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2010-2011
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
INTERNATIONAL TAX AGREEMENTS AMENDMENT (No. 1) BILL 2011
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Existing agreements ...................................................... 9
Chapter 2 Australia-Aruba agreement .......................................... 15
Chapter 3 The Australia-Chile Convention ................................... 37
Chapter 4 Australia-the Cook Islands agreement ....................... 143
Chapter 5 Australia-Guernsey agreement .................................. 163
Chapter 6 Malaysian protocol (No. 3) ......................................... 181
Chapter 7 Australia-Samoa agreement ...................................... 191
Chapter 8 The Australia-Turkey convention ............................... 211
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
Agreements Act 1953 International Tax Agreements Act 1953
Aruba agreement Agreement between the Government of
Australia and the Kingdom of the
Netherlands, in respect of Aruba for the
Allocation of Taxing Rights with respect to
Certain Income of Individuals and to
Establish a Mutual Agreement Procedure in
respect of Transfer Pricing Adjustments
ATO Australian Taxation Office
Chilean convention Convention between Australia and the
Republic of Chile for the Avoidance of
Double Taxation with respect to Taxes on
Income and Fringe Benefits and the
Prevention of Fiscal Evasion and its Protocol
Commissioner Commissioner of Taxation
Cook Islands agreement Agreement between the Government of
Australia and the Government of the Cook
Islands on the Allocation of Taxing Rights
with respect to Certain Income of Individuals
and to Establish a Mutual Agreement
Procedure in respect of Transfer Pricing
Adjustments
EOI Article Exchange of Information Article
existing Malaysian agreement Third Protocol amending the Agreement
between the Government of Australia and the
Government of Malaysia for the Avoidance of
Double Taxation and the Prevention of
Fiscal Evasion with respect to Taxes on
Income as amended by the First Protocol of
2 August 1999 and the Second Protocol of
28 July 2002
GATS General Agreement on Tariff and Trade in
Services
GST goods and services tax
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International Tax Agreements Amendment (No. 1) Bill 2011
Abbreviation Definition
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
Samoa agreement Agreement between the Government of
Australia and the Government of Samoa for
the Allocation of Taxing Rights with respect
to Certain Income of Individuals and to
Establish a Mutual Agreement Procedure in
respect of Transfer Pricing Adjustments
Samoa the Government of Samoa
Third Protocol Agreement between the Government of
Australia and the Government of Malaysia
for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with
Respect to Taxes on Income which was
signed on 20 August 1980
Turkish convention Convention between the Government of
Australia and the Government of the
Republic of Turkey for the Avoidance of
Double Taxation with respect to Taxes on
Income and the Prevention of Fiscal Evasion
and its Protocol
2
General outline and financial impact
Existing agreements
Schedule 1 to this Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953) to modify and streamline its structure, and remove
the majority of the existing Schedules to that Act. Schedule 1 is not
intended to alter the entry into force or application of Australia's tax
treaties.
New agreements
Schedule 2 to this Bill amends the Agreements Act 1953 to give the force
of law in Australia to new taxation agreements with Aruba, Chile, the
Cook Islands, Guernsey, Malaysia, Samoa and Turkey.
Aruban agreement
This Bill amends the Agreements Act 1953 to give the force of law in
Australia to the Agreement between the Government of Australia and the
Kingdom of the Netherlands, in respect of Aruba for the Allocation of
Taxing Rights with respect to Certain Income of Individuals and to
Establish a Mutual Agreement Procedure in respect of Transfer Pricing
Adjustments (Aruban agreement), which was signed in Canberra on
16 December 2009.
Date of effect: The Aruban agreement must first enter into force. For
entry into force, Australia and Aruba are required to provide notification
on the completion of the necessary domestic procedures. Once the
Aruban agreement enters into force it will apply in Australia in respect of
any income year beginning on or after 1 July in the calendar year next
following the date on which it enters into force.
Proposal announced: This measure was announced in the then Assistant
Treasurer's Media Release No. 110 of 16 December 2009.
Financial impact: Minimal.
Compliance cost impact: No significant compliance costs are expected to
result from the entry into force of the Aruban agreement.
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International Tax Agreements Amendment (No. 1) Bill 2011
Chilean convention
This Bill amends the Agreements Act 1953 to give the force of law in
Australia to the Convention between Australia and the Republic of Chile
for the Avoidance of Double Taxation with respect to Taxes on Income
and Fringe Benefits and the Prevention of Fiscal Evasion and its Protocol
(Chilean convention), which was signed in Santiago on 10 March 2010.
Date of effect: The Chilean convention must first enter into force. For
entry into force, Australia and Chile are required to provide notification
on the completion of the necessary domestic procedures. Once the
Chilean convention enters into force it will take effect in Australia in four
stages, namely:
· in respect of withholding tax, on income derived on or after
the first day of the second month following entry into force;
· in respect of fringe benefits tax, on fringe benefits derived on
or after 1 April in the year following entry into force;
· in respect of other tax, on income derived in the income year
beginning 1 July following entry into force; and
· in respect of administrative provisions, upon entry into force.
Proposal announced: This measure was announced in the then Assistant
Treasurer's Media Release No. 038 of 10 March 2010.
Financial impact: Minimal.
Compliance cost impact: The establishment of a tax treaty between
Australia and Chile which is broadly consistent with international norms
would generally be expected to reduce compliance costs.
Summary of the regulation impact statement
A copy of the regulation impact statement to the Chilean convention is
available on the Joint Standing Committee on Treaties web site at
www.aph.gov.au under Joint Committees administered by the House.
Cook Islands agreement
This Bill amends the Agreements Act 1953 to give the force of law in
Australia to the Agreement between the Government of Australia and the
4
General outline and financial impact
Government of the Cook Islands on the Allocation of Taxing Rights with
respect to Certain Income of Individuals and to Establish a Mutual
Agreement Procedure in respect of Transfer Pricing Adjustments (Cook
Islands agreement), which was signed in Rarotonga, on 27 October 2009.
Date of effect: The Cook Islands agreement must first enter into force.
For entry into force, Australia and the Cook Islands are required to
provide notification on the completion of the necessary domestic
procedures. Once the Cook Islands agreement enters into force it will
apply in Australia in respect of any income year beginning on or after
1 July in the calendar year next following the date on which it enters into
force.
Proposal announced: This proposal was announced in the then Assistant
Treasurer's Media Release No. 082 of 28 October 2009.
Financial impact: Minimal.
Compliance cost impact: No significant compliance costs are expected to
result from the entry into force of the Cook Islands agreement.
Guernsey agreement
This Bill amends the Agreements Act 1953 to give the force of law in
Australia to the Agreement between the Government of Australia and the
States of Guernsey for the Allocation of Taxing Rights with respect to
Certain Income of Individuals and to Establish a Mutual Agreement
Procedure in respect of Transfer Pricing Adjustments (Guernsey
agreement), which was signed in London on 7 October 2009.
Date of effect: The Guernsey agreement must first enter into force. For
entry into force, Australia and Guernsey are required to provide
notification on the completion of the necessary domestic procedures.
Once the Guernsey agreement enters into force it will apply in Australia in
respect of any income year beginning on or after 1 July in the calendar
year next following the date on which it enters into force.
Proposal announced: This proposal was announced in the then Assistant
Treasurer's Media Release No. 069 of 8 October 2009.
Financial impact: Minimal.
Compliance cost impact: No significant compliance costs are expected to
result from the entry into force of the Guernsey agreement.
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International Tax Agreements Amendment (No. 1) Bill 2011
Malaysian protocol (No. 3)
This Bill amends the Agreements Act 1953 to give the force of law in
Australia to the Third Protocol amending the Agreement between the
Government of Australia and the Government of Malaysia for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income as amended by the First Protocol of
2 August 1999 and the Second Protocol of 28 July 2002 (Malaysian
protocol No. 3), which was signed on 24 February 2010.
Date of effect: On the date of entry into force of the Malaysian protocol
(No. 3). For entry into force, Australia and Malaysia are required to
provide notification on the completion of the necessary domestic
procedures.
Proposal announced: This measure was announced in the then Assistant
Treasurer's Media Release No. 027 of 24 February 2010.
Financial impact: Unquantifiable, but most likely positive.
The updated exchange of information provisions in the Malaysian
protocol (No. 3) are expected to increase the Commissioner of Taxation's
access to taxpayer information, but they do not alter Australia's taxing
rights. Consequently the protocol is expected to result in enhanced
taxpayer compliance and additional tax revenue.
Compliance cost impact: In terms of the compliance costs, this protocol
is expected to result in a low overall compliance cost impact, comprised
of a low implementation impact and no change in ongoing compliance
costs relative to the affected group.
Samoan agreement
This Bill amends the Agreements Act 1953 to give the force of law in
Australia to the Agreement between the Government of Australia and the
Government of Samoa for the Allocation of Taxing Rights with respect to
Certain Income of Individuals and to Establish a Mutual Agreement
Procedure in respect of Transfer Pricing Adjustments (Samoan
agreement), which was signed in Canberra on 16 December 2009.
Date of effect: The Samoan agreement must first enter into force. For
entry into force, Australia and Samoa are required to provide notification
on the completion of the necessary domestic procedures. Once the
Samoan agreement enters into force it will apply in Australia in respect of
6
General outline and financial impact
any income year beginning on or after 1 July in the calendar year next
following the date on which it enters into force.
Proposal announced: This measure was announced in the then Assistant
Treasurer's Media Release No. 111 of 16 December 2009.
Financial impact: Minimal.
Compliance cost impact: No significant compliance costs are expected to
result from the entry into force of the agreement.
Turkish convention
This Bill amends the Agreements Act 1953 to give the force of law in
Australia to the Convention between the Government of Australia and the
Government of the Republic of Turkey for the Avoidance of Double
Taxation with respect to Taxes on Income and the Prevention of Fiscal
Evasion and its Protocol (Turkish convention), which was signed in
Ankara on 28 April 2010.
Date of effect: The Turkish convention must first enter into force. For
entry into force, Australia and Turkey are required to provide notification
on the completion of the necessary domestic procedures. Once the
Turkish convention enters into force it will take effect in Australia in three
stages, namely:
· in respect of withholding tax, on income derived on or after
1 January in the calendar year next following entry into
force;
· in respect of other tax, on income derived in the income year
beginning 1 July following entry into force; and
· in respect of administrative provisions, upon entry into force.
Proposal announced: This measure was announced in the then Assistant
Treasurer's Media Release No. 079 of 29 April 2010.
Financial impact: The estimated impact of the Turkish convention on the
forward estimates is small.
Compliance cost impact: The establishment of a tax treaty between
Australia and Turkey, which is broadly consistent with international
norms, would generally be expected to reduce compliance costs.
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International Tax Agreements Amendment (No. 1) Bill 2011
Summary of the regulation impact statement
A copy of the regulation impact statement to the Turkish convention is
available on the Joint Standing Committee on Treaties web site at
www.aph.gov.au under Joint Committees administered by the House.
8
Chapter 1
Existing agreements
Outline of chapter
1.1 Schedule 1 to this Bill amends the International Tax Agreements
Act 1953 (Agreements Act 1953) to modify and streamline its structure
and remove the majority of the existing Schedules to the Act, which
contain the texts of Australia's bilateral tax treaties. This Bill is not
intended to alter the entry into force or application of Australia's tax
treaties.
Context of amendments
1.2 The Vienna Convention on the Law of Treaties defines a treaty
as `... an international agreement concluded between States in written
form and governed by international law, whether embodied in a single
instrument or in two or more related instruments and whatever its
particular designation.' The word `treaty' is, however, a generic term
covering all instruments governed by international law and giving rise to
international rights and obligations. Treaties may also be called
agreements, conventions, exchanges of notes and letters constituting
agreements, and protocols.
1.3 Much of the Agreements Act 1953 consists of Schedules to the
Act that are copies of various tax treaties and similar agreements
concluded by Australia. To a large extent these Schedules reflect treaties
based on international standards, for example the Organisation for
Economic Co-operation and Development's (OECD) Model Tax
Convention on Income and on Capital. As a consequence of the
expansion of Australia's tax treaty network, the Agreements Act 1953 has
grown to be one of the largest Acts on the Commonwealth's statute books.
Summary of new law
1.4 The Agreements Act 1953 will be shortened by omitting almost
all of the Schedules to the Act and instead incorporating treaties by
reference to other accessible resources, principally the Australian Treaty
Series online database of treaties. This will substantially reduce the size
of the Agreements Act 1953.
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International Tax Agreements Amendment (No. 1) Bill 2011
Comparison of key features of new law and current law
New law Current law
The majority of the existing The texts of Australia's tax treaties
Schedules to the Agreements are reproduced in full and included as
Act 1953, which contain the texts of Schedules to the Agreements
Australia's tax treaties, have been Act 1953.
removed.
Treaties are defined in alphabetical Treaties are defined in a combination
order, by jurisdiction. of numeric and alphabetical order.
A number of treaties are given the Each treaty is given the force of law
force of law on a consolidated basis. by a separate provision.
Detailed explanation of new law
What does the Agreements Act 1953 do?
1.5 The general proposition under Australian law is that treaties
which Australia has joined, apart from those terminating a state of war,
are not directly and automatically incorporated into Australian law.
Signature and ratification do not, of themselves, make treaties operate
domestically. In the absence of legislation, tax treaties cannot impose
obligations on individuals or create rights in domestic law. To be given
effect, tax treaties must be given the force of law by the Federal
Parliament.
1.6 The Agreements Act 1953 gives the force of law in Australia to
Australia's tax treaties, which currently appear as Schedules to that Act.
1.7 The Income Tax Assessment Act 1936, the Income Tax
Assessment Act 1997 and the Fringe Benefits Tax Assessment Act 1986 are
incorporated into and read as one with the Agreements Act 1953. By
subsection 4(2) of the Agreements Act 1953, the provisions of the
Agreements Act 1953 (including the terms of tax treaties) take precedence
over inconsistent provisions of the:
· Income Tax Assessment Act 1936 (other than the general
anti-avoidance rules under Part IVA);
· Income Tax Assessment Act 1997; and
· Fringe Benefits Tax Assessment Act 1986 (other than
section 67 which is an anti-avoidance rule).
10
Existing agreements
1.8 Historically, the texts of Australia's tax treaties have been
included as Schedules to the Agreements Act 1953 (currently there are 50
such Schedules). This practice, however, is not strictly necessary to give
those treaties the force of law in Australia. The effect of including the
treaty texts as Schedules to the Agreements Act 1953 is essentially only
presentational. By way of comparison, the texts of Australia's tax
information exchange agreements are not included as Schedules to the
Agreements Act 1953 but are given effect by section 23 of the
Agreements Act 1953. Likewise, the texts of treaties in respect of earlier
periods are not included as separate Schedules but continue to have the
force of law for relevant income.
In what way does this Bill change the Agreements Act 1953?
1.9 This Bill will modify and streamline the structure of the
Agreements Act 1953 and remove the majority of the existing Schedules
to the Act which contain the texts of Australia's tax treaties.
Title
1.10 The title of the Agreements Act 1953 will be amended to replace
the phrase `Conventions and Agreements' with the phrase `Treaties and
other Agreements'. This more closely reflects the common usage of the
term `treaty' to describe the agreements covered by the Agreements
Act 1953. [Schedule 1, item 1, title]
What is an agreement?
1.11 An `agreement' is a current tax treaty or other agreement, or an
agreement for an earlier period, covering Australia and another
jurisdiction. [Schedule 1, item 2 subsection 3(1)]
1.12 For greater ease of reference, these agreements, which include
protocols and notes, will be categorised as `current agreements' and
`agreements for earlier periods' and presented in the new law in
alphabetical order, by country name. By comparison, the current law lists
the agreements in a less convenient combination of numeric and
alphabetical order. [Schedule 1, item 5, sections 3AAA and 3AAB]
1.13 An agreement includes a treaty, agreement, convention, protocol
or exchange of notes dealing with the allocation of taxing rights. The
words `agreement' and `convention' are considered to be synonymous in
the context of this Bill. Typically an agreement would include:
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International Tax Agreements Amendment (No. 1) Bill 2011
· a comprehensive tax treaty for the elimination of double
taxation and/or the prevention of fiscal evasion; for example,
the Mexican agreement (signed on 9 September 2002);
· a protocol signed in conjunction with a comprehensive tax
treaty, for example, the Protocol to the Japanese convention
(signed on 31 January 2008);
· a protocol that subsequently amends a comprehensive tax
treaty, for example, the United States protocol (No. 1)
(signed on 27 September 2001);
· an agreement for the allocation of taxing rights over certain
income of individuals and to establish a mutual agreement
procedure in respect of transfer pricing adjustments, for
example, the Isle of Man agreement (signed on 29 January
2009); and
· an exchange of notes conducted in conjunction with a
comprehensive tax treaty, for example, the 2003 Notes
exchanged in conjunction with the signature of the United
Kingdom convention (signed on 21 August 2003).
Current practice
1.14 Under current practice, each treaty is defined in section 3 of the
Agreements Act 1953 by the title of the treaty and a reference to the
particular Schedule where the text of the treaty is reproduced, for
example:
· the Austrian agreement means the Agreement between
Australia and the Republic of Austria for the avoidance of
double taxation and the prevention of fiscal evasion with
respect to taxes on income, being the agreement a copy of
which in the English language is set out in Schedule 27.
1.15 A new section is included in the Agreements Act 1953
(section 11R in the case of the Austrian agreement) which sets out when
and to what extent the treaty is given the force of law.
1.16 Where a treaty is superseded by a new treaty, the previous treaty
continues to be defined in section 3, and a provision is included which
gives it the force of law only in respect of income to which it remains
effective. As mentioned, the superseded treaty is not reproduced in a
Schedule to the Agreements Act 1953.
12
Existing agreements
New approach
1.17 Amendments contained in this Bill will give Australia's tax
treaties the force of law through streamlined arrangements. This Bill is
not intended to change the effect of the Agreements Act 1953 or the
extent to which Australia's tax treaties are given the force of law in
Australia.
· An `agreement' is a current tax treaty or other agreement, or
an agreement for an earlier period, covering Australia and
another jurisdiction. Current agreements and earlier
agreements are specifically listed in new sections 5 and 5A
respectively [Schedule 1, item 2, subsection 3(1)].
· All treaties are defined -- in alphabetical order by country
name -- by reference to their full title and the place and date
of signature. There are separate provisions defining current
agreements and agreements for earlier periods. By
comparison, the current law lists the agreements in a less
convenient combination of numeric and alphabetical order
[Schedule 1, item 5, sections 3AAA and 3AAB].
· There is no reference to a schedule in each definition and all
Schedules containing a treaty text have been repealed, with
the exception of the Taipei agreement, which has been
retained as Schedule 1 due to the specific nature of that
agreement. The parties to the Taipei agreement are the
Australian Commerce and Industry Office and the Taipei
Economic and Cultural Office [Schedule 1, item 5, section 3AAA
under the `Taipei agreement' and Schedule 1, item 68].
· Each definition contains a note directing the reader to the
treaty text by reference to the relevant Australian Treaty
Series number. Any treaty entering into force for Australia is
printed in the Australian Treaty Series. The series is held in
major public and university libraries and is also published on
the Internet, for example, the Australasian Legal Information
Institute (AustLII). Copies of Australian treaties are also
available online via the Department of Foreign Affairs and
Trade's Australian Treaties Database. Copies of Australia's
tax treaties are also available via the Treasury's public
website.
· A new provision will give the force of law to most current
tax treaties, which are listed in a table. It is expected that
most new treaties will be incorporated into this table and
13
International Tax Agreements Amendment (No. 1) Bill 2011
their provisions given the force of law `according to their
tenor' [Schedule 1, item 8, subsection 5(1)].
· `Force of law' rules for earlier treaties are consolidated in a
separate table [Schedule 1, item 8, section 5A].
· Not all of Australia's existing tax treaties are included in the
tables contained in new sections 5 and 5A. Arguably, some
of the existing `force of law' provisions contained in the
Agreements Act 1953 qualify, to some extent, the force of
law given to a treaty. To remove any potential doubt in such
cases, those existing force of law provisions have been
retained. This applies to certain treaties concluded with the
following countries:
Austria (section 11R) Korea (Republic of) (section 11L)
Canada (section 6A) Malaysia (section 11F)
China (section 11Q) Malta (section 11N)
Denmark (section 11H) the Philippines (section 11D)
Germany (section 11) Singapore (section 7)
Ireland (section 11K) Sweden (section 11G)
Italy (section 10A) Switzerland (section 11E)
Application and transitional provisions
1.18 Transitional rules will apply to ensure the prospective
application of the amendments contained in this Bill. That is,
notwithstanding the operation of new section 5 to give the provisions of a
treaty the force of law, those provisions will continue to have effect for
the purposes of the Agreements Act 1953 as it was prior to these
amendments. [Schedule 1, item 71, subsections (1) and (2)]
1.19 In addition, transitional rules will ensure that the legal operation
of a treaty provision that was in force prior to the application of these
amendments, and which is not covered by new section 5 or 5A, will
continue to have the force of law following these amendments. This will
apply regardless of any change in the description of an agreement
resulting from these amendments. [Schedule 1, item 72, subsections (1) and (2)]
14
Chapter 2
Australia-Aruba agreement
Outline of chapter
2.1 Schedule 2 to this Bill amends the International Tax Agreements
Act 1953 (Agreements Act 1953) to define and give the force of law to the
2009 Agreement between the Government of Australia and the Kingdom
of the Netherlands, in respect of Aruba for the Allocation of Taxing Rights
with respect to Certain Income of Individuals and to Establish a Mutual
Agreement Procedure in respect of Transfer Pricing Adjustments (Aruba
agreement). Subsection 3AAA(1) of the Agreements Act 1953 will define
the Aruba agreement and subsection 5(1) will give it the force of law in
Australia. This chapter explains the rules that apply in the Aruba
agreement.
Context of amendments
2.2 The Aruba agreement was signed in Canberra on
16 December 2009. There is no pre-existing agreement of this type
between Australia and the Kingdom of the Netherlands, in respect of
Aruba (Aruba).
Summary of new law
Main features of the Aruba agreement
2.3 The main features of the Aruba agreement are as follows:
· Income from pensions and retirement annuities will generally
be taxed only in the country of residence of the recipient,
provided the income is subject to tax in that country [Article 5].
· Income from government service will generally be taxed only
in the country that pays the remuneration. However, the
remuneration shall only be taxed in the other country where
the services are rendered in that other country by a resident
of that other country who is a national of that other country
or did not become a resident of that other country for the
purpose of rendering the services [Article 6].
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International Tax Agreements Amendment (No. 1) Bill 2011
· Payments made from abroad to visiting students and business
apprentices for the purposes of their maintenance, education
or training will be exempt from tax in the country visited
[Article 7].
· A non-binding administrative mechanism will be established
to assist taxpayers to seek resolution of transfer pricing
disputes [Article 8].
Comparison of key features of new law and current law
New law Current law
Australian source pensions and Australian source income of foreign
retirement annuities derived by residents is generally subject to
residents of Aruba will be exempt Australian tax.
from Australian tax, provided they
are taxed in Aruba.
Certain income derived by residents Australian source income of foreign
of Aruba from government service in residents is generally subject to
Australia will be exempt from Australian tax.
Australian tax.
Certain payments received by visiting Some payments received by foreign
students and business apprentices students and business apprentices
from Aruba will be exempt from may be taxable in Australia,
Australian tax. depending on the circumstances.
The competent authorities of No equivalent.
Australia and Aruba will endeavour
to resolve taxpayers' transfer pricing
disputes arising from transfer pricing
adjustments that contravene the arm's
length principle through mutual
agreement.
16
Australia-Aruba agreement
The Aruban agreement
2.4 A full transcript of the Aruban agreement and detailed
explanation follows:
`AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA
AND THE KINGDOM OF THE NETHERLANDS, IN RESPECT OF
ARUBA, FOR THE ALLOCATION OF TAXING RIGHTS WITH
RESPECT TO CERTAIN INCOME OF INDIVIDUALS AND TO
ESTABLISH A MUTUAL AGREEMENT PROCEDURE IN RESPECT
OF TRANSFER PRICING ADJUSTMENTS
(Canberra, 16 December 2009)
Agreement between the Government of Australia and the Kingdom of the Netherlands,
in respect of Aruba, for the Allocation of Taxing Rights with respect to Certain Income
of Individuals and to establish a Mutual Agreement Procedure in respect of Transfer
Pricing Adjustments
The Government of Australia and the Kingdom of the Netherlands, in respect of Aruba
("the Parties"),
Recognising that the Parties have concluded an Agreement on the Exchange of
Information with Respect to Taxes, and
Desiring to conclude an Agreement for the allocation of taxing rights with respect to
certain income of individuals and to establish a mutual agreement procedure in respect
of transfer pricing adjustments,
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International Tax Agreements Amendment (No. 1) Bill 2011
Have agreed as follows:
ARTICLE 1
PERSONS COVERED
This Agreement shall apply to persons who are residents of one or both of the
Parties.
ARTICLE 2
TAXES COVERED
1. The existing taxes to which this Agreement shall apply are:
(a) in Australia, the income tax imposed under the federal law of
Australia;
(hereinafter referred to as "Australian tax").
(b) in Aruba, the following taxes:
(i) the income tax (inkomstenbelasting);
(ii) the wages tax (loonbelasting); and
(iii) the profit tax (winstbelasting);
(hereinafter referred to as "Aruban tax ").
2. This Agreement shall also apply to any identical or substantially similar taxes
which are imposed after the date of signature of this Agreement in addition to, or in
place of, the existing taxes. The competent authorities of the Parties shall notify each
18
Australia-Aruba agreement
other within a reasonable period of time of any substantial changes to the taxation laws
covered by this Agreement.
3. This Agreement shall not apply to taxes imposed by states, municipalities,
local authorities or other political subdivisions, or possessions of a Party.
ARTICLE 3
DEFINITIONS
1. For the purposes of this Agreement, unless the context otherwise requires:
(a) the term "Australia", when used in a geographical sense, excludes all
external territories other than:
(i) the Territory of Norfolk Island;
(ii) the Territory of Christmas Island;
(iii) the Territory of Cocos (Keeling) Islands;
(iv) the Territory of Ashmore and Cartier Islands;
(v) the Territory of Heard Island and McDonald Islands; and
(vi) the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of Australia
(including the Territories specified in this subparagraph) in respect of
which there is for the time being in force, consistently with international
law, a law of Australia dealing with the exploration for or exploitation of
any of the natural resources of the exclusive economic zone or the seabed
and subsoil of the continental shelf;
19
International Tax Agreements Amendment (No. 1) Bill 2011
(b) the term " Aruba " means that part of the Kingdom of the Netherlands that
is situated in the Caribbean area and consisting of the Island of Aruba;
(c) the term "competent authority" means in the case of Australia, the
Commissioner of Taxation or an authorised representative of the
Commissioner and, in the case of Aruba, the Minister of Finance and
Economic Affairs or an authorised representative of the Minister;
(d) the term "Party" means Australia or the Kingdom of the Netherlands in
respect of Aruba, as the context requires;
(e) the term "national", in relation to a Party, means any individual possessing
the nationality or citizenship of that Party;
(f) the term "person" includes an individual, a company and any other body
of persons;
(g) the term "tax" means Australian tax or Aruban tax as the context requires;
and
(h) the term "transfer pricing adjustment" means an adjustment made by the
competent authority of a Party to the profits of an enterprise as a result of
applying the domestic law concerning taxes referred to in Article 2 of that
Party regarding transfer pricing.
2. As regards the application of this Agreement at any time by a Party, any term
not defined therein shall, unless the context otherwise requires, have the meaning that
it has at that time under the law of that Party, for the purposes of the taxes to which this
Agreement applies, with any meaning under the applicable tax laws of that Party
prevailing over a meaning given to the term under other laws of that Party.
20
Australia-Aruba agreement
ARTICLE 4
RESIDENT
1. For the purposes of this Agreement, the term "resident of a Party" means:
(a) in the case of Australia, a person who is a resident of Australia for the
purposes of Australian tax; and
(b) in the case of Aruba, a person who is a resident of Aruba for the
purposes of Aruban tax.
2. A person is not a resident of a Party for the purposes of this Agreement if the
person is liable to tax in that Party in respect only of income from sources in that Party.
3. Where by reason of the preceding provisions of this Article a person, being an
individual, is a resident of both Parties, then the person's status shall be determined as
follows:
(a) the individual shall be deemed to be a resident only of the Party in which
a permanent home is available to that individual; if a permanent home is
available in both Parties, or in neither of them, that individual shall be
deemed to be a resident only of the Party with which the individual's
personal and economic relations are closer (centre of vital interests);
(b) if the Party in which the individual has their centre of vital interests
cannot be determined, the individual shall be deemed to be a resident only
of the Party of which the individual is a national;
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International Tax Agreements Amendment (No. 1) Bill 2011
(c) if the individual is a national of both Parties or of neither of them, the
competent authorities of the Parties shall endeavour to resolve the
question by mutual agreement.
4. Where, by reason of paragraph 1, a person other than an individual is a resident
of both Parties, then it shall be deemed to be a resident only of the Party in which its
place of effective management is situated.
ARTICLE 5
PENSIONS AND RETIREMENT ANNUITIES
1. Pensions (excluding government pensions) and retirement annuities paid to an
individual who is a resident of a Party shall be taxable only in that Party. However,
pensions and retirement annuities arising in a Party may be taxed in that Party where
such income is not subject to tax in the other Party.
2. The term "retirement annuity" means:
(a) in the case of Australia, a superannuation annuity payment within the
meaning of the taxation laws of Australia;
(b) in the case of Aruba, a stated sum payable in consequence of retirement
and paid periodically at stated times during life or during a specified or
ascertainable period of time under an obligation to make the payments in
return for adequate and full consideration in money or money's worth;
and
(c) any other similar periodic payment agreed upon by the competent
authorities.
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Australia-Aruba agreement
ARTICLE 6
GOVERNMENT SERVICE
1. (a) Salaries, wages and other similar remuneration, other than a pension, paid
by a Party or a political subdivision or a local authority thereof to an
individual in respect of services rendered to that Party or subdivision or
authority shall be taxable only in that Party.
(b) However, such salaries, wages and other similar remuneration shall be
taxable only in the other Party if the services are rendered in that Party
and the individual is a resident of that Party who:
(i) is a national of that Party; or
(ii) did not become a resident of that Party solely for the purpose
of rendering the services.
2. (a) Notwithstanding the provisions of paragraph 1, pensions and other similar
remuneration paid by, or out of funds created by, a Party or a political
subdivision or a local authority thereof to an individual in respect of
services rendered to that Party or subdivision or authority shall be taxable
only in that Party.
(b) However, such pensions and other similar remuneration shall be taxable
only in the other Party if such income is subject to tax in that Party and if
the individual is a resident of, and a national of, that Party and is also not a
national of the first-mentioned Party.
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International Tax Agreements Amendment (No. 1) Bill 2011
3. Notwithstanding the provisions of paragraphs 1 and 2, salaries, wages and
other similar remuneration in respect of services rendered in connection with any trade
or business carried on by a Party or a political subdivision or a local authority thereof
may be taxed in accordance with the laws of a Party. The provisions of Article 5 shall
apply to pensions in respect of services rendered in connection with any trade or
business carried on by a Party or a political subdivision or a local authority thereof.
ARTICLE 7
STUDENTS
Payments which a student or business apprentice, who is or was immediately
before visiting a Party a resident of the other Party and who is temporarily present in
the first-mentioned Party solely for the purpose of their education or training, receives
for the purpose of their maintenance, education or training shall not be taxed in that
Party, provided such payments arise from sources outside that Party.
ARTICLE 8
MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER
PRICING ADJUSTMENTS
1. Where a resident of a Party considers the actions of the other Party results or
will result in a transfer pricing adjustment not in accordance with the arm's length
principle, the resident may, irrespective of the remedies provided by the domestic law
of those Parties, present a case to the competent authority of the first-mentioned Party.
The case must be presented within three years of the first notification of the
adjustment.
24
Australia-Aruba agreement
2. The competent authorities shall endeavour to resolve any difficulties or doubts
arising as to the application of the arm's length principle by a Party regarding transfer
pricing adjustments. They may also communicate with each other directly for the
purposes of this Article.
ARTICLE 9
EXCHANGE OF INFORMATION
The competent authorities of the Parties shall exchange such information as is
foreseeably relevant for carrying out the provisions of this Agreement. Information
may be exchanged by the competent authorities for the purposes of this Article in
accordance with the provisions of the Agreement on the Exchange of Information with
Respect to Taxes concluded by the Parties (whether or not this Agreement, in whole or
in part, forms part of the domestic law of either Party).
ARTICLE 10
ENTRY INTO FORCE
The Parties shall notify each other, in writing, through the diplomatic channel of
the completion of their constitutional and legal procedures for the entry into force of
this Agreement. This Agreement shall enter into force on the date of the last
notification, and shall, provided an Agreement on the Exchange of Information with
Respect to Taxes is in force between the Parties, thereupon have effect:
(a) in respect of Australian tax, for any year of income beginning on or
after 1 July in the calendar year next following the year in which this
Agreement enters into force; and
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International Tax Agreements Amendment (No. 1) Bill 2011
(b) in respect of Aruban tax, for any year of income beginning on or after
1 January in the calendar year next following the year in which this
Agreement enters into force.
ARTICLE 11
TERMINATION
1. This Agreement shall continue in effect indefinitely, but either of the Parties
may, give to the other Party through the diplomatic channel written notice of
termination.
2. Such termination shall become effective:
(a) in respect of Australian tax, in the year of income beginning on or after
1 July in the calendar year next following that in which the notice of
termination is given;
(b) in respect of Aruban tax, for any year of income beginning on or after
1 January in the calendar year next following that in which the notice
of termination is given.
3. Notwithstanding the provisions of paragraph 1 or 2, this Agreement shall, on
receipt through the diplomatic channel of written notice of termination of the
Agreement on the Exchange of Information with Respect to Taxes between the Parties,
terminate and cease to be effective on the first day of the month following the
expiration of a period of 6 months after the date of receipt of such notice.
26
Australia-Aruba agreement
IN WITNESS WHEREOF the undersigned, being duly authorised thereto by
their respective Governments, have signed this Agreement.
DONE at Canberra in duplicate, on this sixteenth day of December 2009.
For the Government of For the Kingdom of the Netherlands,
Australia: in respect of Aruba:
The Hon. Nick Sherry
Cornelis Wilhelmus Andreæ
Assistant Treasurer
Ambassador
Detailed explanation of new law
Article 1 -- Persons Covered
2.5 This Article establishes the scope of the application of the Aruba
agreement by providing for it to apply to persons who are residents of one
or both of the countries [Article 1]. For the purposes of the agreement
person includes an individual, company and other body of persons (see
paragraph 2.17).
2.6 The application of the Aruba agreement to persons who are dual
residents (that is, residents of both countries) is dealt with in Article 4
(Resident) (see paragraph 2.22).
Article 2 -- Taxes Covered
2.7 This Article specifies the existing taxes of each country to which
the Aruba agreement applies. This is, in the case of Australia, the federal
income tax. [Article 2, subparagraph 1a)]
2.8 For Aruba, the Aruba agreement applies to taxes on income,
wages or profits. [Article 2, subparagraph 1b)]
2.9 The application of the Aruba agreement 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 of Australia and Aruba are
27
International Tax Agreements Amendment (No. 1) Bill 2011
required to notify each other in the event of a substantial change to the
taxation laws covered by the Aruba agreement of the respective countries,
within a reasonable period of time after any such changes. [Article 2,
paragraph 2]
2.10 The Aruba agreement does not apply to taxes imposed by states,
municipalities, local authorities or other political subdivisions or
possessions. [Article 2, paragraph 3]
Article 3 -- Definitions
Definition of Australia
2.11 The definition of `Australia' follows corresponding definitions
in Australia's modern tax treaties. `Australia' is defined to include certain
external territories and areas of the continental shelf. [Article 3,
subparagraph 1a)]
Definition of the Aruba
2.12 Aruba is defined to mean that part of the Kingdom of the
Netherlands that is situated in the Caribbean area and consisting of the
Island of Aruba. [Article 3, subparagraph 1b)]
Definition of competent authority
2.13 The `competent authority' is the person or institution
specifically authorised to perform certain actions under the Aruba
agreement. For example, to notify each other of any significant changes
to the tax law of their respective countries, Article 2 (Taxes Covered), to
communicate for the purposes of Article 8 (Mutual Agreement Procedure)
and to exchange information in accordance with Article 9 (Exchange of
Information).
2.14 In the case of Australia, the competent authority is the
Commissioner of Taxation (Commissioner) or an authorised
representative of the Commissioner. In the case of Aruba, the competent
authority is the Minister of Finance and Economic Affairs or an
authorised representative of the Minister. [Article 3, subparagraph 1c)]
Definition of contracting party
2.15 `Party' means Australia or Aruba, as the context requires.
[Article 3, subparagraph 1d)]
28
Australia-Aruba agreement
Definition of national
2.16 `National' means any individual possessing the nationality or
citizenship of Australia or Aruba, as the context requires. [Article 3,
subparagraph 1e)]
Definition of person
2.17 `Person' includes an individual, a company and any other body
of persons [Article 3, subparagraph 1f)]. However, Article 8 (Mutual
Agreement Procedure) is the only substantive article of the Aruba
agreement that will affect persons that are non-individuals.
Definition of transfer pricing adjustment
2.18 A transfer pricing adjustment is an adjustment made by the tax
authorities of Australia or Aruba to the profits of an enterprise, based on
the application of domestic transfer pricing laws [Article 3, subparagraph 1h)].
For Australia, such laws are contained in Division 13 of Part III of the
Income Tax Assessment Act 1936 (ITAA 1936).
Terms not specifically defined
2.19 A term that is not specifically defined in the Aruba agreement
shall have (unless the context requires otherwise) the meaning that it has
under the domestic law of the country applying the Aruba agreement at
the time of its application. In that case, the term's domestic taxation law
meaning will have precedence over any meaning it may have under that
country's other domestic laws. [Article 3, paragraph 2]
Article 4 -- Resident
2.20 This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the Aruba agreement.
Residential status is a criterion for determining each country's taxing
rights and is a necessary condition for the provision of relief under the
Aruba agreement. In the case of Australia, a person's residence is
determined according to Australia's taxation law [Article 4, subparagraph 1a)].
In the case of Aruba, residence is determined according to Aruba's
taxation law [Article 4, subparagraph 1b)].
Special residency rules
2.21 A person is not a resident of a country, for the purposes of the
Aruba agreement, if that person is liable to tax in that country in respect
only of income from sources in that country [Article 4, paragraph 2]. In the
Australian context, this would mean, for example, that Norfolk Island
29
International Tax Agreements Amendment (No. 1) Bill 2011
residents, who are generally only subject to Australian tax on Australian
source income, are not residents of Australia for the purposes of the Aruba
agreement. Accordingly, Aruba will not have to forego tax in accordance
with the Aruba agreement on income derived by Norfolk Island residents
(which will not be subject to Australian tax).
Dual residents
2.22 Tie-breaker rules are included for determining residency of a
person, for the purposes of the Aruba agreement, if the person qualifies as
a resident of both countries in accordance with paragraph 1 of Article 4.
In the case of an individual the rules, in order of application, are:
· if the individual has a permanent home available to
himself or herself in only one of the countries, the person is
deemed to be a resident solely of that country [Article 4,
subparagraph 3a)];
· if the individual has a permanent home available in both
countries or in neither, then the person's residential status
takes into account their personal or economic relations with
Australia and Aruba, and the person is deemed for the
purposes of the Aruba agreement to be a resident only of the
country with which they have the closer personal and
economic relations [Article 4, subparagraph 3a)];
· residency will be determined on the basis of an individual's
nationality where the foregoing tests are not determinative
[Article 4, subparagraph 3b)]; or
· if the individual is a `national' (as defined in
subparagraph 1e)) of Article 3 of the Aruba agreement) of
both countries, or of neither, the competent authorities will
endeavour to resolve the question of treaty residence by
mutual agreement [Article 4, subparagraph 3c)].
2.23 In the case of a non-individual, that is a company, partnership or
other body or person, which would under paragraph 1 of Article 4 be a
resident of both Australia and Aruba, then the entity will be deemed to be
a resident of the country in which the place of effective management is
situated. [Article 4, paragraph 4]
2.24 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 Australian as a resident, insofar as the Aruba agreement
allows.
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Australia-Aruba agreement
Article 5 -- Pensions and Retirement Annuities
2.25 Pensions (excluding government pensions) and retirement
annuities are taxable only by the country of which the recipient is a
resident, provided such income is subject to tax in that country. If such
income is not subject to tax in that country, the income may be taxed by
the country from which the relevant payments were made. [Article 5,
paragraph 1]
Meaning of retirement annuity
2.26 In the case of Australia, retirement annuity means a
superannuation annuity payment within the meaning of the taxation laws
of Australia [Article 5, subparagraph 2a)]. A superannuation annuity as
defined by Regulation 995-1.01 of the Income Tax Assessment
Regulations 1997, which took effect from 1 July 2007 is a retirement
annuity.
2.27 In the case of Aruba, a retirement annuity means a stated sum
payable in consequence of retirement and paid periodically at stated times
during life or during a specified or ascertainable period of time under an
obligation to make the payments in return for adequate and full
consideration in money or money's worth. [Article 5, subparagraph 2b)]
Article 6 -- Government Service
2.28 Salary and wage type income, other than a pension, paid to an
individual for services rendered to a government of one of the countries
(including a political subdivision or local authority), is to be taxed only in
that country. However, such remuneration will be taxable only in the
other country if the services are rendered in that other country and:
· 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 country solely for the purpose of
rendering the services (for example, if the recipient is a
permanent resident of that other country).
[Article 6, subparagraph 1b)]
Business income
2.29 Remuneration in respect of services rendered in connection with
a trade or business carried on by a governmental authority is excluded
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International Tax Agreements Amendment (No. 1) Bill 2011
from the scope of the Article. Such remuneration will remain subject to
the domestic taxation laws of the two countries. [Article 6, paragraph 3]
Article 7 -- Students
Exemption from tax
2.30 This Article applies to students or 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,
resident in 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 7]
Employment income
2.31 Where an Aruban student visiting Australia solely for
educational purposes undertakes employment in Australia, for example,
part-time work with a local employer, the income earned by that student
as a consequence of that employment may be subject to tax in Australia.
2.32 For business apprentices, 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, falls for consideration under domestic taxation law.
2.33 In the case of an Aruban 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.
2.34 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 (that is, a subsistence payment).
If the remuneration is similar to the amounts paid to persons who provide
similar services who are not business apprentices (that is, salary
equivalent), this would generally indicate that the payments constitute
income from employment that would fall for consideration under
domestic taxation law. Likewise, if that business apprentice undertakes
any other employment in Australia, the income earned from that
employment may be subject to tax in Australia.
2.35 Where a taxpayer receives exempt income and assessable
income, the exempt income may in some cases be taken into account in
32
Australia-Aruba agreement
determining the rate of tax payable on the assessable income. However,
the payments received from abroad for a 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.
Article 8 -- Mutual Agreement Procedure in Respect of Transfer Pricing
Adjustments
2.36 This Article provides for consultation between the competent
authorities of the two countries for the purpose of endeavouring to resolve
disputes concerning transfer pricing adjustments purportedly made not in
accordance with the arm's length principle. [Article 8, paragraph 2]
2.37 The term `arm's length principle' refers to the requirement that
businesses price their related party international dealings according to
what truly independent parties acting independently would reasonably be
expected to have done in the same situation. In Australia the
Commissioner would apply the arm's length principle when reviewing
business transactions in the context of Division 13 of Part III of the
ITAA 1936.
2.38 A person wishing to use this mutual agreement procedure must
present their case to the competent authority of their country of residence
within three years of the first notification of the transfer pricing
adjustment. This procedure operates independently of, and in addition to,
domestic legal remedies available to taxpayers. [Article 8, paragraph 1]
Article 9 -- Exchange of Information
2.39 This Article authorises and limits the exchange of information
by the competent authorities to information that is foreseeably relevant to
the administration of the Aruba agreement.
2.40 The exchange of information is subject to the provisions of the
Agreement on the Exchange of Information with Respect to Taxes, which
was signed by the two countries on 16 December 2009. After it takes
effect, that agreement will provide for exchange of information that is
foreseeably relevant to the administration of the taxation laws of the two
countries. It also contains safeguards to protect taxpayers' rights. For
example:
· confidentiality rules to ensure that information exchanged is
only disclosed to authorised recipients; and
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International Tax Agreements Amendment (No. 1) Bill 2011
· limitations to ensure that the competent authorities do not
exceed domestic laws and administrative procedures in the
course of obtaining and supplying information.
Article 10 -- Entry into Force
Date of entry into force
2.41 The Aruba agreement will enter into force on the date of the last
exchange of diplomatic notes notifying that the domestic procedures to
give it the force of law have been completed. In Australia, enactment of
the legislation giving the Aruba agreement the force of law along with
tabling the Aruba agreement in Parliament are prerequisites to the
exchange of diplomatic notes. Entry into force is also conditional upon
the related Agreement on the Exchange of Information with Respect to
Taxes between the two countries being in force at that time.
Date of application in Australia
2.42 Following entry into force, the Aruba agreement will take effect
in Australia in respect of any income year beginning on or after 1 July in
the calendar year next following the date on which it enters into force.
[Article 10, subparagraph 1a)]
Date of application in Aruba
2.43 Following entry into force, the Aruba agreement will take effect
in Aruba in respect of any income year beginning on or after 1 January in
the calendar year next following the date on which it enters into force.
[Article 10, subparagraph 1b)]
Article 11 -- Termination
2.44 The Aruba agreement is to continue in effect indefinitely.
However, either country may give the other country written notice of
termination of the agreement through the appropriate channel. [Article 11,
paragraph 1]
Cessation in Australia
2.45 In the event of either country terminating the Aruba agreement,
it would cease to be effective in Australia in the year of income beginning
on or after 1 July in the calendar year next following that in which the
notice of termination is given. [Article 11, subparagraph 2a)]
34
Australia-Aruba agreement
Cessation for Aruba
2.46 The Aruba agreement would correspondingly cease to be
effective in Aruba for any year of income beginning on or after 1 January
in the calendar year next following that in which the notice of termination
is given. [Article 11, paragraph 2b)]
Cessation in other circumstances
2.47 The Aruba agreement will also terminate and cease to be
effective if the Agreement for the Exchange of Information with Respect
to Taxes between Australia and Aruba is terminated. In that event, the
Aruba agreement would terminate on the first day of the month following
the expiration of six months after receipt of notification of termination of
the Agreement for the Exchange of Information with Respect to Taxes.
[Article 11, paragraph 3]
35
Chapter 3
The Australia-Chile convention
Outline of chapter
3.1 Schedule 2 to this Bill amends the International Tax Agreements
Act 1953 (Agreements Act 1953) to define and give the force of law to the
2010 Convention between Australia and the Republic of Chile for the
Avoidance of Double Taxation with respect to Taxes on Income and
Fringe Benefits and the Prevention of Fiscal Evasion and its Protocol
(Chilean convention). Subsection 3AAA(1) of the Agreements Act 1953
will define the Chilean convention and subsection 5(1) will give it the
force of law in Australia. This chapter explains the rules that apply in the
Chilean convention.
Context of amendments
3.2 The Chilean convention was signed in Santiago on 10 March
2010 and is the first convention of this type between Australia and Chile.
The Chilean convention will:
· promote closer economic cooperation between Australia and
Chile by reducing taxation barriers; in particular avoiding
double taxation on income arising from overlapping
jurisdictions; and
· improve the integrity of the tax system by providing the
framework through which the tax administrations of
Australia and Chile can prevent international fiscal evasion.
Summary of new law
Main features of the Chilean convention
3.3 The main features of the Chilean convention are as follows:
· Dual resident individuals (for example, individuals who are
residents of both Australia and Chile according to the
domestic taxation laws of each country) are, in accordance
with specified criteria, to be treated for the purposes of the
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International Tax Agreements Amendment (No. 1) Bill 2011
Chilean convention as being residents of only one country.
Where a non-individual such as a company is a resident of
both countries for their domestic tax purposes, the entity is
not entitled to the benefits of the Chilean convention except
for benefits under the non-discrimination provisions
[Article 4].
· Income from real property (including the profits of an
enterprise from agriculture or forestry) may be taxed by the
country in which the property is situated. Income from real
property includes natural resource royalties [Article 6].
· Business profits are generally to be taxed only in the country
of residence of the recipient unless they are derived by a
resident of one country through a branch or other prescribed
permanent establishment in the other country, in which case
that other country may tax the profits. These rules also apply
to business trusts [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 adjusted for tax
purposes where transactions have been entered into on other
than arm's length terms [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:
- a 5 per cent limitation applies to intercorporate dividends
where the beneficial owner of those dividends is a
company that holds directly at least 10 per cent of the
voting power of the company paying the dividends
[Article 10, subparagraph 2a)];
- a 15 per cent limitation applies to all other dividends
[Article 10, subparagraph 2b)]; and
38
The Australia-Chile convention
- notwithstanding these limitations the Chilean convention
preserves Chile's right to impose its Additional Tax on
corporate profits [Article 10, paragraph 2].
· In the case of interest:
- a 5 per cent limitation applies to interest paid to financial
institutions that are unrelated and dealing wholly
independently with the payer, subject to certain conditions
[Article 11, subparagraph 2a)];
- a 10 per cent limitation applies to other Australian
sourced interest [Article 11, subparagraph 2b)]; and
- a 15 per cent limitation applies to other Chilean sourced
interest [Article 11, paragraph 4].
· The rate limit on source country taxation of royalties is
5 per cent for equipment royalties and 10 per cent for all
others [Article 12, paragraph 2].
· Income, profits or gains from the alienation of real property
may be taxed 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 certain
companies and other entities (including land rich entities), all
other capital gains will be taxable only in the country of
residence [Article 13].
· Profits 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 fixed base or the
individual is present in the other country for a specified
period [Article 14].
· 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 15].
· Fringe benefits that would otherwise be subject to tax in both
countries will be taxable only in the country which would
have the primary taxing right in respect of salary or wages to
which the benefit relates [Article 15].
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International Tax Agreements Amendment (No. 1) Bill 2011
· Directors' remuneration may be taxed in the country in
which the company of which the person is a director is a
resident for tax purposes [Article 16].
· Income derived by entertainers and sportspersons may
generally be taxed by the country in which the activities are
performed [Article 17].
· Pensions (including government pensions) and retirement
annuities may be taxed only in the country of residence of the
recipient. Certain specified lump sums are only subject to
tax in the country in which they arise [Article 18].
· Income from government service will generally be taxed only
in the country that pays the remuneration. However, the
remuneration will 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 did not become a resident of that other country for the
purpose of rendering the services [Article 19].
· Payments made from abroad to visiting students or business
apprentices for the purposes of their maintenance, education
or training will be exempt from tax in the country visited
[Article 20].
· Other income (that is, income not dealt with by other
Articles) may generally be taxed in both countries, with the
country of residence of the recipient providing double tax
relief [Article 21].
· Source rules in the Chilean convention prescribe, for
domestic law and treaty purposes, that income, profits or
gains derived by a resident of one country, which under
certain provisions of the treaty may be taxed in the other
country, will be treated as having a source in that other
country [Article 22].
· Double taxation relief for income which, under the Chilean
convention, may be taxed by both countries, is required to be
provided by the country of which the taxpayer is a resident
under the terms of the Chilean convention as follows:
- in Australia, by allowing a credit for the Chilean tax
against Australian tax payable on income derived by a
resident of Australia [Article 23, subparagraph 1a)]. However,
where the relevant income derived by the Australian
40
The Australia-Chile convention
resident is a dividend paid by a Chilean company,
Australia's credit obligation is limited [Article 23,
subparagraph 1b)]; and
- in Chile, by allowing a credit for the Australian tax
against Chilean tax payable on income derived by a
resident of Chile [Article 23, paragraph 2].
