (Dispute Settlement and
Enforcement) of the GATS provide for discussion and resolution of
disputes. Where a measure of another party falls within the scope of a tax
treaty, paragraph 3 of Article XXII (Consultation) provides that the other
party to the tax treaty may not invoke Article XVII (National Treatment).
However, if there is a dispute as to whether a measure actually falls within
the scope of a tax treaty, either country may take the matter to the Council
on Trade in Services for referral to binding arbitration.
2.271 Notwithstanding paragraph 3 of Article XXII (Consultation) of
the GATS, Australia and Norway have agreed that the consent of both
countries is required before a dispute as to whether a measure falls within
the scope of this Convention may be brought before the Council on Trade
in Services. This is seen as the most effective way of dealing with such
disputes, and avoids difficult questions as to when a disputed issue falls
within the dispute resolution mechanism of this Convention or of the
GATS dispute.
2.272 This provision is based, in all essential respects, on an
OECD Model commentary recommendation, and is common in recent
international treaty practice. [Article 25, paragraph 5]
143
International Tax Agreements Amendment Bill (No. 1) 2007
Article 26 -- Exchange of Information
2.273 The Norway Convention aligns the information exchange
provisions to the 2005 OECD standard. The Article differs from the
previous approach in the following ways:
· The scope is expanded to a wider range of taxes.
· The new provision clarifies that the Commissioner is obliged
to obtain information for Norwegian tax authorities
regardless of whether Australia has a domestic tax interest in
the information sought.
· Bank secrecy laws do not limit the exchange of information.
Foreseeably relevant information
2.274 Article 26 authorises and limits the exchange of information by
the two competent authorities to information foreseeably relevant to the
administration or enforcement of the relevant taxes. The exchange of
information is not restricted by Article 1 (Persons Covered) of the treaty,
and may therefore cover persons who are not residents of Australia or
Norway.
2.275 The standard of foreseeable relevance is intended to ensure that
information may be exchanged to the widest possible extent. However,
competent authorities are not entitled to request information from the
other country which is unlikely to be relevant to the tax affairs of a
taxpayer, or to the administration and enforcement of tax laws. [Article 26,
paragraph 1]
2.276 The change in wording from that used in the corresponding
Article in the existing Norway treaty to a `foreseeably relevant' standard
reflects the wording in Article 26 of the OECD Model and no difference
in effect is intended.
Taxes to which this Article applies
2.277 Under the corresponding Article in the existing Norway treaty,
the information that could be requested and obtained between the two
countries was limited to information in relation to taxes to which the
treaty applied (generally income taxes).
2.278 Under this Convention, the range of taxes for which information
may be exchanged has been expanded. The Australian competent
authority can now request and obtain information concerning all federal
taxes administered by the Commissioner from their counterpart in
144
2006 Australia-Norway tax Convention
Norway. This means, for example, that information concerning
Australian indirect taxes (ie, the GST) may be requested and obtained
from Norway. [Article 26, paragraph 1]
2.279 Similarly, in the case of Norway, the Norwegian competent
authority can now request and obtain information concerning taxes of
every kind and description imposed under Norwegian tax laws, from the
Australian competent authority to the extent that the requested
information relates to taxes administered by the Commissioner.
Use of exchanged information
2.280 The purposes for which the exchanged information may be used
and the persons to whom it may be disclosed are restricted consistent with
the former Article and the approach taken in the OECD Model. Any
information received by a country must be treated as secret in the same
manner as information obtained under the domestic law of that country
and can only be disclosed to the persons identified in paragraph 2 of the
Article. [Article 26, paragraph 2]
No domestic tax interest required
2.281 When requested, a country is required to obtain information in
the same manner as if it were administering its domestic tax system,
notwithstanding that the country may not require the information for its
own purposes. Australia would recognise this obligation to obtain
relevant information for treaty partner countries, even in the absence of an
explicit provision to this effect. [Article 26, paragraph 4]
Limitations
2.282 The country requested to provide information under this Article
is not obliged to do so where:
· it would be required to carry out administrative procedures
incompatible with its own law or the domestic law and
administrative practice, of either Australia or Norway; or
· such information is not obtainable under the domestic law or
in the normal course of administration by the competent
authority in either Australia or Norway. Australia is not
obliged, for example, to use police powers to obtain
information requested by Norway, although information
gathered in that way which is already in the possession of the
Commissioner may be exchanged.
[Article 26, subparagraphs 3(a) and (b)]
145
International Tax Agreements Amendment Bill (No. 1) 2007
2.283 Also, in no case is the country receiving the request obliged to
supply information under this Article that would:
· disclose any trade, business, industrial, commercial or
professional secret or trade process; or
· be contrary to public policy.
[Article 26, subparagraph 3(c)]
Information held by banks, other financial institutions, nominees etc
2.284 This paragraph ensures that paragraph 3 of this Article cannot be
used to prevent the supply of information solely because the information
is held by banks, other financial institutions, nominees etc. The inclusion
of this paragraph in the Norway Convention should not be interpreted as
suggesting the corresponding Article of the existing Norway treaty did not
cover the exchange of such information. Inclusion of paragraph 5 merely
clarifies Australia's current treaty practice, and reflects recent changes to
Article 26 (Exchange of Information) of the OECD Model. [Article 26,
paragraph 5]
Article 27 -- Assistance in the Collection of Taxes
Assistance in the collection of taxes
2.285 Article 27 (Assistance in the Collection of Taxes) authorises and
requires Australia and Norway to provide assistance to each other in the
collection of revenue claims. This assistance is not to be restricted by the
terms of Article 1 (Personal Scope) of the treaty. Assistance must
therefore be provided as regards a revenue claim owed to either country
by any person, whether or not a resident of Australia or Norway. The
form of the assistance is set out in paragraphs 3 and 4 of this Article.
[Article 27, paragraph 1]
2.286 The term revenue claim is defined for the purposes of this
Article to mean an amount owed in respect of taxes referred to in Article 2
(Taxes Covered) of the treaty. A revenue claim may cover any
Norwegian tax, or any Australian federal tax administered by the
Commissioner, but only insofar as the imposition of such taxes is not
contrary to this treaty or any other instrument in force between Australia
and Norway. It also applies to interest, administrative penalties and costs
of collection or conservancy related to such amount. [Article 27, paragraph 2]
2.287 This Article will apply from the date agreed in an exchange of
notes through the diplomatic channel. [Article 29, subparagraph 1(d)]
146
2006 Australia-Norway tax Convention
Enforceable revenue claims
2.288 Assistance in collection will only be provided by Australia in
relation to a revenue claim that is enforceable in Norway. Similarly,
Norway is not required to provide assistance in collection in respect of an
Australian revenue claim that is not enforceable in Australia. A revenue
claim will be enforceable where the requesting country has the right,
under its domestic law, to collect the revenue claim. Further, the revenue
claim must be owed by a person who, at that time, under the law of that
country, has no administrative or judicial rights to prevent its collection.
2.289 Paragraph 3 of this Article regulates the way in which the
revenue claim of the requesting country is to be collected by the requested
country. Other than in relation to time limits and priority (see paragraphs
2.293 to 2.294), the requested country is required to collect the revenue
claim as though it were its own revenue claim. This obligation applies
even if, at that time, the requested country has no need to undertake
collection actions related to that taxpayer for its own tax purposes.
[Article 27, paragraph 3]
2.290 Where a request from Norway concerns a tax that does not exist
in Australia, Australia will follow the procedure applicable to a claim for
a similar Australian tax or any other appropriate procedure if no similar
tax exists.
Measures of conservancy
2.291 Paragraph 4 of this Article enables Australia or Norway to
request the other country to take measures of conservancy even where it
cannot yet ask for assistance in collection, such as where the revenue
claim is not yet enforceable or when the debtor still has the right to
prevent its collection. An example of a conservancy measure is the
seizure or the freezing of assets before final judgment to guarantee that
the assets will still be available when collection can subsequently take
place.
