Explanatory Memorandum
(Circulated by authority of the Treasurer, The Rt. Hon. Phillip Lynch, M.P.)Notes on Articles
AGREEMENT WITH GREECE
As previously noted, this agreement is limited to the taxation of profits from international traffic of airlines of either country.
This article provides for the agreement to apply to the existing income taxes of each country and to any substantially similar taxes subsequently imposed by either country.
This article defines terms used in the agreement. Its main provision is the definition of the phrase "operation of aircraft in international traffic". In effect, this term defines the flights, the income from which is to qualify for the exemptions afforded by the agreement. Its result is that airline profits of an airline of one country will be exempt from tax in the other country except where derived from carriage between places in that other country.
Article 3 : Exemption of profits
Article 3 is the operative provision conferring reciprocal exemptions from tax on income derived from the operation of aircraft in international traffic. It also confirms that income derived by an airline from the operation of aircraft between places in its home country, (and so not falling within the term "operation of aircraft in international traffic") will not be taxed by the other country.
By this article the agreement will enter into force on the fourteenth day after the date on which the Australian and Greek governments have notified each other that everything has been done to give the agreement the force of law in its country. Enactment of this Bill is a necessary prelude to such notification. On entering into force the agreement will have effect in Australia as from 1 March 1972 and in Greece as from 1 April 1972.
The agreement is to continue in effect indefinitely but this article allows either country to give notice of termination to the other on or before 30 June in any calendar year after 1978. In that event, the agreement would cease to be effective as from the time specified in the article.
AGREEMENT WITH BELGIUM
This agreement corresponds closely with other modern comprehensive double taxation agreements to which Australia is a party. Like them, it limits the tax that the country of source may charge on some types of income and reserves to the country of residence the sole right to tax other types. It also contains provisions to the effect that where both countries may levy tax on income the country of residence, if it taxes, is to give credit against its tax for the tax of the country of source or is to allow other comparable relief from double taxation.
This article provides, in effect, that the agreement will apply to persons (which term includes companies) who are residents of either Australia or Belgium.
The situation of persons who are residents of both countries (i.e., dual residents) is dealt with in Article 4.
This article specifies the existing income taxes of each country to which the agreement is to apply. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may be imposed by either country in addition to, or in place of, the existing taxes.
Article 3 : General definitions
This article defines a number of the terms used in the agreement. Definitions of some other terms are contained in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law of the country applying the agreement.
As with Australia's other modern double taxation agreements, "Australia" is defined as including external territories and areas of the continental shelf. By virtue of this definition, Australia retains taxing rights in relation to mineral exploration and mining activities on its continental shelf. The definition also has relevance to Australian taxation of shipping and airline profits under Article 8 of the agreement.
This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residential status is one of the criteria for determining taxing rights, and the provision of relief, under the agreement. Residence according to each country's taxation law provides the basic test. The article provides rules for determining how a person's residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under both countries' domestic laws.
Article 5 : Permanent establishment
Application of various provisions of the agreement (principally Article 7) is dependent upon whether a resident of one country has a "permanent establishment" in the other, and if so, whether income the person derives in the other country is attributable to the "permanent establishment". The definition of the term "permanent establishment" which this article embodies corresponds with definitions of the term in Australia's other double taxation agreements.
The primary meaning of the defined term is stated in paragraph (1) as being a fixed place of business in which the business of the enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with giving examples of what constitutes a "permanent establishment" - such as an office, a factory or a mine - and defining the circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country.
Article 6 : Income from real property
This article provides that income from real property, including royalties and similar payments in respect of the exploitation of mines, quarries or other natural resources may be taxed in the country in which the property is situated. The scope of the term "income from real property" is extended by paragraph (2) of the article to include income from a lease of land and income from any other direct interest in or over land. Paragraph (2) also provides, in effect, that these elements of real property are to be deemed to be situated where the land to which they relate is situated.
Income to which this article applies is specifically excluded from the scope of Article 7 (by paragraph (6) of that article) and is therefore taxable in the country of source regardless of whether or not the recipient has a "permanent establishment" in that country.
This article sets out the general basis of taxation of business profits derived by a resident of one country from sources in the other.
The taxing of these profits depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer.
If, however, a resident of one country carries on trade or business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment.
Article 7 has a practical effect comparable with corresponding articles in Australia's other double taxation agreements. As under those agreements, the article provides an "arm's length" basis for ascertaining the amount of profits fairly attributable to a "permanent establishment".
Paragraph (5) of the article provides for circumstances in which there is insufficient information available to determine the profits of the "permanent establishment" on the basis of arm's length dealing. In such circumstances the provisions of the general income tax law which permit the taxation authority to estimate taxable profits, such as section 136 of the Australian Income Tax Assessment Act, may be applied.