· In the case of Australia, effect will be given to the double tax
relief obligations arising under the Chilean 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 the Chilean convention will protect nationals and
companies from tax discrimination in the other country and
gives them private rights of appeal. However, Article 24
does not restrict either country from applying provisions
designed to prevent avoidance or evasion of taxes (for
Australia, such measures include thin capitalisation rules or
measures designed to ensure taxes can be collected
efficiently and controlled foreign companies measures) and
research and development concessions [Article 24].
· The Chilean convention provides for consultation between
the two taxation authorities [Article 25].
· The Chilean convention provides for exchange of
information, including bank information, between the two
taxation authorities. It authorises and requires Australia to
exchange information where the information relates to
federal taxes administered by the Commissioner of Taxation
(Commissioner) [Article 26].
· The integrity of the Chilean convention is provided for
through the inclusion of provisions to deny treaty benefits in
certain circumstances and to establish a mechanism for
consultation where benefits apply which were not
contemplated or intended [Article 27].
41
International Tax Agreements Amendment (No. 1) Bill 2011
Comparison of key features of new law and current law
New law Current law
This Schedule implements the 2010 There is no existing treaty between
Convention between Australia and Australia and Chile.
Chile.
This Schedule provides rules to treat No equivalent.
dual resident individuals (for
example, individuals who are
residents of both Australia and Chile
according to the domestic taxation
laws of each country) as residents of
only one country for the purposes of
the Chilean convention.
This Schedule limits the application
of the Chilean convention to other
dual resident persons who are not
individuals.
This Schedule defines the term The definition of `permanent
`permanent establishment' in establishment' is set out in
Article 5 (Permanent Establishment) subsection 6(1) of the Income Tax
for the purposes of the Chilean Assessment Act 1936 (ITAA 1936).
convention. In particular, under the
Chilean convention a building site or
installation project constitutes a
permanent establishment only where
it lasts more than 6 months. An
enterprise is deemed to have a
permanent establishment in a country
if:
· it provides services in that country
for a period or periods exceeding
in the aggregate 183 days in any
12-month period;
· it carries on activities (including
the operation of substantial
equipment) in the exploration for
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
(including in natural resource
activities) for a period or periods
exceeding in the aggregate
183 days in any 12-month period.
42
The Australia-Chile convention
New law Current law
Integrity provisions are included to
prevent related parties from
circumventing the permanent
establishment time thresholds by
splitting contracts.
This Schedule treats certain business The definition of `real property'
profits, such as profits from covers land, and rights relating to
agriculture and forestry, as income exploration for, or exploitation of,
from real property, and ensures that natural resources.
arms' length profits are taxed on a net
basis.
Source taxation of business profits is In general, foreign residents are
limited to those profits derived taxable on all Australian sourced
through a branch or other prescribed income.
permanent establishment (Article 5)
situated in the source country.
Transfer pricing adjustments are No equivalent.
generally limited to seven years.
Source taxation of profits from Source taxation of profits from
shipping and airline transport shipping and airline activities
operations is limited to income from (including non-transport activities) is
domestic transport. Profits from not limited.
non-transport operations taxed as
business profits.
Dividend withholding tax is limited The rate of non-resident dividend
to: withholding tax in Australia is
· five per cent for intercorporate 30 per cent.
dividends on certain non-portfolio
holdings; and
· fifteen per cent in all other cases.
This Schedule reduces the rate of The rate of non-resident interest
Australian interest withholding tax withholding tax in Australia is
from 10 per cent to 5 per cent where 10 per cent.
interest is paid to an unrelated
financial institution.
This Schedule reduces the rate of The rate of non-resident royalty
Australian royalty withholding tax withholding tax in Australia is
from 30 per cent to: 30 per cent of the gross payment.
· five per cent of the gross royalty
payments for use of industrial,
scientific and commercial
equipment; and
· ten per cent for all other royalties.
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International Tax Agreements Amendment (No. 1) Bill 2011
New law Current law
This Schedule includes a Non-residents are taxable on their
comprehensive Alienation of capital gains from the alienation of
Property Article which allocates real property, business assets of a
taxing rights over gains and prevents permanent establishment and on
double non-taxation of certain capital indirect holdings of real property. In
gains. relation to indirect holdings of real
The allocation of taxing rights in the property the non-resident has to have
Chilean convention is broadly a non-portfolio interest in the entity
consistent with Australia's capital holding the real property.
gains tax arrangements for non-
residents.
Source taxation of independent In general, foreign residents are
personal services is limited to those taxable on all Australian sourced
amounts attributable to a fixed base income.
or where a person is present in that
country for a period or periods
exceeding in the aggregate 183 days
in any 12-month period.
Employment income paid in respect No equivalent.
of certain short term visits is taxable
only in the country of residence of the
employee where the remuneration is
borne by a permanent establishment
or fixed base of the employer in the
employee's country of residence.
Pensions and retirement annuities are Pensions may be taxable in both
taxable only in the country of countries.
residence of the recipient.
Lump sums are taxable only in the Lump sums may be taxed in both
country of source. countries.
This Schedule includes a No equivalent.
comprehensive article preventing tax
discrimination under tax laws.
This Schedule includes a framework No equivalent.
to allow for mutual agreement
procedures between the relevant tax
authorities to resolve disputes.
This Schedule includes a framework No equivalent.
to allow the tax authorities to
exchange taxpayer information.
44
The Australia-Chile convention
New law Current law
This Schedule includes a Limitation No equivalent.
of Benefits Article that:
· limits the treaty benefits that a
country is obliged to provide
under Articles 10 to 12;
· provides a framework for
Australia and Chile to consult if
the treaty is being used to provide
benefits not contemplated or not
intended; and
· limits the treaty benefits that Chile
is obliged to provide to Australian
temporary residents.
The Chilean convention
3.4 A full transcript of the Chilean convention and detailed
explanation follows:
`CONVENTION BETWEEN AUSTRALIA AND THE REPUBLIC OF
CHILE FOR THE AVOIDANCE OF DOUBLE TAXATION WITH
RESPECT TO TAXES ON INCOME AND FRINGE BENEFITS AND
THE PREVENTION OF FISCAL EVASION
Australia and the Republic of Chile, desiring to conclude a convention for
the avoidance of double taxation with respect to taxes on income and
fringe benefits and the prevention of fiscal evasion;
Have agreed as follows:
CHAPTER I
SCOPE OF THE CONVENTION
Article 1
PERSONS COVERED
This Convention shall apply to persons who are residents of one or
both of the Contracting States.
Article 2
TAXES COVERED
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International Tax Agreements Amendment (No. 1) Bill 2011
1. The existing taxes to which the Convention shall apply are:
a) in Australia:
(i) the income tax, including the resource rent tax in respect of offshore
projects relating to exploration for or exploitation of petroleum resources;
and
(ii) the fringe benefits tax, imposed under the federal law of Australia
(hereinafter referred to as "Australian tax"); and
b) in Chile, the taxes imposed under the Income Tax Act, "Ley sobre
Impuesto a la Renta", including the specific tax on mining activity
(Impuesto Específico a la Actividad Minera), (hereinafter referred to as
"Chilean tax").
2. The Convention shall apply also to any identical or substantially
similar taxes that are imposed under the federal law of Australia or the
law of Chile after the date of signature of the Convention in addition to, or
in place of, the existing taxes. The competent authorities of the
Contracting States shall notify each other of any significant changes that
have been made in the law of their respective States relating to the taxes to
which the Convention applies within a reasonable period of time after
those changes.
CHAPTER II
DEFINITIONS
Article 3
GENERAL DEFINITIONS
1. For the purposes of this Convention, unless the context otherwise
requires:
a) the term "Australia" means the Commonwealth of Australia and, when
used in a geographical sense, excludes all external territories other than:
(i) the Territory of Norfolk Island;
(ii) the Territory of Christmas Island;
(iii) the Territory of Cocos (Keeling) Islands;
(iv) the Territory of Ashmore and Cartier Islands;
46
The Australia-Chile convention
(v) the Territory of Heard Island and McDonald Islands; and
(vi) the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of Australia
(including the Territories specified in this subparagraph) in respect of
which there is for the time being in force, consistently with international
law, a law of Australia dealing with the exploration for or exploitation of
any of the natural resources of the exclusive economic zone or the seabed
and subsoil of the continental shelf;
b) the term "Chile" means the Republic of Chile and, when used in a
geographical sense, includes any area outside the territorial sea designated
under the laws of the Republic of Chile and in accordance with
international law as an area within which the Republic of Chile may
exercise sovereign rights with regard to the seabed and subsoil and their
natural resources;
c) the terms "a Contracting State" and "the other Contracting State"
mean, as the context requires, Australia or Chile respectively;
d) the term "person" includes an individual, a company and any other
body of persons;
e) the term "company" means any body corporate or any entity that is
treated as a company or body corporate for tax purposes;
f) the terms "enterprise of a Contracting State" and "enterprise of the
other Contracting State" mean respectively an enterprise carried on by a
resident of a Contracting State and an enterprise carried on by a resident
of the other Contracting State;
g) the term "international traffic" means any transport by a ship or aircraft
operated by an enterprise of a Contracting State, except when such
transport is solely between places in the other Contracting State;
h) the term "competent authority" means:
(i) in Australia, the Commissioner of Taxation or an authorised
representative of the Commissioner ; and
(ii) in Chile, the Minister of Finance or an authorised representative of the
Minister;
i) the term "national" in relation to a Contracting State, means:
47
International Tax Agreements Amendment (No. 1) Bill 2011
(i) any individual possessing the nationality or citizenship of that
Contracting State; and
(ii) any company deriving its status as such from the laws in force in that
Contracting State;
j) the term "tax" means Australian tax or Chilean tax as the context
requires, but does not include any penalty or interest imposed under the
law of either Contracting State relating to its tax.
2. As regards the application of the Convention at any time by a
Contracting State, any term not defined therein shall, unless the context
otherwise requires, have the meaning that it has at that time under the law
of that State concerning the taxes to which the Convention applies, any
meaning under the applicable tax law of that State prevailing over a
meaning given to the term under other law of that State.
Article 4
RESIDENT
1. For the purposes of this Convention, the term "resident of a
Contracting State" means any person who, under the laws of that State, is
liable to tax therein as a resident of that State or by reason of domicile in
that State, and also includes that State and any political subdivision or
local authority thereof. This term, however, does not include any person
who is liable to tax in that State in respect only of income from sources in
that State.
2. Where by reason of the provisions of paragraph 1 a person, being an
individual is a resident of both Contracting States, then the person's status
shall be determined as follows:
a) the individual shall be deemed to be a resident only of the State in
which a permanent home is available to that individual; but if a permanent
home is available in both States or in neither of them, that individual shall
be deemed to be a resident only of the State with which the individual's
personal and economic relations are closer (centre of vital interests);
b) if the State in which the centre of vital interests is situated cannot be
determined, the individual shall be deemed to be a resident only of the
State of which that individual is a national.
3. Where by reason of the provisions of paragraph 1 a person other than
an individual is a resident of both Contracting States, the person shall not
be entitled to any benefits provided by the Convention except that the
provisions of Article 24 shall apply.
48
The Australia-Chile convention
Article 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Convention, the term "permanent
establishment" means a fixed place of business through which the
business of an enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, an oil or gas well, a quarry or any other place relating to the
exploration for or the exploitation of natural resources; and
g) an agricultural, pastoral or forestry property.
3. A building site or construction or installation project constitutes a
permanent establishment only if it lasts more than six months.
4. Notwithstanding the provisions of paragraphs 1, 2 and 3, where an
enterprise of a Contracting State:
a) performs services (other than activities to which subparagraphs b) or c)
apply) in the other Contracting State, for a period or periods exceeding in
the aggregate 183 days in any twelve month period, and these services are
performed through one or more individuals who are present and
performing such services in that other State;
b) carries on activities (including the operation of substantial equipment)
in the other State in the exploration for or exploitation of natural resources
situated in that other State for a period or periods exceeding in the
aggregate 90 days in any twelve month period; or
c) operates substantial equipment in the other State (including as
provided in subparagraph b)) for a period or periods exceeding in the
aggregate 183 days in any twelve month period,
49
International Tax Agreements Amendment (No. 1) Bill 2011
such activities shall be deemed to be performed through a permanent
establishment that the enterprise has in that other State, unless the
activities are limited to those mentioned in paragraph 6 which, if exercised
through a fixed place of business, would not make this fixed place of
business a permanent establishment under the provisions of that
paragraph.
5. a)The duration of activities under paragraphs 3 and 4 will be
determined by aggregating the periods during which activities are carried
on in a Contracting State by associated enterprises provided that the
activities of the enterprise in that State are substantially the same as the
activities carried on in that State by its associate.
b) The period during which two or more associated enterprises are
carrying on concurrent activities will be counted only once for the purpose
of determining the duration of activities.
c) Under this Article, an enterprise shall be deemed to be associated with
another enterprise if:
(i) one is controlled directly or indirectly by the other; or
(ii) both are controlled directly or indirectly by the same person or
persons.
6. Notwithstanding the preceding provisions of this Article, the term
"permanent establishment" shall be deemed not to include:
a) the use of facilities solely for the purpose of storage, display or
delivery of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise or of collecting information, for the
enterprise;
e) the maintenance of a fixed place of business solely for the purpose of
advertising, supplying information or carrying out scientific research for
the enterprise, or any other similar activity, if such activity is of a
preparatory or auxiliary character.
50
The Australia-Chile convention
7. Notwithstanding the provisions of paragraphs 1 and 2 where a person -
other than an agent of an independent status to whom paragraph 8 applies
- is acting on behalf of an enterprise and has and habitually exercises in a
Contracting State an authority to conclude contracts on behalf of the
enterprise or manufactures or processes in a Contracting State for the
enterprise goods or merchandise belonging to the enterprise, that
enterprise shall be deemed to have a permanent establishment in that State
in respect of any activities which that person undertakes for the enterprise,
unless the activities of such person are limited to those mentioned in
paragraph 6 which, if exercised through a fixed place of business, would
not make this fixed place of business a permanent establishment under the
provisions of that paragraph.
8. An enterprise shall not be deemed to have a permanent establishment
in a Contracting State merely because it carries on business in that State
through a person who is a broker, general commission agent or any other
agent of an independent status, provided that such persons are acting in
the ordinary course of their business.
9. The fact that a company which is a resident of a Contracting State
controls or is controlled by a company which is a resident of the other
Contracting State, or which carries on business in that other State
(whether through a permanent establishment or otherwise), shall not of
itself make either company a permanent establishment of the other.
CHAPTER III
TAXATION OF INCOME
Article 6
INCOME FROM IMMOVABLE (REAL) PROPERTY
1. Income derived by a resident of a Contracting State from immovable
(real) property (including income from agriculture or forestry) may be
taxed in the Contracting State in which the immovable (real) property is
situated.
2. For the purposes of this Convention, the term "immovable (real)
property":
a) in the case of Australia, means real property according to the law of
Australia, and shall also include:
(i) a lease of land and any other interest in or over land, whether
improved or not, including a right to explore for mineral, oil or gas
51
International Tax Agreements Amendment (No. 1) Bill 2011
deposits or other natural resources, and a right to mine those deposits or
resources; and
(ii) a right to receive variable or fixed payments either as consideration for
or in respect of the exploitation of, or the right to explore for or exploit,
mineral, oil or gas deposits, quarries or other places of extraction or
exploitation of natural resources; and
b) in the case of Chile, means such property which, according to the law
of Chile, is immovable property and shall in any case include:
(i) property accessory to immovable property;
(ii) livestock and equipment used in agriculture and forestry;
(iii) rights to which the provisions of the general law respecting land
apply, including a lease of land and any other interest in or over land,
whether improved or not, including a right to explore for mineral, oil or
gas deposits or other natural resources, and a right to mine those deposits
or resources; and
(iv) usufruct of immovable property and rights to variable or fixed
payments either as consideration for or in respect of the exploitation of or
the right to exploit mineral deposits, mineral sources and other natural
resources.
Ships and aircraft shall not be regarded as immovable (real) property.
3. Any interest or right referred to in paragraph 2 shall be regarded as
situated where the land, mineral, oil or gas deposits or sources, quarries or
natural resources, as the case may be, are situated or where the exploration
may take place.
4. The provisions of paragraph 1 shall apply to income derived from the
direct use, letting, or use in any other form of immovable (real) property.
5. The provisions of paragraphs 1 and 4 shall also apply to profits from
immovable (real) property of an enterprise or immovable (real) property
used for the performance of independent personal services. Where such
profits are attributable to a permanent establishment or a fixed base in the
Contracting State in which the immovable (real) property is situated, the
profits shall be determined in accordance with principles of paragraphs 2
and 3 of Article 7.
Article 7
BUSINESS PROFITS
52
The Australia-Chile convention
1. The profits of an enterprise of a Contracting State shall be taxable only
in that State unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated therein. If
the enterprise carries on or has carried on business as aforesaid, the profits
of the enterprise may be taxed in the other State but only so much of them
as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a
Contracting State carries on business in the other Contracting State
through a permanent establishment situated therein, there shall in each
Contracting State be attributed to that permanent establishment the profits
which it might be expected to make if it were a distinct and separate
enterprise engaged in the same or similar activities under the same or
similar conditions and dealing wholly independently with the enterprise of
which it is a permanent establishment or with other enterprises with which
it deals.
3. In determining the profits of a permanent establishment, there shall be
allowed as deductions expenses of the enterprise, being expenses which
are incurred for the purposes of the permanent establishment, including
executive and general administrative expenses so incurred whether
incurred in the State in which the permanent establishment is situated or
elsewhere
4. No profits shall be attributed to a permanent establishment by reason
of the mere purchase by that permanent establishment of goods or
merchandise for the enterprise.
5. Where profits include items of income or gains which are dealt with
separately in other Articles of this Convention, then the provisions of
those Articles shall not be affected by the provisions of this Article.
6. Notwithstanding the preceding provisions of this Article, premiums in
respect of insurance policies issued by an enterprise of a Contracting State
may be taxed in the other State in accordance with its domestic law.
However, except where the premium is attributable to a permanent
establishment of the enterprise situated in that other State, the tax so
charged shall not exceed:
a) 5 per cent of the gross amount of the premiums in the case of policies
of reinsurance; and
b) 10 per cent of the gross amount of the premiums in the case of all
other policies of insurance.
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International Tax Agreements Amendment (No. 1) Bill 2011
7. Where:
a) a resident of a Contracting State is beneficially entitled, whether
directly or through one or more interposed trust estates, to a share of the
business profits of an enterprise carried on in the other Contracting State
by the trustee of a trust estate other than a trust estate which is treated as a
company for tax purposes; and
b) in relation to that enterprise, that trustee would, in accordance with the
principles of Article 5, have a permanent establishment in that other State,
the enterprise carried on by the trustee shall be deemed to be a business
carried on in the other State by that resident through a permanent
establishment situated therein and that share of business profits shall be
attributed to that permanent establishment.
8. No adjustments to the profits attributable to a permanent establishment
of an enterprise for a year of income shall be made by a Contracting State
after the expiration of seven years from the date on which the enterprise
has completed the tax filing requirements of that State for that year of
income. The provisions of this paragraph shall not apply in the case of
fraud, gross negligence or wilful default or where, within that period of
seven years, an audit into the profits of the enterprise has been initiated by
either State.
9. Nothing in this Convention shall affect the taxation in Chile of a
resident of Australia in respect of profits attributable to a permanent
establishment, or a fixed base, situated in Chile, under both the First
Category Tax and the Additional Tax provided that the First Category Tax
is fully creditable in computing the amount of the Additional Tax.
Article 8
SHIPS AND AIRCRAFT
1. Profits of an enterprise of a Contracting State from the operation of
ships or aircraft in international traffic shall be taxable only in that State.
2. Notwithstanding the provisions of paragraph 1, profits of an enterprise
of a Contracting State derived from the operation of ships or aircraft may
be taxed in the other Contracting State to the extent that they are profits
derived directly or indirectly from ship or aircraft operations confined
solely to places in that other State.
3. The profits to which the provisions of paragraphs 1 and 2 apply
include profits from the operation of ships or aircraft derived through
participation in a pool service or other profit sharing arrangement.
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The Australia-Chile convention
4. For the purposes of this Article, profits derived from the carriage by
ships or aircraft of passengers or cargo (including mail) which are taken
on board in a Contracting State for discharge at a place in that State shall
be treated as profits from ship or aircraft operations confined solely to
places in that State.
Article 9
ASSOCIATED ENTERPRISES
1. Where
a) an enterprise of a Contracting State participates directly or indirectly in
the management, control or capital of an enterprise of the other
Contracting State, or
b) the same persons participate directly or indirectly in the management,
control or capital of an enterprise of a Contracting State and an enterprise
of the other Contracting State,
and in either case conditions operate, or are made or imposed, between the
two enterprises in their commercial or financial relations which differ
from those which might be expected to operate or be made between
independent enterprises, dealing wholly independently with one another
then any profits which, but for those conditions, might have been expected
to accrue to one of the enterprises, but, by reason of those conditions, have
not so accrued, may be included in the profits of that enterprise and taxed
accordingly.
2. Where a Contracting State includes in the profits of an enterprise of
that State - and taxes accordingly - profits on which an enterprise of the
other Contracting State has been charged to tax in that other State and the
profits so included are profits which might have been expected to have
accrued to the enterprise of the first-mentioned State if the conditions
operative between the enterprises had been those which might have been
expected to have operated between independent enterprises dealing
wholly independently with one another, then that other State, if it agrees
that the adjustment made by the first-mentioned State is justified both in
principle and as regard the amount, shall make an appropriate adjustment
to the amount of the taxes charged therein on those profits. In determining
such adjustment, due regard shall be had to the other provisions of this
Convention and the competent authorities of the Contracting States shall if
necessary consult each other.
3. No adjustments to the profits of an enterprise for a year of income
shall be made by a Contracting State after the expiration of seven years
from the date on which the enterprise has completed the tax filing
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International Tax Agreements Amendment (No. 1) Bill 2011
requirements of that State for that year of income. The provisions of this
paragraph shall not apply in the case of fraud, gross negligence or wilful
default or where, within that period of seven years, an audit into the
profits of the enterprise has been initiated by either State.
Article 10
DIVIDENDS
1. Dividends paid by a company which is a resident of a Contracting
State to a resident of the other Contracting State may be taxed in that other
State.
2. However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident and according to the
laws of that State, but if the beneficial owner of the dividends is a resident
of the other Contracting State, the tax so charged shall not exceed:
a) 5 per cent of the gross amount of the dividends if the beneficial owner
of those dividends is a company which holds directly at least 10 per cent
of the voting power in the company paying the dividends; and
b) 15 per cent of the gross amount of the dividends in all other cases.
The provisions of this paragraph shall not limit the application of the
Additional Tax payable in Chile provided that the First Category Tax is
fully creditable in computing the amount of Additional Tax.
3. The term "dividends" as used in this Article means income from shares
or other rights, not being debt-claims, participating in profits, as well as
other amounts which are subjected to the same taxation treatment as
income from shares by the laws of the State of which the company
making the distribution is a resident.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial
owner of the dividends, being a resident of a Contracting State, carries on
business in the other Contracting State of which the company paying the
dividends is a resident, through a permanent establishment situated
therein, or performs in that other State independent personal services from
a fixed base situated therein, and the holding in respect of which the
dividends are paid is effectively connected with such permanent
establishment or fixed base. In such case the provisions of Article 7 or
Article 14, as the case may be, shall apply.
5. Where a company which is a resident of a Contracting State derives
profits or income from the other Contracting State, that other State may
not impose any tax on the dividends paid by the company, except insofar
56
The Australia-Chile convention
as such dividends are paid to a resident of that other State or insofar as the
holding in respect of which the dividends are paid is effectively connected
with a permanent establishment or a fixed base situated in that other State,
nor subject the company's undistributed profits to a tax on the company's
undistributed profits even if the dividends paid or the undistributed profits
consist wholly or partly of profits or income arising in such other State.
Article 11
INTEREST
1. Interest arising in a Contracting State and paid to a resident of the
other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in
which it arises and according to the laws of that State, but if the beneficial
owner of the interest is a resident of the other Contracting State, the tax so
charged shall not exceed:
a) 5 per cent of the gross amount of interest derived by a financial
institution which is unrelated to and dealing wholly independently with
the payer. The term "financial institution" means a bank or other
enterprise substantially deriving its profits by raising debt finance in the
financial markets or by taking deposits at interest and using those funds in
carrying on a business of providing finance; and
b) 10 per cent of the gross amount of interest in all other cases.
3. Notwithstanding paragraph 2, interest referred to in subparagraph a) of
that paragraph may be taxed in the State in which it arises at a rate not
exceeding 10 per cent of the gross amount of the interest if the interest is
paid as part of an arrangement involving back-to-back loans or other
arrangement that is economically equivalent and intended to have a
similar effect to back-to-back loans.
4. Notwithstanding the rate limits specified in subparagraph 2 b) and
paragraph 3, Chile may impose tax on interest arising in Chile to which
those provisions apply at a rate not exceeding 15 per cent of the gross
amount of the interest. However, if Chile agrees to limit the tax charged in
Chile on interest arising in Chile to a rate less than 15 per cent in a tax
treaty with any other State, the tax imposed in Chile on interest arising in
Chile to which subparagraph 2 b) or paragraph 3 applies shall not exceed
the rate provided in that treaty or 10 per cent, whichever is the greater,
after the date of entry into force of that treaty.
5. The term "interest" as used in this Article means income from
debt-claims of every kind, whether or not secured by mortgage and in
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International Tax Agreements Amendment (No. 1) Bill 2011
particular, interest from government securities and interest from bonds or
debentures. The term "interest" also includes 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. The term "interest" shall not
include any item which is treated as a dividend under the provisions of
Article 10 of this Convention.
6. The provisions of paragraphs 1, 2, 3 and 4 shall not apply if the
beneficial owner of the interest, being a resident of a Contracting State,
carries on business in the other Contracting State in which the interest
arises, through a permanent establishment situated therein, or performs in
that other State independent personal services from a fixed base situated
therein, and the indebtedness in respect of which the interest is paid is
effectively connected with such permanent establishment or fixed base. In
such case the provisions of Article 7 or Article 14, as the case may be,
shall apply.
7. Interest shall be deemed to arise in a Contracting State when the payer
is a resident of that State. Where, however, the person paying the interest,
whether a resident of a Contracting State or not, has in a Contracting State
or outside both Contracting States a permanent establishment or a fixed
base in connection with which the indebtedness on which the interest is
paid was incurred, and such interest is borne by such permanent
establishment or fixed base, then such interest shall be deemed to arise in
the State in which the permanent establishment or fixed base is situated.
8. Where, by reason of a special relationship between the payer and the
beneficial owner of the interest or between both of them and some other
person, the amount of the interest exceeds, for whatever reason, the
amount which might have been expected to have been agreed upon by the
payer and the beneficial owner in the absence of such relationship, the
provisions of this Article shall apply only to the last-mentioned amount. In
such case, the excess part of the payments shall remain taxable according
to the laws of each Contracting State, due regard being had to the other
provisions of this Convention.
Article 12
ROYALTIES
1. Royalties arising in a Contracting State and paid to a resident of the
other Contracting State may be taxed in that other State.
2. However, such royalties may also be taxed in the Contracting State in
which they arise and according to the laws of that State, but if the
beneficial owner of the royalties is a resident of the other Contracting
State, the tax so charged shall not exceed:
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a) 5 per cent of the gross amount of the royalties for the use of, or the
right to use, any industrial, commercial or scientific equipment; and
b) 10 per cent of the gross amount of the royalties in all other cases
3. The term "royalties" in this Article means payments or credits,
whether periodical or not, and however described or computed, to the
extent to which they are made as consideration for:
a) (i) the use of, or the right to use, any copyright, including motion
picture films; and
(ii) the use of, or the right to use, in connection with television, radio or
other broadcasting, films or audio or video tapes or disks, or any other
means of image or sound reproduction or transmission;
b) the use of, or the right to use any patent, trade mark, design or model,
plan, secret formula or process or other like property or right;
c) the use of, or the right to use, industrial, commercial or scientific
equipment;
d) the supply of information concerning technical, industrial, commercial
or scientific experience;
e) the supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any
such property or right as is mentioned in subparagraph a), b) or c) or any
such information as is mentioned in subparagraph d);
f) the use of, or the right to use, some or all of the part of the spectrum
specified in a spectrum licence, being spectrum of a Contracting State
where the payment or credit arises; or
g) total or partial forbearance in respect of the use or supply of any
property or right referred to in this paragraph.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial
owner of the royalties, being a resident of a Contracting State, carries on
business in the other Contracting State in which the royalties arise,
through a permanent establishment situated therein, or performs in that
other State independent personal services from a fixed base situated
therein, and the right or property in respect of which the royalties are paid
or credited is effectively connected with such permanent establishment or
fixed base. In such case the provisions of Article 7 or Article 14, as the
case may be, shall apply.
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5. Royalties shall be deemed to arise in a Contracting State when the
payer is a resident of that State. Where, however, the person paying the
royalties, whether a resident of a Contracting State or not, has in a
Contracting State or outside both Contracting States a permanent
establishment or a fixed base in connection with which the obligation to
pay the royalties was incurred, and such royalties are borne by such
permanent establishment or fixed base, then such royalties shall be
deemed to arise in the State in which the permanent establishment or fixed
base is situated.
6. Where, by reason of a special relationship between the payer and the
beneficial owner of the royalties or between both of them and some other
person, the amount of the royalties paid or credited having regard to what
they are paid or credited for, exceeds the amount which might have been
expected to have been agreed upon by the payer and the beneficial owner
in the absence of such relationship, the provisions of this Article shall
apply only to the last-mentioned amount. In such case, the excess part of
the payments or credits shall remain taxable according to the laws of each
Contracting State, due regard being had to the other provisions of this
Convention.
Article 13
ALIENATION OF PROPERTY
1. Income, profits or gains derived by a resident of a Contracting State
from the alienation of immovable (real) property situated in the other
Contracting State may be taxed in that other State.
2. Income, profits or gains from the alienation of property, other than
immovable (real) property, forming part of the business property of a
permanent establishment which an enterprise of a Contracting State has in
the other Contracting State or of property, other than immovable (real)
property, pertaining to a fixed base available to a resident of a Contracting
State in the other Contracting State for the purpose of performing
independent personal services, including such income, profits or gains
from the alienation of such a permanent establishment (alone or with the
whole enterprise) or of such a fixed base, may be taxed in that other State.
3. Income, profits or gains of an enterprise of a Contracting State from
the alienation of ships or aircraft operated by that enterprise in
international traffic, or of property (other than immovable (real) property)
pertaining to the operation of such ships or aircraft, shall be taxable only
in that State.
4. Income, profits or gains derived by a resident of a Contracting State
from the alienation of any shares, comparable interests or other rights
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deriving more than 50 per cent of their value directly or indirectly from
immovable (real) property situated in the other Contracting State may be
taxed in that other State.
5. Gains of a capital nature, other than gains to which paragraph 2 or 4
apply, derived by a resident of a Contracting State (other than a pension
fund) from the alienation of shares or other rights, not being debts claims,
participating in profits, representing the capital of a company that is a
resident of the other Contracting State, may be taxed in that other State
but the tax so charged shall not exceed 16 per cent of the amount of the
gain. However, nothing in this Article shall affect the right of that other
State to tax such gains, in accordance with its laws, if the alienator has at
any time during the twelve month period preceding such alienation owned
shares or other rights representing, directly or indirectly, 20 per cent or
more of the capital of that company.
6. Gains of a capital nature from the alienation of any property, other
than that referred to in the preceding paragraphs shall be taxable only in
the Contracting State of which the alienator is a resident.
7. Where an individual who upon ceasing to be a resident of a
Contracting State, is treated under the taxation law of that State as having
alienated any property and is taxed in that State by reason thereof, the
individual may elect to be treated for the purposes of taxation in the other
Contracting State as if the individual had, immediately before ceasing to
be a resident of the first-mentioned State, alienated and reacquired the
property for an amount equal to its fair market value at that time.
However, the individual may not make the election in respect of property
situated in either Contracting State.
Article 14
INDEPENDENT PERSONAL SERVICES
1. Profits derived by an individual who is a resident of a Contracting
State in respect of professional services or other activities of an
independent character shall be taxable only in that Contracting State.
However, such profits may also be taxed in the other Contracting State:
a) if the individual has a fixed base regularly available in the other
Contracting State for purpose of performing the activities; in that case,
only so much of the profits as are attributable to that fixed base may be
taxed in that other State; or
b) if the individual is present in the other Contracting State for a period or
periods amounting to or exceeding in the aggregate 183 days in any
twelve month period commencing or ending in the income year of that
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other State, the individual shall be deemed to have a fixed base regularly
available in that State; in that case, only so much of the profits as are
derived from the activities performed in that other State may be taxed in
that State.
2. The term "professional services" includes especially independent
scientific, literary, artistic, educational or teaching activities as well as the
independent activities of physicians, lawyers, engineers, architects,
dentists and accountants.
Article 15
INCOME FROM EMPLOYMENT
1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages
and other remuneration derived by a resident of a Contracting State in
respect of an employment shall be taxable only in that State unless the
employment is exercised in the other Contracting State. If the employment
is so exercised, such remuneration as is derived therefrom may be taxed in
that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived
by a resident of a Contracting State in respect of an employment exercised
in the other Contracting State shall be taxable only in the first-mentioned
State if:
a) the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in any twelve month period
commencing or ending in the income year of that other State, and
b) the remuneration is paid by, or on behalf of, a person being an
employer who is not a resident of the other State, and
c) the remuneration is not borne by a permanent establishment or a fixed
base which that employer has in the other State.
3. Notwithstanding the preceding provisions of this Article,
remuneration derived by a resident of a Contracting State in respect of an
employment exercised aboard a ship or aircraft operated in international
traffic shall be taxable only in that State.
4. Where, except for the application of this paragraph, a fringe benefit is
taxable in both Contracting States the benefit will be taxable only in the
Contracting State that has the sole or primary taxing right in accordance
with paragraphs 1, 2 or 3 of this Article in respect of salary or wages from
the employment to which the benefit relates.
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5. For the purposes of this Article:
a) "fringe benefit" includes a benefit provided to an employee or to an
associate of an employee by:
(i) an employer;
(ii) an associate of an employer; or
(iii) a person under an arrangement between that person and the employer,
associate of an employer or another person in respect of the employment
of that employee,
and includes an accommodation allowance or housing benefit so provided
but does not include a benefit arising from the acquisition of an option
over shares under an employee share scheme;
b) a Contracting State has a "primary taxing right" to the extent that a
taxing right in respect of salary or wages from the relevant employment is
allocated to that State in accordance with paragraphs 1, 2 or 3 of this
Article and the other Contracting State is required to provide relief for the
tax imposed in respect of such remuneration by the first-mentioned State.
Article 16
DIRECTORS' FEES
Directors' fees and other similar payments derived by a resident of a
Contracting State in that person's capacity as a member of the board of
directors or a similar organ of a company which is a resident of the other
Contracting State may be taxed in that other State.
Article 17
ARTISTES AND SPORTSPERSONS
1. Notwithstanding the provisions of Articles 7, 14 and 15, income
derived by a resident of a Contracting State as an entertainer, such as a
theatre, motion picture, radio or television artiste, or a musician, or as a
sportsperson, from that person's personal activities as such exercised in
the other Contracting State, may be taxed in that other State.
2. Where income in respect of personal activities exercised by an
entertainer or a sportsperson in that person's capacity as such accrues not
to that person but to another person, that income may, notwithstanding the
provisions of Articles 7, 14 and 15, be taxed in the Contracting State in
which the activities of the entertainer or sportsperson are exercised.
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Article 18
PENSIONS
1. Pensions, including retirement annuities, paid to an individual who is
a resident of a Contracting State shall be taxable only in that State.
2. The term "retirement annuity" means a stated sum payable in respect
of retirement and paid periodically at stated times during life or during a
specified or ascertainable period of time under an obligation to make the
payments in return for adequate and full consideration from funds out of a
retirement savings plan.
3. Alimony and other maintenance payments paid to a resident of a
Contracting State shall be taxable only in that State. However, any
alimony or other maintenance payments paid by a resident of a
Contracting State to a resident of the other Contracting State, shall, to the
extent it is not allowable as a relief to the payer, be taxable only in the
first-mentioned State.
Article 19
GOVERNMENT SERVICE
1. a) Salaries, wages and other remuneration, other than a pension, paid
by a Contracting State or a political subdivision or a local authority
thereof to an individual in respect of services rendered to that State or
subdivision or authority shall be taxable only in that State.
b) However, such salaries, wages and other remuneration shall be taxable
only in the other Contracting State if the services are rendered in that State
and the individual is a resident of that State who:
(i) is a national of that State; or
(ii) did not become a resident of that State solely for the purpose of
rendering the services.
2. The provisions of Articles 15, 16 and 17 shall apply to salaries, wages
and other remuneration in respect of services rendered in connection with
a business carried on by a Contracting State or a political subdivision or a
local authority thereof.
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Article 20
STUDENTS
Payments which a student or business apprentice who is or was
immediately before visiting a Contracting State a resident of the other
Contracting State and who is temporarily present in the first-mentioned
State solely for the purpose of their education or training receives for the
purpose of their maintenance, education or training shall not be taxed in
that State, provided that such payments arise from sources outside that
State.
Article 21
OTHER INCOME
1. Items of income of a resident of a Contracting State, wherever arising,
not dealt with in the foregoing Articles of this Convention shall be taxable
only in that State.
2. The provisions of paragraph 1 shall not apply to income, other than
income from immovable (real) property, derived by a resident of a
Contracting State who carries on business in the other Contracting State
through a permanent establishment or performs in that other State
independent personal services from a fixed based situated therein and the
right or property in respect of which the income is paid is effectively
connected with such permanent establishment or fixed base. In such case
the provisions of Article 7 or Article 14, as the case may be, shall apply.
3. Notwithstanding the provisions of paragraphs 1 and 2, items of
income of a resident of a Contracting State not dealt with in the foregoing
Articles of the Convention from sources in the other Contracting State
may also be taxed in the other Contracting State.
Article 22
SOURCE OF INCOME
1. Income, profits or gains derived by a resident of a Contracting State
which, under any one or more of Articles 6 to 8 and 10 to 19, may be
taxed in the other Contracting State shall for the purposes of the law of
that other Contracting State relating to its tax be deemed to arise from
sources in that other Contracting State.
2. For the purposes of determining where income arises under paragraph
7 of Article 11 or paragraph 5 of Article 12, an individual is a resident of a
Contracting State, notwithstanding the provisions of paragraph 2 of
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Article 4, if that individual is a resident of that State in accordance with its
domestic tax law.
CHAPTER IV
RELIEF FROM DOUBLE TAXATION
Article 23
RELIEF OF DOUBLE TAXATION
1. In Australia, double taxation shall be relieved as follows:
a) subject to the provisions of the law of Australia from time to time in
force which relate to the allowance of a credit against Australian tax of tax
paid in a country outside Australia (which shall not affect the general
principle of this Article), Chilean tax paid under the law of Chile and in
accordance with this Convention, whether directly or by deduction, in
respect of income derived by a person who is a resident of Australia shall
be allowed as a credit against Australian tax payable in respect of that
income; and
b) in the case of income referred to in Article 10, Chilean tax paid shall,
for purposes of subparagraph a) of this paragraph, refer to the amount of
the Additional Tax after the First Category Tax is deducted, or 15 per cent
of the amount on which the Additional Tax is calculated, whichever is the
lesser.
2. In Chile, double taxation shall be relieved as follows:
Residents in Chile, obtaining income which has, in accordance with the
provisions of this Convention, been subject to taxation in Australia, may
credit the tax so paid against any Chilean tax payable in respect of the
same income, subject to the applicable provisions of the law of Chile
(which shall not affect the general principle of this Article). This
paragraph shall apply to all income referred to in this Convention.
3. Where, in accordance with any provision of the Convention, income
derived by a resident of a Contracting State is exempt from tax in that
State, such State may nevertheless, in calculating the amount of tax on
other income, take into account the exempted income.
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CHAPTER V
SPECIAL PROVISIONS
Article 24
NON-DISCRIMINATION
1. Nationals of a Contracting State shall not be subjected in the other
Contracting State to any taxation or any requirement connected therewith,
which is other or more burdensome than the taxation and connected
requirements to which nationals of that other State in the same
circumstances, in particular with respect to residence, are or may be
subjected. This provision shall, notwithstanding the provisions of Article
1, also apply to individuals who are not residents of one or both of the
Contracting States.
2. The taxation on a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less
favourably levied in that other State than the taxation levied on enterprises
of that other State carrying on the same activities in similar circumstances.
3. Nothing in this Article shall be construed as obliging a Contracting
State to grant to individuals who are residents of the other Contracting
State any of the personal allowances, reliefs and reductions for taxation
purposes which it grants to its own residents.
4. Except where the provisions of paragraph 1 of Article 9, paragraph 8
of Article 11, or paragraph 6 of Article 12, apply, interest, royalties and
other disbursements paid by an enterprise of a Contracting State to a
resident of the other Contracting State shall, for the purpose of
determining the taxable profits of such enterprise, be deductible under the
same conditions as if they had been paid to a resident of the first-
mentioned State.
5. Companies which are residents of a Contracting State, the capital of
which is wholly or partly owned or controlled, directly or indirectly, by
one or more residents of the other Contracting State, shall not be subjected
in the first-mentioned State to any taxation or any requirement connected
therewith which is other or more burdensome than the taxation and
connected requirements to which other similar companies which are
residents of the first-mentioned State, in similar circumstances, are or may
be subjected.
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6. This Article shall not apply to any provision of the laws of a
Contracting State which:
a) is designed to prevent the avoidance or evasion of taxes, including
measures designed to address thin capitalisation or to ensure that taxes can
be effectively collected or recovered;
b) provides tax incentives to eligible taxpayers for expenditure on
research or development, provided that a company that is a resident of one
Contracting State and is wholly or partly owned by residents of the other
State can access such incentives on the same terms and conditions as any
other company that is a resident of the first-mentioned State; or
c) is otherwise agreed to be unaffected by this Article in an Exchange of
Notes between the Contracting States.
The competent authorities of the Contracting States shall notify each other
of any changes to such laws, where those changes might, in the absence of
this paragraph, be affected by the provisions of this Article.
7. The provisions of this Article shall apply to the taxes which are the
subject of this Convention, as well as the Goods and Services Tax in the
case of Australia and the Value Added Tax (Impuesto al Valor Agregado)
in the case of Chile.
Article 25
MUTUAL AGREEMENT PROCEDURE
1. Where a person considers that the actions of one or both of the
Contracting States result or will result for the person in taxation not in
accordance with the provisions of this Convention, the person may,
irrespective of the remedies provided by the domestic law of those States,
present a case to the competent authority of the Contracting State of which
the person is a resident or, if the case comes under paragraph 1 of Article
24, to that of the Contracting State of which the person is a national. The
case must be presented within three years from the first notification of the
action resulting in taxation not in accordance with the Convention.
2. The competent authority shall endeavour, if the complaint appears to
it to be justified and if it is not itself able to arrive at a satisfactory
solution, to resolve the case by mutual agreement with the competent
authority of the other Contracting State, with a view to the avoidance of
taxation which is not in accordance with the Convention. Any agreement
reached shall be implemented notwithstanding any time limits in the
domestic laws of the Contracting States provided that, in the case of Chile,
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the case is presented under paragraph 1 within three years from the
determination of the Chilean tax liability to which the case relates.
3. The competent authorities of the Contracting States shall endeavour to
resolve by mutual agreement any difficulties or doubts arising as to the
interpretation or application of the Convention.
4. The competent authorities of the Contracting States may communicate
with each other directly for the purpose of reaching an agreement in the
sense of the preceding paragraphs.
5. For the purposes of paragraph 3 of Article XXII (Consultation) of the
General Agreement on Trade in Services, the Contracting States agree
that, notwithstanding that paragraph, any dispute between them as to
whether a measure falls within the scope of this Convention may be
brought before the Council for Trade in Services, as provided by that
paragraph, only with the consent of both Contracting States. Any doubt as
to the interpretation of this paragraph shall be resolved under paragraph 3
of this Article or, failing agreement under that procedure, pursuant to any
other procedure agreed to by both Contracting States.
Article 26
EXCHANGE OF INFORMATION
1. The competent authorities of the Contracting States shall exchange
such information as is foreseeably relevant for carrying out the provisions
of this Convention or to the administration or enforcement of the domestic
law concerning taxes of every kind and description imposed by or on
behalf of the Contracting States, insofar as the taxation thereunder is not
contrary to the Convention. The exchange of information is not restricted
by Articles 1 and 2.
2. Any information received under paragraph 1 by a Contracting State
shall be treated as secret in the same manner as information obtained
under the domestic law of that State and shall be disclosed only to persons
or authorities (including courts and administrative bodies) concerned with
the assessment or collection of, the enforcement or prosecution in respect
of, the determination of appeals in relation to the taxes referred to in
paragraph 1, or the oversight of the above. Such persons or authorities
shall use the information only for such purposes. They may disclose the
information in public court proceedings or in judicial decisions.
3. In no case shall the provisions of paragraphs 1 and 2 be construed so
as to impose on a Contracting State the obligation:
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a) to carry out administrative measures at variance with the law and
administrative practice of that or of the other Contracting State;
b) to supply information which is not obtainable under the law or in the
normal course of the administration of that or of the other Contracting
State;
c) to supply information which would disclose any trade, business,
industrial, commercial or professional secret or trade process, or
information, the disclosure of which would be contrary to public policy
("ordre public").
4. If information is requested by a Contracting State in accordance with
this Article, the other Contracting State shall use its information gathering
measures to obtain the requested information, even though that other State
may not need such information for its own tax purposes. The obligation
contained in the preceding sentence is subject to the limitations of
paragraph 3 but in no case shall such limitations be construed to permit a
Contracting State to decline to supply information solely because it has no
domestic interest in such information.
5. In no case shall the provisions of paragraph 3 be construed to permit a
Contracting State to decline to supply information solely because the
information is held by a bank, other financial institution, nominee or
person acting in an agency or a fiduciary capacity or because it relates to
ownership interests in a person.
Article 27
LIMITATIONS OF BENEFITS
1. The provisions of Articles 10, 11 and 12 shall not apply if it was the
main purpose or one of the main purposes of any person concerned with
the assignment of dividends, interest or royalties or with the creation or
assignment of a right or debt-claim in respect of which dividends, interest
or royalties are paid to take advantage of those Articles by means of that
creation or assignment.
2. Considering that the main aim of the Convention is to avoid
international double taxation, the Contracting States agree that, in the
event the provisions of the Convention are used in such a manner as to
provide benefits not contemplated or not intended, relevant authorities of
the Contracting States shall consult in an expeditious manner with a view
to recommending specific amendments to be made to the Convention.
3. Where under this Convention any income, profits or gains are relieved
from tax in Chile and, under the law in force in Australia, an individual in
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respect of that income or those profits or gains is exempt from tax by
virtue of being a temporary resident of Australia within the meaning of the
applicable tax laws of Australia, then the relief to be allowed under this
Convention in Chile shall not apply to the extent that that income or those
profits or gains are exempt from tax in Australia.
Article 28
MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS
Nothing in this Convention shall affect the fiscal privileges of
members of diplomatic missions or consular posts under the general rules
of international law or under the provisions of special international
agreements.
CHAPTER VI
FINAL PROVISIONS
Article 29
ENTRY INTO FORCE
The Contracting States shall notify each other through the diplomatic
channel of the completion of their domestic requirements for the entry
into force of this Convention. The Convention shall enter into force on the
date of the last notification, and thereupon the provisions of this
Convention shall have effect:
a) in Australia:
(i) in respect of withholding tax on income that is derived by a non-
resident, in relation to income derived on or after the first day of the
second month next following the date on which the Convention enters into
force;
(ii) in respect of fringe benefits tax, in relation to fringe benefits provided
on or after 1 April next following the date on which the Convention enters
into force;
(iii) in respect of other Australian tax, in relation to income, profits or
gains of any year of income beginning on or after 1 July next following
the date on which the Convention enters into force; and
b) in Chile: in respect of taxes on income obtained and amounts paid,
credited to an account, put at the disposal or accounted as an expense, on
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or after 1 January next following the date on which the Convention enters
into force.
Article 30
TERMINATION
This Convention shall continue in effect indefinitely, but either
Contracting State may terminate the Convention by giving written notice
of termination, through the diplomatic channel, to the other State at least
six months before the end of any calendar year beginning after the
expiration of five years from the date of its entry into force and, in that
event, the Convention shall cease to be effective:
a) in Australia:
(i) in respect of withholding tax on income that is derived by a non-
resident, in relation to income derived on or after the first day of the
second month next following that in which the notice of termination is
given;
(ii) in respect of fringe benefits tax, in relation to fringe benefits provided
on or after 1 April next following the date on which notice of termination
is given;
(iii) in respect of other Australian tax, in relation to income, profits or
gains of any year of income beginning on or after 1 July next following
that in which the notice of termination is given; and
b) in Chile: in respect of taxes on income obtained and amounts paid,
credited to an account, put at the disposal or accounted as an expense, on
or after 1 January next following that in which the notice of termination is
given.
IN WITNESS WHEREOF the undersigned, being duly authorised, have
signed this Convention.
DONE at Santiago, this tenth day of March 2010, in duplicate in the
English and Spanish languages, both texts being equally authentic.
For Australia: For the Republic of Chile:
Virginia Grenville Andrés Velasco Brañes
Ambassador Minister for Finance
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PROTOCOL TO THE CONVENTION BETWEEN AUSTRALIA AND
THE REPUBLIC OF CHILE FOR THE AVOIDANCE OF DOUBLE
TAXATION WITH RESPECT TO TAXES ON INCOME AND FRINGE
BENEFITS AND THE PREVENTION OF FISCAL EVASION
On signing the Convention for the avoidance of double taxation with
respect to taxes on income and fringe benefits and the prevention of fiscal
evasion between Australia and the Republic of Chile, the signatories have
agreed that the following provisions shall form an integral part of the
Convention.
1. In general,
a) If, after the date on which the Convention enters into force, either
Contracting State introduces a tax on capital under its domestic law, the
Contracting States will enter into negotiations with a view to concluding a
Protocol to amend the Convention by extending its scope to include any
tax on capital so introduced. The terms of any such Protocol shall have
regard to any arrangements between either Contracting State and a third
State for the relief of double taxation on capital.
b) With respect to pooled investment accounts or funds (as for instance
the existing Foreign Capital Investment Fund, Law N°18.657), that are
subject to a remittance tax and are required to be administered by a
resident in Chile, the provisions of this Convention shall not be interpreted
to restrict imposition by Chile of the tax on remittances from such
accounts or funds in respect of investment in assets situated in Chile.
c) Nothing in this Convention shall affect the application of the existing
provisions of the Chilean legislation Decree Law No. 600 (Foreign
Investment Statute) as they are in force at the time of signature of this
Convention and as they may be amended from time to time without
changing the general principle thereof.
d) A regulated pension fund which is established in a Contracting State
primarily for the benefit of residents of that State shall be treated as a
resident of that State and the beneficial owner of the income it receives.
For the purposes of this Convention the term "regulated pension fund"
means, in the case of Australia, an Australian Superannuation Fund,
Approved Deposit Fund or Pooled Superannuation Trust within the
meaning of the tax laws of Australia and, in the case of Chile, a pension
fund established under the pension system of Decree Law No. 3500, and
such other similar funds as may be agreed by the competent authorities of
the Contracting States.
2. With reference to Article 5,
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a) A person who substantially negotiates the essential parts of a contract
on behalf of an enterprise will be regarded as exercising an authority to
conclude contracts on behalf of that enterprise within the meaning of
paragraph 7, even if the contract is subject to final approval or formal
signature by another person.
b) A person will come within the scope of paragraph 8 of Article 5 only if
that person is independent of the enterprise referred to in that paragraph,
both legally and economically, and acts in the ordinary course of that
person´s business as such a broker or agent when acting on behalf of the
enterprise.
c) The principles set forth in Article 5 also apply in determining, for the
purposes of paragraph 7 of Article 11 and paragraph 5 of Article 12,
whether there is a permanent establishment outside both Contracting
States and whether an enterprise, not being an enterprise of a Contracting
State, has a permanent establishment in a Contracting State.