2.292 If requested to do so by Norway, Australia is required to take
measures of conservancy in respect of the revenue claim in accordance
with the provisions of Australian law as if the revenue claim were an
Australian revenue claim. Although Australia does not have specific
conservancy measures, the Commissioner may apply for a Mareva
injunction, which would prevent the taxpayer and the taxpayer's
associates from dealing with certain assets. [Article 27, paragraph 4]
147
International Tax Agreements Amendment Bill (No. 1) 2007
Time limits
2.293 Paragraph 5 of this Article provides that the requested country's
domestic law time limitations beyond which a revenue claim cannot be
enforced or collected do not apply to a revenue claim in respect of which
the other country has made a request for assistance in collection. Rather,
the time limits of the requesting country apply. [Article 27, paragraph 5]
Priority of claims
2.294 Paragraph 5 of this Article also provides that any rules of
Australia and Norway which give priority to tax debts over the claims of
other creditors do not apply to a revenue claim of the other country. This
restriction applies regardless of the fact that the requested country must
generally treat the claim as its own revenue claim.
2.295 The words `by reason of its nature as such' in paragraph 5
indicate that any time limits and priority rules to which the paragraph
applies are only those that are specific to unpaid taxes. Consequently,
paragraph 5 does not prevent the application of general rules concerning
time limits or priority which would apply to all debts, such as rules giving
priority to a claim by reason of that claim having arisen or having been
registered before another one. [Article 27, paragraph 5]
Restriction on judicial and administrative proceedings
2.296 Paragraph 6 of this Article ensures that any legal or
administrative objection concerning the existence, validity or the amount
of a revenue claim of the requesting country is to be exclusively dealt with
in that country. For example, no legal or administrative proceedings, such
as a request for judicial review, may be initiated in Australia with respect
to the existence, validity or amount of a Norwegian revenue claim.
[Article 27, paragraph 6]
Change in circumstances
2.297 Paragraph 7 of this Article deals with the situation where the
conditions in paragraph 3 or 4 are no longer satisfied after a request for
assistance has been made, but before the revenue claim has been collected
and remitted by the requested country. An example of such a situation
would be where a request for assistance in collection has been made by
Norway, but the revenue claim ceases to be enforceable in Norway prior
to its collection by Australia.
2.298 Where the relevant conditions in paragraph 3 or 4 of this Article
are no longer satisfied, paragraph 7 requires the competent authority of
148
2006 Australia-Norway tax Convention
the requesting country to promptly notify the competent authority of the
requested country of that fact.
2.299 Following such notification, the requested country has the
option to ask the requesting country to either suspend or withdraw its
request for assistance. If the request is suspended, the suspension applies
until such time as the requesting country informs the other country that
the conditions necessary for making a request as regards the revenue
claim are again satisfied or that it withdraws its request. [Article 27,
paragraph 7]
Limitations
2.300 Paragraph 8 of this Article contains certain limitations to the
obligations imposed on the country which receives a request for
assistance. The requested country is permitted to refuse the request for
assistance where those limitations apply.
2.301 The first limitation is that the requested country is not required
to exceed the bounds of its own domestic laws and administrative practice
or those of the other country in fulfilling its obligations under the Article.
[Article 27, subparagraph 8(a)]
2.302 However, subparagraph 8(a) of this Article does not prevent
Australia from applying administrative measures to collect a Norwegian
revenue claim, even though invoked solely to provide assistance in the
collection of Norwegian taxes.
2.303 Subparagraph 8(b) limits the application of this Article where it
would require the carrying out of measures that are contrary to public
policy, such as where providing assistance may affect the vital interests of
the country itself. [Article 27, subparagraph 8(b)]
2.304 The third limitation provides that neither country is obliged to
satisfy a request for assistance if the other country has not pursued all
reasonable measures of collection or conservancy that are available under
its own laws or administrative practice. [Article 27, subparagraph 8(c)]
2.305 Under subparagraph 8(d) of this Article either country may
reject a request for assistance on the basis of practical administrative
considerations such as when the costs of recovering a revenue claim
would exceed the amount of the revenue claim itself. [Article 27,
subparagraph 8(d)]
2.306 The final limitation allows either country to refuse to provide
assistance if it considers that the taxes with respect to which assistance is
requested are imposed contrary to generally accepted taxation principles.
[Article 27, subparagraph 8(e)]
149
International Tax Agreements Amendment Bill (No. 1) 2007
Article 28 -- Members of Diplomatic Missions and Consular Posts
2.307 The purpose of this Article is to ensure that the provisions of the
tax treaty do not result in members of diplomatic missions, permanent
missions and consular posts receiving less favourable treatment than that
to which they are entitled in accordance with international conventions.
Such persons are entitled, for example, to certain fiscal privileges under
the Diplomatic Privileges and Immunities Act 1967 and the Consular
Privileges and Immunities Act 1972 which reflect Australia's international
diplomatic and consular obligations. [Article 28, paragraph 1]
Prevention of double non-taxation
2.308 Consistent with Norwegian treaty practice, paragraph 2 ensures
that double non-taxation does not arise where income is not subject to tax
in the country to which the diplomat or consular official is posted as a
result of tax privileges granted to diplomats and consular officers under
general rules of international law or under international agreements. In
these circumstances, paragraph 2 provides that the country of which the
diplomat or consular official is a representative will have the right to tax
that income. [Article 28, paragraph 2]
Article 29 -- Entry into Force
Date of entry into Force
2.309 This Article provides for the entry into force of the Norway
Convention. The treaty will enter into force on the last date on which
diplomatic notes are exchanged notifying that the domestic processes to
give the Convention the force of law in the respective countries has been
completed. In Australia, enactment of the legislation giving the force of
law in Australia to the Convention along with tabling the treaty in
Parliament are prerequisites to the exchange of diplomatic notes.
[Article 29, paragraph 1]
Date of application for Australian taxes
Withholding taxes
2.310 Once it enters into force, the Norway Convention will apply in
Australia in respect of withholding tax on income that is derived by a
non-resident in relation to income derived on or after 1 January in the
calendar year next following the date on which the tax treaty enters into
force. [Article 29, sub-subparagraph 2(a)(i)]
150
2006 Australia-Norway tax Convention
Other Australian taxes
2.311 The Norway Convention will first apply to other Australian
taxes on income, profits or gains of the Australian year of income
beginning on or after 1 July in the calendar year next following the date
on which the tax treaty enters into force.
2.312 Where a taxpayer has adopted an accounting period ending on a
date other than 30 June, the accounting period that has been substituted
for the year of income beginning on 1 July in the calendar year next
following the date on which the Norway Convention enters into force will
be the relevant year of income for the purposes of the application of such
Australian tax. [Article 29, sub-subparagraph 2(a)(ii)]
Date of application in Norway
2.313 In Norway, the Norway Convention will have effect in relation
to taxes on income, in the calendar year next following that in which the
treaty enters into force and subsequent years. A calendar year includes
accounting periods beginning in any such year. [Article 29,
subparagraph 2(b)]
Exchange of information application date
2.314 Article 26 (Exchange of Information) will first apply from the
date of entry into force of the treaty. It applies to requests for exchange of
information in respect of taxes of every kind and description imposed
under the federal tax laws administered by the Commissioner, received on
or after that date. However, information that may relate to the income tax
affairs of a taxpayer may predate entry into force of the Convention.
