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2008
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
INTERNATIONAL TAX AGREEMENTS AMENDMENT BILL (No. 1) 2008
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary ................................................................................................. 1
General outline and financial impact ...................................................... 3
Chapter 1 2008 Australia-Japan Convention ................................ 7
Chapter 2 Regulation impact statement.......................................97
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
Agreements Act 1953 International Tax Agreements Act 1953
ATO Australian Taxation Office
Commissioner Commissioner of Taxation
GATS General Agreement on Trade in Services
GST goods and services tax
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
OECD Organisation for Economic Co-operation and
Development
OECD Model OECD Model Tax Convention on Income and
on Capital
OECD Model Commentary The Commentaries on the Articles of the
OECD Model Tax Convention
Protocol Protocol to the Convention between
Australia and Japan for the Avoidance of
Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on
Income
the existing Agreement the Agreement between the Commonwealth
of Australia and Japan for the Avoidance of
Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on
Income and its associated Protocol, that were
signed in Canberra on 20 March 1969
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International Tax Agreements Amendment Bill (No. 1) 2008
Abbreviation Definition
this Convention the Convention between Australia and Japan
for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with
Respect to Taxes on Income and its
associated Protocol and Exchange of Notes,
which were signed in Tokyo on 31 January
2008
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 (Agreements
Act 1953) to give the force of law in Australia to the Convention between
Australia and Japan for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and its
associated Protocol and Exchange of Notes, (together referred to as `this
Convention') that were signed in Tokyo on 31 January 2008.
This Convention is Australia's second comprehensive tax treaty with
Japan. It will modernise the tax relationship between the two countries
and will serve to facilitate trade and investment between Australia and
Japan. This Convention will replace the Agreement between the
Commonwealth of Australia and Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income and its associated Protocol that were signed in Canberra on
20 March 1969 (together referred to as `the existing Agreement').
Who will be affected by this Bill?
Persons who are residents of Australia and/or Japan and who derive
income, profits or gains from Australia or Japan will be affected by this
Bill.
How is the legislation structured?
The 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
Agreements Act 1953. The provisions of the Agreements Act 1953
(including the terms of the tax treaties) take precedence over provisions of
the:
· ITAA 1936 (other than the general anti-avoidance rules
under Part IVA);
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International Tax Agreements Amendment Bill (No. 1) 2008
· 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 Agreements Act 1953 is amended to insert the text of this Convention
as a Schedule to that Act. Australia's tax treaties appear as Schedules to
the above Act, which gives them the force of law in Australia.
When will this Convention enter into force, and from what
date will the Convention have effect?
This Convention will become law from the date of Royal Assent. Further,
the Convention will enter into force 30 days after the date of the last
notification by diplomatic notes that the domestic processes to give this
Convention the force of law in the respective countries have been
completed. In Australia, enactment of this Bill giving the force of law to
this Convention is the prerequisite to such notification.
Once it enters into force this Convention will apply as follows
Application in Australia
For withholding taxes, on income derived:
· on or after 1 January in the calendar year next following the
date on which this Convention enters into force.
For other Australian taxes, on income, profits or gains:
· any year of income beginning on or after 1 July in the
calendar year next following the date on which this
Convention enters into force.
4
General outline and financial impact
Application in Japan
For taxes withheld at source, on amounts taxable:
· on or after 1 January in the calendar year next following the
year in which this Convention enters into force.
With respect to all other taxes:
· any taxable year beginning on or after 1 January in the
calendar year next following the year in which this
Convention enters into force.
The financial impact of this Bill
Treasury has estimated the impact of the first round effects on forward
estimates as $345 million. The estimated distribution of the first round
costs is shown in the table below:
2008-09 2009-10 2010-11 2011-12
$40m $100m $100m $105m
Indirect revenue benefits may arise from increased trade and investment
between Australia and Japan and reduced tax credit obligations to Japan.
Compliance costs
No significant compliance costs will result from the entry into force of
this Convention.
Summary of regulation impact statement
Regulation impact on business
Impact: High.
Main points:
· This Convention is expected to have an impact on Australian
residents doing business with Japan and includes Australian
investors, banks, suppliers of technology, consultants,
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International Tax Agreements Amendment Bill (No. 1) 2008
exporters, Australian employees working in Japan, and
Australian residents receiving pensions from Japan. This
Convention will also impact on the Australian Government
and the Australian Taxation Office.
· While source country tax on interest will generally continue
to be limited to 10 per cent, there will be no withholding tax
charged on interest derived by a financial institution that is
resident in the other country, or on interest derived by a
government body or central bank of the other country, or by
the Australian Export Finance and Insurance Corporation,
Australia's Future Fund, the Japan Bank for International
Cooperation or the Nippon Export and Insurance. 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
10 per cent limitation applies to other dividends. The general
limit for royalties will be reduced from 10 per cent to
5 per cent. The limit for source country tax on distributions
from Australian real estate investment trusts, and
pre-Japanese dividend deduction companies with a majority
of assets consisting of real property is set at 15 per cent.
· This Convention 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.
6
Chapter 1
2008 Australia-Japan Convention
Outline of chapter
1.1 This Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953). This chapter explains the rules that apply in the
2008 Convention between Australia and Japan for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and its associated Protocol and Exchange of Notes
(together referred to as `this Convention').
Context of amendments
1.2 This Convention was signed in Tokyo on 31 January 2008.
1.3 Once in force, this Convention will replace the Agreement
between the Commonwealth of Australia and Japan for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income, and its associated Protocol, that were signed in
Canberra on 20 March 1969 (together referred to as `the existing
Agreement').
Summary of new law
Main features of this Convention
1.4 The main features of this 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
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International Tax Agreements Amendment Bill (No. 1) 2008
establishment in the other country, in which case that other
country may also 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 10 per cent limitation applies to all other dividends
[Article 10, subparagraph 2(b)].
· In the case of dividends paid by a company that is a resident
of Japan and that is entitled to a deduction for dividends paid
to its beneficiaries:
a 15 per cent rate limit applies to dividends where more
than 50 per cent of the assets of the company paying the
dividend consist, directly or indirectly, of real property
situated in Japan [Article 10, subparagraph 4(a)]; and
a 10 per cent limitation applies to all other dividends paid
by such company [Article 10, subparagraph 4(b)].
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2008 AustraliaJapan Convention
· Distributions of income, profits or gains by an Australian real
estate investment trust may be taxed in both Contracting
States, but limits the Australian tax charged on such income
to 15 per cent of the gross amount of the distribution
[Article 10, paragraph 7].
· 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)];
financial institutions [Article 11, subparagraph 3(b)]; and
the Australian Export Finance and Insurance Corporation;
a public authority that manages the investments of the
Future Fund; the Japan Bank for International
Cooperation; the Nippon Export and Investment
Insurance; and similar agreed institutions [Article 11,
subparagraph 3(c)].
· The rate limit on source country taxation of royalties is
5 per cent [Article 12, paragraph 2].
· The definition of `royalty' has been amended, to extend to
forbearance in respect of any right, and, to exclude payments
or credits in respect of the use of, or right to use, industrial,
commercial or scientific equipment. Payments for spectrum
licences are not royalties [Article 12, paragraph 3 and item 16 of the
Protocol].
· 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, unless this would
result in double non-taxation (in the case of alienation of
shares) [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].
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International Tax Agreements Amendment Bill (No. 1) 2008
· 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 [Article 16].
· Pensions and annuities (other than government service
pensions) paid to an individual are taxed only in the country
of residence of the recipient unless they are paid in a lump
sum form. In the case of lump sums, the paying country may
also tax the payment, with the country of residence of the
recipient providing double tax relief [Article 17].
· Income from government service, including pensions paid
periodically, will generally be taxed only in the country that
pays the remuneration. However, the income shall be taxed
only 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, in the case of salaries,
wages and similar remuneration, did not become a resident of
that other country for the purpose of rendering the services
[Article 18].
· Payments made from abroad to visiting students and business
apprentices for the purpose of their maintenance, training or
education will be exempt from tax in the country visited
(limited to a period not exceeding one year in the case of
business apprentices) [Article 19].
· Income, profits or gains derived by a sleeping partner in
`sleeping partnership-Tokumei Kumiai' shall be taxable in
the country where the income, profits or gains arise
[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 this Convention prescribe for domestic law
and treaty purposes that the source of income, profits or gains
derived by a resident of one country which under the
provisions of the treaty may be taxed in the other country,
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2008 AustraliaJapan Convention
will be treated as having a source in that other country
[Article 22].
· Benefits of the treaty will be limited to `qualified persons' in
the case of business profits, certain dividend and interest
payments and income from the alienation of property
[Article 23].
· Limitations on the benefits that a country is obliged to
provide apply where income or gains are taxed in the other
country on a remittance basis or where income or gains of
temporary residents are exempted from tax [Article 24].
· Double taxation relief for income which, under this
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 this Convention as follows:
in Australia, by allowing a credit for the Japanese tax
against Australian tax payable on income derived by a
resident of Australia from sources in Japan [Article 25,
paragraph 2]; and
in Japan, by allowing a credit for the Australian tax
against Japanese tax payable on income derived by a
resident of Japan from sources in Australia. A credit for
underlying tax will also be provided for certain
non-portfolio intercorporate dividends [Article 25,
paragraph 1].
· In the case of Australia, effect will be given to the double tax
relief obligations arising under this Convention by
application of the general foreign income tax offset
provisions of Australia's domestic law, or the relevant
exemption provisions of that law where applicable.
· Rules in this Convention will protect nationals and
businesses from tax discrimination in the other country and
will give them private rights of appeal. However, Article 26
does not preclude Australia from applying its anti-avoidance
rules (including thin capitalisation, dividend stripping,
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 26].
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International Tax Agreements Amendment Bill (No. 1) 2008
· This Convention provides for consultation and exchange of
information between the two taxation authorities. This
Convention authorises and requires Australia to exchange
information where the information relates to federal taxes
administered by the Commissioner of Taxation
(Commissioner) [Articles 27 and 28].
Comparison of key features of new law and current law
New law Current law
Updates all Articles, having regard to Not applicable.
Australian, Japanese and the
Organisation for Economic
Co-operation and Development
(OECD) tax treaty developments since
the existing Agreement was entered
into.
Updates the definition of `Australia' Only territories specifically
to cover Australia's `Exclusive included.
Economic Zone', the seabed and
subsoil of the continental shelf.
Extends the coverage of this 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 treaty apply are:
taxes to which the new treaty · the Commonwealth income tax
arrangements apply. In the case of (including the former additional
Australia, these taxes are: tax upon the undistributed
· the income tax; amount of the distributable
· the petroleum resource rent tax; income of a private company);
and and
· any identical or substantially · any identical or substantially
similar taxes imposed under the similar taxes imposed under the
federal law of Australia. 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 26
(Non-Discrimination); and
· all taxes imposed under the federal
tax laws administered by the
Commissioner for Article 28
(Exchange of Information)
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2008 AustraliaJapan Convention
New law Current law
Includes an Article setting out the No equivalent tie-breaker rules.
basis on which the residential status of
a person is to be determined for the
purposes of this Convention. This
Article includes tiebreaker rules for
both individuals and corporations
Article 4 (Resident).
Updates the meaning of `permanent A building site or construction,
establishment' in Article 5. In installation or assembly project
particular, under this Convention a which exists for more than six
building site or construction or months is included in the list of
installation project constitutes a examples of a permanent
permanent establishment only where it establishment. In addition, an
lasts for more than 12 months. An enterprise is deemed to have a
enterprise is deemed to have a `permanent establishment' if:
`permanent establishment' if: · it carries on supervisory
· it carries on supervisory or activities for more than six
consultancy activities connected months in connection with a
with a building site or construction building site, or construction,
or installation project for a period installation or assembly project.
exceeding 12 months;
· it carries on activities (including No equivalent for activities in the
the operation of substantial exploration for, or exploitation of,
equipment) in the exploration for, natural resources.
or exploitation of, natural
resources for a period or periods
exceeding in the aggregate 90 days
in any 12-month period; or
· it operates substantial equipment No equivalent for substantial
(other than in natural resource equipment.
activities) for a period or periods
exceeding in the aggregate
183 days in any 12-month period.
Integrity provisions are included to
prevent related parties from
circumventing the permanent
establishment time thresholds by
splitting contracts.
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International Tax Agreements Amendment Bill (No. 1) 2008
New law Current law
Includes an Article dealing with the No equivalent.
taxation of real property. This Article
allows source country taxation of
income from real property, including
from the exploration for, and
exploitation of, natural resources;
permanent establishment assets and
interests in land rich entities. This is
broadly consistent with the scope of
Australia's domestic law treatment of
capital gains.
Aligns the treatment of income from Income from independent personal
independent personal services to that services is treated under the
of business profits under Article 7. It previous international standard in
also clarifies the application of the Article 10 of the existing
Business Profits Article to business Agreement.
trusts.
Limits the time for the tax authorities No limit specified in the treaty. No
to initiate transfer-pricing adjustments limit in domestic law.
to seven years, except in the case of
fraud or wilful default where there
remains no time limit.
Dividend withholding tax is limited The rate of dividend withholding
to: tax is limited to 15 per cent.
· zero for intercorporate dividends
on non-portfolio holdings of more
than 80 per cent, subject to certain
conditions;
· five per cent for intercorporate
dividends on other non-portfolio
holdings; and
· ten per cent in all other cases.
Limits withholding tax on No equivalent.
distributions from Australian real
estate investment trusts and dividends
which are paid by a Japanese company
which is entitled to a deduction for
dividends paid to its beneficiaries in
computing its taxable income in Japan
to 15 per cent where the distribution is
made up of predominantly rental
income.
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2008 AustraliaJapan Convention
New law Current law
Reduces the rate of interest No equivalent.
withholding tax from a maximum of
10 per cent to zero where interest is
paid to:
· government bodies and the Bank
of Japan or the Reserve Bank of
Australia;
· financial institutions; or
· the Japan Bank for International
Cooperation, Nippon Export and
Investment Insurance, Australia's
Export Finance and Insurance
Corporation and any public
authority that manages the
investments of the Future Fund.
Reduces the rate of royalty The rate of royalty withholding tax
withholding tax to 5 per cent of the is limited to 10 per cent of the gross
gross royalty payment and extends the payment.
meaning of royalty to include Definition of `royalties' includes
forbearance. Leasing of industrial, payments for use of industrial,
commercial or scientific equipment commercial and scientific
will no longer constitute a royalty. equipment.
Includes a comprehensive Alienation No equivalent.
of Property Article which allocates
taxing rights over capital gains and
prevents double non-taxation of
certain capital gains.
Includes a Directors' Fees Article. No equivalent.
Includes a new Article dealing No equivalent.
specifically with a Japanese `sleeping
partnership-Tokumei Kumiai'.
Includes a comprehensive Limitation No equivalent.
on Benefits Article, which is broadly
consistent with that agreed in the
Australia-United States treaty.
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International Tax Agreements Amendment Bill (No. 1) 2008
New law Current law
Includes a new Limitation of Relief No equivalent.
Article that:
· limits the treaty benefits that a
country is obliged to provide
where income, profits or gains of
temporary resident individuals are
exempted from tax; and
· limits the relief a Contracting State
must provide where an individual
is taxed in the other Contracting
State only on income, profits or
gains that are remitted or received
in that other state.
Includes a comprehensive Article No equivalent.
preventing discrimination in relation
to tax laws (Article 26
(Non-Discrimination)).
