Commonwealth Numbered Regulations - Explanatory Statements

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TAXATION (INTEREST ON OVERPAYMENTS) REGULATIONS 1995 NO. 448

STATUTORY RULES 1995 No. 448

Issued by authority of the Assistant Treasurer

Taxation (Interest on Overpayments and Early Payments) Act 1983

Taxation (Interest on Overpayments) Regulations

Section 15 of the Taxation (Interest on Overpayments and Early Payments) Act 1983 (the Overpayments Act) provides that the Governor-General may make regulations prescribing matters required to give effect to the Overpayments Act. Section 3A of the Overpayments Act defines when an overpayment of tax will be regarded as providing correlative relief and refers, inter alia, to a provision of a double tax agreement which has been prescribed. The regulations prescribe provisions of Australia's double tax agreements or the manner of operation of provisions of Australia's double tax agreements for the purposes of section 3A of the Overpayments Act.

These regulations amend the existing regulations and insert new regulations to supplement amendments to the Overpayments Act that came into effect on 19 December 1994. The amendments to the Overpayments Act generally widened the circumstances in which interest is paid to taxpayers who overpay their income tax and provide for interest to be paid to taxpayers who pay their income tax early.

However, some overpayments of income tax may not qualify for interest or may qualify for a limited amount of interest. These overpayments arise in an international context where Australia provides correlative relief from double taxation which has arisen as a result of a foreign tax administration taxing profits which have been shifted to Australia through transfer pricing.

Transfer pricing occurs where international dealings between an enterprise resident in Australia and an associated enterprise resident in another country are undertaken on a non-arm's length basis. Where profits are shifted to Australia in this manner, the tax administration of the foreign country may increase the taxable profits of the foreign enterprise. Similarly, double taxation may arise as a result of a foreign tax administration reallocating profits or expenses between parts of an enterprise, for example, a head office in Australia and a branch in a tax treaty partner country.

Correlative relief is provided in Australia by an amended assessment to reduce the profits taxed in Australia or by allowing a credit for the additional foreign taxes paid. Such an amended assessment or credit is generally regarded as an overpayment of tax for the purpose of paying interest under the Overpayments Act.

Prior to the amendments in 1994, correlative relief was not specifically dealt with by the Overpayments Act. Where an overpayment of tax arises from the provision of correlative relief, interest will now be paid where the foreign adjusting country imposes interest in respect of the adjustment. However, in certain circumstances the amount of interest payable on such overpayments will be limited.

These regulations prescribe provisions or the manner of operation of provisions of Australia's double tax agreements to identify overpayments of tax arising from the provision of correlative relief.

These regulations commence on gazettal. Subsection 46(2) of the Taxation Laws Amendment Act (No. 4) 1994 provides for the proposed regulations to have effect in relation to overpayments of tax identified on or after 1 July 1994.

Details of the regulations are as follows:

Regulation 1 amends the Taxation (Interest on Overpayments) Regulations (the existing regulations) as set out in the proposed regulations.

Regulation 2 alters the citation in the existing regulations to include "and Early Payments" to be consistent with the altered citation of the Overpayments Act.

Subregulation 3.1 updates the interpretation of references to "the Act" to reflect the amended title of the Overpayments Act.

Subregulation 3.2 links a reference to a named double tax agreement in the proposed regulations to a double tax agreement described in subsection 3(1) of the International Tax Agreements Act 1953.

Regulation 4 inserts new regulations 5 to 8 and new Schedules 1 to 3 to prescribe provisions or the manner of operation of provisions of double tax agreements which identify overpayments of tax arising from the provision of correlative relief for the purposes of determining entitlement to interest under the Overpayments Act.

New regulation 5 prescribes the provisions of the double tax agreements listed in new Schedule 1. The double tax agreement provisions listed in new Schedule 1 provide for the relief of economic double taxation arising from transfer pricing adjustments made by a tax treaty partner country. In this context, economic double taxation occurs where the tax administration of the treaty partner country upwardly adjusts the profits of an enterprise resident in that country in relation to its non-arm's length dealings with an associated enterprise resident in Australia. This is commonly referred to as a transfer pricing adjustment. Economic double taxation results where the two enterprises, being members of the same economic unit, are each taxed on the same income.

New sub regulation 6(1) prescribes the mariner of operation of the provisions of the double tax agreements listed in new Schedule 2. The manner of operation of the provisions listed in new Schedule 2 provide for the relief of juridical double taxation arising from a transfer pricing or profit/expense allocation adjustment made by a tax treaty partner country. In this context, juridical double taxation may occur where profits or expenses are reallocated between parts of an enterprise, for example, a head office in Australia and a branch in the tax treaty partner country. Juridical double taxation occurs where the same enterprise is taxed on the same income by both tax administrations.