[Article 29, subparagraph 2(c)]
Assistance in collection of taxes date of application
2.315 Article 27 (Assistance in the Collection of Taxes) will first have
effect from the date agreed in an exchange of notes between Australia and
Norway. [Article 29, subparagraph 2(d)]
Termination of the existing Norway treaty
2.316 The existing Norway treaty shall be terminated and cease to
have effect from the dates on which the Norway Convention commences
to have application for the respective taxes. [Article 29, paragraph 3]
151
International Tax Agreements Amendment Bill (No. 1) 2007
Article 30 -- Termination
2.317 The Norway Convention is to continue in effect indefinitely.
However, either country may give written notice of termination of the
Convention through the diplomatic channel at least six months before the
end of any calendar year beginning after the expiration of five years from
the date of its entry into force. [Article 30]
Cessation in Australia
2.318 In the event of either country terminating the Norway
Convention, the tax treaty would cease to be effective in Australia for the
purposes of:
· withholding tax on income derived by a non-resident in
relation to income derived on or after 1 January in the
calendar year next following that in which the notice of
termination is given; and
· other Australian taxes in relation to income, profits or gains
in the Australian year of income commencing on or after
1 July in the calendar year next following that in which the
notice of termination is given.
[Article 30, subparagraph (a)]
Cessation in Norway
2.319 The Norway Convention would correspondingly cease to be
effective in Norway for the purposes of taxes on income relating to the
calendar year (including accounting periods beginning in such year) next
following that in which the notice is given. [Article 30, subparagraph (b)]
152
Chapter 3
Regulation impact statement for the
2006 France Convention
Background
How tax treaties operate
3.1 Tax treaties reduce or eliminate double taxation caused by the
exercise of source and residence country taxing rights on cross-border
income flows. They do so by treaty partners agreeing (in certain
situations) to limit taxing rights over various types of income. The
respective countries also agree on methods of reducing double taxation
where both countries exercise their right to tax.
3.2 In addition, tax treaties provide an agreed basis for determining
the allocation of profits within a multinational company and whether the
profits on related party dealings by members of a multinational group
operating in both countries reflect the pricing that would be adopted by
independent parties. Tax treaties are therefore an important tool in
dealing with international profit shifting through transfer pricing.
3.3 To prevent fiscal evasion, tax treaties include provision for
exchange of information held by the respective revenue authorities.
Treaties may also provide for cross-border collection of tax debts, and
may preclude certain types of tax discrimination. Taxpayers can also
avail themselves of the mutual agreement procedures provided for in
treaties which allow the two revenue authorities to consult with a view to
developing a common interpretation and to resolving differences arising
out of application of the treaty.
3.4 Australia seeks an appropriate balance between source and
residence country taxing rights. Generally the allocation of taxing rights
under Australian tax treaties is similar to international practice as set out
in the Organisation for Economic Co-operation and Development
(OECD) Model Tax Convention on Income and on Capital (OECD
Model) (Australia being a member of the OECD and involved in the
development of that Model). There are, however, a number of instances
where Australian practice favours source country taxing rights rather than
the residence approach of the OECD Model.
153
International Tax Agreements Amendment Bill (No. 1) 2007
The France tax treaty
3.5 The existing tax treaty with France was signed on 13 April 1976
(the existing France treaty) and has been in effect in Australia since the
income year commencing 1 July 1972 in respect of income taxes and
1 January 1973 in respect of withholding taxes. The treaty was amended
by a Protocol signed on 19 June 1989 and having effect in Australia in
respect of income taxes derived on or after 1 July 1991. Amendments
to the Royalties Article and the Pensions Article took effect from
20 June 1989 and 1 July 1987 respectively.
3.6 There is also a separate Agreement between the Government of
the Commonwealth of Australia and the Government of the French
Republic for the Avoidance of Double Taxation of Income Derived from
International Air Transport (the Airline Profits Agreement) with France
which was signed on 27 March 1969 and which has been in effect in
Australia since the income year commencing 1 July 1966.
3.7 With the entry into force of the Protocol to the
United States (US) tax Convention on 12 May 2003 Australia is obliged,
under the existing France treaty to provide most favoured nation (MFN)
treatment in respect of the rates of tax applicable to dividends, interest and
royalties1.
3.8 With the entry into force of the new tax treaty with
United Kingdom (UK) on 17 December 2003, Australia is also obliged to
negotiate the inclusion of a non-discrimination Article that operates to
protect taxpayers operating in foreign jurisdictions from discriminatory
tax practices.
3.9 While the triggering of the MFN clauses imposes certain
obligations on Australia, it also presents an opportunity to update certain
aspects of the current France treaty including clarifying Australia's rights
to apply capital gains tax (CGT).
1 Most favoured nation clauses require a country to enter into negotiations with a view to
providing similar treatment to its treaty partner if it subsequently agrees with a third
country to a certain specified tax treatment.
154
Regulation impact statement for the 2006 France Convention
Australia's investment and trade relationship with the
Republic of France2
Bilateral trade
3.10 Australia's commercial links with France are substantial but
one-sided, with the balance of trade increasing further in France's favour
in recent years. France is Australia's 14th largest merchandise trading
partner and 11th largest supplier of imports but is ranked only 22nd as a
destination for Australian merchandise exports.
3.11 Australia's merchandise exports to France for 2005 stood at
A$1.1 billion, while Australian merchandise imports from France were
A$5.3 billion for the same period. Australia's merchandise trade deficit
with France totalled A$4.2 billion in 2005-06. Australia's exports to
France in 2005-06 were dominated by commodities, particularly coal and
iron ore. Medical instruments, medicaments and aircraft and parts were
the major manufactured export items. Major products imported from
France in 2005-06 were aircraft and parts, medicaments and passenger
motor vehicles.
3.12 Two way services trade between Australia and France stood at a
total of A$1.18 billion (with a French surplus of A$164 million) in
2005-06.
Bilateral investment
3.13 Total French investment in Australia as at 31 December 2005
was valued at A$15.1 billion. Foreign direct investment from France in
Australia was valued at A$8.3 billion, making France the 7th largest direct
investor in Australia. Major French investments have been made in the
financial services, telecommunications, pharmaceuticals, energy,
resources and agribusiness sectors. Some important examples include:
· the acquisition of a 51 per cent stake in National Mutual by
insurer AXA;
· Pernod-Ricardi's purchase of the Orlando-Wyndham group;
· the participation of Vivendi in the successful bid for the
A$1.5 billion project to manage South Australian Water;
2 Source: Department of Foreign Affairs and Trade.
155
International Tax Agreements Amendment Bill (No. 1) 2007
· Transroute's participation in the construction consortium
concerning the A$1.5 billion Melbourne City link toll-road;
and
· the purchase of Australian Defence Industries by Thales, as
part of a 50/50 joint venture with Australian engineering
group, Transfield.
3.14 There are now close to 300 companies in Australia with a
French association employing some 70,000 people, with an annual
turnover of 12 billion Euros, or A$20 billion. A number of companies
have chosen to headquarter their regional operations in Australia -- such
as AXA -- or to build very substantial offices with considerable regional
responsibilities -- such as the hotel group Accor.
3.15 In December 2001, the Australian Defence Material
Organisation signed an A$1.3 billion contract with France-based company
Eurocopter for the delivery and through-life support of 22 `Tiger Armed
Reconnaissance' helicopters for the Australian Army, with four to be built
in Europe and the remaining 18 assembled at the Australian Aerospace
facility in Brisbane, generating up to 180 jobs during the assembly phase.
The first two helicopters arrived in Australia in November 2004 and
the first Australian built helicopter rolled out on 18 July 2005. In
August 2004, Australia also signed an A$1 billion contract with
Eurocopter for the delivery of 12 MRH-90 `troop lift' helicopters to the
Australian Defence Force.
3.16 Australian investment in France received a significant boost in
December 2005 with the French Government's announcement of
Macquarie Bank's successful tender -- with its French partner Eiffage --
for the privatisation of the Autoroutes Paris Rhin Rhône tollway.
Macquarie is expected to invest around A$3.9 billion in the project. Prior
to this, total Australian investment in France (as at 31 December 2005)
was valued at A$14.9 billion, including investments in the south west of
France by the surf and sportswear companies, Billabong and Rip Curl;
Oceanis Australia Pty Ltd's construction of the largest aquarium in
France; VitaMan's launch of the first Australian grooming range for men
in France; and Ingeus's involvement in the French employment services
market.