3. With reference to Article 7,
When computing the taxable income of a permanent establishment
situated in a Contracting State, the deductibility of expenses which are
attributable to that permanent establishment shall be determined under the
domestic law of that State.
4. With reference to Articles 7 and 9,
Nothing in Articles 7 and 9 shall affect the application of any law of a
Contracting State relating to the determination of the tax liability of a
person, including determinations in cases where the information available
to the competent authority of that State is inadequate to determine the
profits to be attributed to a permanent establishment or accruing to an
enterprise as the case may be, provided that that law shall be applied, so
far as it is practicable to do so, consistently with the principles applicable
under Articles 7 and 9.
5. With reference to paragraph 2 of Article 10,
If,
a) Chile agrees in a tax treaty with any other State to limit the Additional
Tax charged in Chile; or
b) in either Contracting State the tax imposed on dividends and on profits
out of which such dividends are paid exceeds in the aggregate 42 per cent,
the Contracting States shall consult each other with a view to agreeing to
any amendment of this paragraph that may be appropriate.
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The Australia-Chile convention
6. With reference to paragraph 2 of Article 11,
If, in a tax treaty with any other State, Chile agrees to limit the tax
charged in Chile on interest arising in Chile and derived by a financial
institution to a rate lower than that specified in subparagraph 2a), or
derived by a government to a rate lower than that specified in
subparagraph 2b), Chile shall without delay enter into negotiations with
Australia with a view to making a comparable adjustment.
7. With reference to paragraph 2 of Article 12,
If, in a tax treaty with any other State, Chile agrees that payments for
industrial, commercial or scientific equipment will not be treated as
royalties for the purposes of that treaty, or limits the tax charged in Chile
on royalties arising in Chile to a rate below that provided for in paragraph
2 of Article 12 of this Convention, Chile shall without delay enter into
negotiations with Australia with a view to providing the same treatment
for Australia.
8. With reference to Article 17,
Income referred to in paragraph 1 of Article 17 shall include any income
derived from any personal activity exercised in the other State related to
performances or appearances in that State.
9. With reference to Article 26,
Notwithstanding Article 29 of this Convention, in the case of Chile,
information to which paragraph 5 of Article 26 applies, to the extent that
such information is covered by Article 1 of Decree Law No. 707 and
Article 154 of Decree Law No. 3, will be available with respect to bank
account transactions that take place on or after 1 January 2010. Nothing in
the Convention shall prevent the application of Article 26 to the exchange
of other information that existed prior to the date of entry into force of the
Convention.
IN WITNESS WHEREOF the signatories, duly authorised to that effect,
have signed this Protocol.
DONE at Santiago, this 10th day of March 2010,
in duplicate in the English and Spanish languages, both texts being
equally authentic.
For Australia: For the Republic of Chile:
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International Tax Agreements Amendment (No. 1) Bill 2011
H E Virginia Grenville Andrés Velasco Brañes
Ambassador Minister for Finance'
Detailed explanation of the Chilean convention
Article 1 -- Persons Covered
Scope
3.5 This Article establishes the scope of the application of the
Chilean convention by providing for it to apply to persons (defined to
include individuals, companies and any other body of persons) who are
residents of one or both of the countries. It generally precludes
extra-territorial application of the Chilean convention. [Article 1]
3.6 The Chilean convention also applies to third country residents in
relation to Article 24 (Non-Discrimination) in its application to nationals
of one of the treaty countries, Article 25 (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 26 (Exchange of
Information).
3.7 The application of the Chilean convention to persons who are
dual residents (that is, residents of both countries) is dealt with in Article 4
(Resident).
Capital taxes
3.8 To ensure that the Chilean convention continues to achieve its
purpose of avoiding double taxation, the Protocol provides for the
commencement of negotiations to extend the scope of the Chilean
convention to include any tax on capital if either country introduces such a
tax in the future. [Protocol, subitem 1a)]
Preservation of certain Chilean domestic taxation arrangements
3.9 Subitem 1b) of the Protocol is included in the Chilean
convention to preserve Chile's ability to levy its remittance tax on
distributions of Chilean sourced income to foreign investors in Chilean
funds regulated under the Foreign Capital Investment Funds legislation.
These rules provide a flat 10 per cent rate of tax for relevant remittances
provided that the foreign investor maintains their investment in the
Chilean fund for at least five years. The funds do not qualify as residents
of Chile for the purposes of the Chilean convention. As such they will not
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The Australia-Chile convention
qualify for the benefits of the Chilean convention other than those
provided under the Non-Discrimination Article.
3.10 Subitem 1c) of the Protocol is included in the Chilean
convention to preserve the application of Chile's Foreign Investment
Statute (Decree Law 600). These rules are designed to encourage direct
foreign investment into Chile by providing foreign investors with long-
term certainty concerning their tax treatment in Chile. In particular, the
foreign investor can seek guarantees from the Chilean Government by
entering into an agreement which may grant the following rights:
· A legal regime which is non-discriminatory.
· For a fixed period of time, the option to have tax imposed on
their Chilean profits at a fixed rate of 42 per cent. This locks
in the rate of tax and the tax base.
· A freeze on the existing rate of value added tax and customs
duties applicable to the import of machinery and equipment
not manufactured in Chile.
Article 2 -- Taxes Covered
3.11 This Article specifies the existing taxes of each country to which
the Chilean convention applies. These are, in the case of Australia, the
Australian income tax, the petroleum resource rent tax and the fringe
benefits tax.
3.12 The term `income tax' includes Australian income tax imposed
on capital gains.
3.13 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 the Chilean convention to put beyond doubt that it is a
tax covered.
3.14 The Chilean convention generally does not cover Australia's
goods and services tax (GST), customs duties, state taxes and duties and
estate tax and duties.
3.15 For Chile, the Chilean convention applies to taxes imposed
under the Chilean Income Tax Act, including the specific tax on mining
activity.
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Extended scope for non-discrimination and exchange of information
3.16 While the taxes specified in Article 2 are covered for all
purposes of the Chilean convention, a wider range of taxes are covered for
the purposes of Articles 24 (Non-Discrimination) and 26 (Exchange of
Information). Paragraph 7 of Article 24 provides that the Article applies
to the taxes which are the subject of the Chilean convention (that is, in
Australia, the income tax, the petroleum resource rent tax and the fringe
benefits tax), as well as Australia's GST and Chile's Value Added Tax
(Impuesto al Valor Agregado). Article 26 applies, in Australia, to all
federal taxes administered by the Commissioner of Taxation
(Commissioner) and in Chile, to all taxes imposed by or on behalf of
Chile. [Article 24, paragraph 7 and Article 26, paragraph 1]
Identical or substantially similar taxes
3.17 The application of the Chilean 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 listed in paragraph 1 of this Article (that is, in the case of
Australia, the income tax, the petroleum resource rent tax and the fringe
benefits tax). [Article 2, paragraph 2]
Notification of changes to the tax laws
3.18 The competent authorities (that is, the Commissioner in the case
of Australia and the Minister of Finance in the case of Chile, 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]
Article 3 -- General Definitions
3.19 This Article provides general definitions and rules of
interpretation applicable throughout the Chilean convention. In particular,
paragraph 1 defines a number of basic terms used in the convention. The
introduction to paragraph 1 makes clear that these definitions apply for all
purposes of the convention, unless the context requires otherwise.
3.20 Certain other terms are defined in other Articles of the Chilean
convention. For example, the terms `resident of a Contracting State',
`permanent establishment' and `immovable (real) property' are defined in
Articles 4 (Resident), 5 (Permanent Establishment) and 6 (Income from
Immovable (Real) Property) respectively. These definitions are to be
applied consistently throughout the Chilean convention. In contrast, a
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The Australia-Chile convention
number of terms, such as `dividends', `interest' and `royalties' are defined
in specific Articles for use only in those articles.
Definition of Australia
3.21 As in Australia's other modern tax treaties, Australia is defined
to include certain external territories and the continental shelf. The
Chilean 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 tax treaties, it is specifically
included in the 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 ITAA 1936, certain sea installations and offshore areas
are to be treated as part of Australia). [Article 3, subparagraph 1a)]
Definition of Chile
3.22 The definition of Chile covers the Republic of Chile and
includes any area outside its territorial sea designated under the laws of
the Republic of Chile and within which it may exercise sovereign rights in
accordance with international law. This mirrors the definition of
Australia. [Article 3, subparagraph 1b)]
Definition of person
3.23 The definition of person in the Chilean convention accords with
the OECD Model Tax Convention on Income and on Capital (OECD
Model) and includes individuals, companies and any other body of
persons. This includes a partnership (as a body of persons). [Article 3,
subparagraph 1d)]
Definition of company
3.24 The definition of company in the Chilean convention accords
with the OECD Model, and means any body corporate or any entity which
is treated as a body corporate for tax purposes. [Article 3, subparagraph 1e)]
3.25 The Australian tax law treats certain trusts (public unit trusts and
public trading trusts) and corporate limited partnerships (limited liability
partnerships) in the same way as companies for income tax purposes.
These trusts and partnerships are included as companies for the purposes
of the Chilean convention. [Article 3, subparagraph 1e)]
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Definitions of enterprise of a Contracting State and enterprise of the
other Contracting State
3.26 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. An enterprise of a Contracting State
need not be carried on in that State. It may be carried on in the other
Contracting State or a third state (that is, an Australian company doing all
its business in Chile would still be an Australian enterprise. [Article 3,
subparagraph 1f)]
Definition of international traffic
3.27 In the Chilean convention, this term is of relevance for taxation
of profits from shipping and air transport operations (Article 8 (Ships and
Aircraft)), income, profits or gains from the alienation of ships and
aircraft (paragraph 3 of Article 13 (Alienation of Property)) and wages of
crew (paragraph 3 of Article 15 (Income from Employment)).
3.28 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, that is where the journey of
a ship or aircraft within that country forms part of a longer voyage of that
ship or aircraft involving a place of arrival or departure outside that
country. However, it does not include transport where the ship or aircraft
is operated solely between places in the other country; that is, where the
place of departure and the place of arrival of the ship or aircraft are both
in that other country, irrespective of whether any part of the transport
occurs in international waters or airspace. For example, a `voyage to
nowhere' which begins and ends in Sydney on a ship operated by a
Chilean 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 1g)]
Definition of competent authority
3.29 The competent authority is the person specifically authorised to
perform certain actions under the Chilean convention. For instance, the
competent authority is required to give certain notifications (for example,
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 (for example,
gather and exchange tax information in accordance with Article 26
(Exchange of Information)).
3.30 In the case of Australia, the competent authority is the
Commissioner or an authorised representative of the Commissioner. In
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The Australia-Chile convention
the case of Chile, the competent authority is the Minister of Finance or an
authorised representative of the Minister. [Article 3, subparagraph 1h)]
Definition of national
3.31 The Chilean convention defines national by reference to an
individual's nationality or citizenship. A company will be a national if it
is created or organised under the laws of Australia or Chile. For example,
a company's nationality is determined by where it is incorporated.
[Article 3, subparagraph 1i)]
3.32 The concept of nationality is used in subparagraph b) of
paragraph 2 of Article 4 (Resident), subparagraph b) of paragraph 1 of
Article 19 (Government Service) and paragraph 1 of Article 24
(Non-Discrimination).
Definition of tax
3.33 For the purposes of the Chilean convention, the term tax does
not include any amount of penalty or interest imposed under the
respective domestic tax law of the two countries. [Article 3, subparagraph 1j)]
3.34 In the case of a resident of Australia, any penalty or interest
component of a liability determined under the domestic taxation law of
Chile with respect to income that Chile is entitled to tax under the Chilean
convention would not be a creditable Chilean tax for the purposes of
paragraph 1 of Article 23 (Relief 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 income tax offset
entitlement under paragraph 1 of Article 23 (pursuant to Division 770 of
the ITAA 1997 -- Foreign income tax offsets).
Terms not specifically defined
3.35 Where a term is not specifically defined within the Chilean
convention, that term (unless used in a context that requires otherwise) is
to be taken to have the same interpretative meaning as it has under the
domestic taxation law of the country applying the Chilean convention at
the time of its application. In that case, the meaning of the term under the
taxation law of the country will have precedence over the meaning it may
have under other domestic laws. [Article 3, paragraph 2]
3.36 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
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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.
3.37 If a term is not defined in the Chilean 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
3.38 This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the Chilean convention.
Residential status in one or other country is a necessary condition for the
provision of relief under the convention. For both Australia and Chile,
`resident' status is determined by reference to the person's liability to tax
as a resident, or by reason of domicile, under the laws of the respective
country. [Article 4, paragraph 1]
3.39 The term `liable to tax therein as a resident or by reason of
domicile in that State' is intended to capture those persons who are subject
to comprehensive taxation under a country's domestic taxation laws. A
person may be regarded as liable to tax as a resident even where the
country does not in fact impose tax. For example, under Australian law
charitable institutions are exempt from income tax but only if they meet
the requirements for exemption. Such institutions are liable to tax for the
purposes of the Article and, therefore, are `residents' under the Chilean
convention. [Article 4, paragraph 1]
3.40 The second sentence of paragraph 1 of the Article deals with a
person who may be considered to be a resident of a country according to
its domestic laws but is only liable to taxation on income from sources in
that country, 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 the Chilean
convention. Accordingly, Chile will not have to forgo tax in accordance
with the convention on income derived by residents of Norfolk Island
from sources in Chile (which will not be subject to Australian tax).
[Article 4, paragraph 1]
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Residency of governments
3.41 Article 4 follows the OECD Model in specifically providing that
the State, or a political subdivision, or local authority of the State, are
residents for the purposes of the Chilean convention. This means that the
Australian Government, the state governments and local councils of
Australia will be residents for the purpose of the convention. This does
not necessarily mean that income, profits or gains derived by these bodies
from sources in Chile will be subject to tax in Chile as sovereign
immunity principles may apply. [Article 4, paragraph 1]
Dual residents
Individuals
3.42 A set of tie-breaker rules is included for determining how
residency for an individual is to be allocated to one or other of the
countries for the purposes of the Chilean convention if an individual
taxpayer qualifies as a dual resident; that is, as a resident of both countries
in accordance with paragraph 1 of the Article.
3.43 The tie-breaker rules for individuals apply certain tests, in a
descending hierarchy. 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 the
Chilean 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 Chile, and the person is deemed
for the purposes of the Chilean convention to be a resident
only of the country with which the person has the closer
personal and economic relations (centre of vital interests); or
· if the individual's centre of vital interests cannot be
determined, the individual shall be deemed to be a resident of
the country of which that individual is a national.
[Article 4, paragraph 2]
3.44 Notwithstanding that the Chilean convention deems a dual
resident individual to be a resident only of one country for treaty
purposes, that person remains a resident for the purposes of Australian
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domestic tax law. Accordingly, that individual remains liable to tax in
Australia as a resident, insofar as the Chilean convention allows.
Other persons
3.45 Where a person that is not an individual (such as a company) is a
resident of both countries in accordance with paragraph 1, the person will
not be entitled to any benefits provided by the Chilean convention with
the exception of the protection from discrimination afforded under Article
24 (Non-Discrimination). [Article 4, paragraph 3]
Regulated pension funds
3.46 The Chilean convention also specifically provides that a
`regulated pension fund' will be treated as being a resident of the country
if the fund is established in that country primarily for the benefit of
residents of that country. Furthermore, in applying the convention to
qualifying funds, the funds are to be treated for the purposes of applying
the convention as the beneficial owner of the income it receives. These
rules are included in the convention to ensure that appropriate treaty
benefits apply to qualifying funds.
3.47 The definition of the term regulated pension fund is aligned to
the domestic laws of the respective countries. In the case of Australia, the
term means `an Australian superannuation fund, approved deposit fund or
pooled superannuation trust' within the meaning of the tax laws in
Australia. In the case of Chile, the term means a pension fund established
under the pension system of Decree Law no. 3500. Other similar pension
funds may also qualify with the agreement of the competent authorities.
[Protocol, subitem 1d)]
Article 5 -- Permanent Establishment
Role and definition
3.48 The application of various provisions of the Chilean 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.
3.49 The definition of the term `permanent establishment' in this
Article corresponds generally with definitions of the term in Australia's
more recent tax treaties. However, the definition in the Chilean
convention also includes a provision dealing specifically with services.
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Meaning of permanent establishment
3.50 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]
3.51 Other paragraphs of this Article elaborate on the meaning of the
term by giving examples (by no means intended to be exhaustive) of what
may constitute a permanent establishment -- for example:
· an office;
· a factory;
· a place relating to the exploration for, or the exploitation of,
natural resources; or
· an agricultural, pastoral or forestry property.
3.52 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 property
3.53 Most of Australia's tax treaties include as a permanent
establishment an agricultural, pastoral or forestry property. This reflects
Australia's usual practice of providing for taxation of profits from the
exploitation of Australian land for the purposes of primary production
under Article 7 (Business Profits).
3.54 However, under the Chilean convention, income from
agriculture or forestry is dealt with under Article 6 (Income from
Immovable (Real) Property). This is reflected in the phrase `including
income from agriculture or forestry' in paragraph 1 of that Article.
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3.55 Nevertheless, a fixed place of business that is used for primary
production purposes, such as a farm or forestry property, will constitute a
permanent establishment. This has significance for Articles where the
concept of permanent establishment is relevant, for example, in
determining the right of a country to tax income (that is, under Article 15
(Income from Employment)) or the country in which income arises (for
example, interest).
Building site or construction or installation project
3.56 A building site or construction or installation project constitutes
a permanent establishment only if it lasts more than six months.
3.57 The phrase `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
Performance of services
3.58 Where an enterprise performs services (other than activities to
which subparagraphs 4b) or 4c) apply) in a country for a period exceeding
183 days in any 12-month period, and those services are performed
through one or more individuals who are present and performing such
services in that country, the enterprise will be deemed to have in that
country a permanent establishment through which those activities are
performed (unless the activities are of a type described in paragraph 6 of
this Article and are of a preparatory or auxiliary nature). [Article 5,
subparagraph 4a)]
3.59 For these purposes, an enterprise performs services mainly
through the activities of the entrepreneur or persons who are in a paid
employment relationship with the enterprise (personnel). These personnel
include employees and other persons receiving instructions from the
enterprise (for example, dependent agents).
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The Australia-Chile convention
3.60 In the course of negotiations, the two delegations noted that:
`For [the] purposes of [Article 5], paragraph 4a), the scope of the term
`services' will have regard to the Commentary on the OECD Model on
taxation of services.'
Natural resource activities
3.61 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 exceeding 90 days in any 12-
month period, it will be deemed to have in that country a permanent
establishment through which those activities are performed (unless the
activities are of a type described in paragraph 6 of this Article and are of a
preparatory or auxiliary nature). Any time during which the substantial
equipment was used for such purposes in that country is also counted for
the purpose of computing the number of days in this paragraph. [Article 5,
subparagraph 4b)]
Substantial equipment
3.62 If an enterprise operates substantial equipment in a country for
one or more periods which exceed, in the aggregate, 183 days in any
12-month period, the activity will be deemed to be performed through a
permanent establishment (unless the activities are of a type described in
paragraph 6 of this Article and are of a preparatory or auxiliary nature).
In the course of negotiations, the two delegations noted that:
`The words "(including as provided in subparagraph b))" in
subparagraph c) of paragraph 4 are intended to address the situation
where substantial equipment is used both in natural resource activities
in accordance with subparagraph b) and in other activities in
accordance with subparagraph c). Any use of substantial equipment
for natural resources activities in accordance with subparagraph b) will
therefore also be counted towards the 183 day threshold in
subparagraph c). However the profits will only be taxed once under
Article 7.'
[Article 5, subparagraph 4c)]
3.63 Subparagraphs 4b) and c) together reflect Australia's reservation
to the OECD Model concerning activities relating to natural resources and
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; in particular those
involving the use of such equipment.
3.64 The words `operation' and `operates' have been included to
clarify that only active use of substantial equipment assets will be
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International Tax Agreements Amendment (No. 1) Bill 2011
captured by subparagraphs 4b) 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.
3.65 For example, if a Chilean enterprise itself operates a mobile
crane at an Australian port for more than 183 days in a 12-month period,
the Chilean enterprise would be deemed to have a permanent
establishment in Australia under subparagraph 4c). If, however, that
Chilean 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 Chilean enterprise would not be deemed to have a
permanent establishment in Australia under subparagraph 4c). However,
if that other person operates the substantial equipment for or on behalf of
the Chilean enterprise in Australia, the Chilean enterprise would be
considered to operate the equipment in Australia.
3.66 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. However, some examples of substantial equipment would
include:
· industrial earthmoving equipment or construction equipment
used in road building, dam building or powerhouse
construction;
· manufacturing or processing equipment used in a factory; or
· oil or drilling rigs, platforms and other structures used in the
petroleum, gas or mining industry.
Anti-avoidance provision
3.67 Given that Article 5 of the Chilean convention contains certain
timeframes, an anti-avoidance rule is included to ensure that where
associated enterprises carry on substantially the same activities, the
periods will be aggregated in determining whether an enterprise has a
permanent establishment in the country in which the activities are being
carried on. Activities will be regarded as substantially the same where,
for example, different stages of a 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. [Article 5, paragraph 5]
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The Australia-Chile convention
3.68 This provision is an anti-avoidance measure aimed at
counteracting contract splitting for the purposes of avoiding the
application of the permanent establishment rules.
3.69 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.
3.70 The Chilean 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]
Diagram 3.1
C Co
C Sub A C Sub B C Sub C
Chile
Australia
5 month 5 month 5 month
contract contract contract
Australian
project
In the above diagram, each of the subsidiaries may conduct
substantially the same activities, for example, supervisory activities at
a single building site. In determining whether the six-month time
threshold has been met, the time spent undertaking those activities by
each of the enterprises would be aggregated. However, any period
during which more than one of the subsidiaries is carrying on activities
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concurrently would be counted only once. For example, if C Sub A
was present in Australia from 1 July 2011 to 30 November 2011
conducting supervisory activities at a building site and C Sub B was
present in Australia from 1 November 2011 to 31 March 2012 also
conducting supervisory activities at the same building site, the time
spent by both subsidiaries would be aggregated to produce a nine
month period (that is, as both subsidiaries were in Australia in
November 2011 that month is counted only once in determining
whether the six month threshold is met).
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
3.71 Certain activities do not generally give rise to a permanent
establishment (for example, the use of facilities solely for storage, display
or delivery). Consistent with Chile's treaty practice the list of activities
also includes an express reference to the use of facilities solely for
advertising, supplying information, scientific research or any other similar
activity.
3.72 These activities are ordinarily of a preparatory or auxiliary
character and are unlikely to give rise to substantial profits. The
economic link between the activities of the enterprise and the country in
which the activities are carried on is generally insufficient to warrant the
allocation of taxing rights to that country in these circumstances.
3.73 Another feature consistent with Australia's tax treaty practice is
that subparagraph 4f) of Article 5 (Permanent Establishment) of the
OECD Model -- dealing with combinations of activities of the kind
referred to in subparagraphs 6a) to e) of this convention -- is not
included. Australia does not consider that an enterprise undertaking
multiple functions of the kind indicated in subparagraphs 6a) to e) would
generally be regarded as only engaged in preparatory or auxiliary
activities. [Article 5, paragraph 6]
Dependent agents
3.74 An enterprise of one country is deemed to have a permanent
establishment in the other country if a person acts on its behalf in that
other country where that person has and habitually exercises, an authority
to conclude contracts on behalf of the enterprise. Such people are referred
to as dependent agents. Subitem 2a) of the Protocol clarifies that a person
who substantially negotiates the essential parts of a contract on behalf of
an enterprise will be regarded as `exercising an authority to conclude
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contracts on behalf of that enterprise', even if the contract is subject to
final approval or formal signature by another person. [Article 5, paragraph 7,
Protocol, subitem 2a)]
3.75 However, 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. Agents of
independent status (such as brokers or commission agents) to whom
paragraph 8 of Article 5 applies are also excluded. [Article 5, paragraph 7]
Manufacturing or processing on behalf of others
3.76 Consistent with Australia's reservation 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 for a
foreign enterprise at cost, so that the plant operations produce no
Australian profits. Title to the refined product remains with the foreign
enterprise and profits on sale are realised mainly outside of Australia.
3.77 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. Paragraph 7 prevents an enterprise which
carries on substantial manufacturing or processing activities in a country
through an intermediary from escaping tax in that country.
3.78 The inclusion of this paragraph 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, paragraph 7]
Independent agents
3.79 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. Subitem 2b) of the Protocol provides that a person will
come within the scope of paragraph 8 only if that person is independent of
the enterprise, both legally and economically, and acts in the ordinary
course of that person's business as such a broker or agent when acting on
behalf of the enterprise. [Article 5, paragraph 8, Protocol, subitem 2b)]
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Subsidiary companies
3.80 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
3.81 The principles set out in this Article are also to be applied in
determining whether a permanent establishment exists in a third country
or whether an enterprise of a third country has a permanent establishment
in Australia (or Chile) when applying the source rule contained in:
· paragraph 7 of Article 11 (Interest); and
· paragraph 5 of Article 12 (Royalties).
[Protocol, subitem 2c)]
Article 6 -- Income from Immovable (Real) Property
3.82 This convention uses the term `immovable (real) property' in
place of Australia's preferred treaty practice wording `real property'. No
difference is intended.
Where income from immovable (real) property is taxable
3.83 This Article provides that the income of a resident of one
country, from immovable (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.
3.84 Generally, Australia's tax treaties exclude profits of an
enterprise from agriculture or forestry from the operation of this Article.
Such profits are generally dealt with under Article 7 (Business Profits) of
Australian treaties. However, under the Chilean convention, the
allocation of taxing rights over such income is determined by Article 6
(Income from Immovable (Real) Property). Accordingly, income from the
relevant activities may be taxed in Australia where the real property is
situated in Australia, irrespective of whether the enterprise has a
permanent establishment in Australia. Nonetheless, an enterprise would
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generally have a permanent establishment in the country in which the
agriculture or forestry property is situated. [Article 6, paragraph 1]
Definition
3.85 Immovable (real) property is primarily defined as having the
meaning which it has under the domestic law of the country where the
property is situated. In the case of Australia, real property also extends to:
· a lease of land and any other interest in or over land
(including exploration and mining rights over natural
resources); and
· royalties and other payments relating to the exploration for,
or exploitation of, natural resources.
3.86 In the case of Chile, immovable (real) property also extends to:
· property accessory to immovable property;
· livestock and equipment used in agriculture and forestry;
· rights to which the provisions of the general law of Chile
respecting land apply, including a lease of land and any other
interest in or over land (including exploration and mining
rights over natural resources); and
· usufruct of immovable property, and royalties and other
payments relating to the exploitation of natural resources.
Ships and aircraft are excluded from the definition of `immovable (real)
property', therefore this Article does not cover income from their use.
[Article 6, paragraph 2]
Deemed situs
3.87 Under Australian law the place where an interest in land or
natural resources, 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]
Form of exploitation of immovable (real) property
3.88 Paragraph 4 makes it clear that the general rule in paragraph 1
applies irrespective of the form of exploitation of the immovable (real)
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property. The Article applies to income derived from the direct use,
letting or use in any other form of immovable (real) property. [Article 6,
paragraph 4]
Immovable (real) property of an enterprise
3.89 Paragraphs 1 and 4 of Article 6 are extended to profits derived
from the use or exploitation of real property of an enterprise or real
property used for the performance of independent personal services. The
reference to `profits' in paragraph 5 is intended to ensure that taxation is
on a net basis.
3.90 This Article provides that the country in which the real property
is situated may impose tax on the income derived from that property by a
resident of the other country, irrespective of whether or not that income is
attributable to a permanent establishment or fixed base situated in the
first-mentioned country.
3.91 However, in relation to real property of an enterprise of one
country, or real property used for the performance of independent
personal services by a resident of that country, paragraph 5 of this Article
specifically provides that the profits from such real property, if
attributable to a permanent establishment or a fixed base situated in the
other country, are to be determined in accordance with the rules in
paragraphs 2 and 3 of Article 7 (Business Profits). This clarifies that,
notwithstanding that the profits are dealt with under Article 6, and not
Article 7 as is usually the case under Australian treaties, such profits will
be taxed on a net basis. [Article 6, paragraph 5]
Article 7 -- Business Profits
3.92 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.
3.93 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. Furthermore, the
inclusion of the words `or has carried on business' in the second sentence
of paragraph 1 clarifies that the other country may tax any profits that are
attributable to activities carried on through the permanent establishment,
even if they are derived after the relevant permanent establishment has
ceased to exist. While Australia would apply the treaty in this way even
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The Australia-Chile convention
without these words, the specific inclusion is consistent with Chile's
preferred treaty practice. [Article 7, paragraph 1]
3.94 If an enterprise which is a resident of one country derives
business profits in the other country that are not attributable to a
permanent establishment in that other country, the general principle of this
Article is that the enterprise will not be liable to tax in the other country
on such profits (except where paragraph 7 of this Article applies -- see
the explanation in paragraphs 3.108 and 3.109).
Determination of business profits
3.95 Profits of a permanent establishment are to be determined for the
purposes of this Article on the basis of arm's length dealings. The
provisions in the Chilean convention correspond to international practice
and comparable provisions in Australia's other tax treaties. [Article 7,
paragraphs 2 and 3]
3.96 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. Item 3 of the Protocol specifically
clarifies that for the purposes of the source country's computation of the
taxable income of a permanent establishment situated in that country, the
deductibility of expenses which are attributable to that permanent
establishment are to be determined under the domestic law of that country.
[Article 7, paragraph 3, Protocol, item 3]
3.97 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 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 4]
Application of domestic law
3.98 The domestic law of the country in which the permanent
establishment is situated (for example, 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
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the traditional transaction methods for the attribution of the arm's length
profits.
3.99 Item 4 of the Protocol 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. [Protocol, item 4]
3.100 In addition, paragraph 9 preserves the application of Chile's
unique two-tiered system of taxing profits attributable to a permanent
establishment, or a fixed base, situated in Chile, under both the Chilean
First Category Tax and the Additional Tax provided that the First
Category Tax is fully creditable in computing the amount of the
Additional Tax. [Article 7, paragraph 9]
3.101 The First Category Tax is a business profits tax levied on
income derived on an accrual basis from commercial, industrial, mining
and other activities involving the use of capital. It is currently imposed at
a rate of 17 per cent.
3.102 The Additional Tax applies to remittances or payments of
income abroad or, in general, when money is made available from Chile
to a non-resident or non-domiciled person. The current rate of tax under
the Additional Tax is 35 per cent.
3.103 To calculate Additional Tax, an amount equivalent to the First
Category Tax paid corresponding to the profits distributed or remitted
should be included in the tax base and the income is thus grossed-up. The
amount of the First Category Tax is creditable against the Additional Tax
due on the grossed up distribution.
Profits or gains dealt with under other Articles
3.104 Where income or gains are specifically dealt with under other
Articles of the Chilean convention, the effect of those particular Articles is
not overridden by this Article.
3.105 This provision lays down the general rule of interpretation that
categories of income or gains which are the subject of other Articles of the
Chilean convention (for example, Article 8 (Ships and Aircraft),
Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties) and
Article 13 (Alienation of Property)) are to be treated in accordance with
the terms of those Articles. However, under certain Articles, for example
paragraph 4 of Article 10 (Dividends), where the holding or 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 5]
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The Australia-Chile convention
Insurance with non-residents
3.106 Each country has the right to continue to apply any provisions in
its domestic law relating to the taxation of income from insurance with
non-resident insurers. However, except where the premium is attributable
to a permanent establishment, the tax charged shall not exceed:
· five per cent of the gross amount of the premiums in the case
of policies of reinsurance; and
· ten per cent of the gross amount of the premiums in the case
of all other policies of insurance.
Where the premium is attributable to a permanent establishment situated in
a country, the tax that may be imposed in that country is not subject to
these limits. In such cases, that country may tax the premium in
accordance with its domestic law. [Article 7, paragraph 6]
3.107 An effect of this paragraph is generally to preserve, in the case
of Australia, the application of Division 15 of Part III of the ITAA 1936
(Insurance with Non-residents). This is broadly consistent with
Australia's reservation to Article 7 (Business Profits) of the OECD Model.
Trust beneficiaries
3.108 The principles of this Article will apply to profits which are
derived by a resident of one of the countries (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 7]
3.109 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 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 Chile is beneficially entitled under the trust.
Paragraph 7 of this Article ensures that such business profits will be
subject to tax in Australia where the trustee of the relevant trust has, or
would have if it were a resident of Chile, a permanent establishment in
Australia in relation to that business. This paragraph will also apply
where relevant to other Articles of the Chilean 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. That is, the beneficiary of the trust
will also have a permanent establishment for the purposes of paragraph 2
of Article 13.
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Time limitation
3.110 The Chilean convention specifies a time limit for the adjustment
of profits attributable to a permanent establishment of the enterprise. A
country may not make an adjustment to the profits for a year of income
where a period of seven years has expired from the date on which the
enterprise completed the filing requirements for that year of income in
that country. However, the time limit does not apply in the case of fraud,
gross negligence, wilful default, or where an audit into the profits of an
enterprise was initiated by that country within the seven-year period.
[Article 7, paragraph 8]
3.111 The Article does not impose a time limit on conclusion of the
audit into the profits of the enterprise.
Article 8 -- Ships and Aircraft
Profits from international traffic
3.112 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 3]
3.113 The profits covered consist in the first place of the profits
directly obtained by the enterprise from the transportation of passengers or
cargo by ships or aircraft (whether owned, leased or otherwise at the
disposal of the enterprise) that it operates in international traffic.
However, as international transport has evolved, shipping and air transport
enterprises invariably carry on a large variety of activities to facilitate or
support their international operations. Consistent with the 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.
An example of such ancillary profits would be profits derived by a ship
operator in the business of transport who undertakes a one-off bareboat
lease of one of their ships.
Profits from internal traffic
3.114 Profits derived directly or indirectly by an enterprise of one
country from the operation of ships or aircraft may, to the extent that they
relate to operations that are confined solely to places in the other country,
be taxed in the other country. [Article 8, paragraph 2]
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The Australia-Chile convention
3.115 Australia's (Chile'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 (Chile). [Article 8, paragraph 4]
3.116 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, for Australian tax purposes, Division 12 of Part III of
the ITAA 1936, deems 5 per cent of the amount paid in respect of the
transport of passengers, livestock, mail or goods shipped in Australia to be
the taxable income of a ship owner or charterer who has their principal
place of business outside of Australia.
Example 3.1
A ship operated by a Chilean enterprise, in the course of an
international voyage from Valparaiso to Melbourne, makes a stop in
Hobart to pick up cargo. Profits derived from the transport of the
goods loaded in Hobart and discharged in Melbourne would be profits
from the carriage of goods shipped in and discharged at a place in
Australia under paragraph 2 of Article 8. Australia would therefore
have the right to tax the profits relating to such transport. Five per cent
of the amount paid in respect of the transport of those goods would be
deemed to be taxable income of the operator for Australian tax
purposes pursuant to Division 12 of Part III of the ITAA 1936.
Example 3.2
A Chilean 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. The profits from the carriage of the
passengers shipped in and discharged at a place in Australia would be
covered by paragraph 2 of Article 8, 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.
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Article 9 -- Associated Enterprises
Reallocation of profits
3.117 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 Chile on an arm's length basis where the commercial or
financial arrangements between the enterprises differ from those that
might be expected to operate or be made between unrelated enterprises
dealing wholly independently with one another. In the course of
negotiations, the two delegations noted that:
`The expression "dealing wholly independently with one another"
is included in paragraph 1 [of Article 9 (Associated Enterprises)] to
conform to Australia's consistent treaty practice and to address
Australia's concerns that the appropriate benchmark for
determining the conditions operating between the associated
enterprises should have regard to whether those dealings between
the enterprises occurred on a truly independent basis.'
[Article 9, paragraph 1]
3.118 This Article would not generally authorise the rewriting of
accounts of associated enterprises where it can be satisfactorily
demonstrated that the transactions between such enterprises have taken
place on normal, open market commercial terms. The term `might be
expected to operate or be made' in paragraph 1 is included to conform
broadly to Australia's treaty practice and allows adjustments where it is
not possible to determine the conditions that `would have been made or
occurred' between the associated enterprises.
3.119 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.
3.120 Each country has the right to apply its domestic law relating to
the determination of the tax liability of a person (for example, Australia's
Division 13 of Part III of the ITAA 1936) to enterprises, including in
cases where the available information is inadequate, provided that such
provisions are applied, so far as it is practicable to do so, consistently with
the principles of the Article. This is of particular relevance where there is
no data available or the available data is not of sufficient quality to rely on
the traditional transaction methods for the attribution of arm's length
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The Australia-Chile convention
profits. This reflects Australia's reservation to Article 9 (Associated
Enterprises) of the OECD Model. [Protocol, item 4]
Correlative adjustments
3.121 Where a reallocation of profits is made (either under this Article
or, by virtue of item 4 of the Protocol, under domestic law) so that the
profits of an enterprise of one country are adjusted upwards, economic
double taxation (that is, taxation of the same income in the hands of
different persons) would arise if the profits so reallocated continued to be
subject to tax in the hands of an associated enterprise in the other country.
To avoid this result, the other country is required, if it agrees with the
primary adjustment, to make an appropriate compensatory adjustment to
the amount of tax charged on the profits involved to relieve any such
double taxation.
3.122 It is therefore necessary for the affected enterprise to apply to
the competent authority of the country not initiating the reallocation of
profits for an appropriate compensatory adjustment to reflect the
reallocation of profits made by the other treaty partner country. If
necessary, the competent authorities of Australia and Chile will consult
with each other to determine the appropriate adjustment. [Article 9,
paragraph 2]
Time limitation
3.123 The Chilean convention specifies a time limit for an adjustment
to the profits of an enterprise under this Article. A country may not make
an adjustment to the profits for a year of income where a period of seven
years has expired from the date on which the enterprise completed the
filing requirements for that year of income in that country. However, the
time limit does not apply in the case of fraud, gross negligence, wilful
default, or where an audit into the profits of an enterprise was initiated by
that country within the seven-year period. [Article 9, paragraph 3]
3.124 The Article does not impose a time limit on conclusion of the
audit into the profits of the enterprise.
Article 10 -- Dividends
3.125 This Article allocates taxing rights in respect of dividends
flowing between Australia and Chile. The Article provides that:
· certain cross-border intercorporate dividends will be subject
to a maximum 5 per cent rate of source taxation;
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· a maximum 15 per cent rate of source country tax may be
applied on all other dividends;
· the application of Chile's unique two-tiered system of taxing
profits is not limited by this Article (subject to certain
conditions);
· 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);
· dividends paid in respect of a holding which is effectively
connected with a fixed base are to be dealt with under
Article 14 (Independent Personal Services); and
· the extra-territorial application by either country of taxing
rights over dividend income is not permitted.
3.126 However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
Permissible rate of source country taxation
Five per cent rate limit on source country tax of certain cross-border
intercorporate dividends
3.127 This Article allows both Australia and Chile to tax dividends
flowing between them but limits the rate of tax that the country of source
may impose on dividends paid by companies that are resident 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]
3.128 A rate limit of 5 per cent will apply for dividends paid in respect
of company shareholdings that constitute a direct voting interest of at least
10 per cent. [Article 10, subparagraph 2a)]
Fifteen per cent rate limit for all other dividends
3.129 In all other cases, the Chilean convention provides that the
source country may tax dividends that are beneficially owned by residents
of the other country, but will limit its tax to 15 per cent of the gross
amount of the dividend. [Article 10, subparagraph 2b)]
3.130 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
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The Australia-Chile convention
by Australia under its domestic law for franked dividends paid to
non-residents will continue to apply.
Interaction of paragraph 2 with the Chilean Additional Tax
3.131 Chile does not impose a dividend withholding tax on foreign
investors. Rather it has a unique two-tiered system of taxing profits,
comprising the First Category Tax and the Additional Tax. Thus a key
feature of Chile's tax treaties is to include a provision whereby the
permissible rates of source country taxation in paragraph 2 do not limit the
application of the Additional Tax payable in Chile provided that the First
Category Tax is fully creditable in computing the amount of Additional
Tax. See paragraphs 8.100 to 8.103 for an explanation of Chile's
two-tiered system. [Article 10, paragraph 2]
Requirement for consultation
3.132 To ensure that the rate of withholding tax provided for under this
Chilean convention remain competitive into the future Australia and Chile
are required to consult each other with a view to agreeing to any
amendment of paragraph 2 of this Article if:
· Chile agrees in a tax treaty with any other country to limit the
Additional Tax charged in Chile; or
· in either Australia or Chile the tax imposed on dividends and
on profits out of which such dividends are paid exceeds, in
the aggregate, 42 per cent.
[Protocol, item 5]
Dividends effectively treated as either business profits or profits from
independent personal services
3.133 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 or fixed base in the source
country from which the dividends are derived, if the holding giving rise to
the dividends is effectively connected with such permanent establishment
or fixed base.
3.134 Where the holding is effectively connected with such permanent
establishment or fixed base, the dividends are to be treated as business
profits and profits from independent personal services respectively, 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 Articles 7
(Business Profits) and 14 (Independent Personal Services).
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3.135 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 or fixed base 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 4]
Extra-territorial application precluded
3.136 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 or fixed base
situated in the first country.
[Article 10, paragraph 5]
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The Australia-Chile convention
Diagram 3.2
Australian
resident
company 1
PE of Aust.
dividend resident
shareholding
Australian
resident profits
company 2
Australia Chile
In the diagram above, paragraph 5 would, but for the exception,
preclude Chile from taxing the dividend paid by Australian resident
company 2 to Australian resident company 1 out of profits derived
from Chilean sources. However, as the dividends relate to the
Australian shareholder's permanent establishment in Chile with which
the holding is effectively connected, Chile may tax the dividends.
Definition of dividends
3.137 The term dividends in this Article means income from:
· shares or other rights which participate in profits and are not
debt-claims; and
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· 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 a resident.
[Article 10, paragraph 3]
3.138 In the course of negotiations, the two delegations noted that:
`The definition of dividends in paragraph 3 does not limit either
country's ability to determine the meaning of "income from shares" in
accordance with its domestic law. In the case of Australia,
subsection 3(2A) of the International Tax Agreements Act 1953 shall
apply.'
Limitation of benefits
3.139 The source country rate limits and exemptions available under
this Article will not apply where an assignment of dividends, 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 27, paragraph 1]
Article 11 -- Interest
3.140 This Article allocates taxing rights in respect of interest flows
between Australia and Chile. Article 11 provides that:
· a maximum 5 per cent rate of source country tax may be
applied on interest derived by financial institutions in certain
circumstances;
· a maximum 10 per cent rate of source country tax may be
applied on all other interest income. However, Chile may
impose a maximum rate of 15 per cent provided Chile has
not agreed in a treaty with another country to a rate less than
15 per cent;
· interest paid on a debt-claim which is effectively connected
with a permanent establishment or fixed base shall be subject
to Articles 7 (Business Profits) and 14 (Independent Personal
Services) respectively;
· 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 Chilean
resident other than where the indebtedness in respect of
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The Australia-Chile convention
which the interest is paid is effectively connected with a
permanent establishment or fixed base situated in Chile;
or
- the interest is paid by a non-resident to a Chilean resident
and it is an expense of the payer in connection with a
permanent establishment or fixed base situated in
Australia;
· 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; and
· a `most favoured nation' obligation will be triggered if Chile
agrees in a tax treaty with another country to lower source
country taxation rates in relation to interest derived by
financial institutions or governments.
3.141 No relief is available under this Article in cases that have been
designed with the main purpose of taking advantage of the Article.
Permissible rate of source country taxation
3.142 This Article provides for interest income to be taxed by both
countries but requires the country in which the interest arises (that is, the
source country) to limit its tax where a resident of the other country is the
beneficial owner of the interest. [Article 11, paragraphs 1 and 2]
Five per cent rate limit for financial institutions
3.143 Source country taxation is not to exceed five per cent of the
gross amount of interest derived by a financial institution which is
unrelated to and deals wholly independently with the payer. This applies
to interest derived by a financial institution that is a resident of the other
country and the beneficial owner of the interest.
3.144 The term financial institution means a bank or other enterprise
substantially deriving its profits by raising debt finance in the financial
markets or by taking deposits at interest and using those funds in carrying
on a 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 2a)]
3.145 The 5 per cent rate limit is not available for interest paid as part
of an arrangement involving back-to-back loans or other arrangement that
is economically equivalent and intended to have a similar effect. The
denial of the 5 per cent rate limit for these back-to-back loan type
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arrangements is directed at preventing related party and other debt from
being structured through financial institutions to gain access to a lower
withholding tax rate. The 5 per cent rate limit will only be denied for
interest paid on the component of a loan that is considered to be
back-to-back. In such cases, the 10 per cent rate limit will apply, subject
to paragraph 4. [Article 11, paragraph 3]
3.146 An example of a back-to-back arrangement would include, for
instance, a transaction or series of transactions structured in such a way
that:
· a Chilean financial institution receives or is credited with an
item of interest arising in Australia; and
· the financial institution pays or credits, directly or indirectly,
all or substantially all of that interest (at any time or in any
form, including commensurate benefits) to another person
who, if it received the interest directly from Australia, would
not be entitled to similar benefits with respect to that interest.
3.147 However, a back-to-back arrangement would generally not
include a loan guarantee provided by a related party to a Chilean financial
institution.
Ten per cent rate limit
3.148 Subject to the higher rate limits that may apply in accordance
with paragraph 4, source country taxation is not to exceed 10 per cent of
the gross amount of interest in all other cases where a resident of the other
country is the beneficial owner of the interest. [Article 11, subparagraph 2b)]
Unilateral source country taxation rate limits for Chile
3.149 In the case of interest arising in Chile to which subparagraph 2b)
and paragraph 3 applies, the rate of tax will be 15 per cent rather than the
specified 10 per cent rate. However, in the event Chile agrees in a
subsequent tax treaty with any other country to limit Chilean tax to a rate
less than 15 per cent, Chile's source country taxation to which
subparagraph 2b) or paragraph 3 applies will automatically be reduced to
the greater of the rate provided under that treaty or 10 per cent. The
timing of the reduction in the permissible rate that Chile may impose on
interest beneficially owned by an Australian resident will coincide with
the `date of effect' in Chile's treaty with the other country which has
triggered the event. [Article 11, paragraph 4]
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The Australia-Chile convention
`Most favoured nation' clause
3.150 The Chilean convention contains a `most favoured nation'
clause in respect of interest derived by financial institutions or
governments. In the event that Chile agrees under a tax treaty with any
other country to limit the tax charged on interest derived by a financial
institution to a rate lower than that specified in subparagraph 2a) (that is,
5 per cent), or interest derived by a government to a rate lower than that
specified in subparagraph 2b) (that is, 10 per cent), Chile is required to
enter into negotiations with Australia with a view to providing the same
treatment. [Protocol, item 6]
Definition of interest
3.151 The term interest is defined for the purposes of this Article to
include:
· income from debt-claims of every kind;
· interest from government securities;
· interest from bonds and debentures; and
· income which is subjected to the same taxation treatment as
income from money lent by the law of the country in which
the income arises.
3.152 However, it does not include any income which is treated as a
dividend under Article 10 (Dividends). For purposes of determining
whether income should be treated as a dividend, the two delegations noted
in the course of negotiations that Australia's domestic law characterisation
of `income from shares' is preserved (as discussed in paragraph 8.138).
[Article 11, paragraph 5]
Interest effectively treated as business profits or profits derived from
independent personal services
3.153 Interest derived by a resident of one country which is paid in
respect of a debt-claim which is effectively connected with a permanent
establishment or fixed base of that person in the other country, will
form part of the profits of that permanent establishment or fixed base
and be subject to the provisions of Articles 7 (Business Profits) and
14 (Independent Personal Services) respectively. Accordingly, the rate
limitations on source taxation provided in paragraphs 2 to 4 of this Article
do not apply to such interest in the country in which the interest is
sourced. [Article 11, paragraph 6]
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Deemed source rules
3.154 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
Chile 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 Chilean resident, if it is an expense incurred by the payer of the
interest in connection with a permanent establishment or fixed base
situated in Australia.
3.155 However, consistent with Australia's interest withholding tax
provisions, an Australian source is not deemed in respect of interest that is
an expense incurred by an Australian resident in carrying on a business
through a permanent establishment in Chile, or outside both Australia and
Chile. Similarly, interest connected with a fixed base situated in a third
State is deemed to be sourced in the country in which the fixed base is
situated. [Article 11, paragraph 7]
3.156 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply. [Protocol, subitem 2c)]
Related persons
3.157 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 source country tax rate limits apply to an amount of interest which
might have been expected to have been agreed upon if the parties to the
loan agreement were dealing with one another at arm's length. Any
excess part of the interest remains taxable according to the domestic law
of each country but subject to the other Articles of the Chilean
convention. [Article 11, paragraph 8]
3.158 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.
A special relationship also covers relationships of blood or marriage and,
in general, any community of interests.
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Limitation of benefits
3.159 The source country rate limits and exemptions available under
this Article will not apply where an assignment of the interest, or a
creation or assignment of the debt-claim or other rights in respect of
which the interest is paid, has been made with the main objective, or one
of the main objectives, of accessing the relief otherwise available under
this Article. [Article 27, paragraph 1]
Article 12 -- Royalties
3.160 This Article allocates taxing rights in respect of royalties paid or
credited between Australia and Chile. The Article provides that:
· a maximum 5 per cent rate of source country tax may be
levied on the gross amount of equipment royalties;
· a maximum 10 per cent rate of source country tax may be
levied on the gross amount of royalties in all other cases;
· royalties paid in respect of a right or property which is
effectively connected with a permanent establishment or
fixed base are subject to Articles 7 (Business Profits) and 14
(Independent Personal Services) respectively;
· royalties are deemed to have an Australian source (and may
therefore be taxed in Australia) where:
- the royalties are paid to a Chilean resident by a person
who is a resident of Australia for purposes of Australian
tax, other than a payment made in respect of a right or
property which is effectively connected with a permanent
establishment or a fixed base situated in Chile; or
- the royalties are paid by a non-resident to a Chilean
resident and are an expense of the payer in connection
with a permanent establishment or fixed base situated in
Australia;
· 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; and
· a `most favoured nation' obligation will be triggered if Chile
agrees in a tax treaty with another country to exclude
`equipment' rentals from the scope of this Article, or limits
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source country taxation of royalties to a rate below those
provided for in this Article.
3.161 No relief is available under this Article in cases that have been
designed with a main purpose of taking advantage of the Article.
Permissible rate of source country taxation
3.162 This Article in general allows both countries to tax royalty flows
but limits the tax of the country of source, in respect of royalties
beneficially owned by residents of the other country, to:
· five per cent of the gross amount of royalties which are for
the use of, or the right to use, any industrial, commercial or
scientific equipment; and
· ten per cent of the gross amount of royalties in all other
cases.
[Article 12, paragraphs 1 and 2]
3.163 The specific source country taxation rate limitations above do
not apply to natural resource royalties, which, in accordance with Article
6 (Income from Immovable (Real) Property), remain taxable in the
country of source without limitation of the tax that may be imposed.
`Most favoured nation' clause
3.164 The Chilean convention contains a `most favoured nation'
clause in respect of the definition of the term `royalties' and the rate
limitations. In particular, if Chile agrees in a tax treaty with another
country to exclude equipment rentals from being treated as royalties or to
provide lower rates of tax than those provided under paragraph 2, Chile is
required to enter into negotiations with Australia with a view to providing
the same treatment for Australia. [Protocol, item 7]
Definition of royalties
3.165 The definition of royalties in this Article reflects most elements
of the definition in Australia's domestic income tax law. The definition
encompasses payments (or credits) for the use of, or the right to use, any
copyright, or for the use of, or right to use, industrial, commercial or
scientific equipment. It also includes payments (or credits) for the supply
of information concerning technical, industrial, commercial or scientific
experience but not payments for services rendered, except as provided for
in subparagraph 3e). In the Chilean convention, the definition adopts the
OECD Model approach in referring to `information concerning technical,
industrial, commercial or scientific experience', rather than the more usual
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The Australia-Chile convention
reference in Australian treaties to `knowledge or experience'. However,
both expressions refer to what is commonly known as `know-how', and
no difference in meaning is intended. [Article 12, paragraph 3]
Image or sound reproduction or transmission
3.166 The `royalties' definition includes payments (or credits) made
for the use of, or the right to use, motion picture films. It also covers
payments (or credits) for the use of, or the right to use, images or sounds,
however reproduced or transmitted, for use in connection with television,
radio or other 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 (or credits) will constitute a
royalty. [Article 12, subparagraph 3a)]
Payments for the supply of know-how versus payments for services
rendered
3.167 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
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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.