Paragraph (7) empowers each country to continue to apply special provisions in its domestic law relating to the taxation of income from the carrying on of a business of general insurance. Sections 142, 143 and 148 of the Income Tax Assessment Act are the relevant Australian provisions.
Under Belgium's domestic law, the rate of tax applicable to Belgian source profits of non-resident companies is in excess of the rate applicable to profits derived by Belgian resident companies. Paragraph (8) ensures that the profits of a permanent establishment in Belgium of an Australian company will not be subject to Belgian tax at a rate that is in excess of the highest rate applicable to the profits of a Belgian company. Paragraph (9) is a related provision which provides that if Australia imposes any tax on the profits attributable to a permanent establishment in Australia of a Belgian company that is in addition to the Australian tax that would be chargeable on those profits if they were derived by an Australian resident company, the two countries shall endeavour to agree to appropriate amendments to paragraph (8).
Article 8 : Shipping and air transport
Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits received through participation in a pool service, in a joint transport operating organization or in an international operating agency, is reserved to the country of residence of the operator. However, any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. In such cases, the tax in respect of carriage in internal operations shall not exceed 5 per cent of the net amount paid or payable for the carriage. By reason of the definition of "Australia" in Article 3 and the terms of paragraph (4) of Article 8, any shipments by air or sea from a place in Australia to another place in Australia, its continental shelf or external territories are to be treated as forming part of internal traffic.
Article 9 : Associated enterprises
This article authorises the re-allocation of profits between inter-connected enterprises in Australia and Belgium on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.
Paragraph (2) covers the situation where there is insufficient information available to enable proper application of the arm's length basis of determining profits for the purposes of paragraph (1). In effect, the paragraph will authorise the Commissioner of Taxation, in an appropriate case, to apply the provisions of section 136 of the Income Tax Assessment Act. That section provides, under defined conditions, for assessment on the basis of such portion of the total receipts of a business as the Commissioner determines.
Where a re-allocation of profits is effected under paragraph (1) of Article 9, so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. Paragraph (3) of Article 9 requires the other country concerned to make an appropriate adjustment in these circumstances with a view to relieving any such double taxation.
The broad scheme of this article is to limit to 15 per cent of the gross amount of dividends the tax imposed by the country of source on dividends payable by companies resident in that country to shareholders resident in the other country. This is in line with Australia's other comprehensive agreements. Under this article, Australian withholding tax on dividends paid to residents of Belgium will be at the rate of 15 per cent, rather than at the general rate of 30 per cent. Correspondingly, the withholding tax of Belgium on dividends paid to Australian residents will be reduced from the general rate of 20 per cent to 15 per cent.
Paragraph (4) of Article 10 ensures that the country of source will remain free to impose its normal rate of tax where the holding giving rise to the dividends is effectively connected with a "permanent establishment" in that country.
This article requires the country of source generally to limit its tax on interest income derived by residents of the other country to 10 per cent of the gross amount of the interest. The 10 per cent limitation accords with the Australian interest withholding tax rate of 10 per cent. On the other hand, Belgian withholding tax on interest paid to Australian residents will be reduced from the Belgian general rate of 20 per cent to 10 per cent.
By paragraph (4), the 10 per cent limitation does not apply where the person deriving the interest has in the country of source a "permanent establishment" with which the indebtedness giving rise to the interest is effectively connected. The article also contains a general safeguard (paragraph (6)) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 10 per cent limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.
In Australia, gross royalties paid to non-residents, as reduced by allowable expenses, are, in the absence of an agreement, usually taxed by assessment at ordinary rates of tax. In Belgium, patent royalties paid to non-residents are subject to a general withholding tax of 20 per cent of the royalties. This article requires the country of source generally to limit its tax on royalties derived by residents of the other country to 10 per cent of the gross royalties. The 10 per cent limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed.
There are other cases in which the limitation on the tax of the country of source is not to apply in respect of royalties. One is where the asset giving rise to the royalties is effectively connected with a "permanent establishment" which the recipient has in the country of source. The other is where the royalties are paid by a person not independent of the payee. In the latter case the limitation will not apply to any amount of royalty that is in excess of what might be expected to have been agreed upon by independent persons acting at arm's length.
Article 13 - Alienation of property
This article provides, in effect, that income from the alienation of real property may be taxed in the country in which that property is situated. In Australia it will only apply to amounts that are treated as income for taxation purposes, e.g., profits from the sale of Australian real estate purchased for purposes of re-sale at a profit. Real property is defined for the purposes of the article as including a lease of land or other direct interest in or over land and rights to exploit, or to explore for, natural resources. Shares or comparable interests in a company the assets of which consist wholly or principally of direct interests in or over land in one of the countries, or of rights to exploit or explore for natural resources in one of the countries, are also deemed to be real property.