156
Regulation impact statement for the 2006 France Convention
Specification of policy objectives
3.17 The objective of the measure is to:
· meet Australia's MFN obligations3;
· promote closer economic cooperation between Australia and
France by reducing possible tax barriers to trade and
investment between the two countries; and
· upgrade the framework through which the tax
administrations of Australia and France can prevent
international fiscal evasion.
Identification of implementation options
3.18 The internationally accepted approach to meeting the policy
objectives specified above is to:
· amend an existing treaty to reflect current policies (amending
Protocol); or
· conclude a new bilateral tax treaty 4.
Option 1: Limited amending Protocol (most favoured nation obligations)
-- rely on the existing France tax treaty measures
3.19 In general terms, option 1 relies on the existing France tax treaty
measures with an amending Protocol covering, at a minimum, Australia's
MFN obligations (dividends, interest and royalties5). Australia would
also seek to clarify Australia's rights to tax capital gains.
3 Australia's MFN obligations will be met by the conclusion of the new France
Convention even though negotiators were not able to agree on satisfactory rules
dealing with non-discrimination. Since the current French and Australian tax systems
generally do not discriminate in ways that would breach non-discrimination rules, and
European Union law constraints are likely to ensure that the French tax system remains
non-discriminatory, the non-inclusion of such rules is unlikely to have a negative
impact for taxpayers.
4 There are very few multilateral tax treaties, which reflect the widely differing
economic interests and unique tax law structures of most countries.
5 See footnote 3 for details on the non-discrimination MFN obligation.
157
International Tax Agreements Amendment Bill (No. 1) 2007
Option 2: Amending Protocol covering most favoured nation obligations
and revising the current treaty to the extent possible without entering
into a complete renegotiation
3.20 Option 2 is to deal with a number of other issues, in addition to
those proposed under option 1, on which both sides would like to modify
the treatment in the current treaty but which are not likely to be
contentious. Additional areas include the tax treatment of residual types
of income not covered by the other Articles of the treaty, integrity
measures and clarifying the application of the treaty to each country's
controlled foreign corporation regimes (a French requirement).
Option 3: Conclude a new tax treaty
3.21 Option 3 is to conclude a new bilateral tax treaty to reflect the
current tax treaty policies and practice of both countries.
3.22 A new tax treaty would be largely based on the current
OECD Model and the United Nations Model Double Taxation Convention
between Developed and Developing Countries (UN Model), with some
mutually agreed variations reflecting the economic, legal and cultural
interests of the two countries. It would also dispense with the need for the
separate 1969 Airline Profits Agreement with France.
3.23 Both countries have particular policy objectives to achieve in
updating the tax treaty and the end result ultimately represents
compromises necessary to achieve a mutually acceptable agreement. The
key changes in the new tax treaty are:
· a reduction in the maximum royalty withholding tax rates
from 10 per cent to 5 per cent;
· a reduction in interest withholding tax from 10 per cent to
zero where interest is paid to a financial institution or body
performing governmental functions;
· a reduction of dividend withholding tax from 15 per cent to
zero for dividends paid out of profits that have borne the
normal rate of company tax on non-portfolio holdings of
10 per cent or more and to 5 per cent dividend withholding
tax for other non-portfolio holdings;
· the inclusion of a comprehensive Alienation of Property
Article which allocates taxing rights over capital gains; and
158
Regulation impact statement for the 2006 France Convention
· improved integrity measures -- in particular, rules to allow
for the cross-border collection of tax debts and updated rules
for the exchange of information on tax matters.
Assessment of impacts (costs and benefits) of each option
Difficulties in quantifying the impacts of tax treaties
3.24 Only a partial analysis of costs and benefits can be provided
because all the impacts of tax treaties cannot be quantified. While the
direct cost to Australian revenue of withholding tax changes can be
quantified relatively easily, other cost impacts such as compliance costs
are inherently difficult to quantify. There are also efficiency and
economic growth factors that make the gains or losses to Australia
difficult to estimate (especially as the impact will differ across different
sectors of the economy). Analysis has been conducted to establish
plausible impacts on Australian economic activity and consequent tax
revenue flowing from implementation of the tax treaty. The tax revenue
estimates are subject to more uncertainty than the estimates of costs but
are best estimates based on the available information, current estimation
techniques, likely behavioural responses, and data accuracy.
3.25 Benefits that flow to business are generally equally difficult to
quantify. The evidence from international consideration of the costs and
benefits of treaties previously undertaken (eg, by the OECD) and from
consultation with business strongly indicates, however, that while the
quantum of benefits is very difficult to assess, a modern tax treaty
provides a clear positive benefit to trade and investment relationships.
Impact group identification
3.26 A revised tax treaty with France is likely to have an impact on:
· Australian residents doing business with France, including
principally:
- Australian residents investing directly in France (either
by way of a subsidiary or a branch);
- Australian banks lending to French borrowers and
vice versa;
- Australian residents supplying technology and
know-how to French residents and vice versa;
159
International Tax Agreements Amendment Bill (No. 1) 2007
- Australian residents supplying consultancy services to
France; and
- Australian residents exporting to France;
· Australian residents receiving pensions from France;
· the Australian Government; and
· the Australian Taxation Office (ATO).
Assessment of benefits
3.27 All options would address long term business concerns about the
lack of competitiveness of Australia's tax treaty network, with business
particularly seeking reductions in withholding tax rates.
3.28 These issues were addressed in the updated Convention with the
UK and the Protocol amending the Convention with the US. Extending
similar treatment to France aligns treatment, where possible, in Australia's
recent tax treaties, maintains the integrity of Australia's treaty network
and discourages treaty shopping (and the consequent degradation of the
tax base of countries where the costs of capital and intellectual property
are higher under their treaties as a result of the higher withholding tax
rates). While a reduction in maximum withholding tax rates will involve
a cost to revenue, there are expected to be benefits to the revenue and to
the wider economy arising out of increased business and investment
activity, with the most direct benefits accruing to business.
Benefits common to all options
3.29 The economic benefits of the expected major changes which are
common to all three options, are summarised in paragraphs 3.30 to 3.34.
Dividends
3.30 A lower rate of withholding tax on non-portfolio dividends
(10 per cent ownership requirement) would, as the MFN clause in the
existing treaty aims to do, reduce the cost of capital to Australian
business, as well as reduce distortions in the raising of capital that results
from the more favourable terms that apply bilaterally in the case of the US
and the UK. This provides broad reciprocity with Australia's domestic
exemption for franked dividends.
160
Regulation impact statement for the 2006 France Convention
Interest
3.31 A nil Australian interest withholding tax rate on interest derived
by French financial institutions will be consistent with the exemption
currently provided under domestic law for interest derived from widely
distributed arm's length debenture issues. It also recognises that a
10 per cent interest withholding tax rate on gross interest derived by
financial institutions may be excessive given their cost of funds. It
should, accordingly, lower the costs of borrowing in those cases where the
financial institution can pass the cost represented by the withholding tax
on to the Australian borrower. Conversely, it may encourage French
businesses to source funds from Australian banks.
Royalties
3.32 Australian residents required to meet the cost of Australian
royalty withholding tax on royalty payments made to French residents
would benefit from a reduced royalty withholding tax rate. Commercial
practice indicates that, as with interest, the cost represented by the royalty
withholding tax is commonly passed on to the payer of the royalty. This
means that they may bear the cost of higher rates of withholding tax and
place them at a competitive disadvantage in competing with businesses
from other countries with lower rates. The effect of lowering the cost of
new technology and intellectual property may encourage the development
of Australia's economy through use of the most up to date technology and
processes. Conversely, it may encourage the French to use Australian
technology and intellectual property.
Alienation of Property
3.33 The updating of the Alienation of Property Article to address
taxing rights over capital gains would provide certainty to taxpayers and
reduce the risk of double taxation. Australia's source country taxing
rights over capital gains on real property, land-rich companies and assets
which form the business property of a permanent establishment in
Australia would be retained. More generally, the changes bring into line
Australia's treaty practice with international practice. This will encourage
investment in Australia and result in generally lower compliance costs.