3.168 Payments (or credits) 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.
3.169 In cases where both know-how and services are supplied under
the same contract, if the contract does not separately provide for payments
(or credits) in respect of know-how and services, an apportionment of the
two elements of the contract may be appropriate.
3.170 Depending on the circumstances, payments for services rendered
are to be treated under either Articles 7 (Business Profits) or 14
(Independent Personal Services).
Payments (or credits) for the supply of ancillary assistance
3.171 Consistent with Australia's treaty practice and paragraph 11.6 of
the OECD Model Commentary on Article 12, payments made (or amounts
credited) for the supply of any assistance as a means of enabling the
application or enjoyment of the property, right or information referred to
in subparagraphs 3a) to 3d) fall within the meaning of the term `royalties'
where the assistance is both ancillary and subsidiary to the use or supply
of the relevant property, right or information. [Article 12, subparagraph 3e)]
Spectrum licences
3.172 Under the Chilean convention, payments (or credits) made for
the use of, or right to use, the radiofrequency spectrum specified in a
spectrum licence are treated as royalties. This provision preserves
Australia's ability to tax payments (or credits) that arise in Australia for
the use in Australia of any part of the radiofrequency spectrum specified
in an Australian spectrum licence. [Article 12, subparagraph 3f)]
Forbearance
3.173 Consistent with Australian tax treaty practice and international
standards (see paragraph 8.5 of the OECD Model Commentary on
Article 12), subparagraph 3g) 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,
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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
this Article. [Article 12, subparagraph 3g)]
Other royalties effectively treated as business profits or profits derived
from independent personal services
3.174 As in the case of dividend or 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 or fixed base in the country in which the income
is sourced. Such income is subject to the full rate of tax applicable in the
country in which the royalty is sourced in accordance with the provisions
of Articles 7 (Business Profits) and 14 (Independent Personal Services)
respectively. [Article 12, paragraph 4]
Deemed source rules
3.175 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) and
operate to allow Australia to tax royalties paid by a resident of Australia
to a resident of Chile who is the beneficial owner of those royalties.
Australia may also tax royalties paid by a non-resident, being royalties
which are beneficially owned by a Chilean resident, if the royalties are an
expense incurred by the payer in connection with a permanent
establishment or fixed base situated in Australia.
3.176 Consistent with Australia's royalty withholding tax provisions,
royalty payments that are an expense incurred by an Australian resident in
carrying on a business through a permanent establishment in Chile, or
outside both Australia and Chile, will not be subject to tax in Australia.
Those royalties are deemed to be sourced in the country in which the
permanent establishment is situated. Similarly, royalties connected with a
fixed base situated in a third State are deemed to be sourced in the country
in which the fixed base is situated. [Article 12, paragraph 5]
3.177 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply. [Protocol, subitem 2c)]
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Related persons
3.178 Where a special relationship exists between the payer and the
beneficial owner of the royalties, the source country tax rate limits apply
only to the extent that the royalties are not excessive. Any excess part of
the royalty remains taxable according to the domestic law of each country
but subject to the other Articles of the Chilean convention.
3.179 Examples of special relationships have been provided in respect
of the corresponding paragraph in Article 11. [Article 12, paragraph 6]
Limitation of benefits
3.180 The source country rate limit available under this Article will
not apply where the assignment of the royalties, or the creation or
assignment of the property or right in respect of which the royalty is paid,
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 27, paragraph 1]
Article 13 -- Alienation of Property
Taxing rights
3.181 This Article allocates between the respective countries taxing
rights in relation to income, profits or gains arising from the alienation of
immovable (real) property and other items of property.
3.182 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.
Immovable (real) property
3.183 Income, profits or gains from the alienation of immovable (real)
property may be taxed by the country in which the property is situated.
[Article 13, paragraph 1]
3.184 For the purpose of this Article, the term `immovable (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 Immovable (Real) Property).
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Permanent establishment or fixed base
3.185 Paragraph 2 deals with income, profits or gains arising from the
alienation of property (other than immovable (real) property covered by
paragraph 1) forming part of the business assets of a permanent
establishment of an enterprise or pertaining to a fixed base for the
performance of independent personal services. It also applies where the
permanent establishment or fixed base are themselves (alone or with the
whole enterprise) alienated. Such income, profits or gains may be taxed
in the country in which the permanent establishment or fixed base is
situated. This corresponds to the rules for taxation of business profits
contained in Article 7 (Business Profits). [Article 13, paragraph 2]
Disposal of ships or aircraft
3.186 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 immovable (real) property
covered by paragraph 1), are taxable only in that country. This rule
corresponds to the operation of Article 8 (Ships and Aircraft) in relation to
profits from the international operation of ships or aircraft. [Article 13,
paragraph 3]
3.187 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 (for example, so-called `voyages
to nowhere' by cruise ships). [Article 3, subparagraph 1g)]
Shares and other interests in land-rich entities
3.188 Paragraph 4 applies to situations involving the alienation of
shares, comparable interests or other rights that derive more than
50 per cent of their value directly or indirectly from real property situated
in the other country. Income, profits or gains from the alienation of such
shares, comparable interests or other rights may be taxed in the country in
which the immovable (real) property is situated. Paragraph 4
complements paragraph 1 of this Article and is designed to cover
arrangements involving the effective alienation of incorporated
immovable (real) property, or like arrangements.
3.189 This provision ensures that capital or revenue gains on disposal
of a foreign resident's indirect, as well as direct, interests in certain
targeted assets are taxable by Australia. Such treatment applies whether
the immovable (real) property is held directly or indirectly through a chain
of interposed entities. [Article 13, paragraph 4]
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Capital gains from shares and other rights in companies
Small shareholders -- limited rate of tax at source
3.190 The first sentence of paragraph 5 applies to capital gains (other
than gains to which paragraph 2 or 4 applies) derived by residents of a
country (with the exception of pension funds) from the alienation of
`shares or certain other rights representing the capital of a company',
where that company is a resident of the other country. This provision
permits the other country to tax the capital gain, but the rate so imposed is
limited to 16 per cent of the amount of the gain.
3.191 In the course of negotiations, the two delegations noted that:
`The reference to shares and other rights "representing the capital of a
company" in the first sentence of paragraph 5 reflects Chile's
consistent treaty practice and refers to shares in a company and other
rights or participation in companies such as social rights in the case of
Chilean Sociedates de Responsabilidad Limitada.'
3.192 Capital gains derived by pension funds on the alienation of
shares will be taxable only in the fund's country of residence (that is,
under paragraph 6 of this Article), unless paragraph 2 or 4 or the second
sentence of paragraph 5 applies.
3.193 The second sentence of paragraph 5 removes the limitation on
the rate of tax the source country is permitted to impose in respect of
capital gains from the alienation of `substantial shareholdings'. In this
context `substantial holdings' are those holdings where the alienator has
owned shares or other rights representing, directly or indirectly,
20 per cent or more of the capital of that company during the 12-month
period preceding such alienation. [Article 13, paragraph 5]
3.194 Paragraph 5 of this Article is consistent with Chile's treaty
practice. While the paragraph allocates a taxing right over certain gains
derived by residents of Chile (that is, gains from the sale of shares in
Australian companies that are not `land-rich') it will have no practical
application in Australia as these gains are not taxable under Australia's
domestic tax laws.
Resident country sweep-up provision
3.195 Paragraph 6 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. 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 Chile.
The liability of the Australian resident to taxation on such capital gains
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The Australia-Chile convention
will be determined in accordance with Australia's domestic law.
[Article 13, paragraph 6]
Departing residents
3.196 The purpose of paragraph 7 is to prevent double taxation of
capital gains of departing residents. Under section 104-160 of the
ITAA 1997, a person who ceases to be a resident of Australia will
generally trigger a tax liability on unrealised gains from assets held, other
than taxable Australian property (as defined in section 855-15 of the
ITAA 1997). Under subsections 104-165(2) and (3) of the ITAA 1997, a
departing Australian resident individual may elect to either pay the
Australian tax at the time of departure or to defer tax on the unrealised
gain until the actual disposal of the asset. A former Australian resident
individual who has been taxed on the unrealised gains upon departure
from Australia, and who becomes a Chilean resident, may elect to be
treated for Chilean taxation purposes as having, immediately before
ceasing to be a resident of Australia, alienated and reacquired the property
for an amount equal to its fair market value at that time. However, a
departing resident may not make the election in respect of property
situated in either Australia or Chile. [Article 13, paragraph 7]
Example 3.3
An Australian resident, Kylie, owns a house in Bali which was
purchased in the year 2002 for $200,000 (this is the cost base of the
asset as Kylie has not incurred any further expenditure which should
be taken into account in determining the cost base of the asset). At the
time Kylie ceases to be an Australian resident, the market value of the
house is $300,000. Kylie will therefore have an Australian capital gain
of $100,000. Kylie pays the tax on this unrealised gain rather than
electing to defer payment of the tax.
Kylie later sells the house for $400,000 while a resident of Chile.
Paragraph 7 will allow Kylie to elect to be treated for Chilean tax
purposes as if she had acquired the property for $300,000 at the time
that she ceased to be an Australian resident. This will mean that Chile
is precluded from taxing Kylie on the gain that accrued on the house
during the period of Kylie's residence in Australia.
Example 3.4
An Australian resident, Michael, owns a house in Chile which was
purchased in the year 2004 for $300,000 (this is the cost base of the
asset as Michael has not incurred any further expenditure which should
be taken into account in determining the cost base of the asset). At the
time Michael ceases to be an Australian resident, the market value of
the house is $400,000. Michael will therefore have an Australian
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capital gain of $100,000. Michael pays the tax on this unrealised gain
rather than electing to defer payment of the tax.
Michael later sells the house for $450,000 while a resident of Chile.
Paragraph 7 will not allow Michael to elect to be treated for Chilean
tax purposes as if he had acquired the property for $400,000 at the time
that he ceased to be an Australian resident. This will mean that Chile
is permitted to tax Michael on the gain that accrued on the house.
Double tax relief
3.197 In the event that the operation of this Article should result in an
item of income or gain being subjected to tax in both States, the country
of which the person deriving the income or gain is a resident (as
determined in accordance with Article 4 (Resident)) would be obliged by
Article 23 (Relief of Double Taxation) to provide double tax relief for the
tax imposed by the other country.
Article 14 -- Independent Personal Services
3.198 Under this Article, profits derived by an individual in respect of
professional services or other activities of an independent character will
be subject to tax in the country in which the services or activities are
performed if either:
· the individual has a fixed base regularly available in the other
country for the purpose of performing those activities; or
· the individual is present in the other country for a period or
periods exceeding, in the aggregate, 183 days in any
12-month period commencing or ending in the fiscal year
concerned.
3.199 If either of these conditions are met, the country in which the
services or activities are performed will be able to tax so much of the
profits as are attributable to the activities performed during such period or
periods or through that fixed base. The reference to `profits' (rather than
`income' which is commonly found in articles similar to this Article) is
intended to put beyond doubt that deductions will be allowed for expenses
incurred in gaining the income from the services performed. [Article 14,
paragraph 1]
3.200 If the above tests are not met, the income will be taxed only in
the country of residence of the individual.
3.201 The term professional services includes especially independent
scientific, literary, artistic, educational or teaching activities as well as the
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independent activities of physicians, lawyers, engineers, architects,
dentists and accountants. [Article 14, paragraph 2]
3.202 Remuneration derived as an employee and income derived by
entertainers and sportspersons are the subject of other Articles of the tax
treaty and are not covered by this Article.
Article 15 -- Income from Employment
Basis of taxation
3.203 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 16 (Directors' Fees);
· Article 17 (Artistes and Sportspersons);
· Article 18 (Pensions); and
· Article 19 (Government Service).
3.204 Generally, salaries, wages and other 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 15, paragraphs 1 and 2]
Short-term visit exemption
3.205 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 year of income 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
or a fixed base which the employer has in the country being
visited.
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3.206 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 15, paragraph 2]
Where the short-term visit exemption does not apply
3.207 Where a short-term visit exemption is not applicable,
remuneration derived by a resident of Australia from employment in Chile
may be taxed in Chile. However, this Article does not allocate sole taxing
rights to Chile in that situation.
3.208 Accordingly, Australia would also be entitled to tax that
remuneration, in accordance with the general rule of the ITAA 1997 that a
resident of Australia remains subject to tax on worldwide income.
However, in accordance with Article 23 (Relief of Double Taxation)
Australia would be required in this situation to relieve any resulting
double taxation.
Employment on a ship or aircraft
3.209 Income derived by crew members from employment exercised
aboard a ship or aircraft operated in international traffic will be taxable
only in the country of which the crew member is a resident. Thus, for
example, an Australian resident pilot employed by a Chilean airline would
be taxable only in Australia on his or her remuneration in respect of
services rendered on international flights. [Article 15, paragraph 3]
Fringe benefits
3.210 Paragraphs 4 and 5 of this Article deal with fringe benefits
which, in the absence thereof, would be taxable in both Australia and
Chile. Under paragraph 4, the country that would have the primary taxing
right if the benefit were ordinary employment income will have the sole
taxing right in relation to the fringe benefit. This would be determined in
accordance with paragraph 1, 2 or 3 of this Article. [Article 15, paragraph 4]
Definition of primary taxing right
3.211 This Article provides that the primary taxing right lies with the
country that may, in accordance with paragraph 1, 2 or 3 of this Article,
impose tax on the employment remuneration, being tax in respect of
which the other country is required to provide relief under Article 23
(Relief of Double Taxation). [Article 15, subparagraph 5b)]
Example 3.5
Pedro, a Chilean resident employee of a Chilean company is sent to
work in Australia. He is present in Australia for more than 183 days,
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and receives both employment income and fringe benefits. Under
paragraph 1 of this Article, Australia has the right to tax the
employment income. Chile may also tax but, under Article 23 (Relief
of Double Taxation), would be obliged to give credit for the Australian
tax paid on the fringe benefit if it was ordinary employment income.
Therefore, Australia has the primary right to tax in these
circumstances.
Definition of fringe benefit
3.212 The term fringe benefit is defined as including a benefit
provided to an employee or to an associate of an employee by:
· an employer;
· an associate of an employer; or
· a person under an arrangement between that person and the
employer, associate of an employer or another person in
respect of the employment of that employee.
3.213 They include accommodation allowances or housing benefits but
do not include a benefit arising from the acquisition of an option over
shares under an employee share scheme. For example, a fringe benefit is
provided when an employer allows an employee to use a work motor
vehicle for private purposes, gives an employee a subsidised loan, or pays
an employee's private health insurance costs. Benefits arising from
employee share option schemes are excluded from the treaty definition of
fringe benefit. Such option benefits are treated as remuneration from
employment for the purposes of paragraph 1 of this Article. [Article 15,
subparagraph 5a)]
Article 16 -- Directors' Fees
3.214 This Article relates to remuneration received by a resident of
one country in the person's capacity as a member of a board of directors,
or similar organ, of a company which is a resident of the other country.
The inclusion of the words `similar organ' is to accommodate unlisted
Chilean companies which are not governed by a `board of directors'. To
avoid difficulties in such cases of ascertaining which country a director's
services are performed, and consequently where the remuneration is to be
taxed, the Article provides that directors' fees may be taxed in the country
of residence of the company. [Article 16]
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Article 17 -- Artistes and Sportspersons
Personal activities
3.215 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. Item 8 of the
Protocol specifies that income referred to in paragraph 1 of this Article
includes any income derived from any personal activity exercised in the
other country related to performances or appearances in that country. This
accords with the generally accepted view that the application of this
Article extends to income generated from promotional and associated
kinds of activities engaged in by the entertainer or sportsperson in
connection with a performance while present in the visited country.
[Article 17, paragraph 1, Protocol, item 8]
Safeguard
3.216 Income in respect of personal activities exercised by an
entertainer or sportsperson, where derived by another person (for
example, 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 17, paragraph 2]
Article 18 -- Pensions
General scope
3.217 Pensions (including retirement annuities) are to be taxed only by
the country of which the recipient is a resident.
3.218 In the course of negotiations, the two delegations noted that:
`The term "pensions" is understood to include periodical social
security payments and government service pensions.'
3.219 The term retirement annuity means a stated sum payable in
respect of retirement and paid periodically at stated times during life or
during a specified or ascertainable period of time under an obligation to
make the payments in return for adequate and full consideration from
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funds out of a retirement savings plan. In the course of negotiations, the
two delegations noted that:
`It is understood that the term "retirement annuity" covers, in the case
of Australia, a superannuation annuity payment within the meaning of
the tax laws of Australia, and in the case of Chile, amounts paid under
the pension system of DL 3.500.'
3.220 The application of this Article extends to pensions and annuity
payments made to dependants, for example, a widow, widower or children
of the person in respect of whom the pension or annuity entitlement
accrued where, upon that person's death, such entitlement has passed to
that person's dependants. [Article 17, paragraphs 1 and 2]
Alimony payments
3.221 As a general rule alimony and other maintenance payments are
taxable only in the country of which the recipient is a resident. However,
such payments will be taxable only in the country of which the payer is a
resident to the extent that the payments do not attract allowable relief for
the payer in that country.
3.222 In the case of Australia, maintenance payments received by an
Australian resident are exempt from tax. Where maintenance payments
are made to a resident of Chile by an Australian resident, no deduction or
rebate is generally allowable in Australia. Accordingly, the payments will
not be taxable in Chile in these circumstances. [Article 18, paragraph 3]
Article 19 -- Government Service
Salary and wage income
3.223 Salary and wage type income, other than government service
pensions, paid to an individual for services rendered to a government
(including a political subdivision or local authority) of one of the
countries, is to be taxed only in that country. However, such
remuneration will be taxable only in the other country if the services are
rendered in that other country 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 (for example, if the recipient was a
permanent resident of that other country prior to rendering
the services).
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[Article 19, paragraph 1]
Business income
3.224 Remuneration 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 15 (Income
from Employment), Article 16 (Directors' Fees) or Article 17 (Artistes
and Sportspersons). [Article 19, paragraph 2]
Article 20 -- Students
Exemption from tax
3.225 This Article applies to students or 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 business apprentice
may qualify as a resident of the country visited during the period of their
visit.
3.226 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. [Article 20]
Employment income
3.227 Where a Chilean 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 15 (Income from Employment), be subject
to tax in Australia.
3.228 For business apprentices, 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
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equivalents, fall for consideration under Article 15 (Income from
Employment), as will any income derived from employment with a local
employer.
3.229 In the case of a Chilean business apprentice visiting Australia
solely for training purposes, it may therefore be necessary to distinguish
between remuneration for services and a payment for the apprentice's
maintenance, education or training. The quantum of the payment will be
relevant in such cases.
3.230 A payment for maintenance, education or training would not be
expected to exceed the level of expenses likely to be incurred to ensure
the student or business apprentice's maintenance, education or training
(that is, a subsistence payment). On the other hand, if the remuneration is
similar to the amounts paid to persons who provide similar services that
are not business apprentices (that is, a salary equivalent), this would
generally indicate that the payments constitute income from employment
that would fall for consideration under Article 15 (Income from
Employment). Likewise, if that business apprentice undertakes any other
employment in Australia, the income earned from that employment may
be subject to tax in Australia in accordance with Article 15.
3.231 In these situations, the payments received from abroad for the
student or business 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 qualifies as a
resident of Australia during the visit and the taxable income of the student
does not exceed the tax-free threshold applicable to Australian residents
for income tax purposes.
Article 21 -- Other Income
Allocation of taxing rights
3.232 This Article provides rules for the allocation between the two
countries of taxing rights with respect to items of income not dealt with in
the preceding Articles of the Chilean 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.
3.233 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 the positions expressed by both Australia
and Chile on Article 21 (Other Income) of the OECD Model. [Article 21,
paragraphs 1 and 3]
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3.234 Where the income may be taxed in both countries in accordance
with this provision, the country of residence of the recipient of the income
is obliged by Article 23 (Relief of Double Taxation) to provide double
taxation relief.
3.235 This Article does not apply to income (other than income from
immovable (real) property as defined in paragraph 2 of Article 6 (Income
from Immovable (Real) Property)) where the right or property in respect
of which the income is paid is effectively connected with a permanent
establishment or fixed base which a resident of one country has in the
other country. In such a case, Articles 7 (Business Profits) or
14 (Independent Personal Services) will apply. [Article 21, paragraph 2]
3.236 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, paragraph 1 of Article 7 (Business Profits) provides that
the profits of an enterprise of a country shall be taxable only in that
country.
Example 3.6
Esk Co, an Australia resident company, derives business profits from
the sale of merchandise through an independent agent located in Chile.
As Esk Co does not have a permanent establishment in Chile, the
business profits will be taxable in Australia pursuant to Article 7
(Business Profits) and not under Article 21 (Other Income).
3.237 Similarly, this Article does not apply in the situation where
profits derived by an individual in respect of professional services or other
activities of an independent character are not taxed in the country where
the activities are performed because of the absence of a fixed base or
insufficient `presence in terms of time'. That is, in the absence of a fixed
base or sufficient presence, paragraph 1 of Article 14 (Independent
Personal Services) provides that the profits derived by an individual who
is a resident of a country shall be taxable only in that country.
Article 22 -- Source of Income
Deemed source
3.238 Consistent with Australia's treaty practice, this Article
effectively deems income, profits or gains derived by a resident of a
country which, in accordance with the Chilean convention, may be taxed
in the other country, to have a source in that other country for the
purposes of the law of that other country. It therefore avoids any
difficulties arising under domestic law source rules in respect of the
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exercise by Australia of the taxing rights allocated to Australia by the
convention over income derived by residents of Chile. [Article 22,
paragraph 1]
3.239 Paragraph 2 deals with the source of interest and royalties paid
by dual resident individuals. For the purpose of determining where
income arises under paragraph 7 of Article 11 (Interest) or paragraph 5 of
Article 12 (Royalties), the interest or royalties will be treated as paid by a
resident of a country if the income is paid by an individual who is a
resident of that country in accordance with its domestic law. Such interest
or royalties will be regarded as arising in that country, notwithstanding
that the individual may be treated as a resident only of the other country
for treaty purposes under the tie-breaker rules in paragraph 2 of Article 4
(Resident). This outcome is consistent with that normally provided under
Australia's treaties, where provisions equivalent to paragraph 7 of
Article 11 (Interest) and paragraph 5 of Article 12 (Royalties) refer to `a
person who is a resident of (a) State for the purposes of its tax'. [Article 22,
paragraph 2]
Article 23 -- Relief of Double Taxation
3.240 Double taxation does not arise in respect of income flowing
between Australia and Chile:
· where the terms of the Chilean convention provide for the
income to be taxed only in one country; or
· where the domestic taxation law of one of the States exempts
the income from its tax.
3.241 It is necessary, however, to prescribe a method for relieving
double taxation for other classes of income, profits or gains which, under
the terms of the Chilean 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 an exemption of the foreign income,
or a credit or deduction against its tax for the tax of the country of source.
This Article also reflects that approach.
Australian method of relief
3.242 This Article requires Australia to provide Australian residents a
credit against their Australian tax liability for Chilean tax paid under
Chilean laws and in accordance with the Chilean convention, on income
which is taxable in Australia. The term `income' in this context is
intended to have a broad meaning and includes items of profit or gains
which are dealt with under the income tax law. [Article 23, subparagraph 1a)]
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3.243 Australia's obligation to provide relief is limited in the case of
Chilean dividends included in the assessable income of Australian
taxpayers. This limitation is included in this convention to address
Chile's unique two-tiered system of taxing profits. The amount of relief
in such cases is the lesser of:
· the amount of the Chilean Additional Tax after the First
Category Tax is deducted; or
· fifteen per cent of the amount on which the Additional Tax is
calculated.
[Article 23, subparagraph 1b)]
3.244 Australia's general foreign income tax offset rules, together with
the terms of this Article and of the Chilean convention generally, will
form the basis of Australia's arrangements for relieving a resident of
Australia from double taxation on income, profits or gains that are also
taxed in Chile.
3.245 Accordingly, effect is to be given to the tax credit relief
obligation imposed on Australia by subparagraph 1a) of this Article by
application of the general foreign income tax offset provisions
(Division 770 of the ITAA 1997).
3.246 Dividends and branch profits derived from Chile by an
Australian resident company that are exempt from Australian tax under
the foreign source income measures (for example, 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.
Chilean relief
3.247 Under its domestic law, Chile does not generally provide relief
for foreign taxes paid by Chilean residents. However, under the terms of
this Convention, Chile is required to provide relief by way of a credit for
Australian tax paid to Chilean taxpayers who are taxable in Chile on
income which is also taxable in Australia under this convention.
[Article 23, paragraph 2]
Consideration of exempt amounts
3.248 Paragraph 3 permits each country to take into account income
which is exempt from tax in that country under the Chilean convention in
calculating the amount of tax on other income. [Article 23, paragraph 3]
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The Australia-Chile convention
Article 24 -- Non-Discrimination
3.249 The Chilean convention includes rules to prevent tax
discrimination.
Discrimination based on nationality
3.250 This Article prevents discrimination on the grounds of
nationality by providing that nationals of one country may not be less
favourably treated than nationals of the other country in the same
circumstances. [Article 24, paragraph 1]
3.251 The discrimination that this Article precludes applies to both
taxation and any requirement connected with such taxation. Accordingly,
discrimination in the administration of the tax law is also generally
precluded.
3.252 The term national is defined in subparagraph i) of paragraph 1
of Article 3 (General Definitions) of the Chilean convention and covers
both an individual who is a citizen or national of one country or the other,
and a company `deriving its status as such from the laws in force in that
Contracting State'. Accordingly, a company that is incorporated in
Australia would be a national of Australia while a company that is
incorporated under a law of Chile would be a national of Chile for the
purposes of this paragraph. [Article 3, subparagraph 1i)]
The meaning of `in the same circumstances' and `in particular with
respect to residence'
3.253 The expression `in the same circumstances' refers to persons
who, from the point of the application of the ordinary taxation laws, are in
substantially similar circumstances both in law and in fact.
3.254 Where a person operates in an industry that is subject to
government regulation such as prudential oversight, another person
operating in the same industry but not subject to the same oversight,
would not be in the same circumstances.
3.255 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 Chilean resident compared to an Australian resident will not
constitute discrimination for the 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 Chile.
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The meaning of `other or more burdensome' taxation
3.256 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).
3.257 The phrase `other or more burdensome' taxation 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/Chile
3.258 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 Chile. Consequently, residents of
third countries who are nationals of either Australia or Chile 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
subparagraph i) of paragraph 1 of Article 3 (General Definitions)) of
either country.
Non-discrimination and permanent establishments
3.259 The tax on permanent establishments of enterprises of the other
country will 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 24,
paragraph 2]
3.260 For this paragraph to apply, the enterprises of both States 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.
3.261 Permanent establishments of non-resident enterprises may be
treated differently from resident enterprises as long as the treatment does
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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.
3.262 In determining whether taxation has been less favourably levied,
regard would be had only to the rules applicable to the taxation of the
permanent establishment's own activities, and how those rules compare
with those applicable to the taxation of similar activities carried on by a
local enterprise. As noted in paragraph 41 of the OECD Model
Commentary on Article 24, the equal treatment principle in this paragraph
`does not extend to rules that take account of the relationship between an
enterprise and other enterprises (for example, rules that allow
consolidation, transfer of losses or tax-free transfers of property between
companies under common ownership), since the latter rules do not focus
on the taxation of an enterprise's own business activities similar to those
of the permanent establishment'. Accordingly, this paragraph does not
affect Australia's roll-over rules for capital gains, consolidation rules or
loss transfer rules. Nor does it affect rules concerning the allowance of
rebates or credits in relation to dividends, since these do not relate to the
business activities of the permanent establishment.
Non-resident individuals
3.263 Non-resident individuals do not have to be granted the personal
allowances, reliefs or reductions available to residents of the tax treaty
countries. [Article 24, paragraph 3]
3.264 This means that Australia will continue to be able to grant
certain tax offsets only to resident individuals, such as the tax offset for
dependents contained in Division 13 of the ITAA 1997.
3.265 Unlike paragraph 3 of Article 24 (Non-Discrimination) of the
OECD Model, the 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.
Deductions for payments to foreign residents
3.266 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
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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 24, paragraph 4]
Companies owned or controlled abroad
3.267 A country must not give less favourable treatment to companies,
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 Chilean residents may not
be given other or more burdensome treatment than locally owned or
controlled Australian companies. [Article 24, paragraph 5]
3.268 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 5 or any other
provision of this Article to allow imputation credits to non-resident
shareholders.
Exclusions
3.269 Certain provisions of the law of both countries are not restricted
in their application by this Article. The specific exclusion of these
provisions will ensure that they can continue to operate for their intended
purpose. The provisions of the law of Australia and Chile which are not
restricted in the application by this Article are those that:
· are `designed to prevent the avoidance or evasion of taxes'.
In the case of Australia these laws include thin capitalisation,
dividend stripping, transfer pricing, controlled foreign
companies and transferor trust provisions. Although it is
commonly accepted by most OECD member countries that
such provisions do not contravene Non-Discrimination
Articles, this outcome is specifically provided for in the
Chilean convention by the exclusion of such rules from the
operation of the Article;
· ensure that taxes are effectively collected or recovered. This
preserves the rules relating to the enforcement and operation
of the various aspects of the withholding tax provisions
relating to non-residents. For example, section 26-25
(Interest or royalty) of the ITAA 1997 provides that where
interest and royalties are paid to a non-resident and the payer
fails to deduct withholding tax, the interest or royalty
expense cannot be claimed as a deduction. No similar
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The Australia-Chile convention
measure exists in relation to payments from a resident to
another resident;
· provide tax incentives for research and development
expenditure, provided that a company that is a resident of one
country and is wholly or partly owned by residents of the
other country can access such incentives on the same terms
and conditions as any other company that is a resident of the
first-mentioned country; or
· are agreed in an Exchange of Notes between the two
Governments to be unaffected by this Article.
3.270 Paragraph 6 also requires the competent authorities of both
countries to notify each other of any changes to the excluded laws, where
those changes might, in the absence of these exclusions, be affected by the
provisions of this Article. [Article 24, paragraph 6]
Taxes to which this Article applies
3.271 This Article applies to taxes which are the subject of the Chilean
convention (see paragraphs 3.11 to 3.16 for a list of the taxes covered). It
is intended that the Article extend to any identical or substantially similar
taxes which are subsequently imposed by either country in addition to, or
in place of, these taxes, where those taxes are covered by the convention
in accordance with paragraph 2 of Article 2. In addition, the Article
applies to the GST in the case of Australia and the Value Added Tax in
the case of Chile. [Article 24, paragraph 7]
More favourable treatment
3.272 Nothing in this Article prevents either country from treating
residents of the other country more favourably than its own residents.
Article 25 -- Mutual Agreement Procedure
Consultation on specific cases
3.273 This Article provides for consultation between the competent
authorities of the two countries with a view to reaching a solution in cases
where a person is able to demonstrate actual or potential imposition of
taxation contrary to the provisions of the Chilean convention. [Article 25,
paragraph 2]
3.274 In the case of Australia, the competent authority is the
Commissioner or an authorised representative of the Commissioner.
[Article 3, sub-subparagraph 1h)(i)]
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3.275 A person wishing to use this procedure may present a case to the
competent authority of the country of which the person is a resident. If
the case comes under paragraph 1 of Article 24 (Non-Discrimination) of
the Chilean convention, the person may present a case to the competent
authority of the country of which the person is a national.
3.276 Presentation of a case by a person to a competent authority must
be made within three years of the first notification of the action which the
taxpayer considers gives rise to taxation not in accordance with the
Chilean convention. Presentation of a case does not deprive the person of
access to, or affect their rights in relation to, other legal remedies available
under the domestic laws of the countries. [Article 25, paragraph 1]
3.277 In the course of negotiations, the two delegations agreed that:
`The competent authorities will notify each other at the time when a
case is presented under paragraph 1.'
3.278 If the person's claim seems to the competent authority to which
the case has been presented to be justified, and that competent authority is
not itself able to solve the problem, then the competent authority is
required to seek to resolve the case by mutual agreement with the
competent authority of the other country, with a view to avoiding taxation
not in accordance with the Chilean convention. [Article 25, paragraph 2]
3.279 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
3.280 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, provided that, in the case of Chile, the matter is presented
within three years from the determination of the Chilean tax liability to
which the case relates. This allows the competent authorities the
flexibility to reach a satisfactory solution and avoids problems that might
arise where each country has a different time limit in their domestic law.
[Article 25, paragraph 2]
Consultation on general problems
3.281 This Article also authorises consultation between the competent
authorities of the two countries for the purpose of resolving any
difficulties that arise regarding the interpretation or application of the
Chilean convention. This may allow, for example, the competent
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The Australia-Chile convention
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. [Article 25, paragraph 3]
Methods of communication between competent authorities
3.282 The competent authorities are permitted to communicate directly
with each other without having to go through diplomatic channels. This
may be done by electronic means (for example, facsimile transmission,
e-mail or web conferencing), letter, telephone, direct meetings or any
other convenient means. [Article 25, paragraph 4]
General Agreement on Trade in Services dispute resolution process
3.283 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).
3.284 Australia and Chile 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.
3.285 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.
3.286 This provision is based, in all essential respects, on an OECD
Model Commentary recommendation, and is common in recent
international treaty practice. [Article 25, paragraph 5]
Article 26 -- Exchange of Information
3.287 The Chilean convention allows for the competent authorities to
exchange information on a wide range of taxes and irrespective of
whether the country of whom the information is requested has a domestic
tax interest in the information sought. The information allowed to be
exchanged does not have to concern a resident of either Australia or Chile.
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Foreseeably relevant information
3.288 Article 26 authorises and limits the exchange of information by
the two competent authorities to information foreseeably relevant to the
administration or enforcement of the relevant taxes. The exchange of
information is not restricted by Article 1 (Persons Covered) or Article 2
(Taxes Covered) of the Chilean convention, and may therefore cover
persons who are not residents of Australia or Chile.
3.289 The standard of foreseeable relevance is intended to ensure that
information may be exchanged to the widest possible extent. However,
competent authorities are not entitled to request information from the
other country which is unlikely to be relevant to the tax affairs of a
taxpayer, or to the administration and enforcement of tax laws. [Article 26,
paragraph 1]
Taxes to which this Article applies
3.290 Under the Chilean convention, the Australian competent
authority can request and obtain information concerning all federal taxes
from the competent authority in Chile. This means, for example, that
information concerning Australian indirect taxes (that is, the GST) may be
requested and obtained from Chile.
3.291 Similarly, in the case of Chile, the Chilean competent authority
can request and obtain information concerning taxes of every kind and
description imposed under Chilean tax laws from Australia.
Use of exchanged information
3.292 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 26, paragraph 2]
No domestic tax interest required
3.293 When requested, a country is required to obtain information in
the same manner as if it were administering its domestic tax system,
notwithstanding that the country may not require the information for its
own purposes. Australia would recognise this obligation to obtain
relevant information for treaty partner countries, even in the absence of an
explicit provision to this effect. [Article 25, paragraph 4]
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Limitations
3.294 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 Chile; or
· such information is not obtainable under the domestic law or
in the normal course of administration of Australia or Chile.
[Article 26, subparagraphs 3a) and 3b)]
3.295 Also, in no case is the country receiving the request obliged to
supply information under this Article that would:
· disclose any trade, business, industrial, commercial or
professional secret or trade process; or
· be contrary to public policy.
[Article 26, subparagraph 3c)]
Information held by institutions such as banks, other financial
institutions or nominees
3.296 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 institutions such as banks, other financial institutions or
nominees. This reflects the 2005 changes to Article 26 (Exchange of
Information) of the OECD Model. [Article 26, paragraph 5]
3.297 Notwithstanding Article 29 (Entry into Force) of the Chilean
convention, in the case of Chile, information to which paragraph 5 applies
(that is, information held by institutions such as banks, other financial
institutions or nominees), to the extent that such information is covered by
Article 1 of Decree Law No. 707 and Article 154 of Decree Law No. 3,
will be available with respect to bank account transactions that take place
on or after 1 January 2010. [Protocol, item 9]
Information that exists prior to the entry into force of this Convention
3.298 With the exception of the limitation on the exchange of
information specified in the first sentence of item 9 of the Protocol, the
competent authorities can exchange information that relates to
transactions or events occurring prior to the date of entry into force of the
Chilean convention.
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Article 27 -- Limitations of Benefits
Dividends, interest and royalties
3.299 No treaty benefits are available under Articles 10 (Dividends),
11 (Interest) and 12 (Royalties) in cases where an assignment of the
relevant income, or the creation or assignment of a right or debt-claim in
respect of which the income has been paid, has been designed or
undertaken with a main purpose of taking advantage of those Articles.
[Article 27, paragraph 1]
Maintaining the integrity of the Chilean convention
3.300 Paragraph 2 of this Article obliges the relevant authorities to
consult with a view to recommending specific changes where it is
perceived that benefits may not be within those contemplated or intended
under the Chilean convention. The inclusion of this provision will ensure
that the treaty applies as it was intended to. [Article 27, paragraph 2]
Australian temporary residents
3.301 The Chilean convention also provides that where an individual is
a temporary resident of Australia and is, for that reason, exempt from tax
in Australia on certain income, profits or gains in Australia, then Chile
will not be required to provide any relief specified in the Convention in
respect of such income, profits or gains. [Article 27, paragraph 3]
Article 28 -- Members of Diplomatic Missions and Consular Posts
3.302 The purpose of this Article is to ensure that the provisions of the
Chilean 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 28]
Article 29 -- Entry into Force
Date of entry into force
3.303 This Article provides for the entry into force of the Chilean
convention. The convention will enter into force on the last date on which
diplomatic notes are exchanged notifying that the domestic processes to
approve the convention in the respective countries have been completed.
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In Australia, enactment of the legislation giving the force of law in
Australia to the convention along with tabling the convention in
Parliament are prerequisites to the exchange of diplomatic notes.
[Article 29]
Date of application for Australian taxes
Withholding taxes
3.304 Once it enters into force, the Chilean convention will apply in
Australia in respect of withholding tax on income that is derived by a
non-resident in relation to income derived on or after the first day of the
second month next following the date on which the convention enters into
force. [Article 29, sub-subparagraph a)(i)]
Fringe benefits tax
3.305 The Chilean convention will apply in Australia in respect of
fringe benefits provided on or after 1 April next following the date on
which this convention enters into force. [Article 29, sub-subparagraph a)(ii)]
Other Australian taxes
3.306 The Chilean convention will first apply to other Australian taxes
as regards any year of income beginning on or after 1 July next following
the date on which the convention enters into force.
3.307 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 next following the date on
which the Chilean convention enters into force will be the relevant year of
income for the purposes of the application of such Australian tax.
[Article 29, sub-subparagraph a)(iii)]
Date of application for Chilean taxes
3.308 Once it enters into force, the Chilean convention will apply in
Chile in respect of taxes on income obtained and amounts paid, credited to
an account, put at the disposal or accounted as an expense, on or after
1 January next following the date on which the convention enters into
force. [Article 29, subparagraph b)]
Exchange of Information
3.309 Article 26 (Exchange of Information) is intended to have effect
from the date of entry into force of the Chilean convention, irrespective of
the year of income to which the information relates (subject to any
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domestic law time limits). However it is subject to the limitations of
item 9 of the Protocol (see paragraph 3.297).
Article 30 -- Termination
3.310 The Chilean 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, at least six months
before the end of any calendar year beginning after the expiration of that
five-year period.
Cessation in Australia
3.311 In the event of either country terminating the Chilean
convention, the convention would cease to be effective in Australia for the
purposes of:
· withholding tax on income derived by a non-resident, in
relation to income derived on or after the first day of the
second month next following that in which the notice of
termination is given;
· fringe benefits tax, in respect of fringe benefits provided on
or after 1 April next following that in which the notice of
termination is given; and
· other Australian taxes, as regards any year of income, profits
or gains in the Australian year of income commencing on or
after 1 July next following that in which the notice of
termination is given.
[Article 30, subparagraph a)]
Cessation in Chile
3.312 In the event of either country terminating the Chilean
convention, the convention would cease to be effective in Chile in respect
of taxes on income obtained and amounts paid, credited to an account, put
at the disposal or accounted as an expense, on or after 1 January next
following the date on which the notice of termination is given. [Article 30,
subparagraph b)]
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Chapter 4
Australia-the Cook Islands agreement
Outline of chapter
4.1 Schedule 2 to this Bill amends the International Tax Agreements
Act 1953 (Agreements Act 1953) to define and give the force of law to the
2009 Agreement between the Government of Australia and the
Government of the Cook Islands on the Allocation of Taxing Rights with
respect to Certain Income of Individuals and to Establish a Mutual
Agreement Procedure in respect of Transfer Pricing Adjustments (Cook
Islands agreement). Subsection 3AAA(1) of the Agreements Act 1953
will define the Cook Islands agreement and subsection 5(1) will give it the
force of law in Australia. This chapter explains the rules that apply in the
Cook Islands agreement.
Context of amendments
4.2 The Cook Islands agreement was signed in Rarotonga on
27 October 2009. There is no pre-existing agreement of this type between
Australia and the Cooks Islands.
Summary of new law
Main features of the Cook Islands agreement
4.3 The main features of the Cook Islands agreement are as follows:
· Income from pensions and retirement annuities will generally
be taxed only in the country of residence of the recipient,
provided the income is subject to tax in that country [Article 5].
· Income from government service will generally be taxed only
in the country that pays the remuneration. However, the
remuneration shall only be taxed in the other country where
the services are rendered in that other country by a resident
of that other country who is a national of that other country
or did not become a resident of that other country for the
purpose of rendering the services [Article 6].
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· Payments made from abroad to visiting students and business
apprentices for the purposes of their maintenance, education
or training will be exempt from tax in the country visited
[Article 7].
· A non-binding administrative mechanism will be established
to assist taxpayers to seek resolution of transfer pricing
disputes [Article 8].
Comparison of key features of new law and current law
New law Current law
Australian source pensions and Australian source income of foreign
retirement annuities derived by residents is generally subject to
residents of the Cook Islands will be Australian tax.
exempt from Australian tax, provided
they are taxed in the Cook Islands.
Certain income derived by residents Australian source income of foreign
of the Cook Islands from government residents is generally subject to
service in Australia will be exempt Australian tax.
from Australian tax.
Certain payments received by visiting Some payments received by foreign
students and business apprentices students and business apprentices
from the Cook Islands will be exempt may be taxable in Australia,
from Australian tax. depending on the circumstances.
The competent authorities of No equivalent.
Australia and the Cook Islands will
endeavour to resolve taxpayers'
transfer pricing disputes arising from
transfer pricing adjustments that
contravene the arm's length principle
through mutual agreement.
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Australia-the Cook Islands agreement
The Cook Islands agreement
4.4 A full transcript of the Cook Islands agreement and detailed
explanation follows:
`AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE
GOVERNMENT OF THE COOK ISLANDS ON THE ALLOCATION OF
TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF
INDIVIDUALS AND TO ESTABLISH A MUTUAL AGREEMENT
PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS
The Government of Australia and the Government of the Cook Islands ("the
Contracting Parties"),
Recognising that the Contracting Parties have concluded an Agreement on the
Exchange of Information with Respect to Taxes, and
Desiring to conclude an Agreement for the allocation of taxing rights with respect to
certain income of individuals and to establish a mutual agreement procedure in respect
of transfer pricing adjustments,
Have agreed as follows:
ARTICLE 1
PERSONS COVERED
This Agreement shall apply to persons who are residents of one or both of the
Contracting Parties.
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ARTICLE 2
TAXES COVERED
1 The existing taxes to which this Agreement shall apply are:
(a) in Australia, the income tax imposed under the federal law of
Australia;
(hereinafter referred to as "Australian tax").
(b) in the Cook Islands, the income tax;
(hereinafter referred to as "Cook Islands tax").
2 This Agreement shall also apply to any identical or substantially
similar taxes which are imposed after the date of signature of this Agreement in
addition to, or in place of, the existing taxes. The competent authorities of the
Contracting Parties shall notify each other within a reasonable period of time of any
substantial changes to the taxation laws covered by this Agreement.
3 This Agreement shall not apply to taxes imposed by states,
municipalities, local authorities or other political subdivisions, or possessions of a
Contracting Party.
ARTICLE 3
DEFINITIONS
1 For the purposes of this Agreement, unless the context otherwise requires:
(a) the term "Australia", when used in a geographical sense, excludes all
external territories other than:
(i) the Territory of Norfolk Island;
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(ii) the Territory of Christmas Island;
(iii) the Territory of Cocos (Keeling) Islands;
(iv) the Territory of Ashmore and Cartier Islands;
(v) the Territory of Heard Island and McDonald Islands; and
(vi) the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of Australia
(including the Territories specified in this subparagraph) in respect of
which there is for the time being in force, consistently with international
law, a law of Australia dealing with the exploration for or exploitation of
any of the natural resources of the exclusive economic zone or the seabed
and subsoil of the continental shelf;
(b) the term "the Cook Islands" means the territory of the Cook Islands;
(c) the term "competent authority" means, in the case of Australia, the
Commissioner of Taxation or an authorised representative of the
Commissioner and in the case of the Cook Islands, the Collector of
Inland Revenue or an authorised representative of the Collector;
(d) the term "Contracting Party" means Australia or the Cook Islands, as
the context requires;
(e) the term "person" includes an individual, a company and any other
body of persons;
(f) the term "tax" means Australian tax or Cook Islands tax, as the context
requires; and
(g) the term "transfer pricing adjustment"means an adjustment made by
the competent authority of a Contracting Party to the profits of an
enterprise as a result of applying the domestic law concerning taxes
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referred to in Article 2 of that Contracting Party regarding transfer
pricing.
2 As regards the application of this Agreement at any time by a Contracting
Party, any term not defined therein shall, unless the context otherwise requires, have
the meaning that it has at that time under the law of that Contracting Party, for the
purposes of the taxes to which this Agreement applies, with any meaning under the
applicable tax laws of that Contracting Party prevailing over a meaning given to the
term under other laws of that Contracting Party.
ARTICLE 4
RESIDENT
1 For the purposes of this Agreement, the term "resident of a Contracting Party"
means:
(a) in the case of Australia, a person who is a resident of Australia for the
purposes of Australian tax; and
(b) in the case of the Cook Islands, a person who is a resident of the Cook
Islands for the purposes of Cook Islands tax.
2 A person is not a resident of a Contracting Party for the purposes of this
Agreement if the person is liable to tax in that Contracting Party in respect only of
income from sources in that Contracting Party.
3 Where by reason of the preceding provisions of this Article a person, being an
individual, is a resident of both Parties, then the person's status shall be determined as
follows:
(a) the individual shall be deemed to be a resident only of the Contracting
Party in which a permanent home is available to that individual; if a
permanent home is available in both Parties, or in neither of them, that
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Australia-the Cook Islands agreement
individual shall be deemed to be a resident only of the Contracting
Party with which the individual's personal and economic relations are
closer (centre of vital interests);
(b) if the Contracting Party in which the individual has their centre of vital
interests cannot be determined, the individual shall be deemed to be a
resident only of the Contracting Party in which the individual has an
habitual abode;
(c) if the individual has an habitual abode in both Contracting Parties, or
in neither of them, the competent authorities of the Contracting Parties
shall settle the question by mutual agreement.
4 Where by reason of paragraph 1 a person other than an individual is a resident
of both Parties, then it shall be deemed to be a resident only of the Contracting Party in
which its place of effective management is situated.
ARTICLE 5
PENSIONS AND RETIREMENT ANNUITIES
1 Pensions (including government pensions) and retirement annuities paid to an
individual who is a resident of a Contracting Party shall be taxable only in that Party.
However, pensions and retirement annuities arising in a Contracting Party may be
taxed in that Party where such income is not subject to tax in the other Contracting
Party.
2 The term "retirement annuity" means:
(a) in the case of Australia, a superannuation annuity payment within the
meaning of the taxation laws of Australia;
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International Tax Agreements Amendment (No. 1) Bill 2011
(b) in the case of the Cook Islands, an annuity payment that is not an
approved annuity within the meaning of the taxation laws of the Cook
Islands; and
(c) any other similar periodic payment agreed upon by the competent
authorities.
ARTICLE 6
GOVERNMENT SERVICE
1 (a) Salaries, wages and other similar remuneration, other than a pension or
retirement annuity, paid by a Contracting Party or a political subdivision
or a local authority thereof to an individual in respect of services rendered
to that Contracting Party or subdivision or authority shall be taxable only
in that Contracting Party.
(b) However, such salaries, wages and other similar remuneration shall be
taxable only in the other Contracting Party if the services are rendered in
that Party and the individual is a resident of that Party who:
(i) is a national or citizen of that Contracting Party; or
(ii) did not become a resident of that Party solely for the purpose
of rendering the services.
2 Notwithstanding the provisions of paragraph 1, salaries, wages and other
similar remuneration in respect of services rendered in connection with any trade or
business carried on by a Contracting Party or a political subdivision or a local authority
thereof may be taxed in accordance with the laws of a Party.
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Australia-the Cook Islands agreement
ARTICLE 7
STUDENTS
Payments which a student or business apprentice who is or was immediately before
visiting a Contracting Party a resident of the other Contracting Party and who is
temporarily present in the first-mentioned Party solely for the purpose of their
education or training, receives for the purpose of their maintenance, education or
training shall not be taxed by that Party, provided such payments arise from sources
outside that Party.
ARTICLE 8
MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER
PRICING ADJUSTMENTS
1 Where a resident of a Contracting Party considers the actions of the other
Contracting Party results or will result in a transfer pricing adjustment not in
accordance with the arm's length principle, the resident may, irrespective of the
remedies provided by the domestic law of those Parties, present a case to the
competent authority of the first-mentioned Party. The case must be presented within 3
years of the first notification of the adjustment.
2 The competent authorities shall endeavour to resolve any difficulties or doubts
arising as to the application of the arm's length principle by a Contracting Party
regarding transfer pricing adjustments. They may also communicate with each other
directly for the purposes of this Article.
ARTICLE 9
EXCHANGE OF INFORMATION
The competent authorities of the Contracting Parties shall exchange such information
as is forseeably relevant for carrying out the provisions of this Agreement. Information
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International Tax Agreements Amendment (No. 1) Bill 2011
may be exchanged by the competent authorities for the purposes of this Article in
accordance with the provisions of the Agreement on the Exchange of Information with
Respect to Taxes concluded by the Contracting Parties (whether or not this Agreement,
in whole or in part, forms part of the domestic law of either Contracting Party).
ARTICLE 10
ENTRY INTO FORCE
The Contracting Parties shall notify each other, in writing, through the
diplomatic channel of the completion of their constitutional and legal procedures for
the entry into force of this Agreement. This Agreement shall enter into force on the
date of the last notification, and shall, provided an Agreement on the Exchange of
Information with Respect to Taxes is in force between the Contracting Parties,
thereupon have effect:
(a) in respect of Australian tax, for any year of income beginning on or
after 1 July in the calendar year next following the date on which this
Agreement enters into force; and
(b) in respect of Cook Islands tax, for any year of income beginning on or
after 1 January in the calendar year following the date on which this
Agreement enters into force.
ARTICLE 11
TERMINATION
1 This Agreement shall continue in effect indefinitely, but either of the
Contracting Parties may give to the other Contracting Party written notice of
termination.
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Australia-the Cook Islands agreement
2 Such termination shall become effective:
(a) in respect of Australian tax, in the year of income beginning on or after
1 July in the calendar year next following that in which the notice of
termination is given; and
(b) in respect of Cook Islands tax, in the year of income beginning on or
after 1 January in the calendar year following that in which the notice
of termination is given.