Closely aligns Article 28 (Exchange of The existing rules apply to a
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.
Detailed explanation of new law
Article 1 -- Persons Covered
Scope
1.5 This Article establishes the scope of the application of this
Convention by providing for it to apply to persons (defined to include
individuals, companies and any other bodies of persons) who are residents
of one or both of the countries. It generally precludes extra-territorial
application of this Convention. [Article 1]
1.6 This Convention also applies to third country residents in
relation to Article 26 (Non-Discrimination) in its application to nationals
of one of the treaty countries, Article 27 (Mutual Agreement Procedure)
so far as the person is a national of one of the treaty countries and in
relation to the exchange of information under Article 28 (Exchange of
Information).
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2008 AustraliaJapan Convention
1.7 The application of this Convention to persons who are dual
residents (ie, residents of both countries) is dealt with in Article 4
(Resident).
Article 2 -- Taxes Covered
Taxes covered
1.8 This Article specifies the existing taxes of each country to which
this Convention applies. These are, in the case of Australia, the
Australian income tax and the petroleum resource rent tax.
1.9 The term `income tax' includes Australian income tax imposed
on capital gains. The operation of this Convention therefore extends to
Australian tax on capital gains, which was not covered in the existing
Agreement.
1.10 Although Australia considers the petroleum resource rent tax to
be encompassed by the term `income tax', a specific reference to this has
been included in this Convention to put beyond doubt that it is a tax
covered. [Article 2, sub-subparagraph 1(b)(ii), Protocol, item 1]
1.11 As with the existing Agreement, this 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,
all federal taxes administered by the Commissioner are covered for the
purposes of Article 28 (Exchange of Information) and all taxes (including
State and local taxes) are covered for the purposes of Article 26
(Non-Discrimination). [Article 2, paragraph 1, Protocol, item 22, Article 26,
paragraph 5]
1.12 For Japan, this Convention applies to income tax and
corporation tax. All Japanese taxes are covered for the purposes of
Article 28 (Exchange of Information) and Article 26
(Non-Discrimination). [Article 2, subparagraph 1(a)]
Identical or substantially similar taxes
1.13 The application of this 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 the
case of Australia and the Minister of Finance in the case of Japan, 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, within
a reasonable period of time after those changes. [Article 2, paragraph 2]
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International Tax Agreements Amendment Bill (No. 1) 2008
Article 3 -- General Definitions
Definition of Australia
1.14 As in Australia's other modern tax treaties; Australia is defined
to include certain external territories and the continental shelf. This
Convention also refers specifically to the `exclusive economic zone'.
Although the exclusive economic zone is considered to be covered by the
definition used in Australia's other modern tax treaties, it is specifically
included in this Convention for additional clarity. 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(b)]
Definition of Japan
1.15 The definition of Japan covers the Territory of Japan and its
territorial sea as well as the area beyond Japanese territory over which
Japan has sovereign rights under international law where laws relating to
Japanese tax are in force. This mirrors the definition of Australia and is
consistent with Japan's recent treaties. [Article 3, subparagraph 1(a)]
Definition of tax
1.16 For the purposes of this Convention, the term `tax' does not
include any amount of penalty or interest imposed under the respective
domestic tax law of the two countries. [Protocol, item 2]
1.17 In the case of a resident of Australia, any penalty or interest
component of a liability determined under the domestic taxation law of
Japan with respect to income that Japan is entitled to tax under this
Convention would not be a creditable Japanese tax for the purposes of
paragraph 2 of Article 25 (Elimination of Double Taxation). This is in
keeping with the meaning of `foreign income tax' in subsection 770-15(1)
of the Income Tax Assessment Act 1997 (ITAA 1997). 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 2 of Article 25 (pursuant to Division 770 of
the ITAA 1997 -- Foreign income tax offsets). [Article 3, subparagraph 1(d)]
Definition of person
1.18 The definition of person in this Convention accords with
Australia's normal tax treaty practice and includes individuals, companies
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2008 AustraliaJapan Convention
and any other body of persons. This includes a partnership (as a body of
persons). [Article 3, subparagraph 1(e)]
Definition of company
1.19 The definition of company in this Convention accords with
Australia's tax treaty practice, and means any body corporate or any entity
which is treated as a company or body corporate for tax purposes.
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 this
Convention. [Article 3, subparagraph 1(f)]
Definitions of business and enterprise
1.21 The terms enterprise of a Contracting State and enterprise of
the other Contracting State are defined as an enterprise carried on by
residents of the respective countries. [Article 3, subparagraph 1(h)]
1.22 The term enterprise is stated to apply to the carrying on of any
business. The term business is defined to include the performance of
professional services and other activities of an independent character.
Both these definitions are identical to the definitions added to the OECD
Model Tax Convention on Income and on Capital (OECD Model)
concurrently with the deletion of Article 14 (Independent Personal
Services). The inclusion of the two definitions is intended to clarify that
income from the performance of professional services or other activities
of an independent character is dealt with under Article 7 (Business
Profits) and not Article 21 (Other Income). [Article 3, subparagraphs 1(g), (h)
and (l)]
Definition of international traffic
1.23 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 5 of Article 13 (Alienation of Property)) and wages of
crew (paragraph 3 of Article 14 (Income from Employment)).
1.24 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,
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International Tax Agreements Amendment Bill (No. 1) 2008
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 Japanese 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(i)]
Definition of national
1.25 This Convention defines national by reference to an individual's
nationality or citizenship. A legal or juridical person (or an organisation
that is treated as a legal or juridical person under the laws of one of the
Contracting States) will be a national if it is created or organised under the
laws of Australia or Japan. The reference to juridical person is included in
this Article as Japanese law has no concept of `legal personality'; however
it is not intended to add anything to the meaning of `legal person' in
Australia. [Article 3, subparagraph 1(j)]
1.26 The concept of nationality is used in subparagraph (b)
of paragraph 2 of Article 4 (Resident), subparagraph (b) of paragraph 2 of
Article 18 (Government Service) and Article 26 (Non-Discrimination).
Definition of competent authority
1.27 The `competent authority' is the person or institution
specifically authorised to perform certain actions under this Convention.
For instance, the competent authority is required to give certain
notifications (eg, in paragraph 2 of Article 2 (Taxes Covered), the
competent authorities are required to notify each other of any significant
changes to the relevant tax laws of their respective countries) and perform
certain tasks (eg, exchange tax information in accordance with
Article 28 (Exchange of Information)).
1.28 In the case of Australia, the competent authority is the
Commissioner or an authorised representative of the Commissioner. In
the case of Japan, the competent authority is the Minister of Finance or an
authorised representative of the Minister of Finance. [Article 3,
subparagraph 1(k)]
Terms not specifically defined
1.29 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 this Convention at the time of its
application. In that case, the meaning of the term under the taxation law
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of the country will have precedence over the meaning it may have under
other domestic laws.
1.30 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 ITAA 1997
and the A New Tax System (Goods and Services Tax) Act 1999, the
income tax definition would be the relevant definition to be applied.
1.31 If a term is not defined in this 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]
Article 4 -- Resident
Residential status
1.32 This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of this 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
this 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 Japan,
residence is determined by reference to liability to tax having regard to
criteria such as domicile, residence, place of head or main office and other
similar criteria. [Article 4, paragraph 1]
Residency of governments
1.33 Article 4 specifically provides that the government, a political
subdivision, or local authority of the country, are residents for the
purposes of this Convention. This means that the Australian Government,
the state governments and local councils of Australia will be residents for
the purpose of this Convention. This does not necessarily mean that
income, profits or gains derived by these bodies from sources in Japan
will be subject to tax in Japan as sovereign immunity principles may
apply. [Article 4, paragraph 1]
1.34 The Commentaries on the Articles of the OECD Model Tax
Convention (OECD Model Commentary) note that it has always been the
understanding of member countries that the OECD Model applied to treat
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governments as residents even in the absence of an express reference to
that effect.
Special residency rules
1.35 A person is not a resident of a country (for the purposes of this
Convention) if that person is liable to tax in that Contracting State in
respect only of income from sources in that Contracting State.
1.36 Paragraph 1 deals with a person who may be considered to be a
resident of a Contracting State according to its domestic laws but is only
liable to taxation on income from sources in that Contracting State, such
as foreign diplomatic and consular staff. In the Australian context, this
also means, for example, that Norfolk Island residents, who are generally
subject to Australian tax on Australian source income only, are not
residents of Australia for the purposes of this Convention. Accordingly,
Japan will not have to forgo tax in accordance with this Convention on
income derived by residents of Norfolk Island from sources in Japan
(which will not be subject to Australian tax). [Article 4, paragraph 1]
Dual residents
1.37 A set of tie-breaker rules is included for determining how
residency is to be allocated to one or other of the countries for the
purposes of this 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.
1.38 The tie-breaker rules for individuals apply certain tests, in a
descending hierarchy, for determining the residential status (for the
purposes of this 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 that
individual in only one of the countries, the person is deemed
to be a resident solely of that country for the purposes of this
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 Japan, and the person is deemed
for the purposes of this Convention to be a resident only of
the country with which the person has the closer personal and
economic relations (centre of vital interests). In determining
an individual's centre of vital interests regard shall be had to
the individual's habitual abode [Protocol, item 3];
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· residency will be determined on the basis of an individual's
nationality where the foregoing test is not determinative; or
· if the individual is a national (as defined in subparagraph (j)
of paragraph 1 of Article 3 of this Convention) of both
countries or of neither, the competent authorities will
endeavour to resolve the question of treaty residence by
mutual agreement.
[Article 4, paragraph 2]
1.39 In relation to Australia, a dual resident remains a resident for the
purposes of Australian domestic law. Accordingly, that person remains
liable to tax in Australia as a resident, insofar as this Convention allows.
1.40 Where a non-individual (such as a company) is a resident of
both countries in accordance with paragraph 1, the competent authorities
shall endeavour to determine residency by mutual agreement, having
regard to the entity's place of head or main office, its place of effective
management and any other relevant factors. [Article 4, paragraph 3]
1.41 Such other relevant factors may include:
· where the senior day-to-day management is carried on;
· where the accounting records are held;
· where business is carried on; and
· which Contracting State's law governs the legal status.
[Protocol, item 4]
1.42 Unless and until the competent authorities reach mutual
agreement on the residential status of a dual resident, the person shall not
be considered a resident of either Contracting State for the purposes of the
Convention, and will therefore not be entitled to the benefits of this
Convention. However, the person will still remain protected from
discriminatory taxation under Article 26 (Non-Discrimination) and will be
able to seek redress under paragraph 1 of Article 27. [Article 4, paragraph 4]
Transparent entities
1.43 Paragraph 5 of this Convention deals with income, profits or
gains derived through transparent entities. Subparagraphs (a) to (c)
specify circumstances where treaty benefits will be granted.
Subparagraphs (d) and (e) specify circumstances where treaty benefits are
not available.
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1.44 Subparagraph (a) deals with the situation where income
(including profits or gains) is derived from sources in one Contracting
State through an entity organised in the other Contracting State which is
treated as fiscally transparent in that other State (ie, income derived
through that entity is taxed in the hands of the beneficiaries, members or
participants of the entity). In these circumstances, this Convention
provides that the income will be entitled to such treaty benefits as would
be granted if it were derived directly by the beneficiary, member or
participant. Treaty benefits in respect of such income will be granted
where:
· the beneficiaries, members or other participants are residents
of the other Contracting State; and
· other conditions in this Convention (such as the specific
anti-avoidance measures, limitation on benefits and
limitation of relief) are satisfied.
1.45 It is irrelevant whether the first-mentioned Contracting State
sees the income, profits or gains as the income, profits or gains of the
beneficiaries, members or participants under the tax law of that
Contracting State. [Article 4, subparagraph 5(a)]
Example 1.1
partners A Co B C Co
Australian royalty
partnership income
third State Australia Japan
In the above diagram royalty income arising in Japan is paid to an
Australian partnership. The Australian partnership includes Australian
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partners (residents of Australia for the purposes of the treaty). Under
Australian law the income is treated as the income of the partners.
As such, in this example, the royalty income paid to the partnership on
which the Australian resident partners are assessable under Australian
income tax law would be eligible for the benefits of this Convention.
To the extent that the Australian partners owned only a share of the
income, then only the share of the income attributable to the Australian
partners' interest would be eligible for the benefits of this Convention.
Treaty relief will not apply to income derived by any partners that are
not residents of Australia for purposes of this Convention, or income
which is derived by temporary residents of Australia -- Article 24
(Limitation of Relief).
Eligibility for the treaty benefits will also be subject to the application
of Article 23 (Limitation on Benefits) and the respective anti-avoidance
measures contained in the specific income Article (in this example,
paragraph 8 of Article 12 (Royalties)).
1.46 Subparagraph (b) deals with the situation where income is
derived from sources in one Contracting State through an entity that is
organised in the other Contracting State and is treated as a taxable entity
under the tax law of that other Contracting State. In these circumstances,
this Convention provides that the income will be entitled to such treaty
benefits as would be granted to a resident of the latter Contracting State.
Treaty benefits will be granted where:
· the entity is a resident of the other Contracting State; and
· other conditions in this Convention (such as the specific
anti-avoidance measures, and limitation on benefits) are
satisfied.
1.47 It is irrelevant whether the first-mentioned Contracting State
sees the income, profits or gains as the income, profits or gains of the
entity under the tax law of that Contracting State. [Article 4,
subparagraph 5(b)]
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Example 1.2
partners A Co B C Co
Australian royalty
Corporate Ltd income
Partnership
third State Australia Japan
In the above diagram, royalty income arising in Japan is paid to an
Australian Limited Liability Partnership. The Australian Corporate
Limited Partnership includes Australian partners (residents of Australia
for the purposes of the treaty). The Australian Corporate Limited
Partnership is effectively treated as a company for Australian tax
purposes.
As such, in this example, the royalty income would be eligible for the
benefits of this Convention. This will be the case, notwithstanding that
one or more of the participants in the corporate limited partnership is
not a resident of Australia and irrespective of whether Japan, under its
domestic law, would tax the income in the hands of the Australian
corporate limited partnership or in the hands of the partners in the
Australian corporate limited partnership.
Treaty relief will not apply to income derived by any partners that are
not residents of Australia for purposes of this Convention, or income
which is derived by temporary residents of Australia -- Article 24
(Limitation of Relief).
Eligibility for the treaty benefits will be subject to the application of
Article 23 (Limitation on Benefits) and the respective anti-avoidance
measures contained in the specific income Article.
1.48 Subparagraph (c) deals with the situation where income is
derived from sources in one Contracting State through a third State entity
which is treated as fiscally transparent in the other Contracting State. In
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these circumstances, this Convention provides that the income will be
entitled to such treaty benefits as would be granted if it were derived
directly by the beneficiary, member or participant. Treaty benefits in
respect of such income will be granted where:
· the beneficiary, member or participant is a resident of the
other Contracting State; and
· other conditions in this Convention (such as the specific
anti-avoidance measures, limitation on benefits and
limitation of relief) are satisfied.
1.49 It is irrelevant whether the first-mentioned Contracting State
sees the income, profits or gains as the income, profits or gains of the
beneficiary, member or participant under the tax law of that Contracting
State. [Article 4, subparagraph 5(c)]
Example 1.3
partners A Co B C Co
Australia State C
United States
Ltd Liability
Company
United States
Japan
royalty income
In the above diagram, a Japanese entity pays interest income to a
United States Limited Liability Company (US LLC). The US LLC
includes Australian partners (residents of Australia for the purposes of
the treaty).