Compliance and administration cost reduction benefits
3.34 Tax exemptions in respect of withholding taxes are likely to
reduce compliance and administration costs associated with remitting and
claiming credits for such tax.
161
International Tax Agreements Amendment Bill (No. 1) 2007
Comparative advantage of option 1
3.35 Option 1 involves minimal changes to the existing treaty.
Comparative advantages of option 2
3.36 The advantage of option 2 is that Australia, in addition to
addressing its MFN obligations, would be able to achieve improved
integrity measures, in particular, rules to allow for the cross-border
collection of tax debts and updated rules for the exchange of information
on tax matters.
3.37 This option represents an advance on option 1 and recognises
that the rates of withholding tax negotiated in the US Protocol were
agreed as part of an overall package of measures (including CGT
coverage). It would allow Australia to seek a more balanced update of the
existing treaty.
Comparative advantages of option 3
Renegotiation provides a better outcome for all stakeholders
3.38 While the existing France tax treaty has provided a good
measure of protection against double taxation and prevention of fiscal
evasion since coming into force, it is clear that it has become outdated
(eg, no coverage of CGT) and no longer reflects current tax treaty policies
and practices of either Australia or France.
3.39 A new tax treaty would provide benefits to Australian business
and to the Australian revenue by ensuring certainty of legislative
outcomes based on the treaty. It would be another step forward in
providing Australian business with an internationally competitive tax
treaty network and business tax system.
3.40 A renegotiated treaty will provide a better outcome for all
stakeholders. Given the long-term nature of such arrangements, a revised
tax treaty is expected to promote greater certainty than the existing tax
treaty. It would also be consistent with the Government's decision in
response to the Review of International Taxation Arrangements, to move
towards a more residence-based tax treaty policy, and would contribute to
the updating of Australia's ageing treaty network.
Other benefits
3.41 Where Australians invest directly in France, the existing treaty
prevents France from taxing the business profits of an Australian resident
unless that Australian resident carries on business through a permanent
162
Regulation impact statement for the 2006 France Convention
establishment in France. A revised tax treaty would further refine the
concept of when a permanent establishment should be taken to exist and
the level of activity that would constitute a permanent establishment. This
principle also applies where a French resident invests directly into
Australia. Other benefits also include:
· the appropriate treatment of income derived through
partnerships; and
· the protection of Australian expatriates who temporarily
reside in France from paying French capital taxes on
non-French assets.
Revenue benefits
3.42 New treaty arrangements with France would represent a
significant step in facilitating a competitive and modern treaty network for
Australian companies and would help to maintain Australia's status as an
attractive place for business and investment. While a reduction in
maximum withholding tax rates will involve a cost to revenue, there are
expected to be benefits to the revenue and to the wider economy arising
out of increased business and investment activity, with the most direct
benefits accruing to business.
Compliance and administration cost reduction benefits
3.43 The closer alignment with more recent Australian and
international treaty practice would generally be expected to reduce
compliance costs. In particular, interpretative issues relating to the extent
Australia can tax capital gains under the existing France tax treaty
arrangements has resulted in considerable uncertainty and the risk of
costly legal arguments.
3.44 Administrative costs in explaining the ATO view and
responding to legal arguments would also be significantly reduced.
Clarifying other areas of uncertainty, such as tax treaty tests of `residency'
and updating the treaty text, should also decrease compliance costs.
Improved international relationships
3.45 New treaty arrangements with France will also assist the
bilateral relationship by updating an important treaty in the existing
network of commercial treaties between the two countries. It would also
promote greater cooperation between taxation authorities to prevent fiscal
evasion and tax avoidance. Updating the tax treaty to take account of
changes to the OECD Model would also help to maintain Australia's
163
International Tax Agreements Amendment Bill (No. 1) 2007
status as an active OECD member, which in turn would maintain
Australia's position in the international tax community.
Assessment of costs
Costs common to all options
Revenue costs
3.46 Treasury has estimated that the revenue impact of the first round
effects of the proposals would be around $10 million per annum across
the forward estimates period. The three options do not present material
differences in estimated direct cost to revenue as the only identifiable
costs to revenue are associated with the reductions in dividend, interest
and royalty withholding tax rates.
Administrative costs
3.47 The administrative impacts on the ATO in administering the
changes made by any revised treaty arrangements are considered to be
minimal. Some formal interpretive advice may be required, for example,
private binding rulings, concerning the application of the new treaty
arrangements. ATO staff, clients and tax professionals will need to be
made aware of the entry into force and changes from the previous treaty.
Therefore a number of ATO information products will need to be updated.
3.48 The costs of negotiation and enactment of new tax treaty
arrangements with France are minimal and have mostly been borne by
Treasury and the ATO. There will also be an unquantified but small cost
in terms of parliamentary time and drafting resources in enacting the
proposed new tax treaty arrangements.
3.49 There are also `maintenance' costs to the ATO associated with
tax treaties in terms of dealing with enquiries, rulings and other
interpretative decisions and mutual agreement procedures (including
advance pricing arrangements). These costs also apply to the existing
arrangements. By bringing the France treaty into basic conformity with
recent treaty practice these costs would be reduced. However, as treaties
are deals struck between the two countries that reflect specific features of
the bilateral relationship, some level of differential treatment or wording
between treaties, which may require interpretation or explanation by the
ATO, is inevitable.
164
Regulation impact statement for the 2006 France Convention
Other costs
3.50 Government policy flexibility in relation to taxation of French
residents would be to some extent constrained by changes to treaty
obligations, but as the more significant changes would accord with the
Government's tax treaty policy the cost of such constraints should be
outweighed by the benefits. Ultimately, the tax treaty could be terminated
if it became inconsistent to a significant degree with Government policy.
Such termination is very rare in international tax treaty practice, however,
and could be expected to be resisted by the business community and
others who benefit from the treaty.
3.51 The impact of new tax treaty arrangements on tax policy
flexibility is generally quite minimal as tax treaties are based on broad and
generally accepted taxation principles.
Costs common to options 1 and 2
3.52 Options 1 and 2 primarily represent a continuation of the current
treaty position subject to adjustment to withholding tax rates.
Accordingly, administration and compliance costs that apply to the
existing France tax treaty would not change materially.
Taxpayers
3.53 Even though these options would address Australia's MFN
obligations, they would leave a number of areas of significant difference
or uncertainty unresolved. For example, the treatment of French
partnerships would not be resolved under option 1 or 2. This may result
in ongoing compliance costs for taxpayers.
Costs associated with option 3
Taxpayer costs
3.54 No material costs to taxpayers have been identified as likely to
arise from the renegotiation of the France treaty. The closer alignment
with more recent treaty practice and resolution of areas of current
uncertainty would generally be expected to reduce compliance costs.
Administration costs
3.55 The requirement on the ATO to exchange information on a
broader range of taxes and to provide assistance in the collection of tax
debts are also considered to be of minimal impact. In most cases the ATO
will already have the required information in its possession, and
165
International Tax Agreements Amendment Bill (No. 1) 2007
safeguards in the treaty which limit the obligations to provide collection
assistance will limit the related administrative costs.
Consultation
3.56 The Board of Taxation consulted widely during the Review of
International Taxation Arrangements on the direction of Australia's tax
treaty policy. The Board's recommendations supported a move towards a
more residence-based treaty policy in substitution for treaty policies
(reflected in most of Australia's treaties, including the existing France
treaty) based on the source taxation of income.
3.57 The then Minister for Revenue and Assistant Treasurer's
Press Release No. C101 of 6 November 2003 invited submissions from
stakeholders and the wider community in relation to issues that might be
raised during negotiations with MFN countries such as France. Prior to
this announcement, Treasury had already sought comments from the
business community through the Tax Treaties Advisory Panel.