3 Notwithstanding the provisions of paragraph 1 or 2, this Agreement shall, on
receipt through the diplomatic channel of written notice of termination of the
Agreement on the Exchange of Information with Respect to Taxes between the
Contracting Parties, terminate and cease to be effective on the first day of the month
following the expiration of a period of 6 months after the date of receipt of such notice.
IN WITNESS WHEREOF the undersigned, duly authorised thereto by their
respective Governments, have signed this Agreement.
DONE at [ ], [ ] this [ ]
day of [ ], 200[ ], in duplicate.
FOR THE GOVERNMENT OF FOR THE
GOVERNMENT OF AUSTRALIA: THE COOK ISLANDS:'
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International Tax Agreements Amendment (No. 1) Bill 2011
Detailed explanation of new law
Article 1 -- Persons Covered
4.5 This Article establishes the scope of the application of the Cook
Islands agreement by providing for it to apply to persons who are
residents of one or both of the countries [Article 1]. For the purposes of the
agreement `person' includes an individual, company and other body of
persons (see paragraph 1.16).
4.6 The application of the Cook Islands agreement to persons who
are dual residents (that is, residents of both countries) is dealt with in
Article 4 (Resident) (see paragraph 1.22).
Article 2 -- Taxes Covered
4.7 This Article specifies the existing taxes of each country to which
the Cook Islands agreement applies. This is, in the case of Australia, the
federal income tax. [Article 2, subparagraph 1a)]
4.8 For the Cook Islands, this agreement applies to taxes on income.
[Article 2, subparagraph 1b)]
4.9 The application of the Cook Islands agreement 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 of Australia and
the Cook Islands are required to notify each other in the event of a
substantial changes to the taxation laws covered by the Cook Islands
agreement, within a reasonable period of time after those changes.
[Article 2, paragraph 2]
4.10 The Agreement does not apply to taxes imposed by states,
municipalities, local authorities or other political subdivisions or
possessions. [Article 2, paragraph 3]
Article 3 -- Definitions
Definition of Australia
4.11 The definition of `Australia' follows corresponding definitions
in Australia's modern tax treaties. `Australia' is defined to include certain
external territories and areas of the continental shelf. [Article 3,
subparagraph 1a)]
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Australia-the Cook Islands agreement
Definition of the Cook Islands
4.12 The Cook Islands is defined to mean the territory of the
Cook Islands. [Article 3, subparagraph 1b)]
Definition of competent authority
4.13 The `competent authority' is the person or institution
specifically authorised to perform certain actions under the Cook Islands
agreement. For example, to notify each other of any significant changes
to the tax law of their respective countries, Article 2 (Taxes Covered), to
communicate for the purposes of Article 8 (Mutual Agreement Procedure)
and to exchange information in accordance with Article 9 (Exchange of
Information).
4.14 In the case of Australia, the competent authority is the
Commissioner of Taxation (Commissioner) or an authorised
representative of the Commissioner. In the case of the Cook Islands, the
competent authority is the Collector of Inland Revenue or an authorised
representative of the Collector. [Article 3, subparagraph 1c)]
Definition of contracting party
4.15 `Contracting Party' means Australia or the Cook Islands, as the
context requires. [Article 3, subparagraph 1d)]
Definition of person
4.16 `Person' includes an individual, a company and any other body
of persons [Article 3, subparagraph 1e)]. However, Article 8 (Mutual
Agreement Procedure) is the only substantive article of the Cook Islands
agreement that will affect persons that are non-individuals.
Definition of tax
4.17 `Tax' means Australian tax or Cook Islands tax, as the context
requires. [Article 3, subparagraph 1f)]. See paragraphs 4.7 to 4.10 for taxes
covered by the agreement.
Definition of transfer pricing adjustment
4.18 A transfer pricing adjustment is an adjustment made by the tax
authorities of Australia or the Cook Islands to the profits of an enterprise,
based on the application of domestic transfer pricing laws [Article 3,
subparagraph 1g)]. For Australia, such laws are contained in Division 13 of
Part III of the Income Tax Assessment Act 1936 (ITAA 1936).
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Terms not specifically defined
4.19 A term that is not specifically defined in the Cook Islands
agreement shall have (unless the context requires otherwise) the meaning
that it has under the domestic law of the country applying the Cook
Islands agreement at the time of its application. In that case, the term's
domestic taxation law meaning will have precedence over any meaning it
may have under that country's other domestic laws. [Article 3, paragraph 2]
Article 4 -- Resident
4.20 This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the Cook Islands
agreement. Residential status is a criterion for determining each country's
taxing rights and is a necessary condition for the provision of relief under
the Cook Islands agreement. In the case of Australia, a person's residence
is determined according to Australia's taxation law [Article 4,
subparagraph 1a)]. In the case of the Cook Islands, residence is determined
according to the Cook Islands taxation law [Article 4, subparagraph 1b)].
Special residency rules
4.21 A person is not a resident of a country, for the purposes of the
Cook Islands agreement, if that person is liable to tax in that country in
respect only of income from sources in that country [Article 4, paragraph 2].
In the Australian context, this would mean, for example, that Norfolk
Island residents, who are generally only subject to Australian tax on
Australian source income, are not residents of Australia for the purposes
of the Cook Islands agreement. Accordingly, the Cook Islands will not
have to forego tax in accordance with the Cook Islands agreement on
income derived by Norfolk Island residents (which will not be subject to
Australian tax).
Dual residents
4.22 Tie-breaker rules are included for determining residency of a
person, for the purposes of the Cook Islands agreement, if the person
qualifies as a resident of both countries in accordance with paragraph 1 of
Article 4. In the case of an individual the rules, in order of application,
are:
· if the individual has a permanent home available to himself
or herself in only one of the countries, the person is deemed
to be a resident solely of that country [Article 4,
subparagraph 3a)];
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· if the individual has a permanent home available in both
countries or in neither, then the person's residential status
takes into account their personal or economic relations with
Australia and the Cook Islands, and the person is deemed for
the purposes of the Cook Islands agreement to be a resident
only of the country with which they have the closer personal
and economic relations [Article 4, subparagraph 3a)];
· if the individual has an habitual abode in either Australia or
the Cook Islands the person is deemed to be a resident of that
country [Article 4, subparagraph 3b)];
· if the individual has a habitual abode in both countries, or of
neither, the competent authorities will resolve the question of
treaty residence by mutual agreement [Article 4,
subparagraph 3c)].
4.23 In the case of a non-individual, that is a company, partnership or
other body or person, which would under paragraph 1 of Article 4 be a
resident of both Australia and the Cook Islands, then the entity will be
deemed to be a resident of the country in which the place of effective
management is situated. [Article 4, paragraph 4]
4.24 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 Australian as a resident, insofar as the Cook Islands
agreement allows.
Article 5 -- Pensions and Retirement Annuities
4.25 Pensions and retirement annuities are taxable only by the
country of which the recipient is a resident, provided such income is
subject to tax in that country. If such income is not subject to tax in that
country, the income may be taxed by the country from which the relevant
payments were made. [Article 5, paragraph 1]
Meaning of retirement annuity
4.26 In the case of Australia, retirement annuity means a
superannuation annuity payment within the meaning of the taxation laws
of Australia [Article 5, subparagraph 2a)]. A superannuation annuity as
defined by Regulation 995-1.01 of the Income Tax Assessment
Regulations 1997, which took effect from 1 July 2007, is a retirement
annuity. In the case of the Cook Islands, `retirement annuity' means an
annuity payment which is not an approved annuity under the Cook Islands
tax laws [Article 5, subparagraph 2b)]. This Article also allows for a
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retirement annuity to include other similar periodic payments agreed to by
the competent authority [Article 5, subparagraph 2c)].
Article 6 -- Government Service
4.27 Salary and wage type income, other than government service
pensions paid to an individual for services rendered to a government of
one of the countries (including a political subdivision or local authority),
is to be taxed only in that country. However, such remuneration will be
taxable only in the other country if the services are rendered in that other
country and:
· the recipient is a resident of, and a national or citizen of, that
other country; or
· the recipient is a resident of that other country and did not
become a resident of that country solely for the purpose of
rendering the services (for example, if the recipient is a
permanent resident of that other country).
[Article 6, paragraph 1]
Business income
4.28 Remuneration in respect of services rendered in connection with
a trade or business carried on by a governmental authority is excluded
from the scope of the Article. Such remuneration will remain subject to
the domestic taxation laws of the two countries. [Article 6, paragraph 2]
Article 7 -- Students
Exemption from tax
4.29 This Article applies to students or 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,
resident in 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 7]
Employment income
4.30 Where a Cook Islander student visiting Australia solely for
educational purposes undertakes employment in Australia, for example,
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part-time work with a local employer, the income earned by that student
as a consequence of that employment may be subject to tax in Australia.
4.31 For business apprentices, 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, falls for consideration under domestic taxation law.
4.32 In the case of a Cook Islander 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.
4.33 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 (that is, a subsistence payment).
If the remuneration is similar to the amounts paid to persons who provide
similar services who are not business apprentices (that is, salary
equivalent), this would generally indicate that the payments constitute
income from employment that would fall for consideration under
domestic taxation law. Likewise, if that business apprentice undertakes
any other employment in Australia, the income earned from that
employment may be subject to tax in Australia.
4.34 Where a taxpayer received both exempt income and assessable
income, the exempt income may in some cases be taken into account in
determining the rate of tax payable on the assessable income.
However, payments received from abroad for a 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.
Article 8 -- Mutual Agreement Procedure in Respect of
Transfer Pricing Adjustments
4.35 This Article provides for consultation between the competent
authorities of the two countries for the purpose of endeavouring to resolve
disputes concerning transfer pricing adjustments purportedly made not in
accordance with the arm's length principle. [Article 8, paragraph 2]
4.36 The term `arm's length principle' refers to the requirement that
businesses price their related party international dealings according to
what truly independent parties acting independently would reasonably be
expected to have done in the same situation. In Australia the
Commissioner would apply the arm's length principle when reviewing
business transactions in the context of Division 13 of Part III of the
ITAA 1936.
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4.37 A person wishing to use this mutual agreement procedure must
present their case to the competent authority of their country of residence
within three years of the first notification of the transfer pricing
adjustment. This procedure operates independently of, and in addition to,
domestic legal remedies available to taxpayers. [Article 8, paragraph 1]
Article 9 -- Exchange of Information
4.38 This Article authorises and limits the exchange of information
by the competent authorities to information that is foreseeably relevant to
the administration of the Cook Islands agreement.
4.39 The exchange of information is subject to the provisions of the
Agreement on the Exchange of Information with Respect to Taxes, which
was signed by the two countries on 27 October 2009. After it takes effect,
that agreement will provide for exchange of information that is
foreseeably relevant to the administration of the taxation laws of the two
countries. It also contains safeguards to protect taxpayers' rights. For
example:
· confidentiality rules to ensure that information exchanged is
only disclosed to authorised recipients; and
· limitations to ensure that the competent authorities do not
exceed domestic laws and administrative procedures in the
course of obtaining and supplying information.
Article 10 -- Entry into Force
Date of entry into force
4.40 The Cook Islands agreement will enter into force on the date of
the last exchange of diplomatic notes notifying that the domestic
procedures to give it the force of law have been completed. In Australia,
enactment of the legislation giving the Cook Islands agreement the force
of law along with tabling the Cook Islands agreement in Parliament are
prerequisites to the exchange of diplomatic notes. Entry into force is also
conditional upon the related Agreement on the Exchange of Information
with Respect to Taxes between the two countries being in force at that
time.
Date of application in Australia
4.41 Following entry into force, the Cook Islands agreement will take
effect in Australia in respect of any income year beginning on or after
1 July in the calendar year next following the date on which it enters into
force. [Article 10, subparagraph 1a)]
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Date of application in the Cook Islands
4.42 Following entry into force, the Cook Islands agreement will take
effect in the Cook Islands in respect of any income year beginning on or
after 1 January in the calendar year next following the date on which it
enters into force. [Article 10, subparagraph 1b)]
Article 11 -- Termination
4.43 The Cook Islands agreement is to continue in effect indefinitely.
However, either country may give the other country written notice of
termination of the agreement through diplomatic channels. [Article 11,
paragraph 1]
Cessation in Australia
4.44 In the event of either country terminating the Cook Islands
agreement, it would cease to be effective in Australia in the year of
income beginning on or after 1 July in the calendar year next following
that in which the notice of termination is given. [Article 11, subparagraph 2a)]
Cessation for the Cook Islands
4.45 The Cook Islands agreement would correspondingly cease to be
effective in the Cook Islands for any year of income beginning on or after
1 January in the calendar year next following that in which the notice of
termination is given. [Article 11, subparagraph 2b)]
Cessation in other circumstances
4.46 The Cook Islands agreement will also terminate and cease to be
effective if the Agreement on the Exchange of Information with Respect to
Taxes between Australia and the Cook Islands is terminated. In that
event, the Cook Islands Agreement would terminate on the first day of the
month following the expiration of six months after receipt of notification
of termination of the Agreement on the Exchange of Information with
Respect to Taxes. [Article 11, paragraph 3]
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Chapter 5
Australia-Guernsey agreement
Outline of chapter
5.1 Schedule 2 to this Bill amends the International Tax Agreements
Act 1953 (Agreements Act 1953) to define and give the force of law to the
2009 Agreement between the Government of Australia and the States of
Guernsey for the Allocation of Taxing Rights with respect to Certain
Income of Individuals and to Establish a Mutual Agreement Procedure in
respect of Transfer Pricing Adjustments (Guernsey agreement).
Subsection 3AAA(1) of the Agreements Act 1953 will define the
Guernsey agreement and subsection 5(1) will give it the force of law in
Australia. This chapter explains the rules that apply in the Guernsey
agreement.
Context of amendments
5.2 The Guernsey agreement was signed in London on
7 October 2009. There is no pre-existing agreement of this type
between Australia and Guernsey.
Summary of new law
Main features of the agreement
5.3 The main features of the Guernsey agreement are as follows:
· Income from government service will generally be taxed only
in the country that pays the remuneration. However, the
remuneration shall only be taxed in the other country where
the services are rendered in that other country by a resident
of that other country who is a national of that other country
or did not become a resident of that other country for the
purpose of rendering the services. [Article 5]
· Payments made from abroad to visiting students and business
apprentices for the purposes of their maintenance, education
or training will be exempt from tax in the country visited.
[Article 6]
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· A non-binding administrative mechanism will be established
to assist taxpayers to seek resolution of transfer pricing
disputes. [Article 7]
Comparison of key features of new law and current law
New law Current law
Certain income derived by residents Australian source income of foreign
of Guernsey from government service residents is generally subject to
in Australia will be exempt from Australian tax.
Australian tax.
Certain payments received by visiting Some payments received by foreign
students and business apprentices students and business apprentices
from Guernsey will be exempt from may be taxable in Australia,
Australian tax. depending on the circumstances.
The competent authorities of No equivalent.
Australia and Guernsey will endeavor
to resolve taxpayers' transfer pricing
disputes arising from transfer pricing
adjustments that contravene the arm's
length principle through mutual
agreement.
The Guernsey agreement
5.4 A full transcript of the Guernsey agreement and detailed
explanation follows:
`AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA
AND THE STATES OF GUERNSEY FOR THE ALLOCATION OF
TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF
INDIVIDUALS AND TO ESTABLISH A MUTUAL AGREEMENT
PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS
The Government of Australia and the States of Guernsey ("the Parties"),
Recognising that the Parties have concluded an Agreement for the Exchange of
Information Relating to Tax Matters, and
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Australia-Guernsey agreement
Desiring to conclude an Agreement for the allocation of taxing rights with respect to
certain income of individuals and to establish a mutual agreement procedure in respect
of transfer pricing adjustments,
Have agreed as follows:
ARTICLE 1
PERSONS COVERED
This Agreement shall apply to persons who are residents of one or both of the
Parties.
ARTICLE 2
TAXES COVERED
1 The existing taxes to which this Agreement shall apply are:
(a) in the case of Australia, the income tax imposed under the federal law
of Australia;
(hereinafter referred to as "Australian tax");
(b) in the case of Guernsey:
(i) income tax;
(ii) dwellings profits tax;
(hereinafter referred to as "Guernsey tax").
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2 This Agreement shall also apply to any identical or substantially similar taxes
which are imposed after the date of signature of this Agreement in addition to, or in
place of, the existing taxes. The competent authorities of the Parties shall notify each
other within a reasonable period of time of any substantial changes to the taxation laws
covered by this Agreement.
3 This Agreement shall not apply to taxes imposed by states, municipalities,
local authorities or other political subdivisions, or possessions of a Party.
ARTICLE 3
DEFINITIONS
1 For the purposes of this Agreement, unless the context otherwise requires:
(a) "Australia", when used in a geographical sense, excludes all external
territories other than:
(i) the Territory of Norfolk Island;
(ii) the Territory of Christmas Island;
(iii) the Territory of Cocos (Keeling) Islands;
(iv) the Territory of Ashmore and Cartier Islands;
(v) the Territory of Heard Island and McDonald Islands; and
(vi) the Coral Sea Islands Territory,
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Australia-Guernsey agreement
and includes any area adjacent to the territorial limits of Australia
(including the Territories specified in this subparagraph) in respect of
which there is for the time being in force, consistently with international
law, a law of Australia dealing with the exploration for or exploitation of
any of the natural resources of the exclusive economic zone or the seabed
and subsoil of the continental shelf;
(b) "Guernsey" means Guernsey, Alderney and Herm, including the territorial
sea adjacent to those islands, in accordance with international law;
(c) "competent authority" means in the case of Australia, the Commissioner
of Taxation or an authorised representative of the Commissioner and, in
the case of Guernsey, the Director of Income Tax or his delegate;
(d) "person" includes an individual, a company and any other body of
persons;
(e) "tax" means Australian tax or Guernsey tax as the context requires; and
(f) "transfer pricing adjustment" means an adjustment made by the competent
authority of a Party to the profits of an enterprise as a result of applying
the domestic tax law concerning taxes referred to in Article 2 of that Party
regarding transfer pricing.
2 As regards the application of this Agreement at any time by a Party, any term
not defined therein shall, unless the context otherwise requires, have the meaning that
it has at that time under the law of that Party, for the purposes of the taxes to which this
Agreement applies, any meaning under the applicable tax laws of that Party prevailing
over a meaning given to the term under other laws of that Party.
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ARTICLE 4
RESIDENT
1 For the purposes of this Agreement, the term "resident of a Party" means:
(a) in the case of Australia, a person who is a resident of Australia for the
purposes of Australian tax; and
(b) in the case of Guernsey, a person who is a resident of Guernsey for the
purposes of Guernsey tax.
2 A person is not a resident of a Party for the purposes of this Agreement if the
person is liable to tax in that Party in respect only of income from sources in that Party.
3 Where by reason of the preceding provisions of this Article a person, being an
individual, is a resident of both Parties, then the person's status shall be determined as
follows:
(a) the individual shall be deemed to be a resident only of the Party in which
a permanent home is available to that individual; if a permanent home is
available in both Parties, or in neither of them, that individual shall be
deemed to be a resident only of the Party with which the individual's
personal and economic relations are closer (centre of vital interests);
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Australia-Guernsey agreement
(b) if the Party in which the individual's centre of vital interests cannot be
determined, the individual shall be deemed to be a resident only of the
Party in which the individual has an habitual abode;
(c) if the individual has an habitual abode in both Parties, or in neither of
them, the competent authorities of the Parties shall settle the question by
mutual agreement;
4 Where, by reason of paragraph 1, a person other than an individual is a resident
of both Parties, then it shall be deemed to be a resident only of the Party in which its
place of effective management is situated.
ARTICLE 5
GOVERNMENT SERVICE
1 (a) Salaries, wages and other similar remuneration paid by a Party or a
political subdivision or a local authority thereof to an individual in respect
of services rendered to that Party or subdivision or authority shall be
taxable only in that Party.
(b) However, such salaries, wages and other similar remuneration shall be
taxable only in the other Party if the services are rendered in that Party
and the individual is a resident of that Party who:
(i) is a national or citizen of that Party; or
(ii) did not become a resident of that Party solely for the purpose of
rendering the services.
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2 Notwithstanding the provisions of paragraph 1, salaries, wages and other
similar remuneration paid in respect of services rendered in connection with a business
carried on by a Party or political subdivision or a local authority thereof may be taxed
in accordance with the laws of a Party.
ARTICLE 6
STUDENTS
Payments which a student or business apprentice, who is or was immediately
before visiting a Party a resident of the other Party and who is temporarily present in
the first-mentioned Party solely for the purpose of their education or training, receives
for the purpose of their maintenance, education or training shall not be taxed in that
Party, provided such payments arise from sources outside that Party.
ARTICLE 7
MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER
PRICING ADJUSTMENTS
1 Where a resident of a Party considers the actions of the other Party result or
will result in a transfer pricing adjustment not in accordance with the arm's length
principle, the resident may, irrespective of the remedies provided by the domestic law
of those Parties, present a case to the competent authority of the first-mentioned Party.
The case must be presented within three years of the first notification of the
adjustment.
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Australia-Guernsey agreement
2 The competent authorities shall endeavour to resolve any difficulties or doubts
arising as to the application of the arm's length principle by a Party regarding transfer
pricing adjustments. They may also communicate with each other directly for the
purposes of this Article.
ARTICLE 8
EXCHANGE OF INFORMATION
The competent authorities of the Parties shall exchange such information as is
foreseeably relevant for carrying out the provisions of this Agreement. Information
may be exchanged by the competent authorities for the purposes of this Article in
accordance with the provisions of the Agreement for the Exchange of Information
Relating to Tax Matters concluded by the Parties (whether or not this Agreement, in
whole or in part, forms part of the domestic law of either Party).
ARTICLE 9
ENTRY INTO FORCE
The Parties shall notify each other, in writing, through the appropriate channel
of the completion of their constitutional and legal procedures for the entry into force of
this Agreement. This Agreement shall enter into force on the thirtieth day after the
date of the last notification and shall, provided an Agreement for the Exchange of
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Information Relating to Tax Matters is in force between the Parties, thereupon have
effect:
(a) in respect of Australian tax, for any year of income beginning on or after
the first day of July in the calendar year next following the date on which
this Agreement enters into force; and
(b) in respect of Guernsey tax, for any year of charge beginning on or after
the first day of January in the calendar year next following the date on
which this Agreement enters into force.
ARTICLE 10
TERMINATION
1 This Agreement shall continue in effect indefinitely, but either of the Parties
may, after the expiration of 3 years from the date of its entry into force, give to the
other Party written notice of termination.
2 Such termination shall become effective:
(a) in respect of Australian tax, in the year of income beginning on or after
the first day of July in the calendar year next following the date on which
the notice of termination is given;
(b) in respect of Guernsey tax, for any year of charge beginning on or after
the first day of January in the calendar year next following the date on
which the notice of termination is given.
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Australia-Guernsey agreement
3 Notwithstanding the provisions of paragraphs 1 and 2, this Agreement shall,
upon receipt of written notice of termination of the Agreement for the Exchange of
Information Relating to Tax Matters between the Parties, terminate and cease to be
effective on the first day of the month following the expiration of a period of six
months after the date of receipt of such notice.
IN WITNESS WHEREOF the undersigned, being duly authorised in that
behalf by their respective Parties, have signed this Agreement.
DONE at [ ], [ ] this [
] day of [ ], 200[ ], in duplicate.
FOR THE GOVERNMENT OF FOR THE STATES OF
AUSTRALIA: GUERNSEY:'
Detailed explanation of new law
Article 1 -- Persons Covered
5.5 This Article establishes the scope of the application of the
Guernsey agreement by providing for it to apply to persons who are
residents of one or both of the countries [Article 1]. For the purposes of the
agreement persons includes an individual, company and other body of
persons (see paragraph 5.15).
5.6 The application of the Guernsey agreement to persons who are
dual residents (that is, residents of both countries) is dealt with in Article 4
(Resident) (see paragraph 5.21).
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Article 2 -- Taxes Covered
5.7 This Article specifies the existing taxes of each country to which
the Guernsey agreement applies. This is, in the case of Australia, the
federal income tax. [Article 2, subparagraph 1a)]
5.8 For Guernsey, this agreement applies to income tax and
dwellings profits tax. [Article 2, subparagraph 1b)]
5.9 The application of the Guernsey agreement 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 of Australia and Guernsey are
required to notify each other in the event of a substantial changes to the
taxation laws covered by the agreement, within a reasonable period of
time after those changes. [Article 2, paragraph 2]
5.10 The Guernsey agreement does not apply to taxes imposed by
states, municipalities, local authorities or other political subdivisions or
possessions. [Article 2, paragraph 3]
Article 3 -- Definitions
Definition of Australia
5.11 The definition of `Australia' follows corresponding definitions
in Australia's modern tax treaties. `Australia' is defined to include certain
external territories and areas of the continental shelf. [Article 3,
subparagraph 1a)]
Definition of Guernsey
5.12 Guernsey is defined to mean Guernsey, Alderney and Herm
including the territorial sea adjacent to those islands, in accordance with
international law. [Article 3, subparagraph 1b)]
Definition of competent authority
5.13 The `competent authority' is the person or institution
specifically authorised to perform certain actions under the Guernsey
agreement. For example, to notify each other of any significant changes
to the tax law of their respective countries, Article 2 (Taxes Covered) to
communicate for the purposes of Article 7 (Mutual Agreement Procedure)
and to exchange information in accordance with Article 8 (Exchange of
Information).
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Australia-Guernsey agreement
5.14 In the case of Australia, the competent authority is the
Commissioner of Taxation (Commissioner) or an authorised
representative of the Commissioner. In the case of Guernsey, the
competent authority is the Director of Income Tax or his delegate.
[Article 3, subparagraph 1c)]
Definition of person
5.15 `Person' includes an individual, a company and any other body
of persons [Article 3, subparagraph 1d)]. However, Article 7 (Mutual
Agreement Procedure) is the only substantive Article of the Guernsey
agreement that will affect persons that are non-individuals.
Definition of tax
5.16 `Tax' means Australian tax or Guernsey tax, as the context
requires. [Article 3, subparagraph 1e)]. See paragraph 5.7 to 5.10 for taxes
covered by the Guernsey agreement.
Definition of transfer pricing adjustment
5.17 A transfer pricing adjustment is an adjustment made by the tax
authorities of Australia or Guernsey to the profits of an enterprise, based
on the application of domestic transfer pricing laws [Article 3,
subparagraph 1f)]. For Australia, such laws are contained in Division 13 of
Part III of the Income Tax Assessment Act 1936 (ITAA 1936).
Terms not specifically defined
5.18 A term that is not specifically defined in the Guernsey
agreement shall have (unless the context requires otherwise) the meaning
that it has under the domestic law of the country applying the Guernsey
agreement at the time of its application. In that case, the term's domestic
taxation law meaning will have precedence over any meaning it may have
under that country's other domestic laws. [Article 3, paragraph 2]
Article 4 -- Resident
5.19 This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the Guernsey
agreement. Residential status is a criterion for determining each country's
taxing rights and is a necessary condition for the provision of relief under
the Guernsey agreement. In the case of Australia, a person's residence is
determined according to Australia's taxation law [Article 4, subparagraph 1a)].
In the case of Guernsey residence is determined according to Guernsey
taxation law [Article 4, subparagraph 1b)].
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Special residency rules
5.20 A `person' is not a resident of a country, for the purposes of the
Guernsey agreement, if that person is liable to tax in that country in
respect only of income from sources in that country [Article 4, paragraph 2].
In the Australian context, this would mean, for example, that Norfolk
Island residents, who are generally only subject to Australian tax on
Australian source income, are not residents of Australia for the purposes
of the Guernsey agreement. Accordingly, Guernsey will not have to
forego tax in accordance with the Guernsey agreement on income derived
by Norfolk Island residents (which will not be subject to Australian tax).
Dual residents
5.21 Tie-breaker rules are included for determining residency of a
person, for the purposes of the Guernsey agreement, if the person qualifies
as a resident of both countries in accordance with paragraph 1 of Article 4.
In the case of an individual the rules, in order of application, are:
· if the individual has a permanent home available to himself
or herself in only one of the countries, the person is deemed
to be a resident solely of that country [Article 4,
subparagraph 3a)];
· if the individual has a permanent home available in both
countries or in neither, then the person's residential status
takes into account their personal or economic relations with
Australia and Guernsey, and the person is deemed for the
purposes of the Guernsey agreement to be a resident only of
the country with which they have the closer personal and
economic relations [Article 4, subparagraph 3a)];
· if the individual has an habitual abode in either Australia or
Guernsey the person is deemed to be a resident of that
country [Article 4, subparagraph 3b)];
· if the individual has a habitual abode in both countries, or of
neither, the competent authorities will resolve the question of
treaty residence by mutual agreement [Article 4,
subparagraph 3c)].
5.22 In the case of a non-individual, that is a company, partnership or
other body or person, which would under paragraph 1 of Article 4 be a
resident of both Australia and Guernsey, then the entity will be deemed to
be a resident of the country in which the place of effective management is
situated. [Article 4, paragraph 4]
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5.23 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 Australian as a resident, insofar as the Guernsey agreement
allows.
Article 5 -- Government Service
5.24 Salary and wage type income, paid to an individual for services
rendered to a government of one of the countries (including a political
subdivision or local authority), is to be taxed only in that country.
However, such remuneration will be taxable only in the other country if
the services are rendered in that other country and:
· the recipient is a resident of, and a national or citizen of, that
other country; or
· the recipient is a resident of that other country and did not
become a resident of that country solely for the purpose of
rendering the services (for example, if the recipient is a
permanent resident of that other country).
[Article 5, subparagraph 1b)]
Business income
5.25 Remuneration in respect of services rendered in connection with
a trade or business carried on by a governmental authority is excluded
from the scope of the Article. Such remuneration will remain subject to
the domestic taxation laws of the two countries. [Article 5, paragraph 2]
Article 6 -- Students
Exemption from tax
5.26 This Article applies to students or 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,
resident in 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 [Article 6]. This will apply even though the student or apprentice
may qualify as a resident of the country visited during the period of their
visit.
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Employment income
5.27 Where a student, from Guernsey, visiting Australia solely for
educational purposes undertakes employment in Australia, for example,
part-time work with a local employer, the income earned by that student
as a consequence of that employment may be subject to tax in Australia.
5.28 For business apprentices, 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, falls for consideration under domestic taxation law.
5.29 In the case of a business apprentice visiting Australia from
Guernsey 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.
5.30 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 (that is, a subsistence payment).
If the remuneration is similar to the amounts paid to persons who provide
similar services who are not business apprentices (that is, salary
equivalent), this would generally indicate that the payments constitute
income from employment that would fall for consideration under
domestic taxation law. Likewise, if that business apprentice undertakes
any other employment in Australia, the income earned from that
employment may be subject to tax in Australia.
5.31 Where a taxpayer received both exempt income and assessable
income, the exempt income may in some cases be taken into account in
determining the rate of tax payable on the assessable income.
However, payments received from abroad for a 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.
Article 7 -- Mutual Agreement Procedure in Respect of
Transfer Pricing Adjustments
5.32 This Article provides for consultation between the competent
authorities of the two countries for the purpose of endeavouring to resolve
disputes concerning transfer pricing adjustments purportedly made not in
accordance with the arm's length principle. [Article 7, paragraph 2]
5.33 The term `arm's length principle' refers to the requirement that
businesses price their related party international dealings according to
what truly independent parties acting independently would reasonably be
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Australia-Guernsey agreement
expected to have done in the same situation. In Australia the
Commissioner would apply the arm's length principle when reviewing
business transactions in the context of Division 13 of Part III of the
ITAA 1936.
5.34 A person wishing to use this mutual agreement procedure must
present their case to the competent authority of their country of residence
within three years of the first notification of the transfer pricing
adjustment. This procedure operates independently of, and in addition to,
domestic legal remedies available to taxpayers. [Article 7, paragraph 1]
Article 8 -- Exchange of Information
5.35 This Article authorises and limits the exchange of information
by the competent authorities to information that is foreseeably relevant to
the administration of the Guernsey agreement. [Article 8]
5.36 The exchange of information is subject to the provisions of the
Agreement for the Exchange of Information Relating to Tax Matters,
which was signed by Australia and Guernsey 7 October 2009. After it
takes effect, that agreement will provide for exchange of information that
is foreseeably relevant to the administration of the taxation laws of the
two countries. It also contains safeguards to protect taxpayers' rights. For
example:
· confidentiality rules to ensure that information exchanged is
only disclosed to authorised recipients; and
· limitations to ensure that the competent authorities do not
exceed domestic laws and administrative procedures in the
course of obtaining and supplying information.
Article 9 -- Entry into Force
Date of entry into force
5.37 The Guernsey agreement will enter into force on the
thirtieth day after the date of the last exchange of diplomatic notes
notifying that the domestic procedures to give it the force of law have
been completed. In Australia, enactment of the legislation giving the
Guernsey agreement the force of law along with tabling the Guernsey
agreement in Parliament are prerequisites to the exchange of diplomatic
notes. Entry into force is also conditional upon the related Agreement for
the Exchange of Information Relating to Tax Matters between the two
countries being in force at that time.
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Date of application in Australia
5.38 Following entry into force, the Guernsey agreement will take
effect in Australia in respect of any income year beginning on or after
1 July in the calendar year next following the date on which it enters into
force. [Article 9, subparagraph a)]
Date of application in Guernsey
5.39 Following entry into force, the Guernsey agreement will take
effect in Guernsey in respect of any year of charge beginning on or after
1 January in the calendar year next following the date on which it enters
into force. [Article 9, subparagraph b)]
Article 10 -- Termination
5.40 The Guernsey agreement is to continue in effect indefinitely.
However, after the expiration of three years from the date of entry into
force either country may give the other country written notice of
termination of the agreement through diplomatic channels. [Article 10,
paragraph 1]
Cessation in Australia
5.41 In the event of either country terminating the Guernsey
agreement, it would cease to be effective in Australia in the year of
income beginning on or after 1 July in the calendar year next following
that in which the notice of termination is given. [Article 10, subparagraph 2a)]
Cessation for Guernsey
5.42 The Guernsey agreement would correspondingly cease to be
effective in Guernsey for any year of charge beginning on or after
1 January in the calendar year next following that in which the notice of
termination is given. [Article 10, subparagraph 2b)]
Cessation in other circumstances
5.43 The Guernsey agreement will also terminate and cease to be
effective if the Agreement for the Exchange of Information Relating to
Tax Matters between Australia and Guernsey is terminated. In that event,
the Guernsey agreement would terminate on the first day of the month
following the expiration of six months after receipt of notification of
termination of the Agreement for the Exchange of Information Relating to
Tax Matters. [Article 10, paragraph 3]
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Chapter 6
Malaysian protocol (No. 3)
Outline of chapter
6.1 This Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953) to define and give the force of law to the Third
Protocol amending the Agreement between the Government of Australia
and the Government of Malaysia for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income as
amended by the First Protocol of 2 August 1999 and the Second Protocol
of 28 July 2002 (Malaysian protocol No. 3), which amends the existing
tax treaty with Malaysia (as amended by the Malaysian protocol (No. 1)
and the Malaysian protocol (No. 2) (the existing Malaysian agreement).
Subsection 3AAA(1) of the Agreements Act 1953 will define the
Malaysian protocol (No. 3) and subsection 5(1) will give it the force of
law in Australia.
Context of amendments
6.2 The Malaysian protocol (No. 3) was signed in Canberra on
24 February 2010.
6.3 The Malaysian protocol (No. 3) was negotiated in the context of
recent international progress in improving tax transparency and exchange
of taxpayer information between countries.
6.4 Once in force, the Malaysian protocol (No. 3) will replace the
Exchange of Information (EOI) Article in the existing Malaysian
agreement with a new Article that meets the international standard on tax
information exchange developed by the Organisation for Economic
Co-operation and Development (OECD).
Summary of new law
6.5 The main changes to the EOI Article of the existing Malaysian
agreement (as revised by the Malaysian protocol (No. 3)) are as follows:
· neither tax administration can refuse to provide information
solely because it does not have a domestic interest in such
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information, or because the information is held by a bank or
similar institution [New Article 25, paragraphs 4 and 5];
· the Article now expands the scope of the EOI Article, as it
will now allow tax administrations to request taxpayer
information with regard to all federal taxes and not just taxes
to which the treaty applies [New Article 25, paragraph 1]; and
· the Article also provides that information received by a tax
authority may be used for other purposes when the laws of
both countries permit this and where the tax authority
supplying the information authorises such use [New Article 25,
paragraph 2].
Comparison of key features of new law and current law
New law Current law
The Malaysian protocol (No. 3) The existing rules apply to a narrower
closely aligns Article 25 (Exchange range of taxes and do not require the
of Information) to the current OECD exchange of information that is not
standard. The effect of the change is obtainable by the tax administration
to expand the range of taxes to which under domestic law.
the Article applies and to clarify that The information received can only be
neither bank secrecy laws nor any used for tax purposes
requirement of a domestic tax law
interest in the information limits the
exchange of information.
The new rules also provide that
information received may be used for
non-tax purposes when the laws of
both countries permit this and the
supplying authority authorises such
use.
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The Malaysian protocol (No. 3)
6.6 A full transcript of the Malaysian protocol (No. 3) and detailed
explanation follows:
`THIRD PROTOCOL AMENDING THE AGREEMENT BETWEEN
THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT
OF MALAYSIA FOR THE AVOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO
TAXES ON INCOME AS AMENDED BY THE FIRST PROTOCOL OF
2 AUGUST 1999 AND THE SECOND PROTOCOL OF 28 JULY 2002
The Government of Australia
and
The Government of Malaysia
DESIRING to amend the Agreement between the Government of
Australia and the Government of Malaysia for the avoidance of double
taxation and the prevention of fiscal evasion with respect to taxes on
income done at Canberra on 20 August 1980 (as amended by the first
Protocol to that Agreement, done at Sydney on 2 August 1999 and the
second Protocol to that Agreement, done at Genting Highlands on 28 July
2002), in this Protocol (hereinafter referred to as "the Agreement, as
amended"),
Have agreed as follows:
Article 1
Article 25 of the Agreement, as amended, is deleted and substituted with
the following:
"Article 25
EXCHANGE OF INFORMATION
1. The competent authorities of the Contracting States shall exchange
such information as is foreseeably relevant for carrying out the provisions
of this Agreement or to the administration or enforcement of the domestic
laws concerning taxes of every kind and description imposed on behalf of
the Contracting States, insofar as the taxation thereunder is not contrary to
the Agreement. The exchange of information is not restricted by Articles
1 and 2.
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2. Any information received under paragraph 1 by a Contracting State
shall be treated as secret in the same manner as information obtained
under the domestic laws of that State and shall be disclosed only to
persons or authorities (including courts and administrative bodies)
concerned with the assessment or collection of, the enforcement or
prosecution in respect of, the determination of appeals in relation to the
taxes referred to in paragraph 1, or the oversight of the above. Such
persons or authorities shall use the information only for such purposes.
They may disclose the information in public court proceedings or in
judicial decisions. Notwithstanding the foregoing, information received
by a Contracting State may be used for other purposes when such
information may be used for such other purposes under the laws of both
States and the competent authority of the supplying State authorises such
use.
3. In no case shall the provisions of paragraphs 1 and 2 be construed so
as to impose on a Contracting State the obligation:
(a) to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
(b) to supply information which is not obtainable under the laws or in the
normal course of the administration of that or of the other Contracting
State;
(c) to supply information which would disclose any trade, business,
industrial, commercial or professional secret or trade process, or
information, the disclosure of which would be contrary to public policy
(ordre public).
4. If information is requested by a Contracting State in accordance with
this Article, the other Contracting State shall use its information gathering
measures to obtain the requested information, even though that other State
may not need such information for its own tax purposes. The obligation
contained in the preceding sentence is subject to the limitations of
paragraph 3 but in no case shall such limitations be construed to permit a
Contracting State to decline to supply information solely because it has no
domestic interest in such information.
5. In no case shall the provisions of paragraph 3 be construed to permit a
Contracting State to decline to supply information solely because the
information is held by a bank, other financial institution, nominee or
person acting in an agency or a fiduciary capacity or because it relates to
ownership interests in a person."
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Malaysian protocol (No. 3)
Article 2
This Protocol, which shall form an integral part of the Agreement, as
amended, shall enter into force on the last of the dates on which the
Contracting States exchange notes through the diplomatic channel
notifying each other that the last of such things has been done as is
necessary to give this Protocol the force of law in Australia and in
Malaysia respectively, and thereupon this Protocol shall have effect.
IN WITNESS whereof the undersigned, being duly authorised, have
signed this Protocol.
Done in duplicate in the English and Malay languages at Canberra,
this twenty-fourth day of February two thousand and ten, both texts being
equally authentic.
FOR THE GOVERNMENT FOR THE GOVERNMENT OF
AUSTRALIA: MALAYSIA:
Hon Nicholas Sherry HE Dato' Salman Ahmad
Assistant Treasurer High Commissioner of Malaysia'
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International Tax Agreements Amendment (No. 1) Bill 2011
Detailed explanation of the Malaysian protocol (No. 3)
Article 1
Substitutes new Article 25 (Exchange of Information) into the existing
Malaysian agreement
6.7 This protocol aligns the information exchange provisions to the
current OECD standard by replacing Article 25 (Exchange of Information)
of the existing Malaysian agreement. The new Article 25 continues to
provide for the exchange of tax information by the tax administrations of
the two countries, but differs from the previous approach in the following
ways:
· the scope is expanded to a wider ranges of taxes;
· the new provision clarifies that the Commissioner of
Taxation (Commissioner) is obliged to obtain information for
Malaysian tax authorities regardless of whether Australia has
a domestic tax interest in the information sought or whether
the information concerns a resident of either country;
· bank secrecy laws do not limit the exchange of information;
and
· information received by a tax authority may be used for other
purposes when the laws of both countries permit this and
where the tax authority supplying the information authorises
such use.
Foreseeably relevant information
6.8 Article 25 authorises and limits the exchange of information by
the two competent authorities to information foreseeably relevant to the
administration or enforcement of the relevant taxes. The exchange of
information is not restricted by Article 1 (Personal Scope) of the existing
agreement, and may therefore cover persons who are not residents of
Australia or Malaysia.
6.9 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.
[New Article 25, paragraph 1]
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Malaysian protocol (No. 3)
6.10 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 Tax
Convention on Income and on Capital (OECD Model) and no difference
in effect is intended.
Taxes to which this Article applies
6.11 Under the corresponding Article in the existing Malaysian
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).
6.12 Under the new Article 25, 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 from the Malaysian competent authority. This means, for
example, that information concerning Australian indirect taxes (that is, the
goods and services tax (GST)) may be requested and obtained from
Malaysia. [New Article 25, paragraph 1]
6.13 Similarly, in the case of Malaysia, the Malaysian competent
authority can now request and obtain information concerning all federal
taxes from the Australian competent authority.
Use of exchanged information
6.14 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.
However, the final sentence of this paragraph permits the information to
be used for other purposes when the laws of both countries permit this and
the tax authority supplying the information authorises such use.
[New Article 25, paragraph 2]
6.15 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. [New Article 25, paragraph 2]
No domestic tax interest required
6.16 When requested, a country is required to obtain information
under the new Article 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
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International Tax Agreements Amendment (No. 1) Bill 2011
in the absence of an explicit provision to this effect. [New Article 25,
paragraph 4]
Limitations
6.17 The country requested to provide information under this new
Article 25 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 Malaysia; or
· such information is not obtainable under the domestic law or
in the normal course of administration.
[New Article 25, subparagraphs 3a) and b)]
6.18 Also, in no case is the country receiving the request obliged to
supply information under new Article 25 that would:
· disclose any trade, business, industrial, commercial or
professional secret or trade process; or
· be contrary to public policy.
[New Article 25, subparagraph 3c)]
Information held by banks, other financial institutions, trusts,
foundations and nominees
6.19 Paragraph 5 ensures that paragraph 3 of new Article 25 cannot
be used to prevent the supply of information solely because the
information is held by banks, other financial institutions, trusts,
foundations, nominees etc. The addition of this paragraph will not have
any practical application for Australia, since Australian domestic tax law
already permits the Commissioner to obtain information from banks and
financial institutions in order to meet obligations under EOI Articles in tax
treaties or Tax Information Exchange Agreements. [New Article 25,
paragraph 5]
Information that exists prior to the entry into force of the Malaysian
protocol (No. 3)
6.20 Once new Article 25 is effective, the competent authorities can
exchange information that relates to transactions or events occurring prior
to entry into force of the protocol. This approach conforms to the
international practice contained in paragraph 10.3 of the OECD
Commentary on Article 26 (Exchange of Information).
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Malaysian protocol (No. 3)
Article 2
Date of entry into force of the Malaysian protocol (No. 3)
6.21 Article 2 provides that the Malaysian protocol (No. 3) shall form
an integral part of the existing Malaysian agreement and for the entry into
force of this protocol. The protocol will enter into force on the date of the
last exchange of diplomatic notes notifying that the domestic processes to
give the protocol the force of law in the respective countries has been
completed. Once the protocol enters into force new Article 25 will have
effect. In Australia, enactment of the legislation giving the force of law in
Australia to the Malaysian protocol (No. 3), along with tabling of the
protocol in Parliament, are prerequisites to the exchange of diplomatic
notes. [Article 2 of the Malaysian protocol (No. 3)]
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Chapter 7
Australia-Samoa agreement
Outline of chapter
7.1 Schedule 2 to this Bill amends the International Tax Agreements
Act 1953 (Agreements Act 1953) to define and give the force of law to the
2009 Agreement between the Government of Australia and the
Government of Samoa for the Allocation of Taxing Rights with respect to
Certain Income of Individuals and to Establish a Mutual Agreement
Procedure in respect of Transfer Pricing Adjustments (Samoan
agreement). Subsection 3AAA(1) of the Agreements Act 1953 will define
the Samoan agreement and subsection 5(1) will give it the force of law in
Australia. This chapter explains the rules that apply in the Samoan
agreement.
Context of amendments
7.2 The Samoan agreement was signed in Canberra on
16 December 2009. There is no pre-existing agreement of this type
between Australia and the Government of Samoa (Samoa).
Summary of new law
Main features of the Samoan agreement
7.3 The main features of the Samoan agreement are as follows:
· Income from pensions and retirement annuities will generally
be taxed only in the country of residence of the recipient,
provided the income is subject to tax in that country [Article 5].
· Income from government service will generally be taxed only
in the country that pays the remuneration. However, the
remuneration shall only be taxed in the other country where
the services are rendered in that other country by a resident
of that other country who is a national of that other country
or did not become a resident of that other country for the
purpose of rendering the services [Article 6].
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International Tax Agreements Amendment (No. 1) Bill 2011
· Payments made from abroad to visiting students and business
apprentices for the purposes of their maintenance, education
or training will be exempt from tax in the country visited
[Article 7].
· A non-binding administrative mechanism will be established
to assist taxpayers to seek resolution of transfer pricing
disputes [Article 8].
Comparison of key features of new law and current law
New law Current law
Australian source pensions and Australian source income of foreign
retirement annuities derived by residents is generally subject to
residents of Samoa will be exempt Australian tax.
from Australian tax, provided they
are taxed in Samoa.
Certain income derived by residents Australian source income of foreign
of Samoa from government service in residents is generally subject to
Australia will be exempt from Australian tax.
Australian tax.
Certain payments received by visiting Some payments received by foreign
students and business apprentices students and business apprentices
from Samoa will be exempt from may be taxable in Australia,
Australian tax. depending on the circumstances.
The competent authorities of No equivalent.
Australia and Samoa will endeavour
to resolve taxpayers' transfer pricing
disputes arising from transfer pricing
adjustments that contravene the arm's
length principle through mutual
agreement.
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Australia-Samoa agreement
The Samoan agreement
7.4 A full transcript of the Samoan agreement and detailed
explanation follows:
`AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA
AND THE GOVERNMENT OF SAMOA, FOR THE ALLOCATION OF
TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF
INDIVIDUALS AND TO ESTABLISH A MUTUAL AGREEMENT
PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS
(Canberra, 16 December 2009)
The Government of Australia and the Government of Samoa ("the Parties"),
Recognising that the Parties have concluded an Agreement on the Exchange of
Information with Respect to Taxes, and
Desiring to conclude an Agreement for the allocation of taxing rights with respect to
certain income of individuals and to establish a mutual agreement procedure in respect
of transfer pricing adjustments,
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International Tax Agreements Amendment (No. 1) Bill 2011
Have agreed as follows:
ARTICLE 1
PERSONS COVERED
This Agreement shall apply to persons who are residents of one or both
of the Contracting States.
ARTICLE 2
TAXES COVERED
1 The existing taxes to which this Agreement shall apply are:
(a) in Australia, the income tax imposed under the federal law of Australia;
(hereinafter referred to as "Australian tax").
(b) in Samoa, income tax;
(hereinafter referred to as "Samoan tax").
2 This Agreement shall also apply to any identical or substantially similar taxes
which are imposed after the date of signature of this Agreement in addition to, or in
place of, the existing taxes. The competent authorities of the Contracting States shall
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Australia-Samoa agreement
notify each other within a reasonable period of time of any substantial changes to the
taxation laws covered by this Agreement.
3 This Agreement shall not apply to taxes imposed by states, municipalities,
local authorities or other political subdivisions, or possessions of a Contracting State.
ARTICLE 3
DEFINITIONS
1 For the purposes of this Agreement, unless the context otherwise requires:
(a) the term "Australia", when used in a geographical sense, excludes all
external territories other than:
(i) the Territory of Norfolk Island;
(ii) the Territory of Christmas Island;
(iii) the Territory of Cocos (Keeling) Islands;
(iv) the Territory of Ashmore and Cartier Islands;
(v) the Territory of Heard Island and McDonald Islands; and
(vi) the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of Australia
(including the Territories specified in this subparagraph) in respect of
which there is for the time being in force, consistently with international
law, a law of Australia dealing with the exploration for or exploitation of
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International Tax Agreements Amendment (No. 1) Bill 2011
any of the natural resources of the exclusive economic zone or the seabed
and subsoil of the continental shelf;
(b) the term " Samoa" means the Independent State of Samoa and the
territorial waters thereof;
(c) the term "competent authority" means in the case of Australia, the
Commissioner of Taxation or an authorised representative of the
Commissioner and, in the case of Samoa, the Minister of Revenue or
an authorised representative of the Minister of Revenue;
(d) the term "Contracting State" means Australia or Samoa, as the context
requires;
(e) the term "national", in relation to a Contracting State, means any
individual possessing the nationality or citizenship of that Contracting
State;
(f) the term "person" includes an individual, a company and any other
body of persons;
(g) the term "tax" means Australian tax or Samoan tax as the context
requires; and
(h) the term "transfer pricing adjustment" means an adjustment made by
the competent authority of a Contracting State to the profits of an
enterprise as a result of applying the domestic law concerning taxes
referred to in Article 2 of that State regarding transfer pricing.
2 As regards the application of this Agreement at any time by a Contracting
State, any term not defined therein shall, unless the context otherwise requires, have
the meaning that it has at that time under the law of that State, for the purposes of the
taxes to which this Agreement applies, any meaning under the applicable tax laws of
that State prevailing over a meaning given to the term under other laws of that State.
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Australia-Samoa agreement
ARTICLE 4
RESIDENT
1 For the purposes of this Agreement, the term "resident of a Contracting State"
means:
(a) in the case of Australia, a person who is a resident of Australia for the
purposes of Australian tax; and
(b) in the case of Samoa, a person who is a resident of Samoa for the
purposes of Samoan tax.
2 A person is not a resident of a Contracting State for the purposes of this
Agreement if the person is liable to tax in that State in respect only of income from
sources in that State.
3 Where by reason of the preceding provisions of this Article a person, being an
individual, is a resident of both Contracting States, then the person's status shall be
determined as follows:
(a) the individual shall be deemed to be a resident only of the State in which a
permanent home is available to that individual; if a permanent home is
available in both States, or in neither of them, that individual shall be
deemed to be a resident only of the State with which the individual's
personal and economic relations are closer (centre of vital interests);
(b) if the State in which the individual has their centre of vital interests cannot
be determined, the individual shall be deemed to be a resident only of the
State of which the individual is a national;
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International Tax Agreements Amendment (No. 1) Bill 2011
(c) if the individual is a national of both States or of neither of them, the
competent authorities of the Contracting States shall endeavour to resolve
the question by mutual agreement.