As the US LLC is treated as a partnership for US tax law purposes, it is
also treated as a partnership for Australian tax law purposes.
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In this example, the royalty income derived by the US LLC on which
the Australian resident partners are assessable under Australian income
tax law would be eligible for the benefits of the Convention.
Treaty relief will not apply to income derived by any partners that are
not residents of Australia for purposes of this Convention, or income
which is derived by temporary residents of Australia -- Article 24
(Limitation of Relief).
Eligibility for the treaty benefits will be subject to the application of
Article 23 (Limitation on Benefits), Article 24 (Limitation of Relief)
and the respective anti-avoidance measures contained in the specific
income Article.
1.50 No treaty benefits will be granted in respect of income derived
from a Contracting State through a third State entity where that income is
treated as derived by the entity under the tax law of the other Contracting
State. [Article 4, subparagraph 5(d)]
Example 1.4
A Co
Australia
third State
entity
third State
Japan
interest income
In the above diagram, a Japanese entity pays interest to a third State
entity that is treated as a company for Australian tax purposes. In this
case, the interest income will not be eligible for the benefits of this
Convention. This occurs even if the third State entity was treated
differently under the tax laws of Japan.
1.51 Similarly, income derived from a Contracting State through an
entity organised in that State will not be eligible for treaty benefits if the
income is treated as derived by that entity under the tax laws of the other
Contracting State. [Article 4, subparagraph 5(e)]
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Example 1.5
Australian
shareholder A Co
Australia
Japan
J Co interest income
In the above diagram, a Japanese entity pays interest income to another
Japanese entity, J Co. A Co, an Australian resident shareholder holds
shares in J Co. Australia treats J Co as the entity that derives the
interest income.
In this example, the interest income would be ineligible for the benefits
of this Convention. It is irrelevant how Japan would treat the entity.
Article 5 -- Permanent Establishment
Role and definition
1.52 The application of various provisions of this 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.
1.53 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 Agreement in a separate Article
dealing with professional services and other similar independent activities.
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 Agreement would come within the meaning of permanent
establishment for the purposes of this Convention.
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Meaning of permanent establishment
1.54 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;
· 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]
1.55 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;
· an agricultural, pastoral or forestry property; or
· a place of extraction of natural resources.
1.56 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
1.57 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 in relation to such properties
situated in Australia. [Article 5, subparagraph 2(g)]
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Building site or construction or installation project
1.58 A building site or construction or installation project constitutes
a permanent establishment only if it lasts more than 12 months. The
provision has been relocated to a separate paragraph which aligns with the
OECD Model formatting and ensures that sites or projects which last less
than 12 months will not constitute a permanent establishment.
1.59 The term `building site or construction or installation project'
includes not only places used for the construction of buildings but also for
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, paragraph 3]
Deemed permanent establishment
Supervisory and consultancy activities
1.60 Supervisory and consultancy activities undertaken for more than
12 months in connection with a building site or a construction or
installation project are deemed to be performed through a permanent
establishment. This reflects Australia's reservation to Article 5
(Permanent Establishment) of the OECD Model. [Article 5,
subparagraph 4(a)]
Natural resource activities
1.61 Where an enterprise carries on activities (including the operation
of substantial equipment) in the exploration for, or exploitation of, natural
resources within a country for a period or periods aggregating more than
90 days in any 12-month period, it will be deemed to have a permanent
establishment in that country through which those activities are
performed. [Article 5, subparagraph 4(b)]
Substantial equipment
1.62 If an enterprise operates substantial equipment in a country for
longer than 183 days in any 12-month period, the activity will be deemed
to be performed through a permanent establishment. For the purposes of
calculating this period, days during which the substantial equipment is
used in the exploitation of, or exploration for, natural resources are not
included. [Article 5 subparagraph 4(c)]
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1.63 Subparagraphs 4(b) and (c) together reflect 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 involving the use of such equipment.
1.64 The terms `operation' and `operates' have been included to
clarify that only active use of substantial equipment assets will be
captured by subparagraphs 4(b) and (c). This means that an enterprise
that merely leases substantial equipment to another person for that other
person's own use in a country, would not be deemed to have a permanent
establishment in that country under these provisions. [Protocol, subitem 5(a)]
1.65 For example, if a Japanese enterprise itself operates a mobile
crane at an Australian port for more than 183 days in a 12-month period,
the Japanese enterprise would be deemed to have a permanent
establishment in Australia under subparagraph 4(c). If, however, that
Japanese enterprise merely leases the mobile crane to another person and
that other person operates the crane at an Australian port for its own
purposes, the Japanese enterprise would not be deemed to have a
permanent establishment in Australia under subparagraph 4(c). However,
if that other person operates the substantial equipment for or on behalf of
the enterprise, the enterprise would be considered to operate the
equipment in the country.
1.66 The meaning of the term `substantial' depends on the relevant
facts and circumstances of each individual case. Factors such as the size,
quantity or value of the equipment, or the role of the equipment in income
producing activities, are relevant in determining whether the equipment is
substantial. [Protocol, subitem 5(b)]
1.67 A non-exhaustive list of examples of substantial equipment is
specified in the Protocol to this Convention. These include:
· industrial earthmoving equipment or construction equipment
used in road building, dam building or powerhouse
construction;
· manufacturing or processing equipment used in a factory;
and
· oil or drilling rigs, platforms and other structures used in the
petroleum or mining industry.
[Protocol, subitem 5(c)]
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Anti-avoidance provision
1.68 Given that Article 5 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 an enterprise has 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 or where the nature of the work carried on by the associated
enterprises in respect of such project is the same.
1.69 This provision is an anti-avoidance measure aimed at
counteracting contract splitting for the purposes of avoiding the
application of the permanent establishment rules.
1.70 The OECD Model Commentary recognises that time thresholds
in Article 5 may give rise to abuses and notes that countries concerned
with this issue may adopt solutions in bilateral negotiations to prevent
such abuse.
1.71 This Convention provides that an enterprise shall be deemed to
be associated with another enterprise if one enterprise participates directly
or indirectly in the management, control or capital of the other enterprise
or the same persons participate directly or indirectly in the management,
control or capital of the enterprises. 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 5]
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Example 1.6
J Co
J Sub A J Sub B J Sub C
Japan
Australia
5 month 5 month 5 month
contract contract contract
Australian
project
In the above diagram, each of the subsidiaries may conduct similar
connected activities, for example, supervisory activities at a single
building site. In determining whether the 12-month time threshold has
been met, the time spent by each of the enterprises would be
aggregated. However, any period during which more than one of the
subsidiaries were carrying on activities concurrently would be counted
only once. Where the time threshold is met, each of the subsidiaries
would be deemed to have a permanent establishment through which its
activities with respect to the project are conducted. Only the profits
derived by each subsidiary from its own activities would be attributed
to each company's permanent establishment.
Preparatory and auxiliary activities
1.72 Certain activities do not generally give rise to a permanent
establishment (eg, the use of facilities solely for storage, display or
delivery).
1.73 These activities are ordinarily 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.
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1.74 Unlike the OECD Model, which provides that the listed
activities are deemed not to constitute a permanent establishment, this
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 but when, viewed as a
whole, the activities ought to be regarded as a permanent establishment.
1.75 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 activities of the kind
referred to in subparagraphs 6(a) to (e) of this treaty -- is not included.
Australia does not consider that an enterprise undertaking multiple
functions of the kind indicated in subparagraphs 6(a) to (e) would
generally be regarded as only engaged in preparatory or auxiliary
activities. [Article 5, paragraph 6]
Dependent agents
1.76 A person who acts on behalf of an enterprise of another country
is deemed to constitute a permanent establishment of that enterprise if that
person has and habitually exercises an authority to substantially negotiate
or conclude contracts on behalf of the enterprise.
1.77 Consideration will be given to all the relevant facts and
circumstances in determining whether a person has authority or not to
substantially negotiate or conclude contracts.
1.78 The term `substantially negotiate' has been included to remove
any doubt as to the existence of a permanent establishment where
contracts that have been negotiated in one country by an agent are
formally concluded in the other country by signature by another person in
that other country. [Protocol, item 6]
1.79 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 6. [Article 5,
subparagraph 7(a)]
Manufacturing or processing on behalf of others
1.80 Consistent with Australia's reservations to the OECD Model,
where a person acts on behalf of another in manufacturing or processing
the other's goods, this will give rise to a deemed permanent establishment.
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
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refined product remains with the mining consortium and profits on sale
are realised mainly outside of Australia.
1.81 The refining activities performed for the enterprise through such
a plant are deemed to be carried on through a permanent establishment of
the enterprise because the manufacturing or processing activity (which
gives the processed minerals much of their value) is conducted in
Australia on behalf of the enterprise. Accordingly, Australia should have
taxing rights over the business profits attributable to the processing
activity carried on in Australia. Subparagraph 7(b) prevents an enterprise
which carries on substantial manufacturing or processing activities in a
country through an intermediary from escaping tax in that country.
1.82 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 7(b)]
1.83 Manufacturing or processing activities will not give rise to a
permanent establishment where the activities are limited to the
preparatory and auxiliary activities mentioned in paragraph 6.
Independent agents
1.84 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 8]
Subsidiary companies
1.85 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 the subsidiary acts as an agent such
that a dependent agent permanent establishment is constituted. [Article 5,
paragraph 9]
Other Articles
1.86 The principles set down in this Article are also to be applied in
determining whether a permanent establishment exists in a third country
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or whether an enterprise of a third country has a permanent establishment
in Australia (or Japan) when applying the source rule contained in:
· paragraph 7 of Article 11 (Interest); and
· paragraph 5 of Article 12 (Royalties).
[Article 5, paragraph 10]
Article 6 -- Income from Real Property
Where income from real property is taxable
1.87 Consistent with the OECD Model, this Article provides that the
income of a resident of one country, from real property situated in the
other country, may be taxed by that other country. Thus, income from
real property in Australia will be subject to Australian tax laws. [Article 6,
paragraph 1]
Definition
1.88 `Real property' is primarily defined as having the meaning
which it has under the domestic law of the country where the property is
situated. The definition also provides some particular examples of what
real property would include, such as the usufruct of real property (being a
right to use property without degrading it and to retain any profits derived
from it). [Article 6, paragraph 2]
1.89 The Protocol clarifies that the principal rights intended to be
covered by subparagraph (f) of paragraph 2 (which refers to rights relating
to the exploitation of, and exploration for, natural resources) are rights to
receive payments for the granting of the right to explore for, or exploit
natural resources, and rights to receive payments in relation to the
exploitation of, or exploration for, natural resources. This would apply
regardless of whether the person receiving the payments had an interest in
the resources. For example, where a geologist is engaged to identify
potential mineral deposits, and is paid by a mining company by reference
to the value of the minerals extracted, the right to receive such payment
would come within the definition of real property even if the mining
company, not the geologist, holds the right to extract those minerals.
[Protocol, item 8]
1.90 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]
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1.91 This Article will not prevent a Contracting State applying
domestic law where a resident derives income from real property situated
in that State, regardless of whether that property is effectively connected
with a permanent establishment in the other Contracting State. [Protocol,
item 7]
Deemed situs
1.92 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. Paragraph 3 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
1.93 Paragraphs 1, 3 and 4 of Article 6 are extended to income
derived from the use or exploitation of real property of an enterprise.
1.94 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]
Form of exploitation of real property
1.95 Paragraph 4 makes it clear that the general rule in paragraph 1
applies irrespective of the form of exploitation of the real property. The
Article applies to income derived from the direct use, letting or use in any
other form of real property. [Article 6, paragraph 4]
Article 7 -- Business Profits
1.96 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.
1.97 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]
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2008 AustraliaJapan Convention
1.98 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 its business profits (except where paragraph 7 of this Article applies --
see the explanation in paragraphs 1.108 and 1.109).
1.99 This Article will not prevent a Contracting State applying
domestic law where a resident derives income from real property situated
in that State, regardless of whether that property is effectively connected
with a permanent establishment in the other Contracting State. [Protocol,
item 7]
Determination of business profits
1.100 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 this Convention correspond to international practice and the
comparable provisions in Australia's other tax treaties. [Article 7,
paragraphs 2 and 3]
1.101 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]
1.102 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]
1.103 Paragraph 6 follows the OECD Model and was inserted at the
request of Japan 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]
1.104 A good and sufficient reason to change the method used to
determine the profits to be attributed to the permanent establishment will
be taken to exist where an alternative method gives the most appropriate
determination of the profits in accordance with the principles contained in
the Article. [Protocol, item 10]
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International Tax Agreements Amendment Bill (No. 1) 2008
1.105 The Protocol to this Convention clarifies that income, profits or
gains may continue to be taxed in the country where the permanent
establishment was situated after an enterprise ceases to carry on business
through that permanent establishment, provided the income is attributable
to that permanent establishment. [Protocol, item 9]
Application of domestic law
1.106 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 stated in this 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 especially important 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 the arm's length
profits.
1.107 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
1.108 Where income or gains are specifically dealt with under other
Articles of this Convention, the effect of those particular Articles is not
overridden by this Article.
1.109 This provision lays down the general rule of interpretation that
categories of income or gains which are the subject of other Articles of
this 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. However, under certain articles, for example paragraph 8
of Article 10 (Dividends), where the asset in respect of which the income
is paid is effectively connected with a permanent establishment that
income will be dealt with under Article 7 (Business Profits). [Article 7,
paragraph 7]
Insurance with nonresidents
1.110 Each country has the right to continue to apply any provisions in
its domestic law relating to the taxation of income from insurance. An
effect of this paragraph is to preserve, in the case of Australia, the
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2008 AustraliaJapan Convention
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
1.111 The principles of this Article will apply to profits which are
derived by a resident of one of the Contracting States (directly or through
one or more interposed trusts) as a beneficiary of a trust, except where the
trust is treated as a company for tax purposes. [Article 7, paragraph 9]
1.112 In the case of Japan, it is noted in the Protocol that a trust which
is treated as a company for tax purposes means a trust, the trustee of
which is subject to tax in respect of profits derived from business carried
on by the use of the trust estate. [Protocol, item 11]
1.113 In accordance with this Article, 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 Japan is beneficially entitled under the
trust. Paragraph 9 of this Article 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
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 this 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
1.114 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]
1.115 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
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International Tax Agreements Amendment Bill (No. 1) 2008
support their international operations. Consistent with the OECD Model
Commentary on Article 8 (Shipping, Inland Waterways Transport and Air
Transport), 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.
1.116 This Article exempts Australian enterprises from Japan's local
inhabitant and enterprise taxes in respect of the operation of ships and
aircraft in international traffic, provided that no political subdivision or
local authority in Australia would subject a Japanese enterprise to a
similar tax. [Article 8, paragraph 2]
Internal traffic
1.117 Profits derived directly or indirectly by a Japanese enterprise
from the operation of ships or aircraft, to the extent that they relate to
operations confined solely to places in Australia, may be taxed in
Australia. This reflects Australia's 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. [Article 8,
paragraph 3]
1.118 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]
1.119 There is no specified limit on the amount of tax that can be
charged on profits from the operation of ships and aircraft in internal
traffic. However, under Division 12 of Part III of the ITAA 1936,
5 per cent of the amount paid in respect of the transport of passengers,
livestock, mail or goods would be deemed to be taxable income of the
Japanese ship operator.