Paragraph (3), which is relevant to features of Belgian law, provides that income derived from the alienation of capital assets of an enterprise shall be taxable only in the country of residence of the enterprise. However, where those assets form part of the business assets of a permanent establishment in the other country the income may be taxed in that other country.
Article 14 : Independent personal services
At present, an individual resident in Australia or in Belgium may be taxed in the other country on remuneration derived from the performance in that other country of professional services or other similar independent activities. This article provides that such remuneration will continue to be subject to tax in the country in which the services are performed if the recipient has a fixed base regularly available in that country for the purposes of performing his or her activities, and the remuneration is attributable to that base. If the tests mentioned are not met the remuneration will be taxed only in the country of residence. Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and will not be covered by this article.
Article 15 : Dependent personal services
This article sets out the basis for taxing remuneration derived by visiting employees. A resident of one country will generally be taxed in the other country on salaries, wages, etc., from an employment where the services are rendered during a visit to the other country but, subject to specified conditions, there is a conventional exemption from this rule for short-term visitors which, where it applies, provides an exemption from the tax of the country being visited.
Paragraph (3) provides that income from an employment exercised on ships or aircraft operated in international traffic may be taxed in the country of residence of the employee.
This article relates to remuneration received by a resident of one country in his capacity as a director of a company which is a resident of the other country. To avoid difficulties in such cases of ascertaining in which country a director's services are performed, and his remuneration is to be taxed, the article provides that directors' fees and similar payments may be taxed in the country of residence of the company. However, where the remuneration is derived by a person as a result of the performance of day-to-day functions of a managerial or technical nature, the remuneration will be taxed in the same way as remuneration derived by visiting employees.
This article provides that income derived by visiting entertainers (including athletes) from their personal activities as such may be taxed by the country in which the activities are exercised, no matter how short their visit to that country.
The article also contains a safeguard against attempts by an entertainer to circumvent its general purpose by, e.g., having fees paid to a separate enterprise which arranges the provision of his services. In such a case, the profits of the enterprise from the provision of the services may be taxed in the country in which the activities of the performer are exercised, whether or not that enterprise has a "permanent establishment" in that country.
Article 18 : Pensions and annuities
This article provides that pensions, other than pensions paid to an individual in respect of government service, and annuities are to be taxed only by the country of residence of the recipient.
Article 19 : Government service
Paragraph (1) of this article provides that remuneration, other than a pension, paid in respect of services rendered to a government (including State and local government) of one of the countries shall be taxed only in that country. However, such remuneration is to be taxable only in the other country if the services are rendered in that country and the recipient is, in broad terms, a citizen of, or ordinarily resident in, that country.
Paragraph (2) provides that any pension paid in respect of services rendered to a government (including State and local government) of one of the countries shall be taxed only in that country. However, such a pension shall be taxable only in the other country if the recipient is a citizen or national of and a resident of that other country.
Paragraph (3) provides, in effect, that the article does not apply where the services are rendered in connection with a trade or business carried on by a government.
Article 20 : Professors and teachers
This article applies in respect of professors and teachers resident in one country who visit the other country for a period of not more than two years for the purpose of advanced study or research or of teaching at an educational institution. In these circumstances, the remuneration of the professor or teacher for his teaching, study or research work is to be exempt from tax in the country visited and will remain taxable in the home country. The exemption provided by the article does not apply to remuneration received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons.
This article applies to students resident in one of the countries who are temporarily present in the other country solely for the purposes of their education. A student meeting these tests will be exempt from the tax of the country visited in respect of payments made to him from abroad for the purposes of his maintenance or education.
Article 22 : Income of a dual resident
This article relates to individuals and companies that are residents both of Australia and of Belgium under the general income tax laws of the two countries.
For the purposes of the agreement, the residential status of such a person is established by application of the rules set out in Article 4, and Article 22 reserves to the country to which the person's residence is allotted the sole right to tax income from sources in that country or from a third country.
Article 23 specifies the source of various classes of income for the purposes of ensuring that Australia is empowered to exercise the taxing rights assigned to it by the agreement over residents of Belgium and that, as the agreement intends, Australia will give double taxation relief in respect of tax levied by Belgium pursuant to equivalent rights assigned to it. The article eliminates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country. The article does not apply for purposes of Belgian tax, for the reason that Belgian domestic law has much the same effect in relation to Belgian tax as this article will have in relation to Australian tax.
Article 24 : Methods of elimination of double taxation
Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax. It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income subject to tax in both countries. Australia's other double taxation agreements provide for a credit basis for the relief of double taxation to be applied by Australia and, usually, the other country. In these cases the country of residence is required to give credit against its tax for tax of the country of source. Where the other country (as the country of residence) is not bound by the agreement to give relief by the credit method, it is required to give other relief, such as by freeing the income from its tax. A similar approach has been adopted in this agreement.