4 Where, by reason of paragraph 1, a person other than an individual is a resident
of both Contracting States, then it shall be deemed to be a resident only of the State in
which its place of effective management is situated.
ARTICLE 5
PENSIONS AND RETIREMENT ANNUITIES
1 Pensions (including government pensions) and retirement annuities paid to an
individual who is a resident of a Contracting State shall be taxable only in that State.
However, pensions and retirement annuities arising in a Contracting State may be
taxed in that State where such income is not subject to tax in the other Contracting
State.
2 The term "retirement annuity" means:
(a) in the case of Australia, a superannuation annuity payment within the
meaning of the taxation laws of Australia;
(b) in the case of Samoa, a superannuation annuity payment; and
(c) any other similar periodic payment agreed upon by the competent
authorities.
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ARTICLE 6
GOVERNMENT SERVICE
1 (a) Salaries, wages and other similar remuneration, other than a pension or
retirement annuity, paid by a Contracting State or a political subdivision
or a local authority thereof to an individual in respect of services rendered
to that State or subdivision or authority shall be taxable only in that State.
(b) However, such salaries, wages and other similar remuneration shall be
taxable only in the other Contracting State if the services are rendered in
that State and the individual is a resident of that State who:
(i) is a national of that State; or
(ii) did not become a resident of that State solely for the purpose
of rendering the services.
2 Notwithstanding the provisions of paragraph 1, salaries, wages and other
similar remuneration in respect of services rendered in connection with any trade or
business carried on by a Contracting State or a political subdivision or a local authority
thereof may be taxed in accordance with the laws of a Contracting State.
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ARTICLE 7
STUDENTS
Payments which a student or business apprentice, who is or was immediately
before visiting a Contracting State a resident of the other Contracting State and who is
temporarily present in the first-mentioned State solely for the purpose of their
education or training, receives for the purpose of their maintenance, education or
training shall not be taxed in that State, provided such payments arise from sources
outside that State.
ARTICLE 8
MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER
PRICING ADJUSTMENTS
1 Where a resident of a Contracting State considers the actions of the other
Contracting State results or will result in a transfer pricing adjustment not in
accordance with the arm's length principle, the resident may, irrespective of the
remedies provided by the domestic law of those States, present a case to the competent
authority of the first-mentioned State. The case must be presented within 3 years of the
first notification of the adjustment.
2 The competent authorities shall endeavour to resolve any difficulties or doubts
arising as to the application of the arm's length principle by a Contracting State
regarding transfer pricing
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adjustments. They may also communicate with each other directly for the purposes of
this Article.
ARTICLE 9
EXCHANGE OF INFORMATION
The competent authorities of the Contracting States shall exchange such
information as is foreseeably relevant for carrying out the provisions of this
Agreement. Information may be exchanged by the competent authorities for the
purposes of this Article in accordance with the provisions of the Agreement on the
Exchange of Information with Respect to Taxes concluded by the Contracting States
(whether or not this Agreement, in whole or in part, forms part of the domestic law of
either Contracting State).
ARTICLE 10
ENTRY INTO FORCE
The Government of Australia and the Government of Samoa shall notify each
other, in writing, through the diplomatic channel of the completion of their
constitutional and legal procedures for the entry into force of this Agreement. This
Agreement shall enter into force on the date of the last notification, and shall, provided
an Agreement on the Exchange of Information with Respect to Taxes is in force
between Australia and Samoa, thereupon have effect for any year of income beginning
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on or after 1 July in the calendar year next following the date on which this Agreement
enters into force.
ARTICLE 11
TERMINATION
1 This Agreement shall continue in effect indefinitely, but either of the
Contracting States may give to the other Contracting State through the diplomatic
channel written notice of termination.
2 Such termination shall become effective in the year of income beginning on or
after 1 July in the calendar year next following that in which the notice of termination
is given.
3 Notwithstanding the provisions of paragraph 1 or 2, this Agreement shall, on
receipt through the diplomatic channel of written notice of termination of the
Agreement on the Exchange of Information with Respect to Taxes between the
Contracting States, terminate and cease to be effective on the first day of the month
following the expiration of a period of 6 months after the date of receipt of such notice.
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IN WITNESS WHEREOF the undersigned, being duly authorised by their
respective Governments, have signed this Agreement.
DONE at Canberra on this sixteenth day of December 2009, in
duplicate.
FOR THE GOVERNMENT OF FOR THE GOVERNMENT OF
AUSTRALIA: SAMOA:
The Hon. Nick Sherry The Hon. Tuuu Anasii Leota
Assistant Treasurer Minister of Revenue'
Detailed explanation of new law
Article 1 -- Persons Covered
7.5 This Article establishes the scope of the application of the
Samoan agreement by providing for it to apply to persons who are
residents of one or both of the countries [Article 1]. For the purposes of the
agreement person includes an individual, company and other body of
persons (see paragraph 1.17).
7.6 The application of the Samoan agreement to persons who are
dual residents (that is, residents of both countries) is dealt with in Article 4
(Resident) (see paragraph 1.22).
Article 2 -- Taxes Covered
7.7 This Article specifies the existing taxes of each country to which
the Samoan agreement applies. This is, in the case of Australia, the
federal income tax. [Article 2, subparagraph 1a)]
7.8 For Samoa, this Agreement applies to income taxes. [Article 2,
subparagraph 1b)]
7.9 The application of the Samoan agreement 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 of Australia and Samoa are
required to notify each other in the event of a substantial change to the
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taxation laws covered by the Samoan agreement of the respective
countries, within a reasonable period of time after any such changes.
[Article 2, paragraph 2]
7.10 The Samoan agreement does not apply to taxes imposed by
states, municipalities, local authorities or other political subdivisions or
possessions. [Article 2, paragraph 3]
Article 3 -- Definitions
Definition of Australia
7.11 The definition of `Australia' follows corresponding definitions
in Australia's modern tax treaties. `Australia' is defined to include certain
external territories and areas of the continental shelf. [Article 3,
subparagraph 1a)]
Definition of Samoa
7.12 Samoa is defined to mean the Independent State of Samoa and
the territorial waters thereof. [Article 3, subparagraph 1b)]
Definition of competent authority
7.13 The `competent authority' is the person or institution
specifically authorised to perform certain actions under the Samoan
agreement. For example, to notify each other of any significant changes
to the tax law of their respective countries, Article 2 (Taxes Covered) to
communicate for the purposes of Article 8 (Mutual Agreement Procedure)
and to exchange information in accordance with Article 9 (Exchange of
Information).
7.14 In the case of Australia, the competent authority is the
Commissioner of Taxation (Commissioner) or an authorised
representative of the Commissioner. In the case of Samoa, the competent
authority is the Minister of Revenue or an authorised representative of the
Minister. [Article 3, subparagraph 1c)]
Definition of Contracting State
7.15 `Contracting State' means Australia or Samoa, as the context
requires. [Article 3, subparagraph 1d)]
Definition of national
7.16 `National' means any individual possessing the nationality or
citizenship of Australia or Samoa, as the context requires. [Article 3,
subparagraph 1e)]
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Definition of person
7.17 `Person' includes an individual, a company and any other body
of persons [Article 3, subparagraph 1f)]. However, Article 8 (Mutual
Agreement Procedure) is the only substantive Article of the Samoan
agreement that will affect persons that are non-individuals.
Definition of transfer pricing adjustment
7.18 A transfer pricing adjustment is an adjustment made by the
competent authorities of Australia or Samoa to the profits of an enterprise,
based on the application of domestic transfer pricing laws [Article 3,
subparagraph 1h)]. For Australia, such laws are contained in Division 13 of
Part III of the Income Tax Assessment Act 1936 (ITAA 1936).
Terms not specifically defined
7.19 A term that is not specifically defined in the Samoan agreement
shall have (unless the context requires otherwise) the meaning that it has
under the domestic law of the country applying the Samoan agreement at
the time of its application. In that case, the term's domestic taxation law
meaning will have precedence over any meaning it may have under that
country's other domestic laws. [Article 3, paragraph 2]
Article 4 -- Resident
7.20 This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the Samoan agreement.
Residential status is a criterion for determining each country's taxing
rights and is a necessary condition for the provision of relief under the
Samoan agreement. In the case of Australia, a person's residence is
determined according to Australia's taxation law [Article 4, subparagraph 1a)].
In the case of Samoa, residence is determined according to Samoa's
taxation law [Article 4, subparagraph 1b)].
Special residency rules
7.21 A person is not a resident of a country, for the purposes of the
Samoan agreement, if that person is liable to tax in that country in respect
only of income from sources in that country [Article 4, paragraph 2]. In the
Australian context, this would mean, for example, that Norfolk Island
residents, who are generally only subject to Australian tax on Australian
source income, are not residents of Australia for the purposes of the
Samoan agreement. Accordingly, Samoa will not have to forego tax in
accordance with the Samoan agreement on income derived by Norfolk
Island residents (which will not be subject to Australian tax).
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Dual residents
7.22 Tie-breaker rules are included for determining residency of a
person, for the purposes of the Samoan agreement, if the person qualifies
as a resident of both countries in accordance with paragraph 1 of Article 4.
In the case of an individual the rules, in order of application, are:
· if the individual has a permanent home available to himself
or herself in only one of the countries, the person is deemed
to be a resident solely of that country [Article 4,
subparagraph 3a)];
· if the individual has a permanent home available in both
countries or in neither, then the person's residential status
takes into account their personal or economic relations with
Australia and Samoa, and the person is deemed for the
purposes of the Samoan agreement to be a resident only of
the country with which they have the closer personal and
economic relations [Article 4, subparagraph 3a)];
· residency will be determined on the basis of an individual's
nationality where the foregoing tests are not determinative
[Article 4, subparagraph 3b)]; or
· if the individual is a national (as defined in subparagraph 1e
of Article 3 of the Samoan agreement) of both countries, or
of neither, the competent authorities will endeavour to
resolve the question of residence by mutual agreement
[Article 4, subparagraph 3c)].
7.23 In the case of a non-individual, that is a company, partnership or
other body or person, which would under paragraph 1 of Article 4 be a
resident of both Australia and Samoa, then the entity will be deemed to be
a resident of the country in which the place of effective management is
situated. [Article 4, paragraph 4]
7.24 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 Australian as a resident, insofar as the Samoan agreement
allows.
Article 5 -- Pensions and Retirement Annuities
7.25 Pensions and retirement annuities are taxable only by the
country of which the recipient is a resident, provided such income is
subject to tax in that country. If such income is not subject to tax in that
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country, the income may be taxed by the country from which the relevant
payments were made. [Article 5, paragraph 1]
Meaning of retirement annuity
7.26 In the case of Australia, retirement annuity means a
superannuation annuity payment within the meaning of the taxation laws
of Australia [Article 5, subparagraph 2a)]. A superannuation annuity as
defined by Regulation 995-1.01 of the Income Tax Assessment
Regulations 1997, which took effect from 1 July 2007 is a retirement
annuity.
7.27 In the case of Samoa, a retirement annuity means a
superannuation annuity payment. [Article 5, subparagraph 2b)]
7.28 A retirement annuity also includes any other similar periodic
payment subject to the agreement of the competent authorities of Australia
and Samoa. [Article 5, subparagraph 2c)]
Article 6 -- Government Service
7.29 Salary and wage type income, other than government service
pensions, paid to an individual for services rendered to a government of
one of the countries (including a political subdivision or local authority),
is to be taxed only in that country. However, such remuneration will be
taxable only in the other country if the services are rendered in that other
country and:
· 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 country solely for the purpose of
rendering the services (for example, if the recipient is a
permanent resident of that other country).
[Article 6, paragraph 1]
Business income
7.30 Remuneration in respect of services rendered in connection with
a trade or business carried on by a governmental authority is excluded
from the scope of the Article. Such remuneration will remain subject to
the domestic taxation laws of the two countries. [Article 6, paragraph 2]
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Article 7 -- Students
Exemption from tax
7.31 This Article applies to students or 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,
resident in 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 7]
Employment income
7.32 Where a Samoan student visiting Australia solely for
educational purposes undertakes employment in Australia, for example,
part-time work with a local employer, the income earned by that student
as a consequence of that employment may be subject to tax in Australia.
7.33 For business apprentices, 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, falls for consideration under domestic taxation law.
7.34 In the case of a Samoan 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.
7.35 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 (that is, a subsistence payment).
If the remuneration is similar to the amounts paid to persons who provide
similar services who are not business apprentices (that is, salary
equivalent), this would generally indicate that the payments constitute
income from employment that would fall for consideration under
domestic taxation law. Likewise, if that business apprentice undertakes
any other employment in Australia, the income earned from that
employment may be subject to tax in Australia.
7.36 Where a taxpayer receives exempt income and assessable
income, the exempt income may in some cases be taken into account in
determining the rate of tax payable on the assessable income. However,
the payments received from abroad for a student's or apprentice's
maintenance, education or training will not, be taken into account in
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determining the tax payable on the employment income that is subject to
tax in Australia.
Article 8 -- Mutual Agreement Procedure in Respect of
Transfer Pricing Adjustments
7.37 This Article provides for consultation between the competent
authorities of the two countries for the purpose of endeavouring to resolve
disputes concerning transfer pricing adjustments purportedly made not in
accordance with the arm's length principle. [Article 8, paragraph 2]
7.38 The term `arm's length principle' refers to the requirement that
businesses price their related party international dealings according to
what truly independent parties acting independently would reasonably be
expected to have done in the same situation. In Australia the
Commissioner would apply the arm's length principle when reviewing
business transactions in the context of Division 13 of Part III of the
ITAA 1936.
7.39 A person wishing to use this mutual agreement procedure must
present their case to the competent authority of their country of residence
within three years of the first notification of the transfer pricing
adjustment. This procedure operates independently of, and in addition to,
domestic legal remedies available to taxpayers. [Article 8, paragraph 1]
Article 9 -- Exchange of Information
7.40 This Article authorises and limits the exchange of information
by the competent authorities for the purposes of the Samoan agreement, to
information that is foreseeably relevant to the administration of the
agreement.
7.41 The exchange of information is subject to the provisions of the
Agreement on the Exchange of Information with Respect to Taxes, which
was signed by the two countries on 16 December 2009. After it takes
effect, that agreement will provide for exchange of information that is
foreseeably relevant to the administration of the taxation laws of the two
countries. It also contains safeguards to protect taxpayers' rights. For
example:
· confidentiality rules to ensure that information exchanged is
only disclosed to authorised recipients; and
· limitations to ensure that the competent authorities do not
exceed domestic laws and administrative procedures in the
course of obtaining and supplying information.
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Article 10 -- Entry into Force
Date of entry into force
7.42 The Samoan agreement will enter into force on the date of the
last exchange of diplomatic notes notifying that the domestic procedures
to give it the force of law have been completed. In Australia, enactment
of the legislation giving the Samoan agreement the force of law along
with tabling the Samoan agreement in Parliament are prerequisites to the
exchange of diplomatic notes. Entry into force is also conditional upon
the related Agreement on the Exchange of Information with Respect to
Taxes between the two countries being in force at that time. [Article 10]
Date of application in Australia and Samoa
7.43 Following entry into force, the Samoan agreement will take
effect in Australia and Samoa in respect of any income year beginning on
or after 1 July in the calendar year next following the date on which it
enters into force. [Article 10]
Article 11 -- Termination
7.44 The Samoan agreement is to continue in effect indefinitely.
However, either country may give the other country written notice of
termination of the agreement through the diplomatic channel. [Article 11,
paragraph 1]
Cessation in Australia and Samoa
7.45 In the event of either country terminating the Samoan
agreement, it would cease to be effective in Australia and Samoa in the
year of income beginning on or after 1 July in the calendar year next
following that in which the notice of termination is given. [Article 11,
paragraph 2)]
Cessation in other circumstances
7.46 The Samoan agreement will also terminate and cease to be
effective if the Agreement on the Exchange of Information with Respect to
Taxes between Australia and Samoa is terminated. In that event, the
Samoan agreement would terminate on the first day of the month
following the expiration of six months after receipt of notification of
termination the Agreement on the Exchange of Information with Respect
to Taxes. [Article 11, paragraph 3]
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Chapter 8
The Australia-Turkey convention
Outline of chapter
8.1 Schedule 2 to this Bill amends the International Tax Agreements
Act 1953 (Agreements Act 1953) to define and give the force of law to the
2010 Convention between the Government of Australia and the
Government of the Republic of Turkey for the Avoidance of Double
Taxation with respect to Taxes on Income and the Prevention of Fiscal
Evasion and its Protocol (Turkish convention). Subsection 3AAA(1) of
the Agreements Act 1953 will define the Turkish convention and
subsection 5(1) will give it the force of law in Australia.
Context of amendments
8.2 The Turkish convention was signed in Ankara on 28 April 2010
and is the first convention of this type between Australia and Turkey. The
Turkish convention will:
· promote closer economic cooperation between Australia and
Turkey by reducing taxation barriers; in particular avoiding
double taxation on income arising from overlapping
jurisdictions; and
· improve the integrity of the tax system by providing the
framework through which the tax administrations of
Australia and Turkey can prevent international fiscal evasion.
Summary of new law
Main features of the Turkish convention
8.3 The main features of the Turkish convention are as follows:
· Dual resident individuals (for example, individuals who are
residents of both Australia and Turkey for tax purposes
according to the domestic taxation laws of each country) are,
in accordance with specified criteria, to be treated for the
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purposes of the Turkish convention as being residents of only
one country [Article 4].
· Where a company is a resident of both countries for their
domestic tax purposes, the entity is not entitled to the
benefits of the Turkish convention except for the benefits
provided to nationals under the non-discrimination provisions
[Articles 3 and 4].
· Income from real property (including the profits of an
enterprise from agricultural, pastoral or forestry activities
carried out on that real property) may be taxed by the country
in which the property is situated. Income from real property
includes natural resource royalties [Article 6].
· Business profits are generally to be taxed only in the country
of residence of the recipient unless they are derived by a
resident of one country through a branch or other prescribed
permanent establishment in the other country, in which case
that other country may tax the profits. These rules also apply
to business trusts [Article 7].
· Profits derived from the operation of ships and aircraft are
generally to be taxed only in the country of residence of the
operator [Article 8].
· Profits of associated enterprises may be adjusted for tax
purposes where transactions have been entered into on other
than arm's length terms [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:
- a 5 per cent limitation applies on certain inter-corporate
non-portfolio dividends where the recipient holds directly
at least:
: ten per cent of the voting power of the Australian
company paying the dividend [Article 10,
sub-subparagraph 2a)(i)]; or
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: twenty-five per cent of the capital of the Turkish
company paying the dividend. In these instances, the
profits from which the dividends are paid must have
been subjected to the full rate of corporate tax in
Turkey and the dividends must be exempt from
Australian taxation in the hands of the recipient
company. [Article 10, sub-subparagraph 2a)(ii), Protocol,
subitem 6a)]; and
- a general limit of 15 per cent applies to all other dividends
[Article 10, subparagraph 2b)].
· In the case of branch profits:
- a 5 per cent tax rate limitation applies to the after tax
profits of the company where the branch profits were
subject to the full rate of company tax in the country
where the branch is situated [Article 10, subparagraph 4a)];
and
- a general limit of 15 per cent applies in all other cases
[Article 10, subparagraph 4b)].
· In the case of interest:
- an exemption applies for interest derived from the
investment of official reserve assets by a government, its
central bank or a bank performing central banking
functions [Article 11, paragraph 3]; and
- a general limit of 10 per cent applies to all other interest
[Article 11, paragraph 2].
· The rate limit on source country taxation of royalties is
10 per cent [Article 12, paragraph 2].
· Income, profits or gains from the alienation of real property
may be taxed 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 certain
companies and other entities (including land rich entities), all
other capital gains will be taxable only in the country of
residence [Article 13].
· 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
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by a resident of one country through a fixed base or the
individual is present in the other country for a specified
period [Article 14].
· 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 provided that the remuneration for the services is not
borne by a permanent establishment of the employer in the
country visited [Article 15].
· Directors' remuneration may be taxed in the country in
which the company of which the person is a director is a
resident for tax purposes [Article 16].
· Income derived by entertainers and sportspersons may
generally be taxed by the country in which the activities are
performed [Article 17].
· Pensions and annuities and similar periodic remuneration
(other than those relating to government service) are taxable
only in the country of residence of the recipient. Lump sums
paid after the age of 60 in lieu of a right to receive a pension
are also generally taxable only in the country of residence of
the recipient. However, in respect of other lump sum
payments (other than lump sum retirement benefits relating
to government service), taxing rights are to be shared
between the country of residence and the country of source
[Article 18].
· Income from government service will generally be taxed only
in the country that pays the remuneration. However, the
remuneration will 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 also a national of that other
country or did not become a resident of that other country for
the purpose of rendering the services [Article 19, paragraph 1].
· Pensions or annuities paid by, or out of funds created by, a
country, to an individual in respect of services rendered to
that country are taxable only in that country. However, these
payments shall be taxable in the other country if the
individual is a resident and a national of that country. Lump
sum retirement benefits paid by, or out of funds created by, a
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country, to an individual in respect of services rendered to a
country are taxable only in that country [Article 19, paragraph 2].
· Payments made from abroad to visiting students for their
maintenance or education will be exempt from tax in the
country visited [Article 20, paragraph 1].
· Remuneration received by a professor or teacher for the
purpose of teaching, study or research at an educational
institution for a period not exceeding two years will, under
certain conditions, be exempt from tax in the country visited
to the extent to which it is subject to tax by the country of
residence [Article 20, paragraphs 2 and 3].
· Other income (that is, income not dealt with by other
Articles) may generally be taxed in both countries, with the
country of residence of the recipient providing double tax
relief [Article 21].
· Source rules in the Turkish convention prescribe, for
domestic law and treaty purposes, that income, profits or
gains derived by a resident of one country, which under
certain provisions of the treaty may be taxed in the other
country, will be treated as having a source in that other
country [Article 22].
· Double taxation relief for income which, under the Turkish
convention, may be taxed by both countries, is required to be
provided by the country of which the taxpayer is a resident
under the terms of the Turkish convention as follows:
- in Australia, by allowing a credit for the Turkish tax
against Australian tax payable on income derived by a
resident of Australia from sources in Turkey [Article 23,
paragraph 1]; and
- in Turkey, by allowing a deduction for the Australian tax
against Turkish tax payable on income derived by a
resident of Turkey from sources in Australia [Article 23,
paragraph 2].
· In the case of Australia, effect will be given to the double tax
relief obligations arising under the Turkish 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.
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· Rules in the Turkish convention will protect nationals and
businesses from tax discrimination in the other country and
gives them private rights of appeal. However, Article 24
does not restrict either country from applying provisions
designed to prevent avoidance or evasion of taxes (for
Australia such measures include thin capitalisation,
controlled foreign company rules and measures designed to
ensure that taxes can be effectively collected and recovered,
including conservancy measures), provisions dealing with
capital gains deferral, provisions for the consolidation of
resident entities and research and development concessions
[Article 24].
· The Turkish convention provides for consultation between
the two taxation authorities to prevent taxation not in
accordance with the treaty [Article 25].
· The Turkish convention provides for exchange of
information, including bank information, between the two
taxation authorities. It authorises and requires Australia to
exchange information where the information relates to
federal taxes administered by the Commissioner of Taxation
(Commissioner) [Article 26].
Comparison of key features of new law and current law
New law Current law
Implements the 2010 Convention There is no existing treaty between
between Australia and Turkey. Australia and Turkey.
Provides rules to treat dual resident No equivalent.
individuals (for example, individuals
who are residents of both Australia
and Turkey for tax purposes
according to the domestic taxation
laws of each country) as residents of
only one country for the purposes of
the Turkish convention.
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New law Current law
Defines the term `permanent The definition of `permanent
establishment' in Article 5 establishment' is set out in
(Permanent Establishment) for the subsection 6(1) of the Income Tax
purposes of the Turkish convention. Assessment Act 1936 (ITAA 1936).
In particular, under the Turkish
convention a building site or
installation project constitutes a
permanent establishment where it
lasts more than six months. An
enterprise is deemed to have a
permanent establishment in a country
if:
· it carries on supervisory activities
in that country for more than six
months in connection with a
building site, or a construction,
installation or assembly project,
which is being undertaken in that
country;
· substantial equipment is operated
in that country by the enterprise
for more than six months in any
12-month period;
· it performs professional services
through one or more individuals
for a period or periods exceeding
183 days in any 12-month period;
or
· the enterprise habitually maintains
a stock of goods or merchandise
for the purpose of regular
delivery.
The Turkish convention treats certain The definition of `real property'
business profits, such as profits from covers land, and rights relating to
agricultural, pastoral or forestry exploration for or exploitation of
activities, as income from real natural resources.
property, and ensures that arms'
length profits are taxed on a net basis.
Source taxation of business profits is In general, foreign residents are
limited to those profits derived taxable on all Australian sourced
through a branch or other prescribed income.
permanent establishment (Article 5)
situated in the source country.
Source taxation of profits from Australia's domestic law provides for
shipping and airline transport source country taxation of profits
operations is limited to income from from shipping and airline activities
domestic transport. (including non-transport activities).
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New law Current law
Dividend withholding tax is limited The rate of non-resident dividend
to 5 per cent on certain withholding tax in Australia is
inter-corporate non-portfolio 30 per cent. There is no tax on
dividends where the recipient holds branch profits in Australia and the
directly at least: treaty will not change the taxation
· ten per cent of the voting power of treatment of branch profits.
the Australian company paying
the dividend; or
· twenty-five per cent of the capital
of the Turkish company paying
the dividend. In these instances,
the profits from which the
dividends are paid must have been
subjected to the full rate of
corporate tax in Turkey and the
dividends must be exempt from
Australian taxation in the hands of
the recipient company.
A general limit of 15 per cent applies
to all other dividends.
In the case of branch profits:
· a 5 per cent tax rate limitation
applies to the after tax profits of
the company where the branch
profits were subject to the full rate
of company tax in the country
where the branch is situated; and
· a general limit of 15 per cent
applies in all other cases.
In the case of interest: The rate of non-resident interest
· an exemption applies for interest withholding tax in Australia is
derived from the investment of 10 per cent.
official reserve assets by a
government, its central bank or a
bank performing central banking
functions; and
· a general limit of 10 per cent
applies to all other interest.
Reduces the rate of royalty The rate of non-resident royalty
withholding tax from 30 per cent to withholding tax in Australia is
10 per cent for all royalties. 30 per cent of the gross payment.
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New law Current law
Includes a comprehensive Alienation Non-residents are taxable on their
of Property Article which allocates capital gains from the alienation of
taxing rights over gains. real property, business assets of a
The allocation of taxing rights in the permanent establishment and on
Turkish convention is broadly indirect holdings of real property. In
consistent with Australia's capital relation to indirect holdings of real
gains tax arrangements for property the non-resident has to have
non-residents. a non-portfolio interest in the entity
holding the real property.
Source taxation of independent In general, foreign residents are
personal services is limited to those taxable on all Australian sourced
amounts attributable to a fixed base income.
or where a person is present in that
country for a period or periods
exceeding in the aggregate 183 days
in any 12-month period.
Employment income paid in respect No equivalent.
of certain short term visits are taxable
only in the country of residence of the
employee where the remuneration is
borne by a permanent establishment
or fixed base of the employer in the
employee's country of residence.
Pensions and retirement annuities and Pensions may be taxable in both
similar periodic remuneration (other countries.
than those relating to government
service) may be taxed only in the
country of residence of the recipient.
Lump sums (other than those relating Lump sums may be taxed in both
to government service) paid after the countries.
age of 60 in lieu of a right to receive a
pension, may also be taxed only in
the country of residence of the
recipient. However, in respect of
other lump sum payments, taxing
rights are to be shared between the
country of residence and the country
of source.
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New law Current law
Income from government service will No equivalent.
generally be taxed only in the country
that pays the remuneration.
However, the remuneration will 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, or did not
become a resident of that other
country for the purpose of rendering
the services.
Pensions, annuities or lumps sums
paid in respect of Government
services rendered to a country are
taxable only in that country.
However, these payments shall be
taxable in the other country if the
individual is a resident and a national
of, that other country.
Includes a comprehensive article No equivalent.
preventing tax discrimination under
tax laws.
Includes a framework to allow for No equivalent.
mutual agreement procedures
between the relevant tax authorities to
resolve disputes.
Includes a framework to allow the tax No equivalent.
authorities to exchange taxpayer
information.
The Turkey convention
8.4 A full transcript of the Turkish convention and detailed
explanation follows:
`CONVENTION BETWEEN THE GOVERNMENT OF AUSTRALIA
AND THE GOVERNMENT OF THE REPUBLIC OF TURKEY FOR
THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO
TAXES ON INCOME AND THE PREVENTION OF FISCAL
EVASION
The Government of Australia and the Government of the Republic of
Turkey,
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Desiring to conclude a Convention for the avoidance of double taxation
with respect to taxes on income and the prevention of fiscal evasion,
Have agreed as follows:
ARTICLE 1
Persons Covered
This Convention shall apply to persons who are residents of one or
both of the Contracting States.
ARTICLE 2
Taxes Covered
1. The existing taxes to which this Convention shall apply are:
(a) in Australia:
the income tax, including the resource rent tax in respect of offshore
projects relating to exploration for or exploitation of petroleum resources,
imposed under the federal law of Australia;
(b) in Turkey:
(i) the income tax; and
(ii) the corporation tax.
2. This Convention shall apply also to any identical or substantially
similar taxes which are imposed under the federal law of Australia or the
law of Turkey after the date of signature of this Convention in addition to,
or in place of, the existing taxes. The competent authorities of the
Contracting States shall notify each other of any substantial changes
which have been made in the law of their respective States relating to the
taxes to which this Convention applies within a reasonable period of time
after those changes.
3. For the purposes of Article 26, the taxes to which this Convention
shall apply are:
(a) in the case of Australia, taxes of every kind and description imposed
under the federal tax laws administered by the Commissioner of Taxation;
and
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(b) in the case of Turkey, taxes of every kind and description imposed
under the tax laws administered by Ministry of Finance.
ARTICLE 3
General Definitions
1. For the purposes of this Convention, unless the context otherwise
requires:
(a) the term "Australia", when used in a geographical sense, excludes all
external territories other than:
(i) the Territory of Norfolk Island;
(ii) the Territory of Christmas Island;
(iii) the Territory of Cocos (Keeling) Islands;
(iv) the Territory of Ashmore and Cartier Islands;
(v) the Territory of Heard Island and McDonald Islands; and
(vi) the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of Australia
(including the Territories specified in this subparagraph) in respect of
which there is for the time being in force, consistently with international
law, a law of Australia dealing with the exploration for or exploitation of
any of the natural resources of the seabed and subsoil of the continental
shelf;
(b) the term "Turkey" means the Turkish territory, as well as the
(maritime) areas over which it has jurisdiction or sovereign rights for the
purpose of exploring and exploiting the natural resources of the seabed
and subsoil of the continental shelf in accordance with international law;
(c) the term "Australian tax" means tax imposed by Australia, being tax to
which this Convention applies by virtue of paragraphs 1 or 2 of Article 2,
but does not include any penalty or interest imposed under the law of
Australia relating to its tax;
(d) the term "Turkish tax" means tax imposed by Turkey, being tax to
which this Convention applies by virtue of paragraphs 1 or 2 of Article 2,
but does not include any penalty or interest imposed under the law of
Turkey relating to its tax;
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(e) the term "company" means any body corporate or any entity which is
treated as a company or body corporate for tax purposes;
(f) the term "competent authority" means, in the case of Australia, the
Commissioner of Taxation or an authorised representative of the
Commissioner and, in the case of Turkey, the Minister of Finance or an
authorised representative of the Minister;
(g) the terms "a Contracting State" and "other Contracting State" mean
Australia or Turkey, as the context requires;
(h) the terms "enterprise of a Contracting State" and "enterprise of the
other Contracting State" mean respectively an enterprise carried on by a
resident of a Contracting State and an enterprise carried on by a resident
of the other Contracting State;
(i) the term "international traffic" means any transport by a ship or aircraft
operated by an enterprise of a Contracting State, except when the ship or
aircraft is operated solely from a place or between places in the other
Contracting State;
(j) the term "Turkish company" means a company which, under the law
of Turkey relating to Turkish tax, is a resident of Turkey, and which is
not, under the law of Australia relating to Australian tax, a resident of
Australia;
(k) the term "Australian company" means a company which, under the
law of Australia relating to Australian tax, is a resident of Australia, and
which is not, under the law of Turkey relating to Turkish tax, a resident of
Turkey;
(l) the term "national", in relation to a Contracting State, means:
(i) any individual possessing nationality or citizenship of that Contracting
State; and
(ii) any company or legal person deriving its status as such from the laws
in force in that Contracting State;
(m) the term "person" includes an individual, a company and any other
body of persons.
2. As regards the application of the Convention by a Contracting State,
any term not defined therein shall, unless the context otherwise requires,
have the meaning which it has at that time under the law of that State
concerning the taxes to which the Convention applies, any meaning under
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the applicable tax law of that State prevailing over a meaning given to the
term under other law of that State.
ARTICLE 4
Resident
1. For the purposes of this Convention, a person is a resident of a
Contracting State:
(a) in the case of Australia, if the person is:
(i) an Australian company; or
(ii) any other person (except a company) who, under the law of Australia
relating to Australian tax, is a resident of Australia;
(b) in the case of Turkey, if the person is:
(i) a Turkish company; or
(ii) any other person (except a company) who, under the law of Turkey
relating to Turkish tax, is a resident of Turkey.
2. The term "resident of a Contracting State" also includes that State and
any political subdivision or local authority of that State.
3. A person is not a resident of a Contracting State for the purposes of
this Convention if the person is liable to tax in that State in respect only of
income from sources in that State.
4. Where by reason of the preceding provisions of this Article a person,
being an individual, is a resident of both Contracting States, then the
person's status shall be determined as follows:
(a) the individual shall be deemed to be a resident only of the State in
which a permanent home is available to that individual; but if a permanent
home is available in both States, or in neither of them, that individual shall
be deemed to be a resident only of the State with which the individual's
personal and economic relations are closer (centre of vital interests);
(b) if the State in which the centre of vital interests is situated cannot be
determined, the individual shall be deemed to be a resident only of the
State of which that individual is a national;
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(c) if the individual is a national of both States or of neither of them, the
competent authorities of the Contracting States shall endeavour to resolve
the question by mutual agreement.
ARTICLE 5
Permanent Establishment
1. For the purposes of this Convention, the term "permanent
establishment" means a fixed place of business through which the
business of the enterprise is wholly or partly carried on.
2. The term "permanent establishment" includes especially:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry or any other place relating to the
exploration for or exploitation of natural resources; and
(g) a building site or construction, installation or assembly project which
exists for more than 6 months.
3. An enterprise shall be deemed to have a permanent establishment in a
Contracting State and to carry on business through that permanent
establishment if:
(a) it carries on supervisory activities in that State for more than 6 months
in connection with a building site, or a construction, installation or
assembly project, which is being undertaken in that State;
(b) substantial equipment is operated in that State by the enterprise for
more than 6 months in any 12 month period.
4. An enterprise shall not be deemed to have a permanent establishment
merely by reason of:
(a) the use of facilities solely for the purpose of storage, display or
irregular delivery of goods or merchandise belonging to the enterprise; or
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(b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or irregular delivery;
or
(c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise; or
(d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise or of collecting information, for the
enterprise; or
(e) the maintenance of a fixed place of business solely for the purpose of
activities which have a preparatory or auxiliary character for the
enterprise, such as advertising or scientific research.
5. Notwithstanding the provisions of paragraph 1, 2, and 3, where an
enterprise of a Contracting State performs professional services in the
other Contracting State for a period or periods exceeding 183 days in any
twelve month period, and these services are performed through one or
more individuals who are present and performing such services in that
other State, the activities carried on in that other State in performing these
services shall be deemed to be carried on through a permanent
establishment of the enterprise situated in that other State.
6. Notwithstanding the provisions of paragraphs 1 and 2, where a person
other than an agent of an independent status to whom paragraph 7 applies
is acting in a Contracting State on behalf of an enterprise of the other
Contracting State, that enterprise shall be deemed to have a permanent
establishment in the first-mentioned Contracting State in respect of any
activities which that person undertakes for the enterprise, if such a person:
(a) has, and habitually exercises in that State, an authority to conclude
contracts on behalf of the enterprise, unless the person's activities are
limited to the purchase of goods or merchandise for the enterprise; or
(b) has no such authority, but habitually maintains in the first-mentioned
State a stock of goods or merchandise from which the person regularly
delivers goods or merchandise on behalf of the enterprise; or
(c) in so acting, manufactures or processes in that State for the enterprise
goods or merchandise belonging to the enterprise.
7. An enterprise of a Contracting State shall not be deemed to have a
permanent establishment in the other Contracting State merely because it
carries on business in that other State through a person who is a broker,
general commission agent or any other agent of an independent status and
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is acting in the ordinary course of the person's business as such a broker or
agent.
8. The fact that a company which is a resident of a Contracting State
controls or is controlled by a company which is a resident of the other
Contracting State, or which carries on business in that other State
(whether through a permanent establishment or otherwise), shall not of
itself make either company a permanent establishment of the other.
9. The principles set forth in the preceding paragraphs of this Article
shall be applied in determining for the purposes of paragraph 6 of
Article 11 and paragraph 5 of Article 12 whether there is a permanent
establishment outside both Contracting States, and whether an enterprise,
not being an enterprise of a Contracting State, has a permanent
establishment in a Contracting State.
ARTICLE 6
Income from Real Property
1. Income from real property (including income from agricultural,
pastoral or forestry activities on that real property) may be taxed in the
Contracting State in which the real property is situated.
2. In this Article, the term "real property":
(a) in the case of Australia, has the meaning which it has under the law of
Australia and includes:
(i) a lease of land and any other interest in or over land, whether
improved or not, including a right to explore for mineral, oil or gas
deposits or other natural resources, and a right to mine those deposits or
resources; and
(ii) a right to receive variable or fixed payments either as consideration for
or in respect of the exploitation of, or the right to explore for or exploit,
mineral, oil or gas deposits, quarries or other places of extraction or
exploitation of natural resources;
(b) in the case of Turkey, means property which according to the laws of
Turkey is immovable property, and includes:
(i) property accessory to immovable property;
(ii) livestock and equipment used in agriculture and forestry (including
the breeding and cultivation of fish);
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(iii) rights to which the provisions of general law respecting landed
property apply; and
(iv) usufruct of immovable property and rights to variable or fixed
payments as consideration for the working of, or the right to work,
mineral deposits, sources and other natural resources;
(c) does not include ships, boats and aircraft.
3. Any interest or right referred to in paragraph 2 shall be regarded as
situated where the land, mineral, oil or gas deposits, quarries, natural
resources, immovable property, landed property or sources, as the case
may be, are situated or where the exploration may take place.
4. The provisions of paragraph 1 shall apply to income derived from the
direct use, letting, or use in any other form of real property.
5. The provisions of paragraphs 1, 3, and 4 shall also apply to income
from real property of an enterprise and to income from real property used
for the performance of independent personal services.
ARTICLE 7
Business Profits
1. The profits of an enterprise of a Contracting State shall be taxable only
in that State unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated therein. If
the enterprise carries on business in that manner, the profits of the
enterprise may be taxed in the other State but only so much of them as is
attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a
Contracting State carries on business in the other Contracting State
through a permanent establishment situated therein, there shall in each
Contracting State be attributed to that permanent establishment the profits
which it might be reasonably expected to make if it were a distinct and
separate enterprise engaged in the same or similar activities under the
same or similar conditions and dealing wholly independently with the
enterprise of which it is a permanent establishment or with other
enterprises with which it deals.
3. In determining the profits of a permanent establishment, there shall be
allowed as deductions expenses of the enterprise, being expenses which
are incurred for the purposes of the permanent establishment (including
executive and general administrative expenses so incurred) and which
would be deductible if the permanent establishment were an independent
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entity which paid those expenses, whether incurred in the Contracting
State in which the permanent establishment is situated or elsewhere.
4. No profits shall be attributed to a permanent establishment by reason
of the mere purchase by that permanent establishment of goods or
merchandise for the enterprise.
5. Nothing in this Article shall affect the application of any law of a
Contracting State relating to the determination of the tax liability of a
person, including determinations in cases where the information available
to the competent authority of that State is inadequate to determine the
profits to be attributed to a permanent establishment, provided that that
law shall be applied, so far as the information available to the competent
authority permits, consistently with the principles of this Article.
6. Where profits include items of income or gains which are dealt with
separately in other Articles of this Convention, then the provisions of
those Articles shall not be affected by the provisions of this Article.
7. Nothing in this Article shall affect the operation of any law of a
Contracting State relating to tax imposed on profits from insurance with
nonresidents provided that if the relevant law in force in either
Contracting State at the date of signature of this Convention is varied
(otherwise than in minor respects so as not to affect its general character)
the Contracting States shall consult with each other with a view to
agreeing to any amendment of this paragraph that may be appropriate.
8. Where:
(a) a resident of a Contracting State is beneficially entitled, whether
directly or through one or more interposed trust estates, to a share of the
business profits of an enterprise carried on in the other Contracting State
by the trustee of a trust estate other than a trust estate which is treated as a
company for tax purposes; and
(b) in relation to that enterprise, that trustee would, in accordance with the
principles of Article 5, have a permanent establishment in that other State,
the enterprise carried on by the trustee shall be deemed to be a business
carried on in the other State by that resident through a permanent
establishment situated therein and that share of business profits shall be
attributed to that permanent establishment.
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ARTICLE 8
Shipping and Aircraft Operations
1. Profits of an enterprise of a Contracting State derived from the
operation of ships or aircraft shall be taxable only in that State.
2. Notwithstanding the provisions of paragraph 1, such profits may be
taxed in the other Contracting State to the extent that they are profits
derived directly or indirectly from ship or aircraft operations confined
solely to places in that other State.
3. The provisions of paragraphs 1 and 2 shall also apply to profits from
the participation in a pool, a joint business or an international operating
agency.
4. For the purposes of this Article, profits derived from the carriage by
ships or aircraft of passengers, livestock, mail, goods or merchandise
which are shipped in a Contracting State and are discharged at a place in
that State shall be treated as profits from ship or aircraft operations
confined solely to places in that State.
ARTICLE 9
Associated Enterprises
1. Where:
(a) an enterprise of a Contracting State participates directly or indirectly in
the management, control or capital of an enterprise of the other
Contracting State; or
(b) the same persons participate directly or indirectly in the management,
control or capital of an enterprise of a Contracting State and an enterprise
of the other Contracting State,
and in either case conditions operate between the two enterprises in their
commercial or financial relations which differ from those which might
reasonably be expected to operate between independent enterprises
dealing wholly independently with one another, then any profits which,
but for those conditions, might reasonably have been expected to accrue to
one of the enterprises but, by reason of those conditions, have not so
accrued, may be included in the profits of that enterprise and taxed
accordingly.
2. Nothing in this Article shall affect the application of any law of a
Contracting State relating to the determination of the tax liability of a
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person, including determinations in cases where the information available
to the competent authority of that State is inadequate to determine the
profits accruing to an enterprise, provided that that law shall be applied, so
far as the information available to the competent authority permits,
consistently with the principles of this Article.
3. Where profits on which an enterprise of a Contracting State has been
charged to tax in that State are also included, by virtue of the provisions of
paragraph 1 or 2, in the profits of an enterprise of the other Contracting
State and charged to tax in that other State, and the profits so included are
profits which might reasonably have been expected to have accrued to that
enterprise of the other State if the conditions operative between the
enterprises had been those which might reasonably have been expected to
have operated between independent enterprises dealing wholly
independently with one another, then the first-mentioned State shall make
an appropriate adjustment to the amount of tax charged therein on those
profits, if it agrees with the adjustment made by the other Contracting
State. In determining such adjustment, due regard shall be had to the
other provisions of this Convention and for this purpose the competent
authorities of the Contracting States shall if necessary consult each other.
ARTICLE 10
Dividends
1. Dividends paid by a company which is a resident of a Contracting
State to a resident of the other Contracting State may be taxed in that other
State.
2. However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident, and according to
the law of that State, but if the beneficial owner of the dividends is a
resident of the other State the tax so charged shall not exceed:
(a)(i) in the case of dividends paid by a company that is a resident of
Australia, 5 per cent of the gross amount of the dividends, where those
dividends are paid to a company (other than a partnership) which holds
directly at least 10 per cent of the voting power in the company paying the
dividends; and
(ii) in the case of dividends paid by a company that is a resident of
Turkey, 5 per cent of the gross amount of the dividends which are paid out
of profits which have been subjected to the full rate of corporation tax in
Turkey, where those dividends are paid to a company (other than a
partnership) which holds directly at least 25 per cent of the capital of the
company paying the dividends; and
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(b) 15 per cent of the gross amount of the dividends in all other cases,
provided that if the relevant law in either Contracting State at the date of
signature of this Convention is varied, otherwise than in minor respects so
as to not affect its general character, the Contracting States shall consult
each other with a view to agreeing to any amendment of this paragraph
that may be appropriate.
3. The term "dividends" as used in this Article means income from shares
or other rights, not being debt-claims, participating in profits, as well as
other amounts which are subjected to the same taxation treatment as
income from shares by the law of the State of which the company making
the distribution is a resident.
4. Profits of a company which is a resident of a Contracting State and
which carries on business in the other Contracting State through a
permanent establishment situated therein may, after having been taxed in
accordance with Article 7, be taxed on the remaining amount in the
Contracting State in which the permanent establishment is situated and in
accordance with the law of that State, but the tax so charged shall not
exceed:
(a) 5 per cent of the remaining amount where profits of the company are
subject to the full rate of corporation tax in that State; and
(b) 15 per cent of the remaining amount in all other cases.
5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial
owner of the dividends, being a resident of a Contracting State, carries on
business in the other Contracting State of which the company paying the
dividends is a resident, through a permanent establishment situated
therein, or performs in that other State independent personal services from
a fixed base situated therein, and the holding in respect of which the
dividends are paid is effectively connected with that permanent
establishment or fixed base. In such case the provisions of Article 7 or
Article 14, as the case may be, shall apply.
6. Subject to paragraph 4, where a company which is a resident of a
Contracting State derives profits or income from the other Contracting
State, that other State may not impose any tax on the dividends paid by
the company, except insofar as such dividends are paid to a resident of
that other Contracting State or insofar as the holding in respect of which
such dividends are paid is effectively connected with a permanent
establishment or a fixed base situated in that other State, nor subject the
company's undistributed profits to a tax on the company's undistributed
profits, even if the dividends paid or the undistributed profits consist
wholly or partly of profits or income arising in such other State.
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ARTICLE 11
Interest
1. Interest arising in a Contracting State and paid to a resident of the
other Contracting State may be taxed in that other State.
2. However, that interest may also be taxed in the Contracting State in
which it arises and according to the law of that State, but if the beneficial
owner of the interest is a resident of the other State the tax so charged
shall not exceed 10 per cent of the gross amount of the interest.
3. Interest derived from the investment of official reserve assets by the
Government of a Contracting State, its central bank or a bank performing
central banking functions in that State shall be exempt from tax in the
other Contracting State.
4. The term "interest" in this Article includes interest from Government
securities or from bonds or debentures, whether or not secured by
mortgage and whether or not carrying a right to participate in profits,
interest from any other form of indebtedness and all other income
subjected to the same taxation treatment as income from money lent by
the law of the Contracting State in which the income arises.
5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial
owner of the interest, being a resident of a Contracting State, carries on
business in the other Contracting State, in which the interest arises,
through a permanent establishment situated therein, or performs in that
other State independent personal services from a fixed base situated
therein, and the indebtedness in respect of which the interest is paid is
effectively connected with that permanent establishment or fixed base. In
such case the provisions of Article 7 or Article 14, as the case may be,
shall apply.
6. Interest shall be deemed to arise in a Contracting State when the payer
is a resident of that State. Where, however, the person paying the interest,
whether the person is a resident of a Contracting State or not, has in a
Contracting State or outside both Contracting States a permanent
establishment or fixed base in connection with which the indebtedness on
which the interest is paid was incurred, and that interest is borne by that
permanent establishment or fixed base, then the interest shall be deemed
to arise in the State in which the permanent establishment or fixed base is
situated.
7. Where, by reason of a special relationship between the payer and the
beneficial owner of the interest, or between both of them and some other
person, the amount of the interest paid, having regard to the indebtedness
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for which it is paid, exceeds the amount which might reasonably have
been expected to have been agreed upon by the payer and the beneficial
owner in the absence of that relationship, the provisions of this Article
shall apply only to the last-mentioned amount. In such case the excess
part of the amount of the interest paid shall remain taxable according to
the law of each Contracting State, due regard being had to the other
provisions of this Convention.
ARTICLE 12
Royalties
1. Royalties arising in a Contracting State and paid to a resident of the
other Contracting State may be taxed in that other State.
2. However, those royalties may also be taxed in the Contracting State in
which they arise and according to the law of that State, but if the
beneficial owner of the royalties is a resident of the other State the tax so
charged shall not exceed 10 per cent of the gross amount of the royalties.
3. The term "royalties" in this Article means credits or payments of any
kind, whether periodical or not, and however described or computed, to
the extent to which they are made as consideration for:
(a) the use of, or the right to use, any copyright, patent, design or model,
plan, secret formula or process, trademark or other like property or right;
or
(b) the use of, or the right to use, any industrial, commercial or scientific
equipment; or
(c) the supply of scientific, technical, industrial or commercial knowledge
or information; or
(d) the supply of any assistance that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of, any
such property or right as is mentioned in subparagraph (a), any such
equipment as is mentioned in subparagraph (b) or any such knowledge or
information as is mentioned in subparagraph (c); or
(e) the use of, or the right to use:
(i) motion picture films; or
(ii) films or audio or video tapes or disks, or any other means of image or
sound reproduction or transmission for use in connection with television,
radio or other broadcasting; or
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(f) the use of, or the right to use, some or all of the part of the
radiofrequency spectrum specified in a relevant licence; or
(g) total or partial forbearance in respect of the use or supply of any
property or right referred to in this paragraph.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial
owner of the royalties, being a resident of a Contracting State, carries on
business in the other Contracting State, in which the royalties arise,
through a permanent establishment situated therein, or performs in that
other State independent personal services from a fixed base situated
therein, and the property or right in respect of which the royalties are paid
or credited is effectively connected with that permanent establishment or
fixed base. In such case the provisions of Article 7 or Article 14, as the
case may be, shall apply.
5. Royalties shall be deemed to arise in a Contracting State when the
payer is a resident of that State. Where, however, the person paying the
royalties, whether the person is a resident of a Contracting State or not,
has in a Contracting State or outside both Contracting States a permanent
establishment or fixed base in connection with which the liability to pay
the royalties was incurred, and the royalties are borne by the permanent
establishment or fixed base, then the royalties shall be deemed to arise in
the State in which the permanent establishment or fixed base is situated.
6. Where, by reason of a special relationship between the payer and the
beneficial owner of the royalties, or between both of them and some other
person, the amount of the royalties paid or credited, having regard to what
they are paid or credited for, exceeds the amount which might reasonably
have been expected to have been agreed upon by the payer and the
beneficial owner in the absence of such relationship, the provisions of this
Article shall apply only to the last-mentioned amount. In such case, the
excess part of the amount of the royalties paid or credited shall remain
taxable according to the law of each Contracting State, due regard being
had to the other provisions of this Convention.
ARTICLE 13
Alienation of Property
1. Income, profits or gains derived by a resident of a Contracting State
from the alienation of real property referred to in Article 6 and situated in
the other Contracting State may be taxed in that other State.