Example 1.7
A ship operated by a Japanese enterprise, in the course of an
international voyage from Sendai to Melbourne, makes a stop in Cairns
to pick up cargo. Profits derived from the transport of the goods
loaded in Cairns 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.
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2008 AustraliaJapan Convention
Example 1.8
A Japanese enterprise operates sightseeing flights over 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.
1.120 Operations involving the use of ships or aircraft, such as
haulage, survey or dredging activities, or other activities that are
undertaken in Australia (including coastal waters, the continental shelf,
the exclusive economic zone and external territories) are also regarded as
operations confined solely to places in Australia.
Article 9 -- Associated Enterprises
Reallocation of profits
1.121 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 Japan 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.
1.122 This Article does 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]
1.123 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.
1.124 Each country has the right to apply its domestic law relating to
the determination of the tax liability of a person (eg, Australia's
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International Tax Agreements Amendment Bill (No. 1) 2008
Division 13 of Part III of the ITAA 1936) to enterprises in cases where the
available information is inadequate, provided that, on the basis of the
available information, such provisions are applied, so far as it is
practicable to do so, consistently with the principles of paragraph 1 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]
Correlative adjustments
1.125 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, where the competent authorities of the two countries agree that the
first adjustment reflects arm's length profits, the other country is obliged
to make an appropriate compensatory adjustment to the amount of tax
charged on the profits involved to relieve any such double taxation.
1.126 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.
[Article 9, paragraph 3]
OECD guidelines
1.127 The Exchange of Notes reflects the understanding reached by
negotiators that Australia and Japan will conduct transfer pricing
evaluations in accordance with the OECD transfer pricing guidelines.
This accords with Australia's practice of applying the OECD transfer
pricing guidelines.
Time limitation
1.128 Any enquiry into the profits of the enterprise must be initiated
within seven years in order to make an adjustment under paragraph 1 or 2.
However, the time limit does not apply in the case of fraud or wilful
default, or where the ability to initiate an enquiry is hindered by the action
or inaction of the enterprise. [Article 9, paragraph 4]
1.129 The Article does not impose a time limit on conclusion of the
inquiry into the profits of the enterprise.
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2008 AustraliaJapan Convention
Article 10 -- Dividends
1.130 This Article allocates taxing rights in respect of dividends
flowing between Australia and Japan. The Article provides that:
· certain cross-border intercorporate dividends will be either
exempt from source taxation or subject to a maximum
5 per cent rate of tax in that country;
· a maximum 10 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 to be dealt
with under Article 7 (Business Profits); and
· the extra-territorial application by either country of taxing
rights over dividend income is not permitted.
1.131 The Article also provides for limited source taxation on
distributions from Australian real estate investment trusts and from
Japanese pre-dividend deduction companies.
1.132 However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
1.133 The phrase `for the purposes of its tax', which appears in
paragraph 1 of Article 10, refers to the case where a person is a resident of
a Contracting State by virtue of paragraph 1 of Article 4 of the
Convention, even if the person is deemed to be a resident of the other
Contracting State by virtue of paragraph 2 or 3 of that Article. [Protocol,
item 12]
Permissible rate of source country taxation
Exemption for certain cross-border intercorporate dividends
1.134 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 directly 80 per cent or more of the voting power of the
company paying the dividend;
· satisfies a 12-month holding requirement at the time the
dividend is determined in relation to the shares in respect of
which the dividend is payable; and
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International Tax Agreements Amendment Bill (No. 1) 2008
· meets certain qualifying tests.
[Article 10, paragraph 3]
1.135 In the case of Australia, the date on which entitlement to the
dividends is determined is the date on which the dividends are declared.
As such, the phrase should be regarded as consistent with Australia's
other tax treaties which use the word declared. For the purposes of Japan,
the phrase will be interpreted as meaning the end of the accounting period
for which the distribution of profits takes place. [Exchange of Notes,
paragraph 3]
1.136 To qualify for the exemption, the company that is the beneficial
owner of the dividends must either:
· be a publicly listed company that is a `qualified person' (as
defined under subparagraph 2(c) of Article 23 (Limitation on
Benefits));
· have at least 50 per cent of the aggregate vote and value of its
shares owned directly or indirectly by five or fewer such
companies; or
· be granted benefits with respect to those dividends under
paragraph 5 of Article 23 (Limitation on Benefits).
[Article 10, paragraph 3]
1.137 For the purpose of the above tests, refer to the discussion on
Article 23 (Limitation on Benefits) in paragraphs 1.275 to 1.300.
Five per cent rate limit on source country tax of certain cross-border
intercorporate dividends
1.138 The 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 companies resident in the other country who are
the beneficial owners of the dividends. [Article 10, paragraphs 1 and 2]
1.139 A rate limit of 5 per cent will apply for dividends paid in respect
of company shareholdings 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)]
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2008 AustraliaJapan Convention
Ten per cent rate limit for all other dividends
1.140 Except as provided in paragraph 4 (see paragraphs 1.142 to
1.144), this Article provides that the source country will limit its tax to
10 per cent of the gross amount of the dividend in all other cases. 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
10 per cent. [Article 10, subparagraph 2(b)]
1.141 Although the provisions in Article 10 would allow Australia to
impose withholding tax on both franked and unfranked dividends in the
specified circumstances, the dividend withholding tax exemption provided
by Australia under its domestic law for franked dividends paid to
non-residents will continue to apply.
Japanese pre-dividend deduction entity
1.142 Under Japanese law, certain entities (such as Private Placement
Investment Trusts which invest mainly in securities in the market and
distribute profits arising from such investment to investors) are entitled to
a deduction for dividends paid to their beneficiaries.
1.143 This Article allocates source taxing rights in respect of dividends
paid by such Japanese entities to their Australian resident beneficiaries.
Paragraph 4 provides that the Japanese source taxation shall be limited to:
· a maximum of 15 per cent on the gross amount of the
dividend if more than 50 per cent of the assets of the
company consist, directly or indirectly, of real property
situated in Japan; or
· a maximum of 10 per cent on the gross amount in all other
cases.
[Article 10, paragraph 4]
1.144 The term `beneficiary' is used in this context because under
Japanese domestic law, pre-dividend deduction companies issue
`beneficiary securities' rather than stock. As such, in this context, the
word beneficiaries means, persons in general who own any kind of
beneficial securities of a pre-dividend deduction company. [Article 10,
paragraph 4]
1.145 Paragraph 5 provides that the provisions of paragraphs 2 to 4 are
not intended to affect the tax on a company's profits from which
dividends are paid. This paragraph reflects the OECD Model provision
and was included at the request of Japan for the avoidance of doubt.
[Article 10, paragraph 5]
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International Tax Agreements Amendment Bill (No. 1) 2008
Real estate investment trust distributions
1.146 Paragraph 7 allows distributions from an Australian real estate
investment trust to a resident of Japan to be taxed in both countries but
limits the Australian tax charged on such income to 15 per cent of the
gross amount of the distribution. [Article 10, subparagraphs 7(a) and (b)]
1.147 This provision is broadly consistent with an alternative provision
developed by the OECD to address the taxation of cross-border
distributions by real estate investment trusts. Like the OECD provisions,
paragraph 7 does not apply to distributions in respect of non-portfolio
interests in real estate investment trusts, since such interests may be a
substitute for direct investment in the underlying real property held
through the real estate investment trust.
1.148 Accordingly, the limit on the Australian tax charged on the
distribution, is only available to portfolio investors. Non-portfolio
investors who hold at least a 10 per cent beneficial ownership interest at
any time in the 12 months preceding the date that the distributions are
made will continue to be subject to tax in accordance with Australia's
domestic law. [Article 10, subparagraph 7(b)]
1.149 The term real estate investment trust is defined as a managed
investment trust created or organised under the laws of Australia the
business of which consists of direct or indirect investment in real property
for the main purpose of deriving rent. [Article 10, subparagraph 7(c)]
Dividends effectively treated as business profits
1.150 Limitations on the tax of the country in which the dividend is
sourced do 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. A similar rule
operates with respect to real estate investment trust distributions where the
investor's holding is effectively connected with a permanent
establishment of the investor in Australia.
1.151 In relation to real estate investment trusts, the rate limitation on
Australian tax will not apply where the holding in respect of which a
distribution is paid is effectively connected with a permanent
establishment of the unit holder in Australia. In determining whether the
holding is effectively connected with the unit holder's permanent
establishment the deeming provisions of paragraph 9 of Article 7 will not
apply. This reflects the fact that the holding in respect of which the
distribution is paid is not a holding of the trustee.
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2008 AustraliaJapan Convention
1.152 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).
1.153 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 of that non-resident 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 8]
Extraterritorial application precluded
1.154 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.
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International Tax Agreements Amendment Bill (No. 1) 2008
Example 1.9
A Co 1
dividend permanent
establishment of
A Co 1
shareholding
A Co 2 profits
Australia Japan
In the diagram above, paragraph 9 would, but for the exception,
preclude Japan from taxing the dividend paid by A Co 2 to A Co 1 out
of profits derived from Japanese sources. However, as the dividends
relate to the Australian shareholder's permanent establishment in Japan
with which the holding is effectively connected, Japan may tax the
dividends.
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2008 AustraliaJapan Convention
1.155 In addition, paragraph 9 also provides an exception in the case
of dividends paid by a dual resident company which has been deemed
under mutual agreement between the competent authorities of Australia
and Japan to be a resident of only one of the countries. In these
circumstances the other country may tax dividends where they are paid
out of profits or income arising in that other country. Where the dividends
are beneficially owned by a resident of the first-mentioned Contracting
State, the rate limits provided under paragraph 2 or 3 of Article 10 will
apply. [Article 10, paragraph 9]
Example 1.10
Australian
resident
individual
shareholding
dividend
Australian
resident profits
company
Australia Japan
In the diagram above, the Australian resident company is a dual
resident, which has been determined under the Mutual Agreement
Procedure to be a resident of Australia for purposes of the treaty. The
company makes a payment of dividends to an Australian resident
individual out of profits derived from Japan. In these circumstances
Japan may tax the dividends in accordance with subparagraph 2(b) of
Article 10.
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International Tax Agreements Amendment Bill (No. 1) 2008
Definition of dividends
1.156 The term dividends in this Article means income from:
· shares or other rights which participate in profits and are not
debt-claims; and
· income or other distributions which are subject to the same
taxation treatment as income from shares in the country of
which the distributing company is resident.
[Article 10, paragraph 6]
Back-to-back arrangements
1.157 Paragraph 10 is an anti-treaty-shopping provision which has
been inserted at the request of Japan to ensure that residents of third States
are not entitled to the benefits of this Convention through the use of
preferred shares or other similar interests in a back-to-back arrangement.
[Article 10, paragraph 10]
1.158 The paragraph is intended to capture cases where a third State
resident holds preferred shares or similar interests in an interposed
resident of a Contracting State who in turn holds the same preferred shares
or similar interests in a resident of the other Contracting State, with a view
to obtaining benefits that would not otherwise be available via a direct
investment by the third State resident into the other Contracting State.
1.159 Similar rules are provided in paragraph 9 of Article 11 (Interest),
and paragraph 7 of Article 12 (Royalties).
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2008 AustraliaJapan Convention
Example 1.11
third State
resident
company
third State preferred shares
Australia
Australian
resident
company
preferred shares
Japan
Japanese
resident
company
In the above diagram, an Australian resident company owns preferred
shares in a Japanese resident company. A third State resident company
owns preferred shares in the Australian resident company that are
issued on the same or similar terms and conditions to those shares
issued by the Japanese resident company. The third State does not
have a tax treaty, or has a less favourable tax treaty with Japan than
this Convention, such that the rate of tax imposed on dividends paid by
the Japanese resident company would be higher than the rate payable
under this Convention, on dividends paid to the Australian resident
company.
The preferred shares would not have been acquired but for the holding
of equivalent shares by the third State resident company in the
Australian resident company.
In these circumstances, the Australian resident company will not be
seen to be the beneficial owner of the dividend payments on the
preferred shares from the Japanese resident company to the Australian
resident company.
Limitation of benefits
1.160 The source country rate limits and exemptions available under
this Article will not apply to an assignment of dividends or distributions,
or a creation or assignment of shares or other rights in respect of which
dividends are paid, has been made with the main objective, or one of the
main objectives, of accessing the relief otherwise available under this
Article. [Article 10, paragraph 7]
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International Tax Agreements Amendment Bill (No. 1) 2008
Article 11 -- Interest
1.161 This Article allocates taxing rights in respect of interest flows
between Australia and Japan. Article 11 provides that:
· an exemption from source country tax applies to certain
cross-border interest flows to:
government bodies or the Bank of Japan or the
Reserve Bank of Australia;
financial institutions;
the Japan Bank for International Cooperation;
the Nippon Export and Investment Insurance;
the Australian Export Finance and Insurance Corporation;
a public authority in Australia that manages the
investments of the Future Fund; or
any similar organisation agreed to between the
Governments of the Contracting States;
· 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 Japanese
resident; or
the interest is paid by a non-resident to a Japanese resident
and it is 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 interest which
would be expected to be paid on an arm's length dealing
between independent parties.
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2008 AustraliaJapan Convention
1.162 However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
1.163 The phrase `for the purposes of its tax', which appears in
paragraph 7 of Article 11, refers to the case where a person is a resident of
a Contracting State by virtue of paragraph 1 of Article 4 of this
Convention, even if the person is deemed to be a resident only of the other
Contracting State by virtue of paragraph 2 or 3 of that Article. [Protocol,
item 12]
Permissible rate of source country taxation
Ten per cent rate limit
1.164 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 and central banks
1.165 The exemption for interest paid to the government of a
Contracting State reflects the principle of sovereign immunity and will
apply to interest derived by Australia or Japan, or any political subdivision
or local authority in either Australia or Japan, in addition to any other
body exercising governmental functions. It also applies to the central
banks of Australia and Japan. [Article 11, subparagraph 3(a)]
1.166 According to item 13 of the Protocol, the term `any other body
exercising governmental function' is to be determined in accordance with
the law of the Contracting State where the interest arises. [Protocol, item 13]
1.167 This would mean, for example, that a statutory authority that
exercises governmental functions would qualify for the exemption.
Exemptions for interest paid to financial institutions
1.168 The exemption for interest paid to financial institutions
recognises that the agreed 10 per cent rate on gross interest can be
excessive given their cost of funds. The exemption will also broadly align
the treatment of interest paid to Japanese 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)]
1.169 The term financial institution means a bank or other enterprise
substantially deriving its profits by raising debt finance in the financial
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markets or by taking deposits at interest and using those funds in carrying
on the business of providing finance. This 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)]
1.170 A financial institution will be regarded as `substantially deriving
its profits' where that activity is its main activity when compared to any
other activity that it undertakes. [Protocol, item 14, paragraph (b)]
1.171 For the interest payment to be eligible for the financial
institutions exemption, the issuer of the debt must be unrelated to the
holder of the debt. Item 14 of the Protocol provides that the two parties
will be unrelated where neither party is able exert sufficient influence over
the other. [Protocol, item 14, paragraph (a)]
1.172 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]
1.173 An example of a back-to-back arrangement is described in the
Protocol. Such an arrangement would include a transaction or series of
transactions structured in such a way that:
· a Japanese financial institution receives or is credited with an
item of interest arising in Australia; and
· a financial institution pays an equivalent interest to another
person who is a resident of Japan, which, if that other person
received the interest directly from Australia, would not be
entitled to similar benefits with respect to that interest.