When the Income Tax Assessment Act and the Income Tax (International Agreements) Act (as amended by the present Bill) are read together, the measures that will operate to relieve double taxation of income derived from Belgium by Australian residents are as follows. Australia will allow credit for Belgian tax on dividends derived by individuals from Belgium and, to the extent that Belgium does tax the income, on interest and royalties derived by individuals and companies in respect of which the tax of Belgium is limited to 10 per cent by Articles 11 and 12 or, exceptionally, as in the case of certain interest, to 15 per cent by Article 10.
Section 46 of the Income Tax Assessment Act will continue to free from Australian tax dividends that are derived from Belgium by Australian resident companies. However, should Australia cease to allow Australian resident companies section 46 rebates in respect of dividends received from Belgium, both countries are to enter into negotiations to establish the credit to be allowed by Australia against its tax on the dividends. Other income of Australian residents that is taxed in Belgium will continue to qualify for exemption from Australian tax under section 23(q) of that Act. In these latter cases, as there will be no Australian tax payable, there will be no question of allowance of credits.
For its part, Belgium will include in assessable income, dividends, interest and royalties that are subject to limited Australian tax by the agreement, and will allow its residents a credit at a rate not less than the rate of tax imposed by Australia in respect of those dividends, interest and royalties. In the case of a Belgian company which owns shares in an Australian company that is subject to Australian tax on its profits, dividends paid by the Australian company to the Belgian company will be exempt from Belgian corporate income tax on the same basis as if the two companies had been residents of Belgium. In all other cases, income derived by a Belgian resident from Australia will be exempt from Belgian tax but may be taken into account in determining the amount of tax on the remaining income of the Belgian resident. This is commonly known as the "exemption with progression" method of relief. Belgium may also include in assessable income, and tax, the profits of a permanent establishment in Australia of a Belgian enterprise to the extent that those profits have been freed from Australian tax by reason of the deduction of losses that have also previously been deducted for purposes of Belgian tax from profits of the Belgian enterprise.
Article 25 : Mutual agreement procedure
One of the purposes of this article is to provide for the taxation authorities of the two countries to consult with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case within a three year time limit, and any adjustment agreed may be made notwithstanding any time limits imposed by domestic tax laws of the relevant country.
The other object of the article is to authorise consultation between the taxation authorities of the two countries for the purpose of implementing the agreement and assuring its consistent application.
Article 26 : Exchange of information
This article authorises the exchange between the two taxation authorities of information necessary for the carrying out of the agreement or of domestic laws covering the taxes to which the agreement applies. The restrictions which it contains in relation to the purposes for which this information may be used and the persons to whom it may be disclosed are along the lines of Australia's other double taxation agreements.
This article does not permit the exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process or which would be contrary to public policy.
This article has two purposes. Firstly, it recognises Belgium's right to impose tax, in accordance with its own law, in those cases where a Belgian company either repurchases its own shares or distributes its own assets. Secondly, it ensures that members of diplomatic or consular posts will, under the provisions of the agreement, receive no less favourable treatment than that to which they are entitled in accordance with international law. In Australia, fiscal privileges are conferred on such persons by the Diplomatic (Privileges and Immunities) Act 1967 and Consular (Privileges and Immunities) Act 1972.
This article provides for the entry into force of the agreement on the fifteenth day after the date on which the governments of each country exchange notes through the diplomatic channel notifying each other that the last of such things has been done as is necessary to give the agreement the force of law in both countries. As mentioned earlier in this memorandum, it is proposed that there will be a notification inserted in the Gazette of the day on which the agreement will enter into force.
Once it enters into force the agreement will, in general, have effect for purposes of withholding tax (in Belgium, tax due at source) in both countries as from 1 January in the calendar year immediately following that in which the agreement enters into force. It will have effect in Australia, in respect of tax other than withholding tax, as from 1 July in the calendar year immediately following that in which the agreement enters into force, although where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year beginning on 1 July in which the agreement first has effect, will be the date from which the agreement will take effect. In Belgium, the agreement will have effect in respect of all tax, other than tax due at source, on income of any accounting period beginning on or after 1 January in the calendar year the agreement enters into force.
This article declares that the agreement is to continue in effect indefinitely but either country may give notice of termination on or before 30 June in any calendar year beginning after the expiration of five years from the date of entry into force. In that event, the agreement would cease to be effective in both countries, for withholding tax purposes, from 1 January in the calendar year immediately following that in which notice of termination is given. It would cease to be effective for tax other than withholding tax from the beginning of the income year commencing in that next calendar year in Australia and from the beginning of any accounting period commencing in that next calendar year in Belgium.