2. Income, profits or gains from the alienation of property, other than real
property, that forms part of the business property of a permanent
establishment which an enterprise of a Contracting State has in the other
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Contracting State or pertains to a fixed base available in that other State to
a resident of the first-mentioned State for the purpose of performing
independent personal services, including income, profits or gains from the
alienation of that permanent establishment (alone or with the whole
enterprise) or of that fixed base, may be taxed in that other State.
3. Income, profits or gains of an enterprise of a Contracting State from
the alienation of ships or aircraft operated by that enterprise in
international traffic, or of property (other than real property) pertaining to
the operation of such ships or aircraft, shall be taxable only in that
Contracting State.
4. Income, profit or gains derived by a resident of a Contracting State
from the alienation of any shares or comparable interests deriving more
than 50 per cent of the value directly or indirectly from real property
situated in the other Contracting State may be taxed in that other State.
5. Gains of a capital nature from the alienation of any property, other
than that referred to in the preceding paragraphs, shall be taxable only in
the Contracting State of which the alienator is a resident.
6. Notwithstanding the provisions of paragraph 5, gains of a capital
nature derived by a resident of Australia from the alienation of shares or
similar rights in a Turkish company or bonds issued by a resident of
Turkey may be taxed in Turkey, if the period between acquisition and
alienation of such shares, rights or bonds does not exceed 2 years.
ARTICLE 14
Independent Personal Services
1. Income derived by an individual who is a resident of a Contracting
State in respect of professional services or other activities of an
independent character shall be taxable only in that State. However, such
income may also be taxed in the other Contracting State if such services
or activities are performed in that other State and:
(a) the individual has a fixed base regularly available in that other State
for the purposes of performing those services or activities; or
(b) the individual is present in that other State for the purpose of
performing those services or activities for a period or periods exceeding in
the aggregate 183 days in any 12 month period commencing or ending in
the year of income of that other State.
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In such circumstances, only so much of the income as is attributable to
that fixed base or is derived from the services or activities performed in
that other State, as the case may be, may be taxed in that other State.
2. The term "professional services" includes independent scientific,
literary, artistic, educational or teaching activities as well as the
independent activities of physicians, lawyers, engineers, architects,
dentists and accountants.
ARTICLE 15
Dependent Personal Services
1. Subject to the provisions of Articles 16, 18, 19 and 20, salaries, wages
and other similar remuneration derived by an individual who is a resident
of a Contracting State in respect of an employment shall be taxable only
in that State unless the employment is exercised in the other Contracting
State. If the employment is so exercised, such remuneration as is derived
from that exercise may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived
by an individual who is a resident of a Contracting State in respect of an
employment exercised in the other Contracting State shall be taxable only
in the first-mentioned State if:
(a) the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in any 12 month period commencing
or ending in the year of income of that other State; and
(b) the remuneration is paid by, or on behalf of, an employer who is not a
resident of that other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed
base which the employer has in that other State.
3. Notwithstanding the preceding provisions of this Article, remuneration
derived in respect of an employment exercised aboard a ship or aircraft
operated in international traffic may be taxed in the Contracting State of
which the enterprise is a resident.
ARTICLE 16
Directors' Fees
Directors' fees and other similar payments derived by a resident of a
Contracting State in that person's capacity as a member of the board of
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directors of a company which is a resident of the other Contracting State
may be taxed in that other State.
ARTICLE 17
Entertainers
1. Notwithstanding the provisions of Articles 14 and 15, income derived
by residents of a Contracting State as entertainers (such as theatrical,
motion picture, radio or television artistes and musicians and
sportspersons) from their personal activities as such exercised in the other
Contracting State, may be taxed in that other State.
2. Where income in respect of the personal activities of an entertainer as
such accrues not to that entertainer but to another person, that income
may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in
the Contracting State in which the activities of the entertainer are
exercised.
3. Notwithstanding the provisions of paragraph 1, income derived by an
entertainer who is a resident of a Contracting State, from the entertainer's
personal activities as such exercised in the other Contracting State, shall
be taxable only in the first-mentioned State if the activities in the other
State are supported wholly or substantially from the public funds of the
first-mentioned State, including any of its political subdivisions or local
authorities.
ARTICLE 18
Pensions and Annuities
1. Subject to the provisions of paragraph 2 of Article 19, pensions,
annuities and similar periodic remuneration, paid to a resident of a
Contracting State shall be taxable only in that State.
2. The term "annuity" means a stated sum payable periodically at stated
times during life or during a specified or ascertainable period of time
under an obligation to make the payments in return for adequate and full
consideration in money or money's worth.
3. Subject to the provisions of paragraph 2 of Article 19, lump sums in
lieu of the right to receive a pension, annuity or other similar periodic
remuneration, paid to a resident of a Contracting State shall be taxable
only in that State. However, such lump sums (other than an amount paid
under a pension scheme to a member of that scheme who is aged 60 years
or more) may also be taxed in the other State if they arise in that other
State.
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4. Any alimony or other maintenance payment arising in a Contracting
State and paid to a resident of the other Contracting State shall be taxable
only in the first mentioned State.
ARTICLE 19
Government Service
1. Salaries, wages and other similar remuneration, other than a pension or
annuity, paid by a Contracting State or a political subdivision or a local
authority of that State to an individual in respect of services rendered in
the discharge of governmental functions shall be taxable only in that State.
However, such salaries, wages and other similar remuneration shall be
taxable only in the other Contracting State if the services are rendered in
that other State and the recipient is a resident of that other State who:
(a) is a national of that State; or
(b) did not become a resident of that State solely for the purpose of
rendering the services.
2. a) Notwithstanding the provisions of paragraph 1, pensions,
annuities or lump sum retirement benefits paid by, or out of funds created
by, a Contracting State or a political subdivision or a local authority of
that State to an individual in respect of services rendered to that State or
subdivision or authority shall be taxable only in that State.
b) However, a pension or annuity referred to in subparagraph (a)
shall be taxable only in the other Contracting State if the individual is a
resident of, and a national of, that State.
3. The provisions of Articles 15, 16 and 17 shall apply to salaries, wages
and other remuneration in respect of services rendered in connection with
any trade or business carried on by a Contracting State or a political
subdivision or a local authority of that State.
ARTICLE 20
Teachers and Students
1. Where a student who is a resident of a Contracting State or who was a
resident of that State immediately before visiting the other Contracting
State and who is temporarily present therein solely for the purpose of the
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student's education, receives payments from sources outside that other
State for the purpose of the student's maintenance or education, those
payments shall not be taxed in that other State.
2. Where a professor or teacher who is a resident of one of the
Contracting States visits the other Contracting State for a period not
exceeding 2 years for the purpose of teaching, or carrying out advanced
study or research, at a university, college, school or other educational
institution therein, any remuneration the person receives for such
teaching, advanced study or research shall not be taxed in that other State
to the extent to which that remuneration is, or upon the application of this
Article will be, subject to tax in the first-mentioned State.
3. Paragraph 2 of this Article shall not apply to remuneration which a
professor or teacher receives for conducting research if the research is
undertaken primarily for the private benefit of a specific person or
persons.
ARTICLE 21
Other Income
1. Items of income of a resident of a Contracting State, wherever arising,
not dealt with in the foregoing Articles of this Convention shall be taxable
only in that State.
2. The provisions of paragraph 1 shall not apply to income, other than
income from real property as defined in paragraph 2 of Article 6, derived
by a resident of a Contracting State where that income is effectively
connected with a permanent establishment or fixed base situated therein.
In such case the provisions of Article 7 or Article 14, as the case may be,
shall apply.
3. Notwithstanding the provisions of paragraphs 1 and 2, items of income
of a resident of a Contracting State not dealt with in the foregoing Articles
of this Convention from sources in the other Contracting State may also
be taxed in that other Contracting State.
ARTICLE 22
Source of Income
1. Income, profits or gains derived by a resident of a Contracting State
which, under any one or more of Articles 6 to 8, 10 to 17 and 19, may be
taxed in the other Contracting State shall, for the purposes of the law of
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that other Contracting State relating to its tax, be deemed to arise from
sources in that other Contracting State.
2. Income, profits or gains derived by a resident of a Contracting State
which, under any one or more of Articles 6 to 8, 10 to 17 and 19, may be
taxed in the other Contracting State shall, for the purposes of Article 23
and of the law of the first mentioned Contracting State relating to its tax,
be deemed to arise from sources in the other Contracting State.
ARTICLE 23
Methods of Elimination of Double Taxation
1. Subject to the provisions of the law of Australia from time to time in
force which relate to the allowance of a credit against Australian tax of tax
paid in a country outside Australia (which shall not affect the general
principle of this Article), Turkish tax paid under the law of Turkey and in
accordance with this Convention, whether directly or by deduction, in
respect of income derived by a person who is a resident of Australia from
sources in Turkey shall be allowed as a credit against Australian tax
payable in respect of that income.
2. Subject to the provisions of the law of Turkey from time to time in
force which relate to the allowance of a credit against Turkish tax paid in
a country outside Turkey (which shall not affect the general principle of
this Article), Australian tax paid under the law of Australia and in
accordance with this Convention in respect of income derived by a
resident of Turkey from sources within Australia shall be allowed as a
deduction from the Turkish tax on such income. Such deduction shall not,
however, exceed that part of the Turkish tax, as computed before the
deduction is given, which is attributable to the income which may be
taxed in Australia.
3. Where in accordance with any provision of the Convention income
derived by a resident of a Contracting State is exempt from tax in that
State, such State may nevertheless, in calculating the amount of tax on the
remaining income of such resident, take into account the exempted
income.
ARTICLE 24
Non-Discrimination
1. Nationals of a Contracting State shall not be subjected in the other
Contracting State to any taxation or any requirement connected therewith,
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which is other or more burdensome than the taxation and connected
requirements to which nationals of that other State in the same
circumstances, in particular with respect to residence, are or may be
subjected.
2. Subject to the provisions of paragraph 4 of Article 10 of this
Convention, the taxation on a permanent establishment which an
enterprise of a Contracting State has in the other Contracting State shall
not be less favourably levied in that other State than the taxation levied on
enterprises of that other State carrying on the same activities in similar
circumstances.
3. Except where the provisions of paragraph 1 of Article 9, paragraph 7
of Article 11 or paragraph 6 of Article 12 of this Convention apply,
interest, royalties and other disbursements paid by an enterprise of a
Contracting State to a resident of the other Contracting State shall for the
purpose of determining the taxable profits of such enterprise, be
deductible under the same conditions as if they had been paid to a resident
of the first-mentioned State.
4. Enterprises of a Contracting State, the capital of which is wholly or
partly owned or controlled, directly or indirectly, by one or more residents
of the other Contracting State, shall not be subjected in the first-mentioned
State to any taxation or any requirement connected therewith which is
other or more burdensome than the taxation and connected requirements
to which other similar enterprises of the first-mentioned State in similar
circumstances are or may be subjected.
5. Nothing contained in this Article shall be construed as obliging a
Contracting State to grant to individuals who are residents of the other
Contracting State any of the personal allowances, reliefs and reductions
for tax purposes which are granted to its own residents.
6. This Article shall not apply to any provision of the laws of a
Contracting State which:
(a) is designed to prevent the avoidance or evasion of taxes;
(b) does not permit the deferral of tax arising on the transfer of an asset
where the subsequent transfer of the asset by the transferee would be
beyond the taxing jurisdiction of the Contracting State under its laws;
(c) provides for consolidation of group entities for treatment as a single
entity for tax purposes provided that Australian companies that are owned
directly or indirectly by residents of Turkey can access such consolidation
treatment on the same terms and conditions as other Australian
companies;
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(d) provides deductions to eligible taxpayers for expenditure on research
and development; or
(e) is otherwise agreed to be unaffected by this Article in an Exchange of
Notes between the Government of Australia and the Government of the
Republic of Turkey.
7. In this Article, provisions of the laws of a Contracting State which are
designed to prevent avoidance or evasion of taxes include:
(a) measures designed to address thin capitalisation, dividend stripping
and transfer pricing;
(b) controlled foreign company, transferor trusts and foreign investment
fund rules; and
(c) measures designed to ensure that taxes can be effectively collected and
recovered, including conservancy measures.
8. The provisions of this Article shall apply to the taxes which are the
subject of this Convention.
ARTICLE 25
Mutual Agreement Procedure
1. Where a person considers that the actions of one or both of the
Contracting States result or will result for the person in taxation not in
accordance with this Convention, the person may, irrespective of the
remedies provided by the domestic law of those States concerning taxes to
which this Convention applies, present a case to the competent authority
of the Contracting State of which the person is a resident or, if the case
comes under paragraph 1 of Article 24, to that of the Contracting State of
which the person is a national. The case must be presented within 3 years
from the first notification of the action resulting in taxation not in
accordance with this Convention.
2. The competent authority shall endeavour, if the claim appears to it to
be justified and if it is not itself able to arrive at a satisfactory solution, to
resolve the case by mutual agreement with the competent authority of the
other Contracting State, with a view to the avoidance of taxation which is
not in accordance with this Convention. The agreement reached shall be
implemented notwithstanding any time limits in the domestic law of the
Contracting States. However, in the case of Turkey, the taxpayer must
claim the refund resulting from such mutual agreement within a period of
1 year after the tax administration has notified the taxpayer of the result of
the mutual agreement.
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3. The competent authorities of the Contracting States shall endeavour to
resolve by mutual agreement any difficulties or doubts arising as to the
interpretation or application of this Convention. They may also consult
together for the elimination of double taxation in cases not provided for in
this Convention.
4. The competent authorities of the Contracting States may communicate
with each other directly for the purpose of giving effect to the provisions
of this Convention. When it seems advisable in order to reach a solution
to have an oral exchange of opinions, such exchange may take place
through a meeting of representatives of the competent authorities of the
Contracting States.
5. For purposes of paragraph 3 of Article XXII (Consultation) of the
General Agreement on Trade in Services, the Contracting States agree
that, notwithstanding that paragraph, any dispute between them as to
whether a measure falls within the scope of this Convention may be
brought before the Council for Trade in Services, as provided by that
paragraph, only with the consent of both Contracting States. Any doubt as
to the interpretation of this paragraph shall be resolved under paragraph 3
of this Article or, failing agreement under that procedure, pursuant to any
other procedure agreed to by both Contracting States.
ARTICLE 26
Exchange of Information
1. The competent authorities of the Contracting States shall exchange
such information as is forseeably relevant for carrying out the provisions
of this Convention or to the administration or enforcement of the domestic
law concerning taxes referred to in Article 2, insofar as the taxation
thereunder is not contrary to the Convention. The exchange of
information is not restricted by Article 1.
2. Any information received under paragraph 1 by a Contracting State
shall be treated as secret in the same manner as information obtained
under the domestic law of that State and shall be disclosed only to persons
or authorities (including courts and administrative bodies) concerned with
the assessment or collection of, the enforcement or prosecution in respect
of, the determination of appeals in relation to, the taxes referred to in
paragraph 1, or the oversight of the above. Such persons or authorities
shall use the information only for such purposes. They may disclose the
information in public court proceedings or in judicial decisions.
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3. In no case shall the provisions of paragraphs 1 and 2 be construed so
as to impose on a Contracting State the obligation:
(a) to carry out administrative measures at variance with the law and
administrative practice of that or of the other Contracting State;
(b) to supply information which is not obtainable by the competent
authority under the law or in the normal course of the administration of
that or of the other Contracting State;
(c) to supply information which would disclose any trade, business,
industrial, commercial or professional secret or trade process, or
information, the disclosure of which would be contrary to public policy
(ordre public).
4. If information is requested by a Contracting State in accordance with
this Article, the other Contracting State shall use its information gathering
measures to obtain the requested information, even though that other State
may not need such information for its own tax purposes. The obligation
contained in the preceding sentence is subject to the limitations of
paragraph 3 but in no case shall such limitations be construed to permit a
Contracting State to decline to supply information solely because it has no
domestic interest in such information.
5. In no case shall the provisions of paragraph 3 be construed to permit a
Contracting State to decline to supply information solely because the
information is held by a bank, other financial institution, nominee or
person acting in an agency or a fiduciary capacity or because it relates to
ownership interests in a person.
ARTICLE 27
Members of Diplomatic Missions and Consular Posts
Nothing in this Convention shall affect the fiscal privileges of
members of diplomatic missions and consular posts under the general
rules of international law or under the provisions of special international
agreements.
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ARTICLE 28
Entry into Force
1. The Government of Australia and the Government of the Republic of
Turkey shall notify each other in writing through the diplomatic channel
of the completion of their respective statutory and constitutional
procedures required for the entry into force of this Convention. This
Convention shall enter into force on the date of the last notification.
2. This Convention shall have effect:
(a) in Australia:
(i) in respect of withholding tax on income that is derived by a
nonresident, in relation to income derived on or after 1 January in the
calendar year next following that in which the Convention enters into
force;
(ii) in respect of other Australian tax, in relation to income, profits or gains
of any year of income beginning on or after 1 July next following that in
which the Convention enters into force;
(b) in Turkey:
(i) with regard to taxes withheld at source, in respect of amounts paid or
credited on or after 1 January next following the date upon which this
Convention enters into force;
(ii) with regard to other taxes, in respect of taxable years beginning on or
after 1 January next following the date upon which this Convention enters
into force.
ARTICLE 29
Termination
1. This Convention shall continue in effect indefinitely, but either of the
Government of Australia and the Government of the Republic of Turkey
may terminate the Convention, through the diplomatic channel, by giving
written notice of termination at least 6 months before the end of any
calendar year beginning after the expiration of 5 years from the date of its
entry into force.
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2. This Convention shall cease to be effective:
(a) in Australia:
(i) in respect of withholding tax on income that is derived by a
nonresident, in relation to income derived on or after 1 January in the
calendar year next following that in which the notice of termination is
given;
(ii) in respect of other Australian tax, in relation to income, profits or gains
of any year of income beginning on or after 1 July next following that in
which the notice of termination is given;
(b) in Turkey:
(i) with regard to taxes withheld at source, in respect of amounts paid or
credited after the end of the calendar year in which such notice is given;
(ii) with regard to other taxes, in respect of taxable years beginning after
the end of the calendar year in which such notice is given.
IN WITNESS WHEREOF the undersigned, duly authorised thereto by
their respective Governments, have signed this Convention.
DONE at Ankara, this 28th day of April 2010, in duplicate in the English
and Turkish languages, both texts being equally authentic.
H.E Mr Peter Doyle Mr Mehmet Kilci
For the Government of For the Government of the
Australia Republic of Turkey
PROTOCOL TO THE CONVENTION BETWEEN THE
GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF
THE REPUBLIC OF TURKEY FOR THE AVOIDANCE OF DOUBLE
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH
RESPECT TO TAXES ON INCOME
The Government of Australia and the Government of the Republic of
Turkey,
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Having regard to the Convention between the Government of Australia
and the Government of the Republic of Turkey for the avoidance of
double taxation and the prevention of fiscal evasion with respect to taxes
on income signed today at Ankara (the Convention),
Have agreed as follows:
1. In respect of paragraph 3 of Article 7, no account shall be taken in the
determination of the profits of a permanent establishment, of amounts
paid or charged, (otherwise than towards reimbursement of actual
expenses), by the permanent establishment to the head office of the
enterprise or any of its other offices, by way of royalties, fees or other
similar payments in return for the use of patents or other rights, or by way
of commission for specific services performed or for management, or,
except in the case of a banking enterprise, by way of interest on money
lent by or to the head office of the enterprise or any of its other offices.
2. In respect of paragraphs 3 and 5 of Article 5,
(a) The duration of activities will be determined by aggregating the
periods during which activities are carried on in a Contracting State by
associated enterprises provided that the activities of the enterprise in that
State are connected with the activities carried on in that State by its
associate.
(b) The period during which two or more associated enterprises are
carrying on concurrent activities will be counted only once for the purpose
of determining the duration of activities.
(c) Under Article 5, an enterprise shall be deemed to be associated with
another enterprise if:
(i) one is controlled directly or indirectly by the other; or
(ii) both are controlled directly or indirectly by the same person or
persons.
3. In respect of paragraph 5 of Article 5, it is understood that where an
enterprise of a Contracting State undertakes to perform professional
services in the other Contracting State and subcontracts all or part of those
services to another enterprise, the period during which such services are
performed in that other State by that other enterprise shall be regarded as
time spent by the first-mentioned enterprise.
4. In respect of Article 8, and for the avoidance of doubt, it is understood
that the operation of ships or aircraft referred to in that Article includes
non-transport activities, such as dredging, fishing, and surveying and that
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such activities conducted in a place or places in a Contracting State are to
be treated as ship or aircraft operations confined solely to places in that
State.
5. For the purposes of Articles 10, 11 and 12, it is understood that
dividends, interest or royalties are paid to a resident of a Contracting State
where that person is the beneficial owner of such dividends, interest or
royalties.
6. In respect of Article 10,
(a) Notwithstanding the rate limit specified in subparagraph (a)(ii) of
paragraph 2, Turkey may impose tax on dividends to which that provision
applies at a rate not exceeding that specified in subparagraph (b) of that
paragraph if such dividends are subject to tax in Australia.
(b) Notwithstanding the rate limit specified in subparagraph (a) of
paragraph 4, Turkey may impose tax on amounts to which that provision
applies at a rate not exceeding that specified in subparagraph (b) of that
paragraph if the profits attributable to a permanent establishment situated
in Turkey are subject to tax in Australia.
7. In respect of paragraph 3 of Article 10, it is understood that dividends
in the case of Turkey shall include income from "jouissance" shares,
"jouissance" rights or founder's shares and income derived from an
investment fund or investment trust.
8. In respect of paragraph 3 of Article 18, it is understood that in the case
of payments arising in Australia, the term "lump sums in lieu of the right
to receive a pension, annuity or other similar periodic remuneration" does
not include a departing Australia superannuation payment made to a
person who has worked in Australia while visiting on an eligible
temporary resident visa.
This Protocol shall form an integral part of the Convention.
IN WITNESS WHEREOF the undersigned, duly authorised thereto by
their respective Governments, have signed this Protocol.
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DONE at Ankara this 28th day of April 2010, in duplicate in the English
and Turkish languages, both texts being equally authentic.
H.E Mr Peter Doyle Mr Mehmet Kilci
For the Government of For the Government of the
Australia Republic of Turkey
Detailed explanation of the Turkish convention
Article 1 -- Persons Covered
Scope
8.5 This Article establishes the scope of the application of the
Turkish convention by providing for it to apply to persons (defined to
include individuals, companies and any other body of persons) who are
residents of one or both of the countries. It generally precludes
extra-territorial application of the Turkish convention. [Article 1]
8.6 The Turkish convention also applies in its application to
nationals of one of the treaty countries in relation to Article 24
(Non-Discrimination), Article 25 (Mutual Agreement Procedure) and in
relation to the exchange of information under Article 26 (Exchange of
Information).
8.7 The application of the Turkish convention to persons who are
dual residents (that is, residents of both countries for tax purposes) is dealt
with in Article 4 (Resident).
Article 2 -- Taxes Covered
8.8 This Article specifies the existing taxes of each country to which
the Turkish convention applies. These are, in the case of Australia, the
Australian income tax and the petroleum resource rent tax.
8.9 The term `income tax' includes Australian income tax imposed
on capital gains.
8.10 The Turkish convention generally does not cover Australia's
goods and services tax (GST), customs duties, state taxes and duties and
estate tax and duties.
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8.11 For Turkey, the convention applies to the income tax and the
corporation tax.
Extended scope for exchange of information
8.12 While the taxes specified in Article 2 are covered for all
purposes of the Turkish convention, a wider range of taxes are covered for
the purposes of Article 26 (Exchange of Information). Article 26 applies,
in Australia, to all federal taxes administered by the Commissioner and in
Turkey, to all taxes imposed by the Ministry of Finance. [Article 2,
paragraph 3]
Identical or substantially similar taxes
8.13 The application of the Turkish 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 listed in paragraph 1 of this Article (that is, in the case of
Australia, the income tax and the petroleum resource rent tax). [Article 2,
paragraph 2]
Notification of changes to the tax laws
8.14 The competent authorities (that is, the Commissioner in the case
of Australia and the Minister of Finance in the case of Turkey, or their
authorised representatives) are required to notify each other in the event of
a substantial change in the taxation law of the respective countries, within
a reasonable period of time after those changes. [Article 2, paragraph 2]
Article 3 -- General Definitions
8.15 This Article provides general definitions and rules of
interpretation applicable throughout the Turkish convention. In particular,
paragraph 1 defines a number of basic terms used in the Turkish
convention. The introduction to paragraph 1 makes clear that these
definitions apply for all purposes of the Turkish convention, unless the
context requires otherwise.
8.16 Certain other terms are defined in other Articles of the Turkish
convention. For example, the terms `resident of a Contracting State',
`permanent establishment' and `real property' are defined in Articles 4
(Resident), 5 (Permanent Establishment) and 6 (Income from Real
Property) respectively. These definitions are to be applied consistently
throughout the Turkish convention. In contrast, a number of terms, such
as `dividends', `interest' and `royalties' are defined in specific Articles for
use only in those Articles.
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Definition of Australia
8.17 As in Australia's other modern tax treaties, Australia is defined
to include certain external territories and the continental shelf. By reason
of this definition, Australia preserves its taxing rights, for example, over
mineral exploration and mining activities carried on by non-residents on
the seabed and subsoil of the relevant continental shelf areas (under
section 6AA of the ITAA 1936, certain sea installations and offshore areas
are to be treated as part of Australia). [Article 3, subparagraph 1a)]
Definition of Turkey
8.18 Turkey is defined to mean the Turkish territory, as well as the
(maritime) areas over which it has jurisdiction or sovereign rights for the
purpose of exploring and exploiting the natural resources of the seabed
and subsoil of the continental shelf in accordance with international law.
This mirrors the definition of Australia. [Article 3, subparagraph 1b)]
Definition of Australian tax and Turkish tax
8.19 For the purposes of the Turkish convention, the terms
Australian tax and Turkish tax do not include any amount of penalty or
interest imposed under the respective domestic tax law of the two
countries. [Article 3, subparagraphs 1c) and d)]
8.20 In the case of a resident of Australia, any penalty or interest
component of a liability determined under the domestic taxation law of
Turkey with respect to income that Turkey is entitled to tax under the
Turkish convention would not be a creditable Turkish tax for the purposes
of paragraph 1 of Article 23 (Methods of Elimination of Double Taxation).
This is in keeping with the meaning of `foreign 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 income tax offset entitlement under paragraph 1 of
Article 23 (pursuant to Division 770 of the ITAA 1997 -- Foreign income
tax offsets).
Definition of company, Turkish company and Australian company
8.21 The definition of company in the Turkish convention accords
with the Organisation for Economic Co-operation and Development
Model Tax Convention on Income and on Capital (OECD Model), and
means any body corporate or any entity which is treated as a company or
body corporate for tax purposes. [Article 3, subparagraph 1e)]
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8.22 The Australian tax law treats certain trusts (public unit trusts and
public trading trusts) and corporate limited partnerships (limited liability
partnerships) in the same way as companies for income tax purposes.
These trusts and partnerships are included as companies for the purposes
of the Turkish convention. [Article 3, subparagraph 1e)]
8.23 The terms Turkish company and Australian company are also
defined for the purposes of the Turkish convention. Turkish company
means a company which, under the law of Turkey relating to Turkish tax,
is a resident of Turkey, and which is not under the law of Australia
relating to Australian tax, a resident of Australia. Conversely, Australian
company means a company which, under the law of Australia relating to
Australian tax, is a resident of Australia and which is not, under the law of
Turkey relating to Turkish tax, a resident of Turkey. [Article 3,
subparagraphs 1j) and k)]
Definition of competent authority
8.24 The competent authority is the person specifically authorised to
perform certain actions under the Turkish convention. For instance, the
competent authority is required to give certain notifications (for example,
in paragraph 2 of Article 2 (Taxes Covered), the competent authorities are
required to notify each other of any substantial changes to the relevant tax
laws of their respective countries) and perform certain tasks (for example,
gather and exchange tax information in accordance with Article 26
(Exchange of Information)).
8.25 In the case of Australia, the competent authority means the
Commissioner or an authorised representative of the Commissioner. In
the case of Turkey, the competent authority means the Minister of Finance
or an authorised representative of the Minister. [Article 3, subparagraph 1f)]
Definition of Contracting State and other Contracting State
8.26 These terms mean Australia or Turkey, as the context requires.
[Article 3, subparagraph 1g)]
Definitions of enterprise of a Contracting State and enterprise of the
other Contracting State
8.27 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. An enterprise of a Contracting State
need not be carried on in that State. It may be carried on in the other
Contracting State or a third state (that is, an Australian enterprise doing all
its business in Turkey would still be an Australian enterprise). [Article 3,
subparagraph 1h)]
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Definition of international traffic
8.28 In the Turkish convention, this term is of relevance for taxation
of income, profits or gains from the alienation of ships and aircraft
(paragraph 3 of Article 13 (Alienation of Property)) and wages of crew
(paragraph 3 of Article 15 (Dependent Personal Services)).
8.29 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, that is, where the journey
of a ship or aircraft within that country forms part of a longer voyage of
that ship or aircraft involving a place of arrival or departure outside that
country. However, it does not include transport where the ship or aircraft
is operated solely between places in the other country; that is, where the
place of departure and the place of arrival of the ship or aircraft are both
in that other country, irrespective of whether any part of the transport
occurs in international waters or airspace. For example, a `voyage to
nowhere' which begins and ends in Sydney on a ship operated by a
Turkish 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 1i)]
Definition of national
8.30 The Turkish convention defines national by reference to an
individual's nationality or citizenship. A company or legal person will be
a national if it is created or organised under the laws of Australia or
Turkey. For example, a company's nationality is determined by where it
is incorporated. [Article 3, subparagraph 1l)]
8.31 The concept of nationality is used in subparagraph c) of
paragraph 4 of Article 4 (Resident), subparagraph a) of paragraph 1 and
subparagraph b) of paragraph 2 of Article 19 (Government Service) and
paragraph 1 of Article 24 (Non-Discrimination).
Definition of person
8.32 The definition of person in the Turkish convention accords with
the OECD Model and includes individuals, companies and any other
bodies of persons. This includes a partnership (as a body of persons).
[Article 3, subparagraph 1m)]
Terms not specifically defined
8.33 Where a term is not specifically defined within the Turkish
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
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domestic taxation law of the country applying the Turkish convention at
the time of its application. In that case, the meaning of the term under the
taxation law of the country will have precedence over the meaning it may
have under other domestic laws. [Article 3, paragraph 2]
8.34 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.
8.35 If a term is not defined in the Turkish 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
8.36 This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the Turkish convention.
Residential status in one or other country is a necessary condition for the
provision of relief under the Turkish convention.
8.37 For a company, `resident' status is determined by reference to it
being an Australian or a Turkish company, terms that are defined in
Article 3 (see paragraph 8.22). For persons that are not companies, it can
be any other person who is a resident of the country under the tax laws of
that country. [Article 4, paragraph 1]
Residency of governments
8.38 Article 4 follows the OECD Model in specifically providing that
the State, or a political subdivision, or local authority of the State, are
residents for the purposes of the Turkish convention. This means that the
Australian Government, the state governments and local councils of
Australia will be residents for the purpose of the Turkish convention.
This does not necessarily mean that income, profits or gains derived by
these bodies from sources in Turkey will be subject to tax in Turkey as
sovereign immunity principles may apply. [Article 4, paragraph 2]
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Liable to tax in respect of source income only
8.39 Paragraph 3 of the Article deals with a person who may be
considered to be a resident of a country according to its domestic laws but
is only liable to taxation on income from sources in that country, 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 the Turkish convention.
Accordingly, Turkey will not have to forgo tax in accordance with the
Turkish convention on income derived by residents of Norfolk Island
from sources in Turkey (which will not be subject to Australian tax).
[Article 4, paragraph 3]
8.40 The term `liable to tax' is intended to capture those persons who
are subject to comprehensive taxation under a country's domestic taxation
laws. A person may be regarded as liable to tax as a resident even where
the country does not in fact impose tax. For example, under Australian
law charitable institutions are exempt from income tax but only if they
meet the requirements for exemption. Such institutions are liable to tax
for the purposes of the Article and, therefore, are `residents' under the
Turkish convention. [Article 4]
Dual residents
Individuals
8.41 A set of tie-breaker rules is included for determining how
residency for an individual is to be allocated to one or other of the
countries for the purposes of the Turkish convention if an individual
taxpayer qualifies as a dual resident; that is, as a resident of both countries
in accordance with paragraph 1 of the Article.
8.42 The tie-breaker rules for individuals apply certain tests, in a
descending hierarchy. 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 the
Turkish 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 Turkey, and the person is
deemed for the purposes of the Turkish convention to be a
resident only of the country with which the person has the
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closer personal and economic relations (centre of vital
interests);
· if the individual's centre of vital interests cannot be
determined, the individual shall be deemed to be a resident of
the country of which that individual is a national; or
· if the individual is a national of both countries or is not a
national of either of them, the competent authorities of the
Contracting States shall endeavour to resolve the question by
mutual agreement.
[Article 4, paragraph 4]
8.43 Notwithstanding that the Turkish convention deems a dual
resident individual to be a resident only of one country for treaty
purposes, that person remains a resident for the purposes of Australian
domestic tax law. Accordingly, that individual remains liable to tax in
Australia as a resident, insofar as the Turkish convention allows.
Companies
8.44 The definition of `Turkish company' and `Australian company'
coupled with the definition of a `resident' disentitles companies that are
resident in both Turkey and Australia from the benefits provided by the
Turkish convention with the exception of the protection from
discrimination afforded under Article 24 (Non-Discrimination). [Article 3,
subparagraphs 1j) and 1k); Article 4, paragraph 1]
Article 5 -- Permanent Establishment
Role and definition
8.45 The application of various provisions of the Turkish 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.
8.46 The definition of the term permanent establishment in this
Article corresponds generally with definitions of the term in Australia's
more recent tax treaties. However, the definition in the Turkish
convention also includes a provision dealing specifically with professional
services.
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Meaning of permanent establishment
8.47 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]
8.48 Paragraph 2 of this Article elaborates on the meaning of the term
by giving examples (by no means intended to be exhaustive) of what may
constitute a permanent establishment -- for example:
· an office;
· a factory;
· a workshop; or
· a place relating to the exploration for or the exploitation of
natural resources.
8.49 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]
Building site or construction, installation or assembly project
8.50 A building site or construction, installation or assembly project
constitutes a permanent establishment where it exists for more than six
months. [Article 5, subparagraph 2g)]
8.51 The phrase `building site or construction, installation or
assembly 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
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building site if carried out by the construction contractor. However,
planning and surpervision 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 2]
Deemed permanent establishment
Building site, or a construction, installation or assembly project
8.52 If an enterprise carries on supervisory activities in a country for
more than six months in connection with a building site, or a construction,
installation or assembly project the activity will be deemed to be
performed through a permanent establishment (unless the activities are of
a type described in paragraph 4 of this Article and are of a preparatory or
auxiliary nature). [Article 5, subparagraph 3a)]
Substantial equipment
8.53 If an enterprise operates substantial equipment in a country for
more than six months in any 12-month period, the activity will be deemed
to be performed through a permanent establishment (unless the activities
are of a type described in paragraph 4 of this Article and are of a
preparatory or auxiliary nature). [Article 5, subparagraph 3b)]
8.54 Subparagraph 3b) reflects Australia's reservation to the OECD
Model concerning activities relating to 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; in particular those involving the use of such equipment.
8.55 The word `operated' has been included to clarify that only active
use of substantial equipment assets will be captured by subparagraph 3b).
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. As the definition of `royalties' in Article 12 includes lease
payments for the use of commercial and industrial equipment, the lease
payments in such a case will fall to be dealt with under that Article.
8.56 For example, if a Turkish enterprise itself operated a mobile
crane at an Australian port for more than six months in a 12-month period,
the Turkish enterprise would be deemed to have a permanent
establishment in Australia under subparagraph 3b). If, however, that
Turkish enterprise merely leased the mobile crane to another person and
that other person operated the crane at an Australian port for its own
purposes, the Turkish enterprise would not be deemed to have a
permanent establishment in Australia under subparagraph 3b). However,
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if that other person operated the substantial equipment for or on behalf of
the Turkish enterprise in Australia, the Turkish enterprise would be
considered to have operated the equipment in Australia.
8.57 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. However, some examples of substantial equipment would
include:
· industrial earthmoving equipment or construction equipment
used in road building, dam building or powerhouse
construction;
· manufacturing or processing equipment used in a factory; or
· oil or drilling rigs, platforms and other structures used in the
petroleum, gas or mining industry.
Preparatory and auxiliary activities
8.58 Certain activities do not generally give rise to a permanent
establishment (for example, the use of facilities solely for storage, display
or irregular delivery).
8.59 These activities are ordinarily of a preparatory or auxiliary
character and are unlikely to give rise to substantial profits. The
economic link between the activities of the enterprise and the country in
which the activities are carried on is generally insufficient to warrant the
allocation of taxing rights to that country in these circumstances.
8.60 Other examples of activities that are considered to be of a
preparatory or auxiliary character for the enterprise are advertising or
scientific research. [Article 5, subparagraph 4e)]
8.61 Subparagraph 4f) of Article 5 (Permanent Establishment) of the
OECD Model -- dealing with combinations of activities of the kind
referred to in subparagraphs 4a) to e) of this Convention -- is not
included in this Convention. For the purposes of this Convention,
Australia does not consider that an enterprise undertaking multiple
functions of the kind indicated in subparagraphs 4a) to e) would generally
be regarded as only engaged in preparatory or auxiliary activities.
[Article 5, paragraph 4]
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Anti-avoidance provision
8.62 Given that Article 5 of the Turkish convention contains certain
timeframes, an anti-avoidance rule is included to ensure that where
associated enterprises carry on activities that are connected, the duration
of activities will be determined by aggregating the periods during which
the activities are carried on by the associated enterprises. Activities will
be regarded as connected where, for example, different stages of a 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 connected. [Protocol, subitem 2a)]
8.63 For the purposes of calculating the duration of these activities, a
period of concurrent activities by such associated enterprises is only
counted as one period for aggregation purposes. [Protocol, subitem 2b)]
8.64 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. [Protocol, subitem 2c)]
8.65 Where an enterprise of a Contracting State undertakes to
perform professional services in the other Contracting State and
subcontracts all or part of those services to another enterprise, the period
during which such services are performed in that other State by that other
enterprise shall be regarded as time spent by the first-mentioned
enterprise. [Article 5, paragraph 5; Protocol, item 3]
8.66 These provisions are aimed at counteracting contract splitting
for the purposes of avoiding the application of the permanent
establishment rules.
8.67 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.
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Diagram 8.1
T Co
T Sub A T Sub B T Sub C
Turkey
Australia
5 month project 5 month project 5 month project
Australian project
In the above diagram, each of the subsidiaries may conduct activities
that are connected, for example, supervisory activities at a single
building site. In determining whether the six-month time threshold has
been met, the time spent undertaking those activities by each of the
enterprises would be aggregated. However, any period during which
more than one of the subsidiaries is carrying on activities concurrently
would be counted only once.
For example, if T Sub A was present in Australia from 1 July 2011 to
30 November 2011 conducting supervisory activities at a building site
and T Sub B was present in Australia from 1 November 2011 to
31 March 2012 also conducting supervisory activities at the same
building site, the time spent by both subsidiaries would be aggregated
to produce a nine-month period -- that is, as both subsidiaries were in
Australia in November 2011 that month is counted only once in
determining whether the six-month threshold is met.
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
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each subsidiary from its own activities would be attributed to each
company's permanent establishment.
Performance of professional services by an enterprise
8.68 Notwithstanding the provisions of paragraphs 1 to 3, where an
enterprise performs professional services in a country for a period
exceeding 183 days in any 12-month period, and those services are
performed through one or more individuals who are present and
performing such services in that country, the enterprise will be deemed to
have in that country a permanent establishment through which those
activities are performed (unless the activities are of a type described in
paragraph 4 of this Article and are of a preparatory or auxiliary nature).
[Article 5, paragraph 5]
8.69 For these purposes, an enterprise performs services mainly
through the activities of the entrepreneur or persons who are in a paid
employment relationship with the enterprise (personnel). These personnel
include employees and other persons receiving instructions from the
enterprise (for example, dependent agents).
Dependent agents
8.70 An enterprise of one country is deemed to have a permanent
establishment in the other country if a person acts on its behalf in that
other country where that person has and habitually exercises an authority
to conclude contracts on behalf of the enterprise. Such people are referred
to as dependent agents. [Article 5, subparagraph 6a)]
8.71 However, activities of a dependent agent will not give rise to a
permanent establishment where that agent's activities are limited to the
purchase of goods or merchandise for the enterprise. Agents of
independent status (such as brokers or commission agents) to whom
paragraph 7 of Article 5 applies are also excluded. [Article 5,
subparagraph 6a)]
Maintaining a stock of goods or merchandise from which regular
deliveries are made
8.72 An enterprise of one country is deemed to have a permanent
establishment in the other country, even if a person has no authority to
conclude contracts on behalf of the enterprise, provided that person
habitually maintains a stock of goods or merchandise from which they
regularly deliver goods or merchandise on behalf of the enterprise.
[Article 5, subparagraph 6b)]
8.73 This provision is based on subparagraph 5b) of the United
Nations Model Double Taxation Convention between Developed and
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Developing Countries. According to the 2001 United Nations
Commentary:
`24. With the addition of subparagraph 5(b), this paragraph departs
substantially from and is considerably broader in scope than Article
5, paragraph 5, of the OECD Model Convention, which the Group
considered to be too narrow in scope because it restricted the type
of agent who would be deemed to create a permanent establishment
of a non-resident enterprise, exposing it to taxation in the source
country. Some members from developing countries pointed out
that a narrow formula might encourage tax evasion by permitting
an agent who was in fact dependent to represent himself as acting
on his own behalf. It was the understanding of the Group that the
phrase "authority to conclude contracts on behalf of" in
subparagraph 5(a) of article 5 means that the agent had legal
authority to bind the enterprise for business purposes and not only
for administrative purposes (e.g. conclusion of lease or electricity
and manpower contracts).
25. The Group of Experts understood that the subparagraph 5(b)
was to be interpreted such that if all the sales-related activities take
place outside the host State and only delivery, by an agent, takes
place there, such a situation would not lead to a permanent
establishment. However, if sales-related activities (e.g. advertising
or promotion) are also conducted in that State on behalf of the
resident (whether or not by the enterprise itself or by its dependent
agents) and have contributed to the sale of such goods or
merchandise, a permanent establishment may exist.'
Manufacturing or processing on behalf of others
8.74 Consistent with Australia's reservation 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.
[Article 5, subparagraph 6c)]
8.75 An example is the situation where a mineral plant refines
minerals for a foreign enterprise at cost, so that the plant operations
produce no Australian profits. Title to the refined product remains with
the foreign enterprise and profits on sale are realised mainly outside of
Australia.
8.76 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 6c) prevents an enterprise
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which carries on substantial manufacturing or processing activities in a
country through an intermediary from escaping tax in that country.
Independent agents
8.77 Business carried on through an independent agent will not, of
itself, give rise to a permanent establishment, provided that the
independent agent is acting in the ordinary course of that agent's business
as such an agent. [Article 5, paragraph 7]
Subsidiary companies
8.78 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 8]
Other Articles
8.79 The principles set forth in the preceding paragraphs of Article 5
are to be applied in determining whether a permanent establishment exists
in a third country or whether an enterprise of a third country has a
permanent establishment in Australia (or Turkey) when applying the
source rule contained in:
· paragraph 6 of Article 11 (Interest); and
· paragraph 5 of Article 12 (Royalties).
[Article 5, paragraph 9]
Article 6 -- Income from Real Property
Where income from real property is taxable
8.80 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.
8.81 Generally, Australia's tax treaties exclude profits of an
enterprise from agricultural, pastoral or forestry activities from the
operation of this Article. Such profits are generally dealt with under
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Article 7 (Business Profits) of Australian treaties. However, under the
Turkish convention, the allocation of taxing rights over such income is
determined by Article 6 (Income from Real Property). Accordingly,
income from the relevant activities may be taxed in Australia where the
real property is situated in Australia, irrespective of whether the enterprise
has a permanent establishment in Australia. Nonetheless, an enterprise
would generally have a permanent establishment in the country in which
the agricultural, pastoral or forestry property is situated. [Article 6,
paragraph 1]
Definition
8.82 Real property is primarily defined as having the meaning which
it has under the domestic law of the country where the property is situated.
In the case of Australia, real property also extends to:
· a lease of land and any other interest in or over land
(including exploration and mining rights over natural
resources); and
· royalties and other payments relating to the exploration for or
exploitation of natural resources.
[Article 6, subparagraph 2a)]
8.83 In the case of Turkey, immovable (real) property also extends to:
· property accessory to immovable property;
· livestock and equipment used in agriculture and forestry
(including the breeding and cultivation of fish);
· rights to which the provisions of the general law of Turkey
respecting landed property apply; and
· usufruct of immovable property, and royalties and other
payments relating to the exploitation of natural resources.
[Article 6, subparagraph 2b)]
Ships, boats and aircraft are excluded from the definition of `real
property'; therefore this Article does not cover income from their use.
[Article 6, subparagraph 2c)]
Deemed situs
8.84 Under Australian law, the place where an interest in land or
natural resources, such as a lease, is situated (situs) is not necessarily
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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]
Form of exploitation of real property
8.85 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]
Real property of an enterprise
8.86 Paragraphs 1, 3 and 4 of Article 6 are extended to profits derived
from the use or exploitation of real property of an enterprise or real
property used for the performance of independent personal services.
8.87 Accordingly, this Article provides that the country in which the
real property is situated may impose tax on the income derived from that
property by a resident of the other country, irrespective of whether or not
that income is attributable to a permanent establishment or fixed base
situated in the first-mentioned country. [Article 6, paragraph 5]
Article 7 -- Business Profits
8.88 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.
8.89 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]
8.90 If an enterprise that is a resident of one country derives business
profits in the other country that are not attributable to a permanent
establishment in that other country, the general principle of this Article is
that the enterprise will not be liable to tax in the other country on such
profits (except where paragraph 8 of this Article applies -- see the
explanation in paragraphs 8.98 and 8.99).
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Determination of business profits
8.91 Profits of a permanent establishment are to be determined for the
purposes of this Article on the basis of arm's length dealings. The
provisions in the Turkish convention correspond to international practice
and to comparable provisions in Australia's other tax treaties. [Article 7,
paragraphs 2 and 3]
8.92 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. This is specifically clarified by the
reference in paragraph 3 to expenses that would be deductible if the
permanent establishment were an independent entity which paid those
expenses. [Article 7, paragraph 3]
8.93 In respect of paragraph 3 of Article 7, no account shall be taken
in the determination of the profits of a permanent establishment, of
amounts paid or charged, (otherwise than towards reimbursement of
actual expenses), by the permanent establishment to the head office of the
enterprise or any of its offices, by way of royalties, fees or other similar
payments in return for the use of patents or other rights or by way of
commission for specific services performed or for management, or, except
in the case of a banking enterprise, by way of interest on money lent by or
to the head office of the enterprise or any of its other offices. [Protocol,
item 1]
8.94 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 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 4]
Application of domestic law
8.95 The domestic law of the country in which the permanent
establishment is situated (for example, 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
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profits. Paragraph 5 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 5]
Profits or gains dealt with under other Articles
8.96 Where income or gains are specifically dealt with under other
Articles of the Turkish convention, the effect of those particular Articles is
not overridden by this Article.
8.97 This provision lays down the general rule of interpretation that
categories of income or gains which are the subject of other Articles of the
Turkish convention (for example, Article 8 (Shipping and Aircraft
Operations), 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 5 of Article 10 (Dividends), where the
holding or 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 6]
Insurance with non-residents
8.98 Each country has the right to continue to apply any provisions in
its domestic law relating to the taxation of income from insurance with
non-resident insurers provided that if the relevant law in force in either
country at the date of signature of the Turkish convention is varied
(otherwise than in minor respects) the Contracting States shall consult
with a view to agreeing to appropriate amendments.
8.99 An effect of paragraph 8.7 is generally to preserve, in the case of
Australia, the application of Division 15 of Part III of the ITAA 1936
(Insurance with Non-residents). This is broadly consistent with
Australia's reservation to Article 7 (Business Profits) of the OECD Model.
[Article 7, paragraph 7]
Trust beneficiaries
8.100 The principles of this Article will apply to profits which are
derived by a resident of one of the countries (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 8]
8.101 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 that is treated as a company for tax purposes) from the
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carrying on of a business through a permanent establishment in Australia,
to which a resident of Turkey is beneficially entitled under the trust.
Paragraph 8 of this Article ensures that such business profits will be
subject to tax in Australia where the trustee of the relevant trust has, or
would have if it were a resident of Turkey, a permanent establishment in
Australia in relation to that business. Since the outcome provided under
this paragraph merely states specifically the position that would apply
even in its absence, the principles of this paragraph will also apply where
relevant to other Articles of the Turkish 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. That is, the beneficiary of the trust
will also have a permanent establishment for the purposes of paragraph 2
of Article 13.
Article 8 -- Shipping and Aircraft Operations
8.102 The main effect of this Article is that the right to tax profits from
the operation of ships or aircraft, including a share of profits attributable
to participation in a pool, joint business or an international operating
agency, is generally reserved to the country in which the operator is a
resident for tax purposes. [Article 8, paragraphs 1 and 3]
8.103 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 except for profits from shipping
and aircraft operations dealt with under paragraph 2. However, as
international transport has evolved, shipping and air transport enterprises
invariably carry on a large variety of activities to facilitate or support their
international operations. Consistent with the 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 but which
are ancillary to such operation. An example of such ancillary profits
would be profits derived by a ship operator in the business of transport
who undertakes a one-off bareboat lease of one of their ships.
Profits from internal traffic
8.104 Profits derived directly or indirectly by an enterprise of one
country from the operation of ships or aircraft may, to the extent that they
relate to operations that are confined solely to places in the other country,
be taxed in the other country. [Article 8, paragraph 2]
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8.105 Australia's (Turkey's) taxing rights are specifically preserved
over profits from the carriage by ships or aircraft of passengers, livestock,
mail, goods or merchandise where the passenger or cargo is shipped and
discharged in Australia (Turkey). [Article 8, paragraph 4]
8.106 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, for Australian tax purposes, Division 12 of Part III of
the ITAA 1936, deems 5 per cent of the amount paid in respect of the
transport of passengers, livestock, mail or goods shipped in Australia to be
the taxable income of a ship owner or charterer who has their principal
place of business outside of Australia.
8.107 The Protocol makes it clear that the operation of ships or
aircraft referred to in Article 8 includes non-transport activities such as
dredging, fishing and surveying and that such activities conducted in a
place or places in a country are to be treated as ship or aircraft operations
confined solely to places in that country. [Protocol, item 4]
Example 8.1
A ship operated by a Turkish enterprise, in the course of an
international voyage from Istanbul to Melbourne, makes a stop in
Hobart to pick up cargo. Profits derived from the transport of the
goods loaded in Hobart and discharged in Melbourne would be profits
from the carriage of goods shipped in and discharged at a place in
Australia under paragraph 2 of Article 8. Australia would therefore
have the right to tax the profits relating to such transport. Five per cent
of the amount paid in respect of the transport of those goods would be
deemed to be taxable income of the operator for Australian tax
purposes pursuant to Division 12 of Part III of the ITAA 1936.
Example 8.2
A Turkish 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. The profits from the carriage of the
passengers shipped in and discharged at a place in Australia would be
covered by paragraph 2 of Article 8, 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.
Article 9 -- Associated Enterprises
Reallocation of profits
8.108 This Article deals with associated enterprises (such as parent and
subsidiary companies and companies under common control). It
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authorises the reallocation of profits between related enterprises in
Australia and Turkey on an arm's length basis where the commercial or
financial arrangements between the enterprises differ from those that
might be expected to operate or be made between unrelated enterprises
dealing wholly independently with one another. [Article 9, paragraph 1]
8.109 This Article would not generally authorise the rewriting of
accounts of associated enterprises where it can be satisfactorily
demonstrated that the transactions between such enterprises have taken
place on normal, open market commercial terms. The term `might
reasonably be expected to operate' in paragraph 1 is included to conform
to Australia's treaty practice and allows adjustments where it is not
possible to determine the conditions that `would have been made or
occurred' between the associated enterprises.