[Protocol, item 15]
1.174 However, a back-to-back arrangement would generally not
include a loan guarantee provided by a related party to a Japanese
financial institution.
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Exemptions for interest paid to specific government bodies
1.175 Subparagraph 3(c) provides that the exemption from interest
withholding tax will be extended to:
· the Japan Bank for International Cooperation;
· the Nippon Export and Investment Insurance;
· the Australian Export Finance and Insurance Corporation;
· a public authority in Australia that manages the investments
of the Future Fund; and
· any similar institution as may be agreed upon from time to
time between the governments of the Contracting States
through an exchange of diplomatic notes.
[Article 11, subparagraph 3(c)]
1.176 Subparagraph 3(c) has been inserted at the request of Japan to
clarify that interest payments to these bodies are free from interest
withholding tax.
Definition of interest
1.177 The term interest is defined for the purposes of this Article to
mean:
· income from debt-claims of every kind;
· interest from government securities;
· interest from bonds and debentures;
· premiums and prizes attaching to such securities, bonds or
debentures; 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]
1.178 The use of the term `debt-claims' in this Article of the treaty
rather than the more commonly used `indebtedness' in Australia's other
treaties reflects the preferred tax treaty practice of Japan and is of no
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practical consequence for the purposes of Australian law. The two terms
are intended to encompass the same kinds of debt.
Interest effectively treated as business profits
1.179 Interest derived by a resident of one country which is paid in
respect of the debt-claims or other rights which are 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]
Deemed source rules
1.180 The source rules which determine where interest arises for the
purposes of this 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
Japan 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 Japanese resident, if it is an expense incurred by the payer of the
interest in carrying on a business in Australia through a permanent
establishment.
1.181 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 (for the purposes of
Australian tax) in carrying on a business through a permanent
establishment outside both Australia and Japan (ie, the permanent
establishment is in a third country). In that case, the interest is not
deemed to arise in either Contracting State. [Article 11, paragraph 7]
1.182 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply.
Related persons
1.183 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
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domestic law of each country but subject to the other Articles of this
Convention. [Article 11, paragraph 8]
1.184 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.
1.185 A special relationship also covers relationships of blood or
marriage and, in general, any community of interests.
Back-to-back arrangements
1.186 Paragraph 9 is an anti-treaty-shopping provision which has been
inserted at the request of Japan to ensure that residents of third States are
not entitled to the benefits of this Convention through the use of debt
claims or other rights in a back-to-back arrangement. [Article 11,
paragraph 9]
1.187 Paragraph 9 is intended to capture cases where a third State
resident holds an equivalent debt-claim or other right in an interposed
resident of a Contracting State who in turn holds the same debt-claim or
other right in a resident of the other Contracting State, with a view to
obtaining benefits that would not otherwise be available via a direct
investment by the third State resident into the other Contracting State.
1.188 Similar rules are provided in paragraph 10 of Article 10
(Dividends), and paragraph 7 of Article 12 (Royalties).
Limitation of benefits
1.189 The source country rate limit and exemptions available under
this Article will not apply where an assignment of the interest, the creation
or assignment of a debt-claim or other rights in respect of which interest is
paid, or the establishment, acquisition or maintenance of a company
which is the beneficial owner of the interest or the conduct of its
operations has been made or performed with the main objective, or one of
the main objectives, of accessing the relief otherwise available under this
Article. [Article 11, paragraph 10]
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Article 12 -- Royalties
1.190 This Article allocates taxing rights in respect of royalties paid or
credited between Australia and Japan. 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 are subject to either Article 7 (Business
Profits) or Article 8 (Ships and Aircraft);
· payments for spectrum licences are not included within the
definition of royalties and are dealt with under 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
Japanese resident; or
the royalties are paid by a non-resident to a Japanese
resident and are an expense of the payer in carrying on
business through a permanent establishment in Australia;
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.
1.191 However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
1.192 The phrase `for the purposes of its tax', which appears in
paragraph 1 of Article 12, refers to the case where a person is a resident of
a Contracting State by virtue of paragraph 1 of Article 4 of this
Convention, even if the person is deemed to be a resident of the other
Contracting State by virtue of paragraph 2 or 3 of that Article. [Protocol,
item 12]
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Permissible rate of source country taxation
1.193 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]
1.194 In the absence of a tax treaty, Australia taxes royalties paid to
non-residents at 30 per cent of the gross royalty.
1.195 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
1.196 The definition of `royalties' in this Article reflects most
elements of the definition in Australia's domestic income tax law.
Royalties includes payments for the supply of scientific, technical,
industrial or commercial knowledge 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
media and used in connection with television, radio or other broadcasting
(eg, satellite, cable and Internet broadcasting). [Article 12, paragraph 3]
1.197 Payments for the use of, or the right to use industrial,
commercial or scientific equipment, do not appear in the definition under
this Convention. Such amounts 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.
1.198 Payments for the use of spectrum licences shall not be included
within the definition of `royalties'. Such payments will be taxed in
accordance with Article 7 (Business Profits). [Protocol, item 16]
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Payments for the supply of know-how versus payments for services
rendered
1.199 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 (Royalties). 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 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.
1.200 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.
1.201 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.
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1.202 Payments for services rendered are to be treated under Article 7
(Business Profits).
Image or sound reproduction or transmission
1.203 The `royalties' 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)]
Forbearance
1.204 Consistent with 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), Protocol, item 17]
Other royalties effectively treated as business profits
1.205 As in the case of interest income, it is specified that 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
1.206 The source rules which determine where royalties arise for the
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).
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1.207 Consistent with Australia's royalty withholding tax provisions,
royalty payments that are an expense incurred by an Australian resident
(for the purposes of its Australian tax), in carrying on a business through a
permanent establishment outside both Australia and Japan (ie, the
permanent establishment is in a third country) will not be subject to tax in
Australia. Those royalties are not deemed to be sourced in either
Contracting State. [Article 12, paragraph 5]
1.208 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply. [Article 5, paragraph 10]
Related persons
1.209 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.
1.210 Examples of special relationships have been provided in respect
of the corresponding paragraph in Article 11. [Article 12, paragraph 6]
Back-to-back arrangements
1.211 Paragraph 7 is an anti-treaty-shopping provision which has been
inserted at the request of Japan to ensure that residents of third States are
not entitled to the benefits of the Convention through the granting the use
of property or rights in a back-to-back arrangement. [Article 12, paragraph 7]
1.212 The paragraph is intended to capture cases where a third State
resident grants the use of property or right to an interposed resident of a
Contracting State who in turn grants the use of the same property or rights
to a resident of the other Contracting State, with a view to obtaining
benefits that would not otherwise be available where the grant of the use
of the property or right was made directly by the third State resident to a
resident of the other Contracting State.
1.213 Similar rules are provided in paragraph 10 of Article 10
(Dividends), and paragraph 9 of Article 11 (Interest).
Limitation of benefits
1.214 The source country rate limit available under this Article will
not apply where the assignment of the royalties, the creation or
assignment of the property or right in respect of which the royalty is paid,
or the establishment, acquisition or maintenance of the company which is
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the beneficial owner of the royalties or the conduct of its operations has
been made or performed with the main objective, or one of the main
objectives, of accessing the relief otherwise available under this Article.
[Article 12, paragraph 8]
Article 13 -- Alienation of Property
Taxing rights
1.215 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.
1.216 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 may be income or a profit under ordinary concepts,
will be taxed in accordance with this Article, rather than Article 7
(Business Profits), together with relevant capital gains.
Real property
1.217 Income, profits or gains from the alienation of real property may
be taxed by the country in which the property is situated. [Article 13,
paragraph 1]
1.218 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 clarified under paragraph 3 of Article 6 (Income
from Real Property).
Shares and other interests in land-rich entities
1.219 Paragraph 2 applies to situations involving the alienation of
shares or other interests in companies and other entities, where at least
50 per cent of the value of the shares 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 the alienation of such shares or interests
may be taxed by the country in which the real property is situated.
Paragraph 2 complements paragraph 1 of this Article and is designed to
cover arrangements involving the effective alienation of incorporated real
property, or like arrangements.
1.220 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
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whether the real property is held directly or indirectly through a chain of
interposed entities.)
1.221 This provision responds to 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, profits 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 2]
Prevention of double non-taxation
1.222 Paragraph 3 was inserted at the request of Japan in order to
prevent double non-taxation of income, profits or gains arising from the
disposal of shares in a company (other than a land-rich company) in
certain circumstances. For example, such double non-taxation could arise
in the context of shares which are not subject to tax in Australia due to the
application of the participation exemption in Division 768 of the
ITAA 1997.
1.223 Income, profits or gains of a resident of a Contracting State
which arise from the alienation of shares issued by a company which is
resident of the other Contracting State, where such amounts are exempt
from tax in the first-mentioned Contracting State, may be taxed in the
other Contracting State where:
· the alienator (together with connected persons) owned at
least 25 per cent of the total issued shares of the company at
any time during the taxable year in which the alienation takes
place; and
· the alienator (together with connected persons) disposes of at
least 5 per cent of the total issued shares of the company
during the taxable year.
[Article 13, paragraph 3]
1.224 This paragraph does not apply to deferral of tax on capital gains
in the first-mentioned Contracting State in the case of corporate
reorganisations (unless the deferred gains will be exempt from taxation at
a future point in time under the laws of that Contracting State). [Protocol,
item 18]
Permanent establishment
1.225 Paragraph 4 deals with income, profits or gains arising from the
alienation of property (other than real property covered by paragraph 1)
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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 4]
1.226 The Protocol clarifies that income, profits or gains may continue
to be taxed in the country where the permanent establishment was situated
after an enterprise ceases to carry on business through that permanent
establishment, provided the amount is attributable to that permanent
establishment. [Protocol, item 9]
Disposal of ships or aircraft
1.227 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 (Shipping and Air Transport) in relation to
profits from the international operation of ships or aircraft. [Article 13,
paragraph 5]
1.228 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
through international airspace or waters (eg, so-called `voyages to
nowhere' by cruise ships). [Article 3, subparagraph 1(i)]
Capital gains
1.229 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 of 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 or a company to which
paragraph 3 applies). 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 Japan. 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]
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Article 14 -- Income from Employment
Basis of taxation
1.230 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).
1.231 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]
Short-term visit exemption
1.232 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 taxable year of the visited country;
· the remuneration is paid by, or on behalf of, an employer
who is not a resident of the visited country; and
· the remuneration is not borne by a permanent establishment
which the employer has in the country being visited.
1.233 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]
1.234 Where a short-term visit exemption is not applicable,
remuneration derived by a resident of Australia from employment in
Japan may be taxed in Japan. However, this Article does not allocate sole
taxing rights to Japan in that situation.
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1.235 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 25 (Elimination of Double Taxation)
Australia would be required in this situation to relieve any resulting
double taxation.
1.236 Although Article 25 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 Japanese 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
1.237 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]
Article 15 -- Directors' Fees
1.238 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
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
1.239 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
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associated kinds of activities engaged in by the entertainer or sportsperson
while present in the visited country. [Article 16, paragraph 1]
Safeguard
1.240 Income in respect of personal activities exercised by an
entertainer or sportsperson, where derived by another person (eg, a
separate enterprise which formally enters into the contractual
arrangements relating to the provision of 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
1.241 Pensions (other than government service pensions), other similar
remuneration paid periodically and annuities (the term `annuity' as used in
this Article is defined in paragraph 4) are taxable only by the country of
which the recipient is a resident. The application of this Article extends to
pensions, similar periodical remuneration and annuity payments made to
dependants, for example, a widow, widower or children of the person in
respect of whom the pension, similar periodical payment 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]
Lump sum payments
1.242 Paragraphs 1 and 2 only cover amounts paid periodically; they
do not cover lump sum superannuation payments. Paragraph 3 deals with
lump sum payments which are paid in lieu of a pension or annuity to a
resident of a Contracting State. Such amounts will be taxable only by that
residence state, unless the lump sum arises in the other Contracting State,
in which case that other Contracting State may also tax the lump sum. A
lump sum will be considered to arise in a Contracting State where the
fund is located. [Article 17, paragraph 3]
Article 18 -- Government Service
Salary and wage income
1.243 Salary and wage type income, other than government service
pensions, paid to an individual for services rendered to a government
(including a government of a political subdivision or local authority) in
the discharge of functions of a governmental nature, of one of the
Contracting States, is to be taxed only in that country. However, such
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remuneration will be taxable only in the other country if the services are
rendered in that other country and:
· the recipient is a resident of, and a national of that other
country; or
· the recipient is a resident of that other country and did not
become a resident of that other country solely for the purpose
of rendering the services (eg, if the recipient is a permanent
resident of that other country).
[Article 18, paragraph 1]
Government service pensions
1.244 Pensions and other similar remuneration which is periodically
paid by a government (including a government of a political subdivision
or local authority) of one of the countries to an individual in respect of
services rendered to that government, are taxable only by that country.
However, these rules do not apply if the individual receiving the pension
is both a resident and national of the other country. In such case, the
pension is taxable only in the country of which the pensioner is a resident.
Business income
1.245 Remuneration or pensions paid in respect of services rendered in
connection with a business carried on by any governmental authority
referred to in paragraph 1 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]
Article 19 -- Students
Exemption from tax
1.246 This Article applies to students and business apprentices who are
temporarily present in one of the countries solely for the purpose of their
education or training if they are, or immediately before the visit were, a
resident of the other country. In these circumstances, payments from
abroad received by the students or business apprentices solely for their
maintenance, education or training will be exempt from tax in the country
visited. This will apply even though the student or apprentice may qualify
as a resident of the country visited during the period of their visit.
[Article 19]
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1.247 The exemption from tax provided by the visited country extends
to maintenance payments received by the student or apprentice that are
made for maintenance of dependent family members who have
accompanied the student or apprentice to the visited country.
1.248 The exemption provided by the Article is limited to one year for
business apprentices. This reflects the ambiguous meaning of business
apprentice in Japan, and is intended to limit opportunities for the abuse of
this exemption. This is consistent with Japan's recent treaties with the
United States of America and the United Kingdom of Great Britain and
Northern Ireland.
Employment income
1.249 Where a Japanese student visiting Australia solely for
educational purposes undertakes any employment in Australia, for
example:
· 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.
1.250 For business apprentices, the exemption provided under this
Article only applies where the apprentice's remuneration consists solely
of subsistence payments to cover training or maintenance. Remuneration
for service, that is, salary equivalents, fall for consideration under
Article 14.
1.251 In the case of a Japanese business apprentice visiting Australia
solely for training purposes, it may therefore be necessary to distinguish
between remuneration for service and a payment for the apprentice's
maintenance or training. The quantum of the payment will be relevant in
such cases.
1.252 A payment for maintenance or training would not be expected to
exceed the level of expenses likely to be incurred to ensure the
apprentice's maintenance and training (ie, a subsistence payment).
Whereas, if the remuneration is similar to the amounts paid to persons
who provide similar services that are not business apprentices (ie, a salary
equivalent), this would generally indicate that the payments constitute
income from employment that would fall for consideration under
Article 14. Likewise, if that business apprentice undertakes any other
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employment in Australia, the income earned from that employment may
be subject to tax in Australia in accordance with Article 14.