3.58 In general, business and industry groups supported similar
outcomes as those in the UK agreement and the Protocol with the US.
3.59 The state and territory Governments have been consulted
through the Commonwealth/State Standing Committee on Treaties.
Information on the negotiation of this treaty was included in the schedules
of treaties to state and territory representatives from October 2003.
3.60 The proposed treaty arrangements have also been considered by
the Joint Standing Committee on Treaties, which provides for public
consultation in its hearings.
Conclusion and recommended option
3.61 While the existing France tax treaty has provided a good
measure of protection against double taxation and prevention of fiscal
evasion since coming into force, it has become outdated and no longer
adequately reflects current tax treaty policies and practices of either
Australia or France, nor modern international norms.
3.62 All options would address long term business concerns about the
lack of competitiveness of Australia's tax treaty network with respect to
withholding tax rates. They also address Australia's MFN obligations in
the existing treaty.
166
Regulation impact statement for the 2006 France Convention
3.63 However, developments in both countries' domestic law,
commercial practices, and treaty policies and practices support a full
revision of the treaty (option 3). This option also provides an opportunity
to update the text in accordance with modern OECD practice.
3.64 The proposed new treaty arrangements with France are
consistent with the Government's response to the Review of International
Taxation Arrangements, moving towards a more residence-based treaty
policy and contributing to the updating of Australia's ageing treaty
network. It would bring Australia's arrangements with France more into
line with international norms, as set out in the OECD Model and would
provide outcomes similar to Australia's treaties with the US and UK.
3.65 There is a direct cost to revenue common to all options, largely
sourced in reduced withholding tax collections. The compliance costs
associated with option 3 are considered to be minimal. On balance, the
benefits of concluding a new treaty outweigh the cost to revenue.
3.66 Option 3 is therefore recommended as the preferred option.
167
Chapter 4
Regulation impact statement for the
2006 Norway Convention
Background
How tax treaties operate
4.1 Tax treaties reduce or eliminate double taxation caused by the
exercise of source and residence country taxing rights on cross-border
income flows. They do so by treaty partners agreeing (in certain
situations) to limit taxing rights over various types of income. The
respective countries also agree on methods of reducing double taxation
where both countries exercise their right to tax.
4.2 In addition, tax treaties provide an agreed basis for determining
the allocation of profits within a multinational company and whether the
profits on related party dealings by members of a multinational group
operating in both countries reflect the pricing that would be adopted by
independent parties. Tax treaties are therefore an important tool in
dealing with international profit shifting through transfer pricing.
4.3 To prevent fiscal evasion, tax treaties include provision for
exchange of information held by the respective revenue authorities.
Treaties may also provide for cross-border collection of tax debts, and
may preclude certain types of tax discrimination. Taxpayers can also
avail themselves of the mutual agreement procedures provided for in
treaties which allow the two revenue authorities to consult with a view to
developing a common interpretation and to resolving differences arising
out of application of the treaty.
4.4 Australia seeks an appropriate balance between source and
residence country taxing rights. Generally the allocation of taxing rights
under Australian tax treaties is similar to international practice as set out
in the Organisation for Economic Co-operation and Development
(OECD) Model Tax Convention on Income and on Capital (OECD
Model) (Australia being a member of the OECD and involved in the
development of that Model). There are, however, a few instances where
Australian practice favours source country taxing rights rather than the
residence approach of the OECD Model.
169
International Tax Agreements Amendment Bill (No. 1) 2007
The Norway tax treaty
4.5 The existing Australia-Norway tax treaty was signed on
6 May 1982 and has effect from 1 July 1983 (for Australian tax purposes).
With the entry into force of the Protocol to the United States (US) tax
treaty on 12 May 2003, Australia was obliged, under the existing
Norwegian treaty to provide most favoured nation (MFN) treatment in
respect of the rates of tax applicable to dividends, interest and royalties6.
4.6 While the triggering of the MFN clauses imposes certain
obligations on Australia, it also presents an opportunity to update certain
aspects of the current treaty including clarifying Australia's rights to
apply capital gains tax (CGT).
Australia's investment and trade relationship with the
Kingdom of Norway7
4.7 Major Australian merchandise exports to Norway (totalling
A$96 million in 2005-06) include alumina, wine, gold, base metal
manufactures, and medical instruments. Imports from Norway in 2005
totalled A$276.4 million and included pumps for liquids,
telecommunication equipment, paper products, arms and ammunition and
cheese/curd. These figures do not include, however, the very strong
services trade between Norway and Australia in the education sector.
Two-way trade in services was valued at A$423 million in 2005-06 and
marginally (A$17 million) in favour of Norway. In 2005 there were just
over 3,300 Norwegian students in Australia, of which 2,641 were
undertaking higher education courses, making Australia one of the top
destinations for Norwegian students overseas. The number of Norwegian
students studying in Australia has declined from a high of 4,789 just two
years earlier. This trend has been due to a Norwegian preference for
students to remain in Norway to undertake higher education courses.
Investment
4.8 Norway has a significant level of investment in Australia,
totalling just over A$2.2 billion.
6 Most favoured nation clauses require a country to enter into negotiations with a view to
providing similar treatment to its treaty partner if it subsequently agrees with a third
country to a certain specified tax treatment.
7 Source: Department of Foreign Affairs and Trade.
170
Regulation impact statement for the 2006 Norway Convention
4.9 Norway and Australia share common expertise in various
industrial sectors, including oil and gas, mining, chemicals, and marine
and shipping. This points to a receptive market for Australian technology
and expertise in these sectors. There are a number of significant
Norwegian companies with direct investments in Australia. These include
the Kvaerner Group (oil and gas), Norsk Hydro (fertilisers/aluminium
production) and Dyno Wesfarmers (explosives). In March 2005 the major
Norwegian global investor Yara International ASA agreed to acquire a
30 per cent share of the world's largest ammonia plant (under
construction) on the Burrup Peninsula in Western Australia, owned by
Burrup Holdings Pty Ltd. It is estimated that the investment is in the
order of $A100 million. In 2002 Yara had entered into a long term
agreement with Burrup to market and sell 100 per cent of the production
from the new plant. There is a small amount of direct Australian
investment in Norway, largely concentrated in the mining sector.
Specification of policy objectives
4.10 The objective of the measure is to:
· meet Australia's MFN obligations;
· promote closer economic cooperation between Australia and
the Kingdom of Norway by reducing tax barriers to trade and
investment between the two countries; and
· upgrade the framework through which the tax
administrations of Australia and the Kingdom of Norway can
prevent international fiscal evasion.
Identification of implementation options
4.11 The internationally accepted approach to meeting the policy
objectives specified above is to:
· amend the existing treaty to reflect current policies
(amending Protocol); or
· conclude a new bilateral tax treaty.
171
International Tax Agreements Amendment Bill (No. 1) 2007
Option 1: Limited amending Protocol (most favoured nation obligations)
-- rely on the existing Norway tax treaty measures
4.12 In general terms, option 1 relies on the existing Norway tax
treaty measures with an amending Protocol covering, at a minimum,
Australia's MFN obligations (dividends, interest and royalty withholding
tax rates). Australia would also seek to clarify Australia's rights to tax
capital gains.
Option 2: Amending Protocol covering most favoured nation obligations
and revising the current treaty to the extent possible without entering
into a complete renegotiation
4.13 Option 2 is to deal with a number of other issues, in addition to
those proposed under option 1, on which both sides would like to modify
and update the existing treaty. Additional areas include for example,
improved integrity measures -- in particular, updated rules for the
exchange of information on tax matters to the 2005 OECD standard and
rules to allow for the cross-border collection of tax debts.
Option 3: Conclude a new tax treaty
4.14 Option 3 is to replace the existing treaty with a new bilateral tax
treaty that reflects current policies and practice of both countries.
4.15 A new tax treaty would be largely based on the current
OECD Model and the United Nations Model Double Taxation Convention
between Developed and Developing Countries, with some mutually
agreed variations reflecting the economic, legal and cultural interests of
the two countries.
