What are income tax treaties?
Income tax treaties – also called a tax convention or double tax agreement (DTA) – are formal bilateral agreements between two jurisdictions. The agreements foster cooperation and prevent double taxation or fiscal evasion.
The full list of our income tax treaties is maintained by the Treasury and can be found at Income tax treatiesExternal Link, as well as information about all Australian tax treatiesExternal Link.
We also have information about Foreign employment income.
Multilateral Instrument
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting is also known as the Multilateral Instrument (MLI). It is a multilateral treaty that enables jurisdictions to swiftly modify their tax treaties to implement measures designed to:
- better address multinational tax avoidance
- more effectively resolve tax disputes.
The MLI has modified some of Australia's tax treaties and further treaties will be modified in due course. The potential impact of the MLI needs to be considered when interpreting Australia's tax treaties.
What tax treaties do
Generally, Australia's tax treaties operate to:
- reduce or eliminate double taxation caused by overlapping tax jurisdictions
- provide a level of security about the tax rules that will apply to particular international transactions by
- allocating taxing rights between the jurisdictions over different categories of income
- specifying rules to resolve dual claims in relation to the residential status of a taxpayer and the source of income
- providing an avenue to present a case for determination by the relevant taxation authorities where a taxpayer considers there has been taxation treatment contrary to the terms of a tax treaty
- prevent avoidance and evasion of taxes on various forms of income flows between the treaty partners by
- providing for the allocation of profits between related parties on an arm's length basis
- generally preserving the application of domestic law rules that are designed to address transfer pricing and other international avoidance practices
- providing for exchanges of information between the respective taxation authorities
- facilitating investment, trade, movement of technology and movement of personnel between jurisdictions – for example, by reducing rates of withholding tax.
How tax treaties work
Some of the basic principles that apply to all of Australia's tax treaties are outlined below.
Residence versus source
Each country or jurisdiction has the right to tax the income of its own residents under their own domestic laws. Therefore, the tax treaty will not always re-state this rule.
If the country or jurisdiction of residence has the sole taxing right over certain types of income, profits or gains, this is usually expressed as 'shall be taxable only in that country'.
Tax treaties give the source country or jurisdiction a taxing right over selected types of income, profits or gains. Sometimes there are limits on source taxation.
Where the source country or jurisdiction imposes a limited rate of tax on selected types of income, profits or gains, for example, a withholding tax, this is usually expressed as 'may be taxed in that other state'.
For more information, see Foreign employment income.
Business profits
The principal factor considered in relation to the taxation of business profits is the presence of a 'permanent establishment'. This refers to a fixed place of business through which the taxpayer either fully or partly carries on their business enterprise.
Under the business profits article of most tax treaties, the profits of an enterprise in one country or jurisdiction may be taxed in the other country or jurisdiction only when both of the following circumstances are met:
- the enterprise carries on business in the other jurisdiction through a permanent establishment
- the profits are attributable to the permanent establishment.
Tax relief
A tax treaty may require the jurisdiction of residence to provide tax relief against its own tax if the income has been taxed in the source country or jurisdiction.
In Australia, we apply either the general foreign tax credit provisions of our domestic law or specific exemption provisions where they are applicable. Under some tax treaties, if a person or entity is an Australian resident for tax purposes they may be entitled to a reduction in, or exemption from, withholding tax on certain classes of their foreign source income.
If this applies to you, you should contact the tax authorities in the source country or jurisdiction where the income is derived to ask:
- how to apply for the reduction or exemption
- what documents you will need to provide with your application.
For more information, see Withholding from dividends paid to foreign residents.
Superannuation or social security contributions
Authorities from other countries may require you to provide evidence that you are covered by a bilateral social security agreement and therefore exempt from making superannuation (or equivalent) contributions under the legislation of the other country.
This evidence will be in the form of a certificate of coverage. It is taken as proof by other countries that the employer or employee is subject to Australia's superannuation guarantee legislation and will remain so while the employee is on secondment in the other country.
How to work out if you're affected by a tax treaty
Your residency status determines the country or jurisdiction in which you pay income tax and how much tax you are liable to pay.
If you are an Australian resident for tax purposes and have income, profits or gains from overseas, you will need to consider the relevant income tax treaty. To work out if you are an Australian resident for tax purposes as:
- an individual, refer to Work out your residency status for tax purposes
- a company or trust, refer to Residency requirements for companies, corporate limited partnerships and trusts.
You may also be a resident of another jurisdiction. Most tax treaties include a 'tie-breaker' test under which a dual resident is deemed to be a resident solely of one of the 2 countries or jurisdictions for the purposes of the application of that treaty.