1.253 In these situations, the payments received from abroad for the
student's or apprentice's maintenance, education or training will not 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 or apprentice qualifies
as a resident of Australia during the visit and the taxable income of the
student or apprentice does not exceed the tax-free threshold applicable to
Australian residents for income tax purposes.
Article 20 -- Sleeping partnership-Tokumei Kumiai
1.254 Article 20 provides that income, profits or gains from a `sleeping
partnership-Tokumei Kumiai' or other similar contractual arrangement
may be taxed in the country where income, profits or gains arise.
[Article 20]
1.255 The provision was inserted at the request of Japan to ensure
source country taxing rights over payments from a `sleeping
partnership-Tokumei Kumiai' contract. This ensures that even where
another provision of the treaty might otherwise limit the tax that may be
imposed by Japan, Japan may still tax income profits or gains in
accordance with this article.
1.256 A `sleeping partnership-Tokumei Kumiai' is a contractual
arrangement based in Japanese Commercial Law between a business
proprietor (the Tokumei Kumiai operator) and a sleeping partner, where
the Tokumei Kumiai operator invests property contributed by the sleeping
partner.
1.257 The phrase `other similar contract' refers to a consensual
contract under Japanese income tax law and corporate tax law between
two parties where one party invests on behalf of the other.
Article 21 -- Other Income
Allocation of taxing rights
1.258 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 this 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.
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1.259 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]
1.260 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 25 (Elimination of Double Taxation) to provide
double taxation relief.
1.261 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]
1.262 This Article will not prevent a Contracting State applying
domestic law to tax a resident who derives income from real property
situated in that Contracting State, regardless of whether that property is
effectively connected with a permanent establishment in the other
Contracting State. [Protocol, item 7]
1.263 This Article does not apply in the situation where business
profits are not taxed in the country of source because of the absence of a
permanent establishment. That is, in the absence of a permanent
establishment, Article 7 (Business Profits) provides that the profits of an
enterprise of a Contracting State shall be taxable only in that Contracting
State.
Example 1.12
A Co, an Australia resident company, derives business profits from the
sale of merchandise through an independent agent located in Japan. As
A Co does not have a permanent establishment in Japan, the business
profits will be taxable in Australia pursuant to Article 7 (Business
Profits) and not under Article 21 (Other Income).
Article 22 -- Source of Income
Deemed source
1.264 This Article effectively deems income, profits or gains derived
by a resident of a country which, in accordance with this 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
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respect of the exercise by Australia of the taxing rights allocated to
Australia by this Convention over income derived by residents of Japan.
[Article 22, paragraph 1]
1.265 In accordance with item 7 of the Protocol, income from real
property will have its source in the Contracting State where the real
property is located, regardless of whether that property is effectively
connected with a permanent establishment in the other Contracting State.
[Protocol, item 7]
Source of income -- double taxation relief
1.266 Income, profits or gains of a resident of one country that may be
taxed in the other country under this Convention are deemed to arise in
that other country. This applies for both the purposes of Article 25
(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 22, paragraph 2]
1.267 This provision is variously included in the Source of Income
Article or the Relief from 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 25,
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 may be
taxed by Japan under this Convention, will be treated as being foreign
income for the purposes of the ITAA 1936 and the ITAA 1997.
Article 23 -- Limitation on Benefits
1.268 Treaty benefits under Article 7, paragraph 3 of Article 10,
paragraph 3 of Article 11 or Article 13, will generally only be available
for qualified persons specified in the Limitation on Benefits Article.
[Article 23, paragraph 1]
1.269 However, certain other persons may also qualify for treaty
benefits under these Articles in respect of income, profits or gains derived
in connection with, or incidental to, a business (other than certain
investment activities) carried on in a Contracting State by that person.
[Article 23, paragraph 4]
1.270 Persons other than qualified persons may also be granted the
benefits of the above-mentioned provisions if the relevant competent
authority is satisfied that the establishment, acquisition or maintenance of
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such person and the conduct of its operations did not have as one of its
principal purposes the obtaining of treaty benefits. [Article 23, paragraph 5]
Qualified person
1.271 Qualified persons entitled to claim treaty benefits are specified
in paragraph 2. Only residents of Australia or Japan for the purposes of
this Convention can be qualified persons. [Article 23, paragraph 2]
Individuals
1.272 Individuals who are residents of Australia or Japan are qualified
persons. [Article 23, subparagraph 2(a)]
Qualified governmental entity
1.273 Qualified governmental entities of Australia or Japan will be
treated as qualified persons. [Article 23, subparagraph 2(b)]
1.274 Subparagraph 6(a) provides that qualified governmental entity
means those entities referred to in subparagraphs (a) and (c) of
paragraph 3 of Article 11. As such, the Government of Australia or Japan
or of a political subdivision or local authority of either country, or, any
other body exercising governmental functions (according to the law of the
Contracting State in which the interest arises), will be qualified persons.
In the case of Japan, the Bank of Japan, the Reserve Bank of Australia, the
Japan Bank for International Cooperation, and the Nippon Export and
Investment Insurance are also qualified persons. Similarly, in the case of
Australia, the Export Finance and Insurance Corporation, or a public
authority that manages the investments of the Future Fund, shall be
qualified persons, as will be any similar institutions agreed between the
Governments of the Contracting States. [Article 23, subparagraph 6(a)]
Publicly traded companies
1.275 A company (including a company participating in a dual listed
company arrangement) that is a resident of Australia or Japan will be
treated as a qualified person if the company's principal class of shares is
listed or registered on a recognised Australian or Japanese stock exchange
and is regularly traded on one or more recognised stock exchanges.
[Article 23, subparagraph (2)(c)]
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1.276 The term dual listed company arrangement is defined in
paragraph 6 of the Article to mean an arrangement pursuant to which two
publicly listed companies, while maintaining separate legal entity status,
shareholdings and listings, align their strategic directions and the
economic interests of their respective shareholders through:
· appointment of common (or almost identical) boards of
directors;
· unified management of the operations of the two companies;
· distributions to shareholders in accordance with an
equalisation ratio;
· shareholders of both companies voting as a single
decision-making body on substantial issues; and
· cross-guarantees as to, or similar financial support for, each
other's material obligations or operations.
[Article 23, subparagraph 6(c)]
1.277 A company that participates in a dual listed company
arrangement will be a qualified person where it meets the conditions
specified in subparagraph (2)(c). The relevant arrangement may be
between an Australian resident company and a Japanese resident
company, or between a company that is resident in one Contracting State
and a third State resident company.
1.278 The term principal class of shares is defined in
subparagraph 6(b) of the Article to mean the ordinary shares of the
company, provided that such class of shares represents the majority of
the voting power and value of the company. Where no single class of
ordinary shares represents the majority of the voting power and value of
the company, the principal class of shares is that class or those classes that
in the aggregate represent a majority of the voting power and value of the
company. For dual listed arrangements the principal class of shares will
be determined after excluding special voting shares issued for the
purposes of establishing the dual listed company arrangement. [Article 23,
subparagraph 6(b)]
1.279 The term recognised stock exchange is defined in
paragraph 6(d) of the Article to mean:
· stock exchanges established by a Financial Instruments
Exchange or an approved-type financial instruments firms
association under the terms of the Financial Instruments and
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Exchange Law (Law No. 25 of 1948) of Japan, which
includes the Tokyo Stock Exchange, the Nagoya Stock
Exchange, the Fukuoka Stock Exchange, the Sapporo
Securities Exchange and the Jasdaq Securities Exchange;
· the Australian Securities Exchange and any other securities
exchange recognised as such under the Corporations
Act 2001 of Australia, being, at the time of signature, the
National Stock Exchange of Australia Limited, the Bendigo
Stock Exchange Limited, and the Australian Pacific
Exchange Limited; and
· any other stock exchange which the competent authorities of
Australia or Japan agree to recognise for the purposes of this
Article.
[Article 23, subparagraph 6(d)]
Other publicly traded entities
1.280 A person other than an individual or a company (eg, a public
unit trust) that is a resident of Australia or Japan will be treated as a
qualified person if the person's `principal class of units' is listed or
admitted to dealings on a recognised Australian or Japanese stock
exchange and is regularly traded on one or more recognised stock
exchanges. [Article 23, subparagraph 2(d)]
1.281 The term principal class of units is defined in subparagraph 6(f)
of the Article to mean the class of units which represents the majority of
the value of the person. Where no single class of units represents the
majority of the value of the person, the principal class of units is that class
or those classes that in the aggregate represent the majority of the value of
the person. [Article 23, subparagraph 6(f)]
1.282 The term units is defined in subparagraph 6(e) of the Article to
mean any instrument, not being a debt-claim, granting an entitlement to
share in the asset or income of, or receive a distribution from, the person.
[Article 23, subparagraph 6(e)]
1.283 The use of the term `debt-claims' in this Article is intended to
have the same meaning as the term `indebtedness' as used in Australia's
other treaties. The two terms are intended to encompass the same kinds of
debt.
1.284 The term `recognised stock exchange' is discussed in
paragraph 1.279.
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Pension funds
1.285 A pension fund, which at the end of the prior taxable year has
more than 50 per cent of its beneficiaries, members or participants who
are resident individuals of either Australia or Japan shall be seen as a
qualified person for the purpose of the treaty. [Article 23, subparagraph 2(e)]
1.286 A pension fund is defined in subparagraph 6(g) of the Article to
mean any person established under the law of Australia or Japan operated
principally to administer or provide pensions, retirement benefits or other
similar remuneration or to earn income, profits or gains for the benefit of
other pension funds. [Article 23, subparagraph 6(g)]
1.287 For the purposes of Australia, a pension fund would include, for
example, superannuation funds regulated under the Superannuation
Industry (Supervision) Act 1993.
Benevolent organisations
1.288 Benevolent organisations established and maintained in
Australia or Japan are also specified as qualified persons. The provision
applies to organisations established and operated exclusively for religious,
charitable, educational, scientific, artistic, cultural or public purposes
notwithstanding that the organisation may be exempt from tax in its home
country. [Article 23, subparagraph 2(f)]
1.289 Thus, for example, a charitable institution that is a resident of
Australia will be a qualified person even if some or all of its income is
exempt from Australian tax or it is an exempt entity for the purposes of
section 50-5 of the ITAA 1997.
Entities principally owned by qualified persons
1.290 Entities that are residents of Australia or Japan and are
principally owned, directly or indirectly, by specified qualified persons
may be treated as qualified persons if the entities satisfy requirements set
out in paragraph 3. [Article 23, subparagraph 2(g)]
1.291 According to paragraph 3, in order for an entity to be regarded
as a qualified person for a taxable year it must satisfy the ownership
requirements in subparagraph 2(g):
· for taxes withheld at source, in the 12-month period
preceding the date of payment of an item of income, profits
or gains, or, in the case of dividends, the date on which
entitlement to the dividends is determined; or
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· in other cases, on at least half the days of the taxable year.
[Article 23, subparagraphs 3(a) and (b)]
1.292 In the case of Australia, `the date on which entitlement to the
dividends is determined' is the date on which the dividends are declared.
For the purposes of Japan, the phrase will be interpreted as meaning the
end of the accounting period for which the distribution of profits takes
place. [Exchange of Notes, paragraph 3]
Persons carrying on an active business
1.293 Persons resident in Australia or Japan who are not qualified
persons will nevertheless generally be entitled to treaty benefits with
respect to business profits, intercorporate dividends, certain interest, or
income arising from alienation of property if:
· the person is carrying on business in the country of which
they are resident;
· the income, profits or gains derived from the other
Contracting State are derived in connection with, or are
incidental to, the business; and
· the person satisfies any other specified conditions in the
Business Profits, Dividends, Interest, and Alienation of
Property paragraphs or Articles for the obtaining of such
benefits.
1.294 Relevant treaty benefits will not be available where the income
profits or gains arise from a business of making or managing investments
for the resident's own account, unless the business is banking, insurance
or securities business carried on by a bank, insurance company or
securities dealer. [Article 23, subparagraph 4(a)]
Substantial business requirement
1.295 In cases where the business generating the item of income,
profits or gains in subparagraph (a) is carried on by the person in the other
country or the income is derived from an associated person then the
business carried on by the person in their country of residence must be
substantial in relation to the business carried on in the other Contracting
State. A person will be regarded as `associated' for these purposes where
it would be an associated enterprise under Article 9. [Article 23,
subparagraph 4(b)]
1.296 Whether the business in the person's country of residence is
substantial when compared to the business in the other Contracting State
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shall be determined on the basis of all the facts and circumstances.
[Article 23, subparagraph 4(b)]
Partnerships carrying on an active business
1.297 For purposes of determining whether a person is carrying on
business in a Contracting State, the activity grouping rules for related
persons will deem a business carried on by a connected person, or by a
partnership in which the person is a partner, to be business conducted by
the first-mentioned person. The activities of these persons will therefore
be taken together in determining whether a business is being carried on in
a person's country of residence and whether the activities are substantial
relative to a business activity being conducted in the other treaty country.
[Article 23, subparagraph 3(c)]
1.298 A person will be taken to be connected to another if, based on
the relevant facts and circumstances, one has control of the other or both
are under the control of the same person or persons. This general rule is
not limited by the specific connected person tests provided in the
subparagraph.
1.299 The specific connected person tests provide that a person will be
connected with a trust if the person holds at least half of the beneficial
interests in the trust. Similarly, a person will be connected with a
company if the person holds at least half of the aggregate vote and value
of the company's shares. Each person in a group of entities that share
50 per cent common ownership held directly or indirectly by a head entity
are also to be treated as connected.
Competent authority discretion to grant treaty benefits
1.300 Persons who are residents of Japan or Australia and who are not
qualified persons may be granted benefits of this Convention with respect
to Article 7 (Business Profits), paragraph 3 of Article 10 (Dividends),
paragraph 3 of Article 11 (Interest) or Article 13 (Alienation of Property),
if the competent authority of the other treaty country determines that the
establishment, acquisition or maintenance of the resident and the conduct
of its operations did not have as one of its principal purposes the gaining
of benefits under this Convention. This discretion recognises that there
may be cases where significant participation by third country residents in
an enterprise that is a resident of one of the treaty countries may be
warranted by sound business practice or long-standing business structures
and does not necessarily indicate a treaty shopping motive. [Article 23,
paragraph 5]
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Anti-avoidance
1.301 Paragraph 7 clarifies that the Limitation on Benefits Article will
not restrict the application of domestic anti-avoidance rules. In the case of
Australia, these will include the general anti-avoidance rule in Part IVA of
the ITAA 1936 and other specific anti-avoidance provisions such as those
addressing thin capitalisation in Division 820 of the ITAA 1997, transfer
pricing in Division 13 of Part III of the ITAA 1936 or transferor trusts in
Division 6AAA of Part III of the ITAA 1936. [Article 23, paragraph 7]
1.302 It is noted that subsection 4(2) of the Agreements Act 1953
preserves the operation of Part IVA of the ITAA 1936, notwithstanding
anything inconsistent in this Convention.