4.16 Both countries have particular policy objectives to achieve in
updating the tax treaty and the end result ultimately represents
compromises necessary to achieve a mutually acceptable agreement. The
key changes in a new treaty include:
· a reduction in the maximum royalty withholding tax rates
from 10 per cent to 5 per cent;
· a reduction in interest withholding tax from 10 per cent to
zero where interest is paid to a financial institution or body
performing governmental functions;
· a reduction of dividend withholding tax from 15 per cent to
zero for dividends on non-portfolio holdings of more than
172
Regulation impact statement for the 2006 Norway Convention
80 per cent, subject to certain conditions and to 5 per cent
dividend withholding tax for other non-portfolio holdings;
· the inclusion of a comprehensive Alienation of Property
Article which allocates taxing rights over capital gains;
· improved integrity measures -- in particular, rules to allow
for the cross-border collection of tax debts and updated rules
for the exchange of information on tax matters; and
· new rules to prevent tax discrimination against Australian
nationals and businesses operating in Norway and vice versa.
Assessment of impacts (costs and benefits) of each option
Difficulties in quantifying the impacts of tax treaties
4.17 Only a partial analysis of costs and benefits can be provided
because all the impacts of tax treaties cannot be quantified. While the
direct cost to Australian revenue of withholding tax changes can be
quantified relatively easily, other cost impacts such as compliance costs
are inherently difficult to quantify. There are also efficiency and growth
gains and losses to Australia that provide estimation problems. Analysis
has been conducted to establish plausible impacts on Australian economic
activity and consequent tax revenue flowing from implementation of the
tax treaty. The tax revenue estimates are subject to more uncertainty than
the estimates of costs but are best estimates given the technology of
estimation, the availability of estimates of behavioural responses, and
data.
4.18 Benefits that flow to business are generally equally difficult to
quantify. The evidence from international consideration (eg, the OECD)
and from consultation with business strongly indicates, however, that
while the quantum of benefits is very difficult to assess, a modern tax
treaty provides a clear positive benefit to trade and investment
relationships. Tax treaties provide increased certainty and reduce
complexity and compliance costs for business.
173
International Tax Agreements Amendment Bill (No. 1) 2007
Impact group identification
4.19 A revised tax treaty with the Kingdom of Norway is likely to
have an impact on:
· Australian residents doing business with Norway, including
principally:
- Australian residents investing directly in the Kingdom of
Norway (either by way of a subsidiary or a branch);
- Australians borrowing from Norwegian banks;
- Australian residents using technology and know-how
supplied by Norwegian residents;
- Australian residents supplying consultancy services to
the Kingdom of Norway; and
- Australian residents exporting to the
Kingdom of Norway;
· Australian employees working in the Kingdom of Norway;
· Australian residents receiving pensions from the
Kingdom of Norway;
· the Australian Government; and
· the Australian Taxation Office (ATO).
Assessment of benefits
4.20 All options would address long term business concerns about the
lack of competitiveness of Australia's tax treaty network with business
particularly seeking reductions in withholding tax rates.
4.21 These issues were addressed in the 2003 Convention with the
United Kingdom (UK) and the 2001 Protocol amending the Convention
with the US. Extending similar treatment to Norway aligns treatment,
where possible, in Australia's recent tax treaties, maintains the integrity of
Australia's treaty network and discourages treaty shopping (and the
consequent degradation of the tax base of countries where the costs of
capital and intellectual property are higher under their treaties as a result
of the higher withholding tax rates). While a reduction in maximum
withholding tax rates will involve a cost to revenue, there are expected to
174
Regulation impact statement for the 2006 Norway Convention
be benefits to the revenue and to the wider economy arising out of
increased business and investment activity, with the most direct benefits
accruing to business.
Economic benefits common to all options
4.22 The economic benefits of the expected major changes from the
existing Norway tax treaty are summarised in paragraphs 4.23 to 4.29.
Dividends
4.23 An outcome such as that provided to the US and UK (no
withholding tax on dividends paid to a company with an 80 per cent or
greater voting interest in a listed company in the other jurisdiction --
5 per cent withholding tax where the interest is at least 10 per cent of the
voting power and 15 per cent in other cases) would remove distortions in
the raising of capital that results from the more favourable terms that
currently apply bilaterally in the case of the US and the UK.
Interest
4.24 A nil Australian interest withholding tax rate on interest derived
by Norwegian financial institutions will be consistent with the exemption
currently provided under domestic law for interest derived from widely
distributed arm's length debenture issues. It also recognises that a
10 per cent interest withholding tax rate on gross interest derived by
financial institutions may be excessive given their cost of funds. It
should, accordingly, lower the costs of borrowing in those cases where the
financial institution can pass the cost represented by the withholding tax
on to the Australian borrower.
4.25 Although Norway does not currently impose interest
withholding tax on payments to Australian residents, locking in the rates
will benefit Australian residents should Norway introduce such a tax in
the future.
Royalties
4.26 Australian residents required to meet the cost of Australian
royalty withholding tax on royalty payments made to Norwegian residents
would benefit from a reduced royalty withholding tax rate. Commercial
practice indicates that, as with interest, the cost represented by the royalty
withholding tax is commonly passed on to the payer of the royalty. This
means that they may bear the cost of higher rates of withholding tax and
place them at a competitive disadvantage in competing with businesses
from other countries with lower rates. The effect of lowering the cost of
new technology and intellectual property may encourage the development
175
International Tax Agreements Amendment Bill (No. 1) 2007
of Australia's economy through use of the most up-to-date technology and
processes.
4.27 Although Norway does not currently impose a royalty
withholding tax on payments to Australian residents, locking in the
reduced royalty withholding tax rate will benefit Australian residents
should Norway introduce such a tax in the future.
Alienation of Property
4.28 The updating of the Alienation of Property Article to address
taxing rights over capital gains would provide certainty to taxpayers and
reduce the risk of double taxation. Australia's source country taxing
rights over capital gains on real property, land-rich companies and assets
which form the business property of a permanent establishment in
Australia would be retained. More generally, the changes bring into line
Australia's treaty practice with international practice. This will encourage
investment in Australia and result in generally lower compliance costs.
Compliance and administrative cost reduction benefits
4.29 Tax exemptions in respect of withholding taxes are likely to
reduce compliance and administration costs associated with remitting and
claiming credits for such tax.
Comparative advantage of option 1
4.30 Option 1 involves minimal changes to the existing treaty.
Comparative advantages of option 2
4.31 The advantage of option 2 is that Australia, in addition to
addressing its MFN obligations, would be able to achieve improved
integrity measures, in particular, rules to allow for the cross-border
collection of tax debts, updated rules for the exchange of information on
tax matters and rules to prevent tax discrimination against Australian
nationals and businesses operating in Norway and vice versa.
4.32 This option represents an advance on option 1 and recognises
that the rates of withholding tax negotiated in the 2001 US Protocol were
agreed as part of an overall package of measures (including CGT
coverage). It would allow Australia to seek a more balanced update of the
existing treaty.
Comparative advantages of option 3
4.33 The advantages of option 2 are also common to option 3.
176
Regulation impact statement for the 2006 Norway Convention
Renegotiation provides a better outcome for all stakeholders
4.34 While the existing Norway tax treaty has provided a good
measure of protection against double taxation and prevention of fiscal
evasion since coming into force, it has become outdated (eg, no coverage
of CGT) and no longer adequately reflects current tax treaty policies and
practices of either Australia or Norway.
4.35 A new tax treaty would provide benefits to Australian business
and to the Australian revenue by ensuring certainty of legislative
outcomes based on the treaty. It would be another step forward in
providing Australian business with an internationally competitive tax
treaty network and business tax system.