New sub regulation 6(1) distinguishes between resident and non resident taxpayers in prescribing the manner of operation of the double tax provisions listed in new Schedule 2. If the taxpayer is a resident of Australia, paragraph (a) of new sub regulation 6(1) prescribes the application of the double tax provision by Australia in a manner which increases the profits attributable to a permanent establishment (a branch) of the taxpayer in the other country. If the taxpayer is not a resident of Australia, paragraph (b) of new sub regulation 6(1) prescribes the application of the double tax provision by Australia in a manner which decreases the profits attributable to a permanent establishment of the taxpayer in Australia.

Prescribing the manner of operation of the double tax agreement provisions listed in new Schedule 2 in this way ensures that the provision of correlative relief is identified only where overpayments of tax result from a tax treaty partner country's transfer pricing or profit/expense allocation adjustment which increases the taxpayer's liability to tax in that country.

New sub regulation 6(2) defines "profits" for the purposes of new sub regulation 6(1).

New sub regulation 6(3) prescribes the manner of operation of the provisions of the double tax agreements listed in new Schedule 3. The manner of operation of the provisions listed in new Schedule 3 provide for the relief of juridical double taxation arising from a transfer pricing or profit/expense allocation adjustment made by a tax treaty partner country. In this context, juridical double taxation may occur where:

•       profits are reallocated between parts of an enterprise, for example, a head office in Australia and a branch in the tax treaty partner country; or

•       certain profits similar to those attributable to a permanent establishment are subject to tax by the country of source, for example, where the tax treaty partner country taxes on a source basis the profits from sales of goods similar to those sold by a branch of an Australian enterprise in that country.

New sub regulation 6(3) distinguishes between resident and non resident taxpayers in prescribing the manner of operation of the double tax provision listed in new Schedule 3. If the taxpayer is a resident of Australia, the application of the double tax provision by Australia is prescribed in a manner to increase the profits attributable to:

•       a permanent establishment of the taxpayer in the other country (subparagraph (a)(i) of new sub regulation 6(3)); or

•       sales in the other country of like goods or merchandise to those sold through that permanent establishment (subparagraph (a)(ii) of new sub regulation 6(3)); or

•       other like business activities carried on in the other country as those carried on through that permanent establishment (subparagraph (a)(iii) of new sub regulation 6(3)).

If the taxpayer is not a resident of Australia, the application of the double tax provision by Australia is prescribed in a manner to decrease the profits attributable to: a permanent establishment of the taxpayer in Australia; or, the sale in Australia of like goods or merchandise to those sold through that permanent establishment; or, other like business activities carried on in Australia as those carried on through that permanent establishment (subparagraphs (b)(i), (ii) and (iii) of new sub regulation 6(3)).

Prescribing the manner of operation of the double tax agreement provisions listed in new Schedule 3 in this way ensures that the provision of correlative relief is identified only where overpayments of tax result from a tax treaty partner country's transfer pricing or profit/expense allocation adjustments which increase the taxpayer's liability to tax in that country.

New regulation 7 prescribes Article 9(3) of the Vietnamese double tax agreement for the purposes of paragraph 3A(2)(b) of the Overpayments Act. Paragraph 3A(2)(b) of the Overpayments Act applies where no double tax agreement exists between Australia and the foreign country making a transfer pricing or profit/expense allocation adjustment. Like the provisions listed in new Schedule 1 prescribed in new regulation 5, Article 9(3) of the Vietnamese double tax agreement provides for the relief of economic double taxation arising from a transfer pricing adjustment made by the tax administration of a foreign country. Thus, for the purpose of identifying whether an overpayment of tax arises from the provision of correlative relief, the wording of the prescribed provision will be used as if it existed in a double tax agreement between Australia and the foreign country.

New regulation 8 prescribes the manner of operation of Article 7 of the Vietnamese double tax agreement for the purposes of paragraph 3A(2)(b) of the Overpayments Act. Like the manner of operation prescribed in new subregulation 6(1) for the provisions listed in new Schedule 2 , the manner of operation of Article 7 of the Vietnamese double tax agreement provides for the relief of juridical double taxation arising from a transfer pricing or profit/expense allocation adjustment made by the tax administration of a foreign country. Thus, for the purpose of identifying whether an overpayment of tax arises from the provision of correlative relief, the manner of operation prescribed in new regulation 8 of the wording of Article 7 of the Vietnamese double tax agreement will be used as if the provision existed in a double tax agreement between Australia and the foreign country making the adjustment.

New regulation 8, like new sub regulation 6(1), distinguishes between resident and non resident taxpayers in prescribing the manner of operation of Article 7 of the Vietnamese double tax agreement (paragraphs (a) and (b) of new regulation 8).