8.110 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.
8.111 Each country has the right to apply its domestic law relating to
the determination of the tax liability of a person (for example, Australia's
Division 13 of Part III of the ITAA 1936) to enterprises, including in
cases where the available information is inadequate, provided that such
provisions are applied, so far as it is practicable to do so, consistently with
the principles of the Article. This is of particular relevance where there is
no data available or the available data is not of sufficient quality to rely on
the traditional transaction methods for the attribution of arm's length
profits. This reflects Australia's reservation to Article 9 (Associated
Enterprises) of the OECD Model. [Article 9, paragraph 2]
Correlative adjustments
8.112 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, economic double taxation
(that is, taxation of the same income in the hands of different persons)
would arise if the profits so reallocated continued to be subject to tax in
the hands of an associated enterprise in the other country. To avoid this
result, the other country is required, if it agrees with the primary
adjustment, to make an appropriate compensatory adjustment to the
amount of tax charged on the profits involved in order to relieve any such
double taxation.
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Australia-Turkey convention
8.113 It is therefore necessary for the affected enterprise to apply to
the competent authority of the country not initiating the reallocation of
profits for an appropriate compensatory adjustment to reflect the
reallocation of profits made by the other treaty partner country. If
necessary, the competent authorities of Australia and Turkey will consult
with each other to determine the appropriate adjustment. [Article 9,
paragraph 3]
Article 10 -- Dividends
8.114 This Article allocates taxing rights in respect of dividends
flowing between Australia and Turkey. The Article provides that:
· certain cross-border inter-corporate dividends will be subject
to a maximum 5 per cent rate of source taxation where the
recipient holds directly at least:
- ten per cent of the voting power of the Australian
company paying the dividend [Article 10,
sub-subparagraph 2a)(i)]; or
- twenty five per cent of the capital of the Turkish company
paying the dividend. In these instances, the profits from
which the dividends are paid must have been subjected to
the full rate of corporate tax in Turkey and the dividends
must be exempt from Australian taxation in the hands of
the recipient [Article 10, sub-subparagraph 2a)(ii); Protocol,
subitem 6a)];
· a maximum 15 per cent rate of source country tax applies to
all other dividends [Article 10, subparagraph 2b)];
· in the case of branch profits:
- a 5 per cent tax rate limitation applies to the after tax
profits of the company where the branch profits were
subject to the full rate of company tax in the country
where the branch is situated [Article 10, subparagraph 4a)];
and
- a general limit of 15 per applies in all other cases
[Article 10, subparagraph 4b)];
· 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) [Article 10, paragraph 5];
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· dividends paid in respect of a holding which is effectively
connected with a fixed base are to be dealt with under
Article 14 (Independent Personal Services) [Article 10,
paragraph 5]; and
· the extra-territorial application by either country of taxing
rights over dividend income is not permitted [Article 10,
paragraph 6].
8.115 For the purposes of Article 10, it is understood that dividends
are paid to a resident of a Contracting State where that person is the
beneficial owner of such dividends. [Protocol, item 5]
Permissible rate of source country taxation
Five per cent rate limit on source country tax of certain cross-border
inter-corporate dividends
8.116 This Article allows both Australia and Turkey to tax dividends
flowing between them but limits the rate of tax that the country of source
may impose on dividends paid by companies that are resident of that
country under its domestic law to companies resident in the other country
who are the beneficial owners of the dividends. [Article 10, paragraph 1,
subparagraph 2a)]
8.117 A rate limit of 5 per cent will apply in Australia for dividends
paid to a company (other than a partnership) which holds a direct voting
interest of at least 10 per cent in the company paying the dividends.
[Article 10, sub-subparagraph 2a)(i)]
8.118 A rate limit of 5 per cent will apply in Turkey for dividends paid
to a company (other than a partnership) which holds directly at least
25 per cent of the capital of the company paying the dividends which are
paid out of profits that have been subject to the full rate of corporation tax
in Turkey. [Article 10, sub-subparagraph 2a)(ii)]
8.119 In the course of negotiations, the two delegations agreed that:
`... the exclusion of partnerships in subparagraphs 2(a)(i) and (ii) of
Article 10 does not exclude from the application of those provisions
partnerships subject to the same tax treatment as companies in the
respective countries.'
8.120 The Protocol makes it clear that, notwithstanding the rate
specified in sub-subparagraph 2a)(ii) of Article 10, Turkey may impose
tax on dividends at the rate of 15 per cent should such dividends be
subject to tax in Australia. Australia does not currently impose any
additional taxation on inter-corporate dividends (section 23AJ of
ITAA 1936). [Protocol, subitem 6a)]
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Australia-Turkey convention
Fifteen per cent rate limit for all other dividends
8.121 For other dividends, the Turkish convention provides that the
source country may tax dividends that are beneficially owned by residents
of the other country, but will limit its tax to 15 per cent of the gross
amount of the dividend. [Article 10, subparagraph 2b)]
8.122 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.
Requirement for consultation
8.123 To ensure that the rate of withholding tax provided for under
paragraph 2 remains competitive in the future, Australia and Turkey are
required to consult each other with a view to agreeing to any amendment
of paragraph 2 of this Article if the relevant law in either Contracting
State at the date of signature of the Turkish convention is varied
(otherwise than in minor respects). [Article 10, paragraph 2]
Definition of dividends
8.124 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 a resident.
8.125 In the case of Australia, the definition is consistent with
subsection 3(2A) of the Agreements Act 1953 which clarifies that a
reference to income from shares, or to income from other rights
participating in profits, does not include a reference to a return on a debt
interest as defined in Subdivision 974-B of the ITAA 1997. [Article 10,
paragraph 3]
8.126 In respect of paragraph 3 of Article 10, it is understood that
dividends in the case of Turkey shall include income from `jouissance'
shares, `jouissance' rights or founder's shares and income derived from an
investment fund or investment trust. [Protocol, item 7]
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Branch profits tax
8.127 Profits of a company which is a resident of a country and which
carries on business in the other country through a permanent
establishment, after having been taxed in accordance with Article 7
(Business Profits), may be taxed on the remaining amount in the country
in which the permanent establishment is situated. The tax so charged on
the branch profits shall not exceed:
· five per cent of the remaining amount where profits of the
company are subject to the full rate of company tax in the
country in which the branch is situated [Article 10,
subparagraph 4a)]; and
· fifteen per cent of the remaining amount in all other cases
[Article 10, subparagraph 4b)].
8.128 This rule will benefit Australian business operating in Turkey
through a branch as it reduces the rate of Turkish tax from 15 per cent to
5 per cent on qualifying profits.
8.129 Subitem 6b) of the Protocol makes it clear that, notwithstanding
the rate specified in subparagraph a) of paragraph 4, Turkey may impose
tax on dividends at the rate of 15 per cent should such dividends be
subject to tax in Australia. Australia does not currently impose tax on
foreign branch profits of Australian resident companies (section 23AH of
the ITAA 1936). [Protocol, subitem 6b)]
Dividends effectively treated as either business profits or profits from
independent personal services
8.130 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 or fixed base in the source
country from which the dividends are derived, if the holding giving rise to
the dividends is effectively connected with such permanent establishment
or fixed base.
8.131 Where the holding is effectively connected with such permanent
establishment or fixed base, the dividends are to be treated as business
profits and profits from independent personal services respectively, 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 Articles 7
(Business Profits) and 14 (Independent Personal Services).
8.132 Franked and unfranked dividends paid by an Australian
company will be included in the assessable income of a non-resident
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company or individual where the dividends are attributable to a permanent
establishment or fixed base 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 5]
Extra-territorial application precluded
8.133 Subject to paragraph 4, 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 or fixed base
situated in the first country.
[Article 10, paragraph 6]
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Diagram 8.2
Australian resident
company 1
dividend PE of Aust.
resident
shareholding
Australian resident
company 2 profits
Australia Turkey
In the diagram above, paragraph 6 would, but for the exception,
preclude Turkey from taxing the dividend paid by Australian resident
company 2 to Australian resident company 1 out of profits derived
from Turkish sources. However, as the dividends relate to the
Australian shareholder's permanent establishment in Turkey with
which the holding is effectively connected, Turkey may tax the
dividends.
Article 11 -- Interest
8.134 This Article allocates taxing rights in respect of interest flows
between Australia and Turkey. Article 11 provides that:
· an exemption applies for interest derived from the investment
of official reserve assets by a government, its central bank or
a bank performing central banking functions [Article 11,
paragraph 3];
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Australia-Turkey convention
· a maximum 10 per cent rate of source country tax may be
applied to all other interest income [Article 11, paragraph 2];
· interest paid on a debt-claim which is effectively connected
with a permanent establishment or fixed base shall be subject
to Articles 7 (Business Profits) and 14 (Independent Personal
Services) respectively [Article 11, paragraph 5];
· 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 Turkish
resident other than where the indebtedness in respect of
which the interest is paid is effectively connected with a
permanent establishment or fixed base situated in Turkey;
or
- the interest is paid by a non-resident to a Turkish resident
and it is an expense of the payer in connection with a
permanent establishment or fixed base situated in
Australia [Article 11, paragraph 6]; 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 [Article 11, paragraph 7].
8.135 For the purposes of Article 11, it is understood that interest is
paid to a resident of a Contracting State where that person is the beneficial
owner of such interest. [Protocol, item 5]
Permissible rate of source country taxation
8.136 This Article provides for interest income to be taxed by both
countries but requires the country in which the interest arises (that is, the
source country) to limit its tax where a resident of the other country is the
beneficial owner of the interest. [Article 11, paragraphs 1 to 3]
Ten per cent rate limit
8.137 Source country taxation is not to exceed 10 per cent of the gross
amount of interest in all cases where a resident of the other country is the
beneficial owner of the interest. [Article 11, paragraph 2]
Exemption for interest paid to Government on investment of official
reserve assets
8.138 The exemption for interest paid to the government of a country
in respect of the investment of official reserve assets will apply to interest
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derived by the Australian or Turkish governments, or the government of
any political subdivision or local authority (including government
investment funds) in either Australia or Turkey.
8.139 The exemption also applies to banks performing central banking
functions in Australia and Turkey. [Article 11, paragraph 3]
Definition of interest
8.140 The term interest is defined for the purposes of this Article to
include:
· interest from Government securities or from bonds or
debentures whether or not secured by mortgage and whether
or not carrying a right to participate in profits;
· interest from any other form of indebtedness; and
· all other income subjected to the same taxation treatment as
income from money lent by the law of the country in which
the income arises.
[Article 11, paragraph 4]
Interest effectively treated as business profits or profits derived from
independent personal services
8.141 Interest derived by a resident of one country which is paid in
respect of indebtedness which is effectively connected with a permanent
establishment or fixed base of that person in the other country, will
form part of the profits of that permanent establishment or fixed base
and be subject to the provisions of Articles 7 (Business Profits) and
14 (Independent Personal Services) respectively. Accordingly, the rate
limitations on source taxation provided in paragraphs 2 to 3 of this Article
do not apply to such interest in the country in which the interest is
sourced. [Article 11, paragraph 5]
Deemed source rules
8.142 The source rules which determine where interest arises for the
purposes of this Article are set out in paragraph 6. They operate to allow
Australia to tax interest paid by a resident of Australia to a resident of
Turkey 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 Turkey resident, if it is an expense incurred by the payer of
the interest in connection with a permanent establishment or fixed base
situated in Australia.
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Australia-Turkey convention
8.143 However, consistent with Australia's interest withholding tax
provisions, an Australian source is not deemed in respect of interest that is
an expense incurred by an Australian resident in carrying on a business
through a permanent establishment in Turkey, or outside both Australia
and Turkey. Similarly, interest connected with a fixed base situated in a
third State is deemed to be sourced in the country in which the fixed base
is situated. [Article 11, paragraph 6]
8.144 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply. [Article 5, paragraph 9]
Related persons
8.145 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 source country tax rate limits apply to an amount of interest paid,
having regard to the indebtedness for which it is paid, which might have
been expected to have been agreed upon if the parties to the loan
agreement were dealing with one another at arm's length. Any excess
part of the interest remains taxable according to the domestic law of each
country but subject to the other Articles of the Turkish convention.
[Article 11, paragraph 7]
8.146 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.
A special relationship also covers relationships of blood or marriage and,
in general, any community of interests.
Article 12 -- Royalties
8.147 This Article allocates taxing rights in respect of royalties paid or
credited between Australia and Turkey. The Article provides that:
· a maximum 10 per cent rate of source country tax may be
levied on the gross amount of royalties [Article 12, paragraph 2];
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· royalties paid in respect of a right or property which is
effectively connected with a permanent establishment or
fixed base are subject to Articles 7 (Business Profits)
and 14 (Independent Personal Services) respectively
[Article 12, paragraph 4];
· royalties are deemed to have an Australian source (and may
therefore be taxed in Australia) where:
- the royalties are paid to a Turkish resident by a person
who is a resident of Australia for purposes of Australian
tax other than a payment made in respect of a right or
property which is effectively connected with a permanent
establishment or fixed base situated in Turkey; or
- the royalties are paid by a non-resident to a Turkish
resident and are an expense of the payer in connection
with a permanent establishment or fixed base situated in
Australia [Article 12, paragraph 5]; 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 [Article 12, paragraph 6].
8.148 For the purposes of Article 12, it is understood that royalties are
paid to a resident of a Contracting State where that person is the beneficial
owner of such royalties. [Protocol, item 5]
Permissible rate of source country taxation
8.149 This Article in general allows both countries to tax royalty flows
but limits the tax of the country of source, in respect of royalties
beneficially owned by residents of the other country to 10 per cent of the
gross amount of royalties. [Article 12, paragraphs 1 and 2]
8.150 In the absence of a tax treaty, Australia taxes royalties paid to
non-residents at 30 per cent of the gross royalty.
8.151 The specific source country taxation rate limit above 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
8.152 The definition of royalties in this Article reflects most elements
of the definition in Australia's domestic income tax law. The definition
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encompasses credits or payments of any kind for the use of, or the right to
use, any copyright, patent, design or model, plan, secret formula or
process, trademark or other like property or right or for the use of, or right
to use, industrial, commercial or scientific equipment. It also includes
payments (or credits) for the supply of information concerning scientific,
technical, industrial, or commercial knowledge or information but not
payments for services rendered, except as provided for in
subparagraph 3d). [Article 12, paragraph 3]
Image or sound reproduction or transmission
8.153 The `royalties' definition includes credits or payments of any
kind made for the use of, or the right to use, motion picture films. It also
covers credits or payments for the use of, or the right to use, films or
audio or video tapes or disks, or any other means of image or sound
reproduction or transmission for use in connection with television, radio
or other broadcasting. Such images or sounds may be transmitted
electronically, such as by satellite, cable or Internet. [Article 12,
subparagraph 3e)]
Payments for the supply of know-how versus payments for services
rendered
8.154 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
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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.
8.155 Payments or credits for design, engineering or construction of a
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.
8.156 In cases where both know-how and services are supplied under
the same contract, if the contract does not separately provide for payments
or credits in respect of know-how and services, an apportionment of the
two elements of the contract may be appropriate.
8.157 Depending on the circumstances, payments for services rendered
are to be treated under either Articles 7 (Business Profits) or
14 (Independent Personal Services).
Credits or payments for the supply of ancillary assistance
8.158 Consistent with Australia's treaty practice and paragraph 11.6 of
the OECD Model Commentary on Article 12, credits or payments made
for the supply of any assistance as a means of enabling the application or
enjoyment of the property, right or information referred to in
subparagraphs 3a) to 3c) fall within the meaning of the term royalties
where the assistance is both ancillary and subsidiary to the use or supply
of the relevant property or right, equipment, or knowledge or information.
[Article 12, subparagraph 3d)]
Spectrum licences
8.159 Under the Turkish convention, credits or payments made for the
use of, or right to use, the radiofrequency spectrum specified in a
spectrum licence are treated as royalties. This provision preserves
Australia's ability to tax credits or payments that arise in Australia for the
use in Australia of any part of the radiofrequency spectrum specified in an
Australian spectrum licence. [Article 12, subparagraph 3f)]
Forbearance
8.160 Consistent with Australian tax treaty practice and international
standards (see paragraph 8.5 of the OECD Model Commentary on
Article 12), subparagraph 3g) expressly treats as a royalty, amounts paid
or credited in respect of forbearance to grant to third persons, rights to use
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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 3g)]
Other royalties effectively treated as business profits or profits derived
from independent personal services
8.161 As in the case of dividend or 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 or fixed base in the country in which the income
is sourced. Such income is subject to the full rate of tax applicable in the
country in which the royalty is sourced in accordance with the provisions
of Articles 7 (Business Profits) and 14 (Independent Personal Services)
respectively. [Article 12, paragraph 4]
Deemed source rules
8.162 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 6 of Article 11 (Interest) and
operate to allow Australia to tax royalties paid by a resident of Australia
to a resident of Turkey who is the beneficial owner of those royalties.
Australia may also tax royalties paid by a non-resident, being royalties
which are beneficially owned by a Turkish resident, if the royalties are an
expense incurred by the payer in connection with a permanent
establishment or fixed base situated in Australia.
8.163 Consistent with Australia's royalty withholding tax provisions,
royalty payments that are an expense incurred by an Australian resident in
carrying on a business through a permanent establishment in Turkey, or
outside both Australia and Turkey will not be subject to tax in Australia.
Those royalties are deemed to be sourced in the country in which the
permanent establishment is situated. Similarly, royalties connected with a
fixed base situated in a third State are deemed to be sourced in the country
in which the fixed base is situated. [Article 12, paragraph 5]
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8.164 In determining whether a permanent establishment exists in a
third country, the principles set out in Article 5 (Permanent
Establishment) apply. [Article 5, paragraph 9]
Related persons
8.165 Where a special relationship exists between the payer and the
beneficial owner of the royalties, the source country tax rate limits apply
only to the extent that the royalties are not excessive. Any excess part of
the royalty remains taxable according to the domestic law of each country
but subject to the other Articles of the Turkish convention.
8.166 Examples of special relationships have been provided in respect
of the corresponding paragraph in Article 11. [Article 12, paragraph 6]
Article 13 -- Alienation of Property
Taxing rights
8.167 This Article allocates between the respective countries taxing
rights in relation to income, profits or gains arising from the alienation of
real property and other items of property.
8.168 The reference to `income, profits or gains' in this Article is
designed to put beyond doubt that a gain from the alienation of property,
which in Australia 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
8.169 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]
8.170 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).
Permanent establishment or fixed base
8.171 Paragraph 2 deals with income, profits or gains arising from the
alienation of property (other than real property covered by paragraph 1)
forming part of the business assets of a permanent establishment of an
enterprise or pertaining to a fixed base for the performance of independent
personal services. It also applies where the permanent establishment or
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fixed base are themselves (alone or with the whole enterprise) alienated.
Such income, profits or gains may be taxed in the country in which the
permanent establishment or fixed base is situated. This corresponds to the
rules for taxation of business profits contained in Article 7 (Business
Profits). [Article 13, paragraph 2]
Disposal of ships or aircraft
8.172 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. [Article 13, paragraph 3]
8.173 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 (for example, so-called `voyages
to nowhere' by cruise ships). [Article 3, subparagraph l(i)]
Shares and other interests in land-rich entities
8.174 Paragraph 4 applies to situations involving the alienation of
shares or comparable interests that derive more than 50 per cent of their
value directly or indirectly from real property situated in the other
country. Income, profits or gains from the alienation of such shares,
comparable interests or other rights may be taxed in the country in which
the real property is situated. Paragraph 4 complements paragraph 1 of this
Article and is designed to cover arrangements involving the effective
alienation of incorporated real property, or like arrangements.
8.175 This provision ensures that capital or revenue gains on disposal
of a foreign resident's indirect, as well as direct, interests in certain
targeted assets are taxable by Australia. Such treatment applies whether
the real property is held directly or indirectly through a chain of
interposed entities. [Article 13, paragraph 4]
Resident country sweep-up provision
8.176 Paragraph 5 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. 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
Turkey. The liability of the Australian resident to taxation on such capital
gains will be determined in accordance with Australia's domestic law.
[Article 13, paragraph 5]
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Exception to resident country sweep-up for certain shares, similar rights
or bonds issued by Turkish companies or residents
8.177 Notwithstanding the resident country sweep-up in paragraph 5
of this Article, Turkey has reserved its taxing right in relation to gains of a
capital nature derived by a resident of Australia from the alienation of
shares or rights in a Turkish company or bonds issued by a resident of
Turkey. Such gains will be taxable if the period between acquisition and
alienation of such shares, rights or bonds does not exceed two years.
[Article 13, paragraph 6]
Double tax relief
8.178 In the event that the operation of this Article should result in an
item of income or gain being subjected to tax in both States, the country
of which the person deriving the income or gain is a resident (as
determined in accordance with Article 4 (Resident)) would be obliged by
Article 23 (Methods of Elimination of Double Taxation) to provide double
tax relief for the tax imposed by the other country.
Article 14 -- Independent personal services
8.179 Under this Article, income derived by an individual in respect of
professional services or other activities of an independent character will
be subject to tax in the country in which the services or activities are
performed if either:
· the individual has a fixed base regularly available in the other
country for the purpose of performing those services or
activities; or
· the individual is present in the other country for the purpose
of performing those services or activities for a period or
periods exceeding in the aggregate 183 days in any 12-month
period commencing or ending in the fiscal year concerned.
8.180 If either of these conditions is met, the country in which the
services or activities are performed will be able to tax so much of the
profits as is attributable to the activities performed during such period or
periods or through that fixed base. [Article 14, paragraph 1]
8.181 If the above tests are not met, the income will be taxed only in
the country of residence of the individual.
8.182 The term professional services includes independent scientific,
literary, artistic, educational or teaching activities as well as the
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independent activities of physicians, lawyers, engineers, architects,
dentists and accountants. [Article 14, paragraph 2]
8.183 Remuneration derived as an employee and income derived by
entertainers and sportspersons are the subject of other Articles of the tax
treaty and are not covered by this Article.
8.184 Article 14 deals with the provision of services by individuals of
a typical type (that is professional services). The threshold test of
establishing whether professional services are caught are if the individual
has a fixed base available (a permanent establishment) or if the individual
is present in the country in which the services are performed for 183 days
or more. [Article 14]
Article 15 -- Dependent Personal Services
Basis of taxation
8.185 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 16 (Directors' Fees);
· Article 17 (Entertainers);
· Article 18 (Pensions and Annuities);
· Article 19 (Government Service); and
· Article 20 (Teachers and Students).
8.186 Generally, salaries, wages and other 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 15, paragraphs 1 and 2]
Short-term visit exemption
8.187 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 year of income of the visited country;
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· 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
or a fixed base which the employer has in the country being
visited.
8.188 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 15, paragraph 2]
Where the short-term visit exemption does not apply
8.189 Where a short-term visit exemption is not applicable,
remuneration derived by a resident of Australia from employment in
Turkey may be taxed in Turkey. However, this Article does not allocate
sole taxing rights to Turkey in that situation.
8.190 Accordingly, Australia would also be entitled to tax that
remuneration, in accordance with the general rule of the ITAA 1997 that a
resident of Australia remains subject to tax on worldwide income.
However, in accordance with Article 23 (Methods of Elimination of
Double Taxation) Australia would be required in this situation to relieve
any resulting double taxation.
Employment on a ship or aircraft
8.191 Income derived by crew members from employment exercised
aboard a ship or aircraft operated in international traffic may be taxable in
the country of which the entity operating the ship or aircraft is a resident.
Thus, for example, an Australian resident pilot employed by a Turkish
resident airline would be taxable in Turkey on his or her remuneration in
respect of services rendered on international flights and entitled to a tax
credit for the Turkish tax paid under Article 23 (Methods of Elimination of
Double Taxation). [Article 15, paragraph 3]
Article 16 -- Directors' Fees
8.192 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 which country a director's
services are performed, and consequently where the remuneration is to be
taxed, the Article provides that directors' fees may be taxed in the country
of residence of the company. [Article 16]
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Article 17 -- Entertainers
Personal activities
8.193 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
`entertainers' is intended to have a broad meaning and would include, for
example, actors and musicians as well as other performers whose
activities have an entertainment character, such as comedians, talk show
hosts, participants in chess tournaments or racing drivers. The application
of this Article extends to income generated from promotional and
associated kinds of activities engaged in by entertainers or sportspersons
while present in the visited country. [Article 17, paragraph 1]
Safeguard
8.194 Income in respect of personal activities exercised by an
entertainer or sportsperson, where derived by another person (for
example, 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 17, paragraph 2]
Exception for activities supported wholly or substantially from public
funds
8.195 Income derived by an entertainer or sportsperson from their
personal activities performed in a country, which would be ordinarily
taxable in the country of performance under paragraph 1 of this Article,
will be taxable in the entertainer or sportsperson's country of residence
only where the activities are supported wholly or substantially from public
funds of the country of residence, including any of its political
subdivisions or local authorities. [Article 17, paragraph 3]
Article 18 -- Pensions and Annuities
General scope
8.196 Pensions, annuities and similar periodic remuneration are
generally taxable only by the country of which the recipient is a resident.
8.197 The term annuity means a stated sum payable periodically at
stated times during life or during a specified or ascertainable period of
time under an obligation to make the payments in return for adequate and
full consideration in money or money's worth.
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8.198 The application of this Article extends to pensions, annuities and
similar periodic remuneration made to dependants, for example, a widow,
widower or children of the person in respect of whom the pension, annuity
or periodic remuneration entitlement accrued where, upon that person's
death, such entitlement has passed to that person's dependants. [Article 18,
paragraphs 1 and 2]
8.199 Certain lump sums may be taxed in both countries. Pensions
and retirement annuities and similar periodic remuneration (other than
those relating to government service) may be taxed only in the country of
residence of the recipient. Lump sums paid after the age of 60 in lieu of a
right to receive a pension, may also be taxed only in the country of
residence of the recipient. However, in respect of other lump sum
payments (other than lump sum retirement benefits relating to government
service), taxing rights are to be shared between the country of residence
and the country of source. [Article 18, paragraph 3]
8.200 In respect of paragraph 3 of Article 18, it is understood that in
the case of payments arising in Australia, the term `lump sums in lieu of
the right to receive a pension, annuity or other similar periodic
remuneration' does not include a departing Australia superannuation
payment made to a person who has worked in Australia while visiting on
an eligible temporary resident visa. [Article 18, paragraph 3; Protocol, item 8]
Alimony payments
8.201 Alimony and other maintenance payments are taxable only in
the country of which the recipient is a resident. The purpose of this
paragraph is to remove any possibility of double taxation of such
payments arising by reason of the treatment accorded such payments
under the respective domestic law of the two countries. In the case of
Australia, those payments will generally remain exempt from Australian
tax in the hands of the recipient and are non-deductible to the payer.
[Article 17, paragraph 4]
Article 19 -- Government Service
Salary and wage income
8.202 Salary, wage and other similar remuneration, other than
government service pensions or annuities, paid to an individual for
services rendered to a government (including a political subdivision or
local authority) of one of the countries, are to be taxed only in that
country. However, such remuneration will be taxable only in the other
country if the services are rendered in that other country and;
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· 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 (for example, if the recipient was a
permanent resident of that other country prior to rendering
the services).
[Article 19, paragraph 1]
Government pensions, annuities or lump sums
8.203 Pensions, annuities or lump sum retirement benefits paid by, or
out of funds created by a government (including a political subdivision or
local authority) of one of the countries to an individual in respect of
services rendered to that State are taxable only in that State. [Article 19,
subparagraph 2a)]
8.204 However, such pensions or annuities shall be taxable only in the
other Contracting State if the individual is a resident and a national of that
state. Lump sum retirement benefits paid by, or out of funds created by, a
country, to an individual in respect of services rendered to a country are
taxable only in that country. [Article 19, subparagraphs 2a) and b)]
Business income
8.205 Remuneration paid in respect of services rendered in connection
with any trade or 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 15 (Dependent Personal Services), Article 16 (Directors' Fees) or
Article 17 (Entertainers). [Article 19, paragraph 3]
Article 20 -- Teachers and Students
Students
8.206 This Article applies to students who are temporarily present in
one of the countries solely for the purpose of their education if they are, or
immediately before the visit were, a resident of the other country. In these
circumstances, payments received from sources outside that country for
the purpose of the student's maintenance or education will be exempt
from tax in the country visited. This will apply even though the student
may qualify as a resident of the country visited during the period for their
visit. [Article 20, paragraph 1]
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8.207 The exemption from tax provided by the visited country extends
to maintenance payments received by the student that are made for
maintenance of dependent family members who have accompanied the
student to the visited country. [Article 20]
Employment income
8.208 Where a Turkish 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 15 (Dependent Personal Services), be
subject to tax in Australia.
8.209 A payment for maintenance or education would not be expected
to exceed the level of expenses likely to be incurred to ensure the
student's maintenance or education (that is, a subsistence payment).
8.210 In these situations, the payments received from abroad for the
student's maintenance or education 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 qualifies as a resident of Australia during the visit
and the taxable income of the student does not exceed the tax-free
threshold applicable to Australian residents for income tax purposes.
Professors and teachers
8.211 This Article applies to exempt remuneration received by
professors or teachers in certain circumstances. In order for the
exemption to apply:
· the professor or teacher is a resident of one country who
visits the other country for a period not exceeding two years;
· the visit to the other country is for the purpose of teaching, or
carrying out advanced study or research at a university,
college, school or other educational institution in the country
visited; and
· the remuneration received is for the teaching, advanced study
or research.
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8.212 Provided that these requirements are fulfilled, any remuneration
the professor or teacher receives for such teaching, advanced study or
research in the visited country shall be exempt to the extent to which the
remuneration is or upon the application of Article 20, subject to tax in the
other country. [Article 20, paragraph 2]
8.213 Where a professor or teacher remains or intends to remain in
Australia for a period in excess of two years the exemption from
Australian income tax will cease. Any income that was received that was
initially exempt under the Article from the beginning of the visit to the
date of the change of intention to stay in Australia beyond two years, will
remain exempt because the initial purpose and intentions of the visiting
professor or teacher satisfied the two-year condition. [Article 20,
paragraph 2]
8.214 Research that is undertaken primarily for the benefit of a
specific person or persons will not qualify for the exemption. [Article 20,
paragraph 3]
8.215 In the course of negotiations, the two delegations agreed that:
`[I]n respect of teachers, the Teachers and Students Article in the
draft treaty would take precedence in application over the
Government Services Article in cases where the terms of both
Articles could apply to the taxpayer.'
Article 21 -- Other Income
Allocation of taxing rights
8.216 This Article provides rules for the allocation between the two
countries of taxing rights with respect to items of income not dealt with in
the preceding Articles of the Turkish 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.
8.217 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 the position expressed by Australia on
Article 21 (Other Income) of the OECD Model. [Article 21, paragraphs 1
and 3]
8.218 Where the income may be taxed in both countries in accordance
with this provision, the country of residence of the recipient of the income
is obliged by Article 23 (Methods of Elimination of Double Taxation) to
provide double taxation relief.
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8.219 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 or fixed base
which a resident of one country has in the other country. In such a case,
Articles 7 (Business Profits) or 14 (Independent Personal Services) will
apply. [Article 21, paragraph 2]
8.220 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, paragraph 1 of Article 7 (Business Profits) provides that
the profits of an enterprise of a country shall be taxable only in that
country.
Example 8.3
Esk Co, an Australia resident company, derives business profits from
the sale of merchandise through an independent agent located in
Turkey. As Esk Co does not have a permanent establishment in
Turkey, the business profits will be taxable in Australia pursuant to
Article 7 (Business Profits) and not under Article 21 (Other Income).
8.221 Similarly, this Article does not apply in the situation where
profits derived by an individual in respect of professional services or other
activities of an independent character are not taxed in the country where
the activities are performed because of the absence of a fixed base or
insufficient `presence in terms of time'. That is, in the absence of a fixed
base or sufficient presence, paragraph 1 of Article 14 (Independent
Personal Services) provides that the profits derived by an individual who
is a resident of a country shall be taxable only in that country.
Article 22 -- Source of Income
Deemed source
8.222 Consistent with Australia's treaty practice, this Article
effectively deems income, profits or gains derived by a resident of a
country which, in accordance with the Turkish convention, may be taxed
in the other country, to have a source in that other country for the
purposes of the law of that other country. It therefore avoids any
difficulties arising under domestic law source rules in respect of the
exercise by Australia of the taxing rights allocated to Australia by the
Turkish convention over income derived by residents of Turkey.
[Article 22, paragraph 1]
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Source of income -- double taxation relief
8.223 This Article also ensures that where an item of income, profits
or gains is taxable in both countries, double taxation relief will be given
by the taxpayer's country of residence (pursuant to Article 23 (Methods of
Elimination of Double Taxation)) for tax levied by the other country in
accordance with the tax treaty. In this way, income derived by a resident
of Australia, which is taxable by Turkey under the tax treaty, will be
treated as being foreign income for the purposes of the ITAA 1936 and
the ITAA 1997, including the foreign income tax offset provisions of the
ITAA 1997. [Article 22, paragraph 2]
Article 23 -- Methods of Elimination of Double Taxation
8.224 Double taxation does not arise in respect of income flowing
between Australia and Turkey:
· where the terms of the Turkish convention provide for the
income to be taxed only in one country; or
· where the domestic taxation law of one of the States exempts
the income from its tax.
8.225 It is necessary, however, to prescribe a method for relieving
double taxation for other classes of income, profits or gains which, under
the terms of the Turkish convention, remain subject to tax in both
countries. In accordance with international practice, Australia's tax
treaties provide for double tax relief to be afforded by the country of
residence of the taxpayer by way of an exemption of the foreign income,
or a credit or deduction against its tax for the tax of the country of source.
This Article also reflects that approach.
Australian method of relief
8.226 This Article requires Australia to provide Australian residents a
credit against their Australian tax liability for Turkish tax paid under
Turkish laws and in accordance with the Turkish convention, on income
which is taxable in Australia. The term `income' in this context is
intended to have a broad meaning and includes items of profit or gains
which are dealt with under the income tax law. [Article 23, paragraph 1]
8.227 Australia's general foreign income tax offset rules, together with
the terms of this Article and of the Turkish convention generally, will
form the basis of Australia's arrangements for relieving a resident of
Australia from double taxation on income, profits or gains that are also
taxed in Turkey.
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8.228 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).
8.229 Dividends and branch profits derived from Turkey by an
Australian resident company that are exempt from Australian tax under
the foreign source income measures (for example, 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.
Turkish relief
8.230 This Article also requires Turkey to provide Turkish residents
relief by way of a deduction against their Turkish tax liability for
Australian tax paid under Australian laws and in accordance with the
Turkish convention, on income which is taxable in Turkey. The
deduction is made against the Turkish tax payable on the same income,
subject to that deduction not exceeding an amount which bears to the total
Turkish tax payable the same ratio as the income concerned bears to the
total income. [Article 23, paragraph 2]
Consideration of exempt amounts
8.231 Paragraph 3 permits each country to take into account income
which is exempt from tax in that country under the Turkish convention in
calculating the amount of tax on other income. [Article 23, paragraph 3]
Article 24 -- Non-Discrimination
8.232 The Turkish convention includes rules to prevent tax
discrimination.
Discrimination based on nationality
8.233 This Article prevents discrimination on the grounds of
nationality by providing that nationals of one country may not be less
favourably treated than nationals of the other country in the same
circumstances. [Article 24, paragraph 1]
8.234 The discrimination that this Article precludes applies to both
taxation and any requirement connected with such taxation. Accordingly,
discrimination in the administration of the tax law is also generally
precluded.
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8.235 The term `national' is defined in subparagraph (l) of paragraph 1
of Article 3 (General Definitions) of the Turkish convention and covers
both an individual who is a citizen or national of one country or the other,
and any company or legal person `deriving its status as such from the laws
in force in that Contracting State'. Accordingly, a company that is
incorporated in Australia would be a national of Australia while a
company that is incorporated under a law of Turkey would be a national
of Turkey for the purposes of this paragraph. [Article 3, subparagraph 1l)]
The meaning of `in the same circumstances' and `in particular with
respect to residence'
8.236 The expression `in the same circumstances' refers to persons
who, from the point of the application of the ordinary taxation laws, are in
substantially similar circumstances both in law and in fact.
8.237 Where a person operates in an industry that is subject to
government regulation such as prudential oversight, another person
operating in the same industry but not subject to the same oversight,
would not be in the same circumstances.
8.238 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 Turkish resident compared to an Australian resident will not
constitute discrimination for the 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 Turkey.
The meaning of `other or more burdensome' taxation
8.239 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).
8.240 The phrase `other or more burdensome' taxation 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.
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Non-discrimination and permanent establishments
8.241 The tax on permanent establishments of enterprises of the other
country will 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. The application
of this paragraph, however, is subject to paragraph 4 of Article 10 of the
Turkish convention, which permits the imposition of branch profits tax by
Turkey. [Article 24, paragraph 2]
8.242 For this paragraph to apply, the enterprises of both States 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.
8.243 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.
8.244 In determining whether taxation has been less favourably levied,
regard would be had only to the rules applicable to the taxation of the
permanent establishment's own activities, and how those rules compare
with those applicable to the taxation of similar activities carried on by a
local enterprise. As noted in paragraph 41 of the OECD Model
Commentary on Article 24, the equal treatment principle in this paragraph
`does not extend to rules that take account of the relationship between an
enterprise and other enterprises (for example, rules that allow
consolidation, transfer of losses or tax-free transfers of property between
companies under common ownership), since the latter rules do not focus
on the taxation of an enterprise's own business activities similar to those
of the permanent establishment'. Accordingly, this paragraph does not
affect Australia's roll-over rules for capital gains, consolidation rules or
loss transfer rules. Nor does it affect rules concerning the allowance of
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rebates or credits in relation to dividends, since these do not relate to the
business activities of the permanent establishment.
Deductions for payments to foreign residents
8.245 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 7 of Article 11 (Interest), and
paragraph 6 of Article 12 (Royalties). [Article 24, paragraph 3]
Enterprises owned or controlled abroad
8.246 A country must not give less favourable treatment to enterprises,
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 Turkish residents may not
be given other or more burdensome treatment than locally owned or
controlled Australian enterprises. [Article 24, paragraph 4]
8.247 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 enterprise as resident shareholders.
Accordingly, there is no obligation under paragraph 5 or any other
provision of this Article to allow imputation credits to non-resident
shareholders.
Non-resident individuals
8.248 Non-resident individuals do not have to be granted the personal
allowances, reliefs or reductions available to residents of the tax treaty
countries. [Article 24, paragraph 5]
8.249 This means that Australia will continue to be able to grant
certain tax offsets only to resident individuals, such as the tax offset for
dependents contained in Division 13 of the ITAA 1997.
8.250 Unlike paragraph 3 of Article 24 (Non-Discrimination) of the
OECD Model, the 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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Exclusions
8.251 Certain provisions of the law of both countries are not restricted
in their application by this Article. The specific exclusion of these
provisions will ensure that they can continue to operate for their intended
purpose. The provisions of the law of Australia and Turkey which are not
restricted in their application by this Article are those that:
· prevent the avoidance or evasion of taxes;
· defer tax where an asset is transferred out of the jurisdiction;
· provide for consolidation of group entities;
· provide for deductions to eligible taxpayers for expenditure
on research and development; or
· are agreed in an Exchange of Notes between the two
Governments to be unaffected by the Article.
Avoidance or evasion provisions
8.252 The operation of domestic measures to combat avoidance and
evasion is not affected by this Article. [Article 24, subparagraph 6a)]
8.253 The reference to `laws...designed to prevent avoidance or
evasion of taxes' includes, in the case of Australia, thin capitalisation,
dividend stripping, transfer pricing, controlled foreign companies
provisions, transferor trust provisions, foreign investment fund provisions
and collection measures including conservancy. Although it is commonly
accepted by most OECD member countries that such provisions do not
contravene Non-discrimination Articles, this outcome is specifically
provided for in the Turkish convention by the exclusion of such rules from
the operation of the Article. [Article 24, paragraph 7]
8.254 The enforcement and operation of the various aspects of the
withholding tax provisions relating to non-residents are preserved by this
Article. For example, section 26-25 (interest or royalty) of the
ITAA 1997 provides that where interest and royalties are paid to a non-
resident and the payer fails to deduct withholding tax, the interest or
royalty expense cannot be claimed as a deduction. No similar measure
exists in relation to payments from a resident to another resident.
[Article 24, subparagraphs 6a) and 7c)]
Capital gains roll-over relief
8.255 This Article will not affect the operation of any provision of
domestic tax legislation which does not permit the deferral of tax arising
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on the transfer of an asset where the transfer of the asset by the transferee
would take the asset beyond the taxing jurisdiction of the country.
8.256 Under Australia's domestic tax legislation, permanent
establishments generally enjoy the same tax treatment as resident
enterprises. However, roll-over relief is denied to a permanent
establishment where an asset that is taxable Australian property is
transferred to a non-resident if the asset is not taxable Australian property
in the hands of the transferee. Australia will be able to continue to deny
roll-over relief in these circumstances. [Article 24, subparagraph 6b)]
Consolidation
8.257 Domestic law rules which provide for single entity treatment of
a group of entities are excluded from the operation of this Article,
provided that there is no discrimination regarding access to consolidation
treatment between Australian resident companies on the basis of
ownership of the company.
8.258 Australia's consolidation measures are restricted to
wholly-owned Australian resident entities. This Article will not apply to
these measures, with the result that domestic law provisions continue to
operate to preclude permanent establishments of non-resident companies
from consolidating with resident entities that may be wholly-owned by a
non-resident. [Article 24, subparagraph 6c)]
Research and development expenditure
8.259 The domestic law research and development provisions are
excluded from the operation of Article 24. It follows that Australia will
be able to continue to apply its domestic law rules concerning access to
concessions in respect of research and development expenditure.
Currently, these concessions are only available to companies that are
incorporated in Australia. [Article 24, subparagraph 6d)]
Power to carry out an Exchange of Notes
8.260 The two Governments may agree in an Exchange of Notes that
other domestic law provisions will not be affected by the requirements of
Article 24. [Article 24, subparagraph 6e)]
Taxes to which this Article applies
8.261 This Article applies to taxes which are the subject of the Turkish
convention (see paragraphs 8.8 and 8.12 for a list of the taxes covered). It
is intended that the Article extend to any identical or substantially similar
taxes which are subsequently imposed by either country in addition to, or
in place of, these taxes, where those taxes are covered by the Turkish
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convention in accordance with paragraph 2 of Article 2. [Article 24,
paragraph 8]
More favourable treatment
8.262 Nothing in this Article prevents either country from treating
residents of the other country more favourably than its own residents.
Article 25 -- Mutual Agreement Procedure
Consultation on specific cases
8.263 This Article provides for consultation between the competent
authorities of the two countries with a view to reaching a solution in cases
where a person is able to demonstrate actual or potential imposition of
taxation contrary to the provisions of the Turkish convention. [Article 25,
paragraph 2]
8.264 In the case of Australia, the competent authority is the
Commissioner or an authorised representative of the Commissioner.
[Article 3, subparagraph 1f)]
8.265 A person wishing to use this procedure may present a case to the
competent authority of the country of which the person is a resident. If
the case comes under paragraph 1 of Article 24 (Non-Discrimination) of
the Turkish convention, the person may present a case to the competent
authority of the country of which the person is a national.
8.266 Presentation of a case by a person to a competent authority must
be made within three years of the first notification of the action which the
taxpayer considers gives rise to taxation not in accordance with the
Turkish convention. Presentation of a case does not deprive the person of
access to, or affect their rights in relation to, other legal remedies available
under the domestic laws of the countries. [Article 25, paragraph 1]
8.267 If the person's claim seems to the competent authority to which
the case has been presented to be justified, and that competent authority is
not itself able to solve the problem, then the competent authority is
required to seek to resolve the case by mutual agreement with the
competent authority of the other country, with a view to avoiding taxation
not in accordance with the Turkish convention. [Article 25, paragraph 2]
8.268 If, after consideration by the competent authorities, a solution is
reached, it must be implemented in accordance with the provisions of the
Article.
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Implementation of a solution
8.269 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, provided that, in the case of Turkey, the taxpayer must claim
the refund resulting from such mutual agreement within a period of one
year after the tax administration has notified the taxpayer of the result of
the mutual agreement. This allows the competent authorities the
flexibility to reach a satisfactory solution and avoids problems that might
arise where each country has a different time limit in their domestic law.
[Article 25, paragraph 2]
Consultation on general problems
8.270 This Article also authorises consultation between the competent
authorities of the two countries for the purpose of resolving any
difficulties that arise regarding the interpretation or application of the
Turkish 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.
8.271 The competent authorities may also consult together with a view
to eliminating double taxation in cases where the Turkish convention does
not provide a solution. However, in eliminating such double taxation, the
competent authorities must act within their statutory powers. [Article 25,
paragraph 3]
Methods of communication between competent authorities
8.272 The competent authorities are permitted to communicate directly
with each other without having to go through diplomatic channels. This
may be done by electronic means (for example, facsimile transmission,
e-mail or web conferencing), letter, telephone, direct meetings or any
other convenient means.
8.273 This provision also envisages that, where advisable, an oral
exchange of opinions through a meeting of representatives of the
competent authorities of the Contracting States may take place. [Article 25,
paragraph 4]
General Agreement on Trade in Services dispute resolution process
8.274 This Article also deals with disputes that may be brought before
the World Trade Organisation Council for Trade in Services under the
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dispute resolution processes of the General Agreement on Trade in
Services (GATS).
8.275 Australia and Turkey 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.
8.276 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.
8.277 This provision is based, in all essential respects, on an OECD
Model Commentary recommendation, and is common in recent
international treaty practice. [Article 25, paragraph 5]
Article 26 -- Exchange of Information
8.278 The Turkish convention allows for the competent authorities to
exchange information on a wide range of taxes and irrespective of
whether the country of whom the information is requested has a domestic
tax interest in the information sought. The information allowed to be
exchanged does not have to concern a resident of either Australia or
Turkey.
Foreseeably relevant information
8.279 Article 26 authorises and limits the exchange of information by
the two competent authorities to information foreseeably relevant to the
administration or enforcement of the relevant taxes. The exchange of
information concerns taxes referred to in Article 2 (Taxes Covered) of the
Turkish convention, and is not restricted by Article 1 (Persons Covered).
It may, therefore, cover persons who are not residents of Australia or
Turkey.
8.280 The standard of foreseeable relevance is intended to ensure that
information may be exchanged to the widest possible extent. However,
competent authorities are not entitled to request information from the
other country which is unlikely to be relevant to the tax affairs of a
taxpayer, or to the administration and enforcement of tax laws. [Article 26,
paragraph 1]
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Taxes to which this Article applies
8.281 Under the Turkish convention, the Australian competent
authority can request and obtain information concerning all federal taxes
from the competent authority in Turkey. This means, for example, that
information concerning Australian indirect taxes (that is, the GST) may be
requested and obtained from Turkey.
8.282 Similarly, in the case of Turkey, the Turkish competent authority
can request and obtain information concerning taxes of every kind and
description imposed under Turkish tax laws from Australia.
Use of exchanged information
8.283 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 26, paragraph 2]
No domestic tax interest required
8.284 When requested, a country is required to obtain information in
the same manner as if it were administering its domestic tax system,
notwithstanding that the country may not require the information for its
own purposes. Australia would recognise this obligation to obtain
relevant information for treaty partner countries, even in the absence of an
explicit provision to this effect. [Article 25, paragraph 4]
Limitations
8.285 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 Turkey; or
· such information is not obtainable by the competent authority
under the domestic law or in the normal course of
administration of Australia or Turkey.
[Article 26, subparagraphs 3a) and b)]
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8.286 Also, in no case is the country receiving the request obliged to
supply information under this Article that would:
· disclose any trade, business, industrial, commercial or
professional secret or trade process; or
· be contrary to public policy.
[Article 26, subparagraph 3c)]
Information held by institutions such as banks, other financial
institutions or nominees
8.287 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 institutions such as banks, other financial institutions or
nominees. This reflects the 2005 changes to Article 26 (Exchange of
Information) of the OECD Model. [Article 26, paragraph 5]
Information that exists prior to the entry into force of this convention
8.288 Under this Article, the competent authorities can exchange
information that relates to transactions or events occurring prior to entry
into force of this convention. This approach conforms with the
international practice contained in paragraph 10.3 of the Commentary on
Article 26 (Exchange of Information) of the OECD Model.
8.289 In the course of negotiations the Turkish delegation advised that,
in relation to the Turkish Free Zones:
`...Turkish tax authorities were able to obtain tax information on
businesses operating in those zones and benefiting from the tax
concessions available. Such information may be exchanged under the
terms of the Exchange of Information Article...(that is, such
information is not subject to secrecy or confidentiality requirements
preventing the Turkish competent authority from exchanging such
information) providing the terms of the Exchange of Information
Article are met in other respects.'
Article 27 -- Members of Diplomatic Missions and Consular Posts
8.290 The purpose of this Article is to ensure that the provisions of the
Turkish 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
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Immunities Act 1972 which reflect Australia's international diplomatic
and consular obligations. [Article 27]
Article 28 -- Entry into Force
Date of entry into force
8.291 This Article provides for the entry into force of the Turkish
convention. The Turkish convention will enter into force on the last date
on which diplomatic notes are exchanged notifying that the statutory and
constitutional procedures required for the entry into force of the Turkish
convention in the respective countries have been completed. In Australia,
enactment of the legislation giving the force of law in Australia to the
Turkish convention along with tabling the Turkish convention in
Parliament are prerequisites to the exchange of diplomatic notes.
[Article 28]
Date of application for Australian taxes
Withholding taxes
8.292 Once it enters into force, the Turkish convention will apply in
Australia in respect of withholding tax on income that is derived by a
non-resident in relation to income derived on or after 1 January in the
calendar year next following the date on which the Turkish convention
enters into force. [Article 28, sub-subparagraph 2a)(i)]
Other Australian taxes
8.293 The Turkish convention will first apply to other Australian taxes
as regards any year of income beginning on or after 1 July next following
the date on which the Turkish convention enters into force.
8.294 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 next following the date on
which the Turkish convention enters into force will be the relevant year of
income for the purposes of the application of such Australian tax.
[Article 29, sub-subparagraph 2a)(ii)]
Date of application for Turkish taxes
Taxes withheld at source
8.295 In Turkey, the Turkish convention will apply with regard to
taxes withheld at source, in respect of amounts paid or credited on or after
1 January next following the date upon which the Turkish convention
enters into force. [Article 28, sub-subparagraph 2b)(i)]
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Other Turkish taxes
8.296 The Turkish convention will first apply to Turkish taxes in
respect of taxable years beginning on or after 1 January next following the
date upon which the Turkish convention enters into force. [Article 28,
sub-subparagraph 2b)(ii)]
Exchange of information
8.297 Article 26 (Exchange of Information) is intended to have effect
from the date of entry into force of the Turkish convention, irrespective of
the year of income to which the information relates (subject to any
domestic law time limits).
Article 29 -- Termination
8.298 The Turkish convention is to continue in effect until terminated.
Either country may terminate the Turkish 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, at least six
months before the end of any calendar year beginning after the expiration
of that five-year period.
Cessation in Australia
8.299 In the event of either country terminating the Turkish
convention, the Turkish convention would cease to be effective in
Australia for the purposes of:
· withholding tax on income derived by a non-resident, in
relation to income derived on or after 1 January in the
calendar year next following that in which the notice of
termination is given; and
· other Australian taxes, as regards any year of income, profits
or gains in the Australian year of income commencing on or
after 1 July next following that in which the notice of
termination is given.
[Article 30, subparagraph 2a)]
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Cessation in Turkey
8.300 In the event of either country terminating the Turkish
convention, the Convention would cease to be effective in Turkey for the
purposes of:
· taxes withheld at source, in respect of amounts paid or
credited after the end of the calendar year in which notice is
given; and
· other Turkish taxes, in respect of taxable years beginning
after the end of the calendar year in which such notice is
given.
[Article 30, subparagraph 2b)]
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