Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)PROTOCOL TO THE AGREEMENT WITH THE KINGDOM OF BELGIUM
Australia's existing double taxation agreement with Belgium was signed in 1977, and given the force of law in Australia in 1979. Since that time, three significant developments have taken place in Australia in areas relevant to the operation of the provisions of the 1977 agreement ("the agreement"). The first two developments were the enactment of legislation for a branch profits tax and to introduce the revised Division 13 of the Income Tax Assessment Act dealing with transfer pricing. The third development was the exposure of technical deficiencies in the definition of the term "royalties" in the existing agreement. The protocol will amend the agreement to take account of these three matters and, in so doing, will bring the Belgian agreement into line with Australia's more recently concluded agreements.
Article I - Amendment of Article 7
The amendment proposed by this article - the deletion of paragraphs (8) and (9) of Article 7 of the agreement arises as a result of the introduction in Australia in 1978 of the branch profits tax. 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) of Article 7 of the agreement 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) of Article 7 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) of that article.
The amendments agreed