Article 24 -- Limitation of Relief
1.303 The treaty provides that where income, profits or gains derived
by a resident of a country are taxed in that country only to the extent that
such amounts are remitted to the country, then any relief (such as
exemption from taxation or reduction in tax rates) that the other country
may be required to provide under the treaty will only apply to the amount
remitted. [Article 24, paragraph 1]
1.304 Japan operates a remittance-based system in respect of the
income of taxpayers who are resident but considered non-permanent
residents of Japan. Under Japan's domestic law, such taxpayers are only
subject to tax in Japan on the amount actually remitted to Japan. An
example of the operation of this Article might be where only half of the
total amount of a dividend payable to a Japanese shareholder is remitted to
Japan. In these circumstances, as the recipient is taxed in Japan only on
that part of the dividend that is remitted to Japan, Australia would only be
required to limit its tax under the treaty with respect to half the dividend.
1.305 The treaty also 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, profits 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, profits or gains. [Article 24, paragraph 2]
Article 25 -- Elimination of Double Taxation
1.306 Double taxation does not arise in respect of income flowing
between Australia and Japan:
· where the terms of this Convention provide for the income to
be taxed only in one country; or
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· where the domestic taxation law of one of the countries
exempts the income from its tax.
Tax credit
1.307 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 this Convention, 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
1.308 This Article requires Australia to provide Australian residents a
credit against their Australian tax liability for Japanese tax paid in
accordance with this Convention on income derived from Japanese
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 25, paragraph 2]
1.309 Australia's general foreign income tax offset rules, together with
the terms of this Article and of this Convention generally, will form the
basis of Australia's arrangements for relieving a resident of Japan from
double taxation on income, profits or gains arising from sources in Japan.
1.310 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 income tax offset provisions
(Division 770 of the ITAA 1997).
1.311 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 Japan, the exemption with progression method of relief
will be applicable.
1.312 Dividends and branch profits derived from Japan by an
Australian resident company that are exempt from Australian tax under
the foreign source income measures (eg, section 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.
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Japanese relief
1.313 In the case of a resident of Japan who is taxable in Japan on
income which is also taxable in Australia under this Convention, this
Article requires Japan to allow the Japanese resident a credit against
Japanese tax payable on that income, but only up to the amount of
Japanese tax paid. [Article 25, subparagraph 1(a)]
1.314 Consistent with Australia's recent treaty practice and Article 2
of this Convention, the Protocol makes it clear that the petroleum resource
rent tax is included as part of the income tax for the purposes of the
Japanese credit. [Protocol, item 19]
1.315 Where dividends are paid by an Australian resident company to
a Japanese resident company which directly controls, for more than
six months before the obligation to pay the dividend arises, at least
10 per cent of the voting shares or total issued shares in the Australian
resident company paying the dividends, the underlying tax paid by the
Australian company will be included in calculating the credit against the
Japanese tax. [Article 22, subparagraph 1(b)]
Article 26 -- Non-Discrimination
1.316 This Convention includes rules to prevent tax discrimination.
The Australian tax system is generally non-discriminatory. However, for
clarity the Protocol to this Article provides that certain features of the
Australian tax system should not be seen as coming within the Article's
terms.
Discrimination based on nationality
1.317 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 26, paragraph 1]
1.318 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.
1.319 The term national is defined in Article 3 (General Definitions)
of this Convention and covers both an individual who is a citizen or
national of one country or the other and a juridical or legal person which
is created or organised under 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 and registered
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under a law of Japan would be a national of Japan for the purposes of this
paragraph. [Article 3, subparagraph 1(j)]
The meaning of `in the same circumstance' and `in particular with respect
to residence'
1.320 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.
1.321 Where a person operates in an industry that is subject to
government regulation such as prudential oversight, another person
undertaking similar transactions but not subject to the same oversight,
would not be in the same circumstances.
1.322 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 Japanese resident compared to an Australian resident will not
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 Japan.
The meaning of `other' and `more burdensome'
1.323 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).
1.324 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/Japan
1.325 Consistent with paragraph 1 of Article 24 (Non-Discrimination)
of the OECD Model, paragraph 1 of this Article applies to persons who
are residents of neither Australia nor Japan. Consequently, residents of
third countries are able to seek the benefits of this provision. Paragraph 1
does not, however, extend to residents of either country who are not
`nationals' (as defined in Article 3 (General Definitions)) of either
country.
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Non-Discrimination and permanent establishments
1.326 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
applies to all residents of a treaty country, irrespective of their nationality,
who have a permanent establishment in the other country. [Article 26,
paragraph 2]
1.327 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.
1.328 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.
Non-resident individuals
1.329 Non-resident individuals do not have to be granted the personal
allowances, reliefs or reductions available to residents of the tax treaty
countries. [Article 26, paragraph 2]
1.330 This means that Australia will continue to be able to grant only
to resident individuals rebates such as the dependent spouse rebate (under
section 159J of the ITAA 1936).
1.331 Unlike paragraph 3 of Article 24 (Non-Discrimination) of the
OECD Model, 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.
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Deductions for payments to non-residents
1.332 The treaty partner countries must allow the same deductions for
interest, royalties and other disbursements paid to residents of the other
country as it does for payments to its own residents. However, the treaty
countries are allowed 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 26, paragraph 3]
Companies owned or controlled abroad
1.333 A country must not give 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 Japanese residents may
not be given other or more burdensome treatment than locally owned or
controlled Australian companies. [Article 26, paragraph 4]
1.334 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 paragraph 4 or any other
provision of this Article to allow imputation credits to non-resident
shareholders.
Exclusions
1.335 Certain provisions of the law of Australia which are important
for the purposes of economic regulation and the integrity of the tax system
are excluded from the operation of this Article by item 20 of the Protocol.
The provisions that are excluded deal with deductions for research and
development and measures to ensure effective collection of taxes (such as
`matching' rules that deny deductions until withholding tax has been paid)
under the ITAA 1997, and conservancy measures under the general law.
[Protocol, item 20]
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1.336 In addition, although most are generally recognised by the
international community as not being discriminatory, certain other
provisions which are understood to be unrestricted by the Article are
documented in the Protocol to ensure that they can continue to operate for
their intended purpose. The provisions of Australian law which are
considered unrestricted by the operation of the Article are those provisions
which:
· deal with:
transfer pricing;
dividend stripping arrangements;
controlled foreign companies, foreign investment funds
and transferor trusts; and
thin capitalisation;
· do not allow tax rebates or credits in relation to dividends
paid by a company;
· defer tax where an asset is transferred out of the jurisdiction;
· provide for consolidation of group entities,
and any substantially similar provisions. Item 21 of the Protocol lists
provisions covered by the exclusions. [Protocol, item 21]
Taxes to which this Article applies
1.337 This Article applies to `taxes of every kind and description
imposed on or on behalf of the Contracting States, or their political
subdivision or local authorities'. [Article 26, paragraph 5]
1.338 In the case of Australia, the relevant taxes include the income
tax (including the petroleum resource rent tax and tax on capital gains),
and the GST and the fringe benefits tax. The provisions of this Article
also apply to taxes imposed by the Australian states and territories.
1.339 In the case of Japan, the relevant taxes include the income tax,
the corporation tax, the inhabitants tax and the value added tax.
More favourable treatment
1.340 Nothing in this Article prevents either country from treating
residents of the other country more favourably than its own residents.
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Article 27 -- Mutual Agreement Procedure
Consultation on specific cases
1.341 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 this Convention. [Article 27,
paragraph 2]
1.342 In the case of Australia, the competent authority is the
Commissioner or an authorised representative of the Commissioner.
[Article 3, sub-subparagraph 1(k)(ii)]
1.343 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 26 (Non-Discrimination) of
this Convention, the person may present a case to the competent authority
of the country of which the person is a national.
1.344 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 this
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 27, paragraph 1]
1.345 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 this Convention. [Article 27, paragraph 2]
1.346 If, after consideration by the competent authorities, a solution is
reached, it must be implemented in accordance with the provisions of the
Article.
Implementation of a solution
1.347 The solution reached by mutual agreement between the
competent authorities of the relevant countries must 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 27,
paragraph 2]
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Consultation on general problems
1.348 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 this
Convention. 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.
1.349 The competent authorities may also consult together with a view
to eliminating double taxation in cases where this Convention does not
provide a solution. [Article 27, paragraph 3]
Methods of communication between competent authorities
1.350 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 27, paragraph 4]
General Agreement on Trade in Services dispute resolution process
1.351 This Article also deals with disputes that may be brought before
the World Trade Organisation Council for Trade in Services under the
dispute resolution processes of the General Agreement on Trade in
Services (GATS). [Article 27, paragraph 5]
Background
1.352 Australia and Japan 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.
1.353 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.
1.354 Notwithstanding paragraph 3 of Article XXII (Consultation) of
the GATS, Australia and Japan have agreed that the consent of both
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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.
1.355 This provision is based, in all essential respects, on an
OECD Model Commentary recommendation, and is common in recent
international treaty practice. [Article 27, paragraph 5]
Article 28 -- Exchange of Information
1.356 This Convention aligns the information exchange provisions to
the 2005 OECD standard. The Article differs from the previous approach
in a number of ways, including:
· the scope is expanded to a wider range of taxes;
· the new provision clarifies that the Commissioner is obliged
to obtain information for Japanese tax authorities regardless
of whether Australia has a domestic tax interest in the
information sought or whether the information concerns a
resident of either Contracting State; and
· bank secrecy laws do not limit the exchange of information.
Foreseeably relevant information
1.357 Article 28 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 this
Convention, and may therefore cover persons who are not residents of
Australia or Japan.
1.358 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 28,
paragraph 1]
1.359 The change in wording from `necessary' used in the previous
version of the Article to a `foreseeably relevant' standard reflects the
wording in Article 26 (Exchange of Information) of the OECD Model and
no difference in effect is intended.
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Taxes to which this Article applies
1.360 Under the corresponding Article in the existing Agreement, the
information that could be requested and obtained between the two
countries was limited to information in relation to taxes to which that
Agreement applied (generally income taxes).
1.361 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 the competent authority in
Japan. This means, for example, that information concerning Australian
indirect taxes (ie, the GST) may be requested and obtained from Japan.
[Article 28, paragraph 1, Protocol, item 22]
1.362 Similarly, in the case of Japan, the Japanese competent authority
can now request and obtain information concerning taxes of every kind
and description imposed under Japanese 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
1.363 The purposes for which the exchanged information may be used
and the persons to whom it may be disclosed are restricted in a manner
which is consistent with 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 28, paragraph 2]
No domestic tax interest required
1.364 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 28, paragraph 4]
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Limitations
1.365 The country requested to provide information under this Article
is not obliged to do so where:
· it would be required to carry out administrative measures at
variance with the law and administrative practice of either
Australia or Japan; or
· such information is not obtainable under the domestic law or
in the normal course of administration.
[Article 28, subparagraphs 3(a) and (b)]
1.366 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 28, subparagraph 3(c)]
Information held by banks, other financial institutions or nominees etc
1.367 Paragraph 5 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 or nominees etc. The
inclusion of this paragraph should not be interpreted as suggesting the
corresponding Article of the existing Agreement 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 28,
paragraph 5]
1.368 The Protocol clarifies that a refusal to supply information held
by a bank, other financial institution, nominee or person acting in an
agency capacity, or information relating to ownership interests must be
based on reasons unrelated to the person's status as such, or the fact that
the information relates to ownership interests. [Protocol, item 23]
1.369 The Protocol also clarifies that paragraph 5 does not prevent a
Contracting State declining to supply information under subparagraph 3(a)
where it relates to confidential communications between lawyers and their
clients in their role as lawyers, to the extent such information is protected
from disclosure under the domestic laws of the Contracting States. This
Protocol item reflects the internationally accepted position set out in the
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OECD Model Commentary at paragraph 19.4 on paragraph 5 of Article 26
(Exchange of Information). [Protocol, item 23]
Information that exists prior to the entry into force of this Convention
1.370 This Article will apply to the exchange of information after the
date of entry into force, including where the relevant information existed
prior to that date.
Article 29 -- Members of Diplomatic Missions and Consular Posts
1.371 The purpose of this Article is to ensure that the provisions of this
Convention do not result in members of diplomatic missions or 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 29]
Article 30 -- Headings
1.372 It is not Japan's practice to include Article headings in treaties;
however they were included in this treaty, at Australia's insistence, to aid
navigation. This Article provides, in accordance with Japan's preferred
position, that the titles are not to be given interpretive value in this treaty.
Article 31 -- Entry into Force
Date of entry into force
1.373 This Article provides for the entry into force of this Convention.
This Convention will enter into force 30 days after the last date on which
diplomatic notes are exchanged notifying that the domestic processes to
approve this Convention in the respective countries have been completed.
In Australia, enactment of the legislation giving the force of law in
Australia to this Convention along with tabling this Convention in
Parliament are prerequisites to the exchange of diplomatic notes.
[Article 31, paragraph 1]
Date of application for Australian taxes
Withholding taxes
1.374 Once it enters into force, this Convention will apply in Australia
in respect of withholding tax on income that is derived by a non-resident
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in relation to income derived on or after 1 January in the calendar year
next following the date on which this Convention enters into force.
[Article 31, sub-subparagraph 2(b)(i)]
Other Australian taxes
1.375 This Convention will first apply to other Australian taxes as
regards any year of income beginning on or after 1 July in the calendar
year next following the date on which this Convention enters into force.
1.376 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 this Convention enters into force will be the
relevant year of income for the purposes of the application of such
Australian tax. [Article 31, sub-subparagraph 2(b)(ii)]
Date of application in Japan
Withholding taxes
1.377 In Japan, this Convention will apply to taxes withheld at source
on income derived on or after 1 January in the calendar year next
following the year in which this Convention enters into force. [Article 31,
sub-subparagraph 2(a)(i)]
Other Japanese taxes
1.378 This Convention will first apply to other Japanese taxes
chargeable for any taxable year beginning on or after 1 January in the
calendar year next following the year this Convention enters into force.
[Article 31, sub-subparagraphs 2(a)(ii) and (iii)]
Termination of the existing Agreement
1.379 The existing Agreement shall cease to have effect from the dates
on which this Convention commences to have application for the
respective taxes. The existing Agreement shall be terminated on the last
of those dates. [Article 31, paragraphs (3) and (4)]
Transitional provision
1.380 A transitional provision has been inserted for Article 15 of the
existing Agreement which deals with professors and teachers. There is no
equivalent to Article 15 in this Convention. However, the transitional
provision provided in this Article enables teachers or professors who are
entitled to the benefits of the existing Article 15 when the Convention
enters into force, to continue to receive those benefits until they would
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have ceased to be entitled under that prior Agreement. Teachers and
professors who are not so entitled will now fall under Article 14 (Income
from Employment), or Article 7 (Business Profits) if they are independent
contractors. [Article 31, paragraph 5]
Article 32 -- Termination
1.381 This Convention is to continue in effect until terminated. Either
country may terminate the Convention after the expiration of five years
from the date of its entry into force. Termination is by notice in writing of
termination through the diplomatic channel, six months before termination
is to occur. [Article 32]
Cessation in Australia
1.382 In the event of either country terminating this Convention, this
Convention would cease to be effective in Australia for the purposes of:
· withholding tax on income derived by a Japanese resident, in
relation to income derived on or after 1 January in the
calendar year next following the expiration of the six-month
period; and
· other Australian taxes, as regards any year of income
commencing on or after 1 July in the calendar year next
following the expiration of the six-month period.