4.36 A renegotiated treaty will provide a better outcome for all
stakeholders. Given the long-term nature of such arrangements, a revised
tax treaty is expected to promote greater certainty than the existing tax
treaty. It would also be consistent with the Government's decision in
response to the Review of International Taxation Arrangements, to move
towards a more residence-based tax treaty policy, and would contribute to
the updating of Australia's ageing treaty network.
Other benefits
4.37 Where Australians carry on business activities in Norway, the
existing treaty prevents Norway from taxing the business profits of an
Australian resident unless that Australian resident carries on business
through a permanent establishment in Norway. A new tax treaty would
further refine the concept of when a permanent establishment should be
taken to exist and the level of activity that would constitute a permanent
establishment. This principle also applies where a Norwegian carries on
business activities in Australia. Other benefits also include:
· the clarification of the residency rules;
· coverage of royalties from Australian spectrum licences;
· clarifying the treatment of income derived through trusts; and
· the inclusion of anti-avoidance rules.
Revenue benefits
4.38 New treaty arrangements with Norway would represent another
step in facilitating a competitive and modern treaty network for Australian
companies and would help to maintain Australia's status as an attractive
place for business and investment. While a reduction in maximum
177
International Tax Agreements Amendment Bill (No. 1) 2007
withholding tax rates will involve a small cost to revenue, there are
expected to be benefits to the revenue and to the wider economy arising
out of increased business and investment activity, with the most direct
benefits accruing to business.
4.39 Small revenue benefits should also result from enhanced tax
integrity measures over a broader range of taxes.
Compliance and administration cost reduction benefits
4.40 The closer alignment with more recent Australian and
international treaty practice would generally be expected to reduce
compliance costs. In particular, interpretative issues relating to the extent
Australia can tax capital gains under the existing treaty arrangements has
resulted in considerable uncertainty and the risk of costly legal arguments.
4.41 Administrative costs in explaining the ATO view and
responding to legal arguments would also be significantly reduced.
Clarifying other areas of uncertainty, such as tax treaty tests of `residency'
and updating the treaty text, should also decrease compliance costs and
uncertainty.
Improved international relationships
4.42 New treaty arrangements with Norway will also assist the
bilateral relationship by updating an important treaty in the existing
network of commercial treaties between the two countries. It would also
promote greater cooperation between taxation authorities to prevent fiscal
evasion and tax avoidance. Updating the tax treaty to take account of
changes to the OECD Model would also help to maintain Australia's
status as an active OECD member, which in turn would maintain
Australia's position in the international tax community.
Assessment of costs
Costs common to all options
Revenue costs
4.43 Treasury has estimated the impact of the first round effects on
forward estimates as unquantifiable but probably negligible. The three
options do not present material differences in estimated direct cost to
revenue as the only identifiable costs to revenue are associated with the
reductions in dividend, interest and royalty withholding tax rates.
178
Regulation impact statement for the 2006 Norway Convention
Administrative costs
4.44 The administrative impacts on the ATO from the changes made
by any new treaty arrangements are considered to be minimal. Some
formal interpretive advice may be required, for example, private binding
rulings, concerning the application of the new treaty arrangements. ATO
staff, clients and tax professionals will need to be made aware of the entry
into force and changes from the previous treaty. Therefore a number of
ATO information products will need to be updated
4.45 The costs of negotiation and enactment of new tax treaty
arrangements with Norway are minimal and have mostly been borne by
Treasury and the ATO. There will also be an unquantified but small cost
in terms of parliamentary time and drafting resources in enacting the
proposed new tax treaty arrangements.
4.46 There are also `maintenance' costs to the ATO associated with
tax treaties in terms of dealing with enquiries, rulings and other
interpretive decisions and mutual agreement procedures (including
advance pricing arrangements). These costs also apply to the existing
arrangements. By bringing the Norwegian treaty into basic conformity
with recent treaty practice these costs would be reduced. However, as
treaties are deals struck between the two countries that reflect specific
features of the bilateral relationship, some level of differential treatment
or wording between treaties, which may require interpretation or
explanation by the ATO, is inevitable.
Other costs
4.47 Government policy flexibility in relation to taxation of
Norwegian residents would be further constrained by changes to treaty
obligations, for example, with respect to taxation of capital gains.
However, as the more significant changes accord with the Government's
tax treaty policy the cost of such constraints are outweighed by the
benefits. Ultimately, the tax treaty could be terminated if it became out of
step with Government policy. Such termination is very rare in
international tax treaty practice, however, and could be expected to be
resisted by the business community and others who benefit from the
treaty.
4.48 The impact of new tax treaty arrangements on tax policy
flexibility is generally quite minimal as tax treaties are based on broad and
generally accepted taxation principles.
179
International Tax Agreements Amendment Bill (No. 1) 2007
Costs associated with option 1
4.49 Option 1 primarily represents a continuation of the current treaty
position subject to adjustment to withholding tax rates. Accordingly,
administration and compliance costs that apply to the existing Norway tax
treaty would not change materially.
Costs associated with options 2 and 3
Taxpayer costs
4.50 No material additional costs to taxpayers have been identified as
likely to arise from the renegotiation of the Norwegian treaty.
Administrative costs
4.51 The requirement on the ATO to exchange information on a
broader range of taxes and to provide assistance in the collection of tax
debts are also considered to be of minimal impact. In most cases the ATO
will already have the required information in its possession, and
safeguards in the treaty which limit the obligations to provide collection
assistance will limit the related administrative costs.
Consultation
4.52 The Board of Taxation consulted widely during the Review of
International Taxation Arrangements on the direction of Australia's tax
treaty policy. The Board's recommendations supported a move towards a
more residence-based treaty policy in substitution for treaty policies
(reflected in most of Australia's treaties, including the existing Norway
treaty) based on the source taxation of income.
4.53 The then Minister for Revenue and Assistant Treasurer's
Press Release No. C101 of 6 November 2003 announced proposed tax
treaty negotiations, and invited submissions from stakeholders and the
wider community in relation to issues that might be raised during
negotiations with MFN countries such as Norway. Prior to this
announcement, Treasury had already sought comments from the business
community through the Tax Treaties Advisory Panel.
4.54 In general, business and industry groups supported similar
outcomes to those in the 2003 UK Convention and the updated
Australia-US tax treaty.
180
Regulation impact statement for the 2006 Norway Convention
4.55 The state and territory Governments have been consulted
through the Commonwealth/State Standing Committee on Treaties.
Information on the negotiation of this treaty was included in the schedules
of treaties to state and territory representatives from October 2003.
4.56 The proposed treaty arrangements have also been considered by
the Joint Standing Committee on Treaties, which provides for public
consultation in its hearings.
Conclusion and recommended option
4.57 While the existing Norway tax treaty has provided a good
measure of protection against double taxation and prevention of fiscal
evasion since coming into force, it has become outdated and no longer
adequately reflects current tax treaty policies and practices of either
Australia or Norway, nor modern international norms.
4.58 All options would address long term business concerns about the
lack of competitiveness of Australia's tax treaty network with respect to
withholding tax rates. They also address Australia's MFN obligation in
the existing treaty.
4.59 However, developments in both countries' domestic law,
commercial practices, and treaty policies and practices support a full
revision of the treaty (option 3). This option also provides an opportunity
to update the text in accordance with modern OECD practice.
4.60 The proposed new treaty arrangements with Norway are
consistent with the Government's response to the Review of International
Taxation Arrangements, moving towards a more residence-based tax
treaty policy and contributing to the updating of Australia's ageing treaty
network. It would bring Australia's arrangements with Norway more into
line with international norms, as set out in the OECD Model and would
provide outcomes similar to Australia's treaties with the US and the UK.
4.61 There is a direct cost to revenue common to all options, largely
sourced in reduced withholding tax collections. The compliance costs
associated with option 3 are considered to be minimal. On balance, the
benefits of concluding a new treaty outweigh the cost to revenue.
4.62 Option 3 is therefore recommended as the preferred option.
181
183
Index]
[Search]
[Download]
[Bill]
[Help]