Tax treaties are formal bilateral agreements between two jurisdictions. Australia has tax treaties with more than 40 jurisdictions.
A tax treaty is also referred to as a tax convention or double tax agreement (DTA). They prevent double taxation and fiscal evasion, and foster cooperation between Australia and other international tax authorities by enforcing their respective tax laws.
The full list of our tax treaties is maintained by the Treasury and can be found at Australian tax treatiesExternal Link.
- Income Tax TreatiesExternal Link
- Foreign employment income
- Withholding from dividends paid to foreign residents
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, also known as the Multilateral Instrument (MLI), is a multilateral treaty that enables jurisdictions to swiftly modify their tax treaties to implement measures designed to better address multinational tax avoidance and 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.
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.
Outlined below are some basic principles that apply to all of Australia's tax treaties. They relate to a person's residency status and how tax applies to income and business profits they earn, or tax relief they receive in the other jurisdiction.
Residency versus source
Tax treaties give the source jurisdiction a taxing right over selected types of income, profits or gains, sometimes at limited rates.
Each jurisdiction has the right to tax the income of its own residents under their own domestic laws, so the tax treaty will not always restate this rule.
If the 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'.
Where the jurisdiction of source 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'.
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 jurisdiction may be taxed in the other jurisdiction only under both of the following circumstances:
- if the enterprise carries on business in that other jurisdiction through a permanent establishment, and
- to the extent that the profits are attributable to the permanent establishment.
The tax treaty also allows the jurisdiction of residence to provide tax relief against its own tax if the income has been taxed in the jurisdiction of source. In Australia, we apply the general foreign tax credit provisions of our domestic law or specific exemption provisions where applicable.
Your residency status determines the jurisdiction in which you pay income tax and how much tax you are liable to pay.
Most tax treaties include a 'tie-breaker' test under which a dual resident is deemed to be a resident solely of one of the two jurisdictions for the purposes of taxation.
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.