[Article 32, subparagraph (b)]
Cessation in Japan
1.383 This Convention would correspondingly cease to be effective in
Japan for the purposes of:
· taxes withheld at source, for amounts taxable on or after
1 January in the calendar year next following the expiration
of the six-month period; and
· other Japanese taxes chargeable for any Japanese tax year
commencing on or after 1 January in the calendar year next
following the expiration of the six-month period.
[Article 32, subparagraph (a)]
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Chapter 2
Regulation impact statement
Background
How tax treaties operate
2.1 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.
2.2 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.
2.3 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.
2.4 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.
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The Japanese tax treaty
2.5 The existing Australia-Japan tax treaty was signed on
20 March 1969 and has been in effect in Australia since the income year
commencing 1 July 1970 in respect of income taxes and withholding
taxes.
2.6 On 17 November 2006 the then Treasurer announced that it had
been agreed that the necessary preparations for discussions to revise the
existing tax treaty with Japan, signed in 1969, should commence.
Australia's investment and trade relationship with Japan
Trade
2.7 Japan has been Australia's largest export market for 40 years.
2.8 Bilateral merchandise trade in 2006-07 totalled A$50 billion,
with the balance of trade in Australia's favour.
2.9 Total exports (goods and services) in 2006-07 were valued at
A$35.5 billion, an increase of 11 per cent on 2005. Key exports include
coal, beef, and aluminium and iron ores. Japan is a larger buyer of
Australian exports than the combined total of exports purchased from
Australia by China and the United States of America (US).
2.10 Total imports from Japan in 2006-07 were valued at
A$17.4 billion. Imports were mainly comprised of manufactured items,
with major items being passenger motor vehicles (A$6.2 billion) and
transport vehicles (A$1.4 billion).
Investment
2.11 Japan is Australia's 3rd largest investor, with a total stock of
investment worth A$51 billion at the end of 2006, of which 45 per cent
was direct investment, 44 per cent portfolio investment, and 10 per cent
other investment (loans, trade credit, derivatives and reserve assets).
Japanese direct investment has been essential in many of the export
industries that have driven Australia's export performance. Japanese
investment has also been important for the development of Australia's
export-oriented manufacturing sector. Toyota Motor Corporation
Australia, for example, has invested more than US$1.5 billion in
manufacturing and car design facilities since the mid 1990s.
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Regulation impact statement
2.12 Australia is Japan's 15th largest source of foreign investment.
At the end of 2006, Australia's stock of investment in Japan was
A$39.8 billion, equivalent to 4.6 per cent of total Australian investment
abroad.
Specification of policy objectives
2.13 The objective of this measure is to:
· promote closer economic cooperation between Australia and
Japan by reducing barriers to trade and investment between
the two countries; and
· upgrade the framework through which the tax
administrations of Australia and Japan can prevent
international fiscal evasion.
Identification of implementation options
2.14 The internationally accepted approach to meeting the policy
objectives specified in paragraph 2.13 is to:
· amend parts of the existing treaty to reflect current policies
(amending Protocol); or
· conclude a new bilateral tax treaty.
Option 1: Limited amending Protocol -- rely on the existing tax treaty
measures
2.15 This option would rely on the existing tax treaty measures with
an amending Protocol covering both countries' desired changes.
However, in view of the age of the existing treaty and its outdated
approaches and language, the majority of the existing text would require
detailed amendment. An amending Protocol is therefore not practicable
in this instance.
Option 2: Conclude a new tax treaty
2.16 This option would replace the existing treaty with a new
bilateral tax treaty that reflects the current policies and practices of both
countries.
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2.17 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.
2.18 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, body
performing governmental functions, central bank or certain
specified Australian and Japanese institutions;
· a reduction of dividend withholding tax from 15 per cent to
zero for intercorporate dividends on non-portfolio holdings
of more than 80 per cent, subject to certain conditions,
5 per cent dividend withholding tax for other intercorporate
non-portfolio holdings and 10 per cent dividend withholding
tax for all other dividends;
· a withholding tax rate limit of 15 per cent on certain
distributions from real estate investment trusts;
· inclusion of a comprehensive Alienation of Property Article
which allocates taxing rights over capital gains;
· special provisions confirming Japan's taxing rights over
income derived through Japanese `sleeping
partnership-Tokumei Kumiai';
· improved integrity measures -- in particular, updated rules
for the exchange of information on tax matters and
limitations on treaty benefits to prevent treaty shopping and
other inappropriate access to the treaty concessions; and
· new rules to prevent tax discrimination against Australian
nationals and businesses operating in Japan and vice versa.
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Regulation impact statement
Assessment of impacts (costs and benefits)
Difficulties in quantifying the impacts of tax treaties
2.19 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.
2.20 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.
Impact group identification
2.21 A revised tax treaty with Japan is likely to have an impact on:
· Australian residents doing business with Japan, including
principally:
Australian residents investing directly in Japan (either by
way of a subsidiary or a branch);
Australian real estate investment trusts with Japanese
resident investors;
Australian residents investing in Japanese real estate
investment trusts;
Australian banks and the other specified Australian
institutions lending to Japanese borrowers;
Australians borrowing from Japanese banks and the other
specified Japanese institutions;
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Australian residents using technology and know-how
supplied by Japanese residents;
Australian residents supplying consultancy services to
Japan; and
Australian residents exporting to Japan;
· Australian employees working in Japan;
· Australian residents receiving pensions from Japan;
· the Australian Government; and
· the Australian Taxation Office (ATO).
Assessment of benefits
Renegotiation provides a better outcome for all stakeholders
2.22 While the existing 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
Japan.
2.23 A new bilateral tax treaty would comprehensively modernise
and update the existing treaty. As well as revising the allocation of
taxing rights between the two countries and the tax rate limits prescribed
in the treaty, Australia would also be able to achieve improved integrity
measures -- in particular, updated rules for the exchange of information
on tax matters and updated anti-avoidance and comprehensive limitation
of benefit rules.
2.24 A new tax treaty would provide benefits to Australian business
and to 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.
2.25 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 contribute to the updating of
Australia's ageing treaty network.
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Regulation impact statement
Economic benefits
Withholding tax reductions
2.26 A new bilateral tax treaty would address business concerns
about the lack of competitiveness of Australia's tax treaty network with
business particularly seeking reductions in withholding tax rates.
2.27 Under its domestic tax law, Australia imposes a final
withholding tax on interest, royalty and unfranked dividend payments to
non-residents at the rates of 10 per cent, 30 per cent and 30 per cent of
the gross payment respectively. However, Australia generally agrees to
limit these withholding tax rates, on a reciprocal basis, in its bilateral tax
treaties. In the existing Japanese treaty, the withholding tax rates for
dividend, interest and royalty payments are limited to 15 per cent,
10 per cent and 10 per cent of the gross payments respectively.
2.28 Withholding tax reductions below the rates reflected in the
existing Japanese tax treaty were first included in the 2001 Protocol
amending the Convention with the US and have been included in
Australia's subsequent tax treaties. Extending similar treatment to Japan
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).
However, this treaty would further reduce the maximum withholding tax
rate for all dividends from 15 per cent to 10 per cent, as well as
including a withholding tax rate limit of 15 per cent for certain
distributions from real estate investment trusts, to respond to business
concerns and maintain Australia's competitiveness with our major
investment partners.
2.29 While a reduction in maximum withholding tax rates will
involve a cost to Government 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.
Dividends
2.30 An outcome such as that provided to the US and United
Kingdom of Great Britain and Northern Island (UK) (ie, 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 and 5 per cent
withholding tax where the interest is at least 10 per cent of the voting
power) would remove distortions in the raising of capital for direct
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investment that results from the more favourable terms that currently
apply bilaterally in the case of the US and the UK.
2.31 A reduction in the dividend withholding tax rate limit for other
dividends from 15 per cent to 10 per cent would align Australia's treaty
practice with the current treaty practice of many other countries (such as
the US, UK, the Netherlands, Norway and Japan who reduce their treaty
dividend rate for other dividends to 10 per cent or below). This would
assist in maintaining Australia's attractiveness as a destination for
investment, especially in attracting foreign equity investors.
Distributions from real estate investment trusts
2.32 Australia recently introduced a 30 per cent non-final
withholding tax on distributions to non-residents from Australian
managed investment trusts.
2.33 In response to submissions from Australian business (especially
the managed funds industry) and in view of the growing international
trend to limit treaty withholding tax rates on distributions from real
estate investment trusts, the Senate Standing Committee on Economics
recommended in its June 2007 report on the Tax Laws Amendment
(2007 Measures No. 3) Bill 2007 that when negotiating tax treaties,
Australia seek reciprocal withholding tax treatment for distributions to
foreign residents from managed investment trusts (including a
15 per cent withholding tax rate limit on certain distributions from real
estate investment trusts). The new treaty with Japan is consistent with
the Committee's recommendation. The Government has introduced
measures through the Tax Laws Amendment (Election Commitments
No. 1) Act 2008 that will provide a 22.5 per cent final withholding tax
for fund payments in relation to income years on or after 1 July 2008;
15 per cent in the following income year; and 7.5 per cent thereafter.
The provisions in the Japanese treaty dealing with distributions from
Australian real estate investment trusts are consistent with that approach.
Interest
2.34 A zero Australian interest withholding tax rate on interest
derived by Japanese financial institutions will be consistent with the
exemption currently provided 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.
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Regulation impact statement
2.35 As is the case in Australia's other recent tax treaties, the new
treaty would include an exemption for interest derived by the
Governments of either country (including their political subdivisions and
local authorities), bodies exercising governmental functions and the
countries' central banks (in this case, the Bank of Japan and the
Reserve Bank of Australia).
2.36 Consistent with the principles underlying these two exemption
clauses but for clarity, a specific provision would also be inserted to
expressly exempt interest derived by:
· the Japan Bank for International Cooperation;
· the Nippon Export and Investment Insurance;
· the Australian Export Finance and Insurance Corporation;
· a public authority that manages the investments of the Future
Fund; or
· any similar institution agreed in an exchange of notes
between the Governments of the two countries.
Royalties
2.37 Australian residents required to meet the cost of Australian
royalty withholding tax on royalty payments made to Japanese 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 the use
of the most up-to-date technology and processes. Additionally it may
encourage Japanese residents to use Australian technology and
intellectual property.
Alienation of property
2.38 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
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International Tax Agreements Amendment Bill (No. 1) 2008
encourage investment in Australia and result in generally lower
compliance costs.
Non-Discrimination
2.39 Inclusion of a Non-Discrimination Article will insert rules to
prevent tax discrimination against Australian nationals and businesses
operating in Japan and vice versa.
Other benefits
2.40 Where Australians carry on business activities in Japan, the
existing treaty prevents Japan from taxing the business profits of an
Australian resident unless that Australian resident carries on business
through a permanent establishment (such as a branch) in Japan. 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 Japanese enterprise carries on business activities in Australia.
2.41 Other benefits also include:
· clarifying the residency rules;
· clarifying that treaty relief is not available on certain income,
profits or gains that are exempt in a country because the
recipient is a temporary resident of that country;
· clarifying the treatment of income derived through trusts;
· special provisions confirming Japan's taxing rights over
income derived through Japanese `sleeping
partnership-Tokumei Kumiai';
· refined anti-profit shifting (transfer pricing) rules, including
new time limits for initiating audit activity; and
· including anti-avoidance and limitation of benefits rules.
Revenue benefits
2.42 New treaty arrangements with Japan 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 withholding tax rates will involve a cost to revenue, there are
expected to be benefits to the revenue and to the wider economy arising
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Regulation impact statement
out of increased business and investment activity, with the most direct
benefits accruing to business.
2.43 Small revenue benefits should also result from enhanced tax
integrity measures over a broader range of taxes.
Compliance and administrative cost reduction benefits
2.44 Tax exemptions in respect of withholding taxes are likely to
reduce compliance and administration costs associated with remitting
and claiming credits for such tax.
2.45 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.
2.46 Administrative costs incurred 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
2.47 New treaty arrangements with Japan 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 -- types of costs
Revenue costs
2.48 Treasury has estimated the impact of the first round effects on
forward estimates as $345 million, with the identifiable costs to revenue
associated with the reductions in dividend, interest and royalty
withholding tax rates. As Australia has a number of `most favoured
nation' clauses regarding dividend withholding tax rates in its existing
treaties, Australia would be obliged to enter into negotiations with a
view to offering similar withholding tax reductions to those countries
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International Tax Agreements Amendment Bill (No. 1) 2008
(including the proposed 10 per cent rate limit for other dividends), which
may create an additional pressure on revenue cost. Countries that offer
bilateral treaty withholding tax reductions for distributions from real
estate investment trusts would also be expected to seek the 15 per cent
withholding tax rate limit for such payments proposed for Japan, which
may also create a pressure on revenue cost.
Administration costs
2.49 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 treaty. Staff from the ATO,
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.
2.50 The cost of negotiation and enactment of new tax treaty
arrangements with Japan is 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.
2.51 There are also `maintenance' costs to the ATO associated with
tax treaties and mutual agreement procedures (including advance pricing
arrangements). These costs also apply to the existing arrangements. By
bringing the Japanese treaty into basic conformity with modern 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
2.52 Government policy flexibility in relation to taxation of Japanese
residents would be further constrained by changes to treaty obligations,
for example, with respect to taxation of capital gains. However, such
constraints are also placed on Japanese law makers, providing long term
certainty to businesses. As such, the cost of such constraints is
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.
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Regulation impact statement
2.53 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.
Assessment of costs
Taxpayer costs
2.54 No material additional costs to taxpayers have been identified as
likely to arise from the renegotiation of the Japanese treaty.
2.55 Businesses that collect withholding taxes would need to make
small system changes to change the rate at which they withhold to reflect
the new treaty withholding tax rate limits. Previous experience and
anecdotal evidence suggests that these changes will be straight forward
and easily accommodated.
2.56 No costs for the community or other parties have been
identified.
Administration costs
2.57 The requirement on the ATO to exchange information on a
broader range of taxes is also considered to be of minimal impact. In
most cases the ATO will already have the required information in its
possession which will limit the related administrative costs.
Consultation
2.58 The then Treasurer's Press Release No. 124 of
17 November 2006 invited submissions from stakeholders and the wider
community in relation to issues that might be raised during negotiations
with Japan. Treasury has also sought comments from the business
community through the Tax Treaties Advisory Panel.
2.59 In general, business and industry groups support outcomes
which are consistent to those in the 2003 Australia-UK Convention and
the updated Australia-US tax treaty. They also favour withholding tax
reductions for distributions from real estate investment trusts.
2.60 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 August 2006.
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International Tax Agreements Amendment Bill (No. 1) 2008
2.61 The proposed treaty arrangements will be considered by the
Commonwealth Joint Standing Committee on Treaties, which provides
for public consultation in its hearings.
Conclusion and recommendation
2.62 While the existing 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
Japan, nor modern international norms.
2.63 A new bilateral tax treaty would address long term business
concerns about the lack of competitiveness of withholding tax rate limits
in Australia's tax treaty network.
2.64 Developments in both countries' domestic law, commercial
practices, and treaty policies and practices support a full revision of the
treaty. This also provides an opportunity to update the text in
accordance with modern OECD practice.
2.65 The proposed new treaty arrangements with Japan are consistent
with Australia's recent move 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 Japan 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.
2.66 There is a direct cost to revenue, largely sourced in reduced
withholding tax collections. On balance, the benefits of concluding a
new treaty outweigh the cost to revenue.
2.67 A new bilateral tax treaty is therefore recommended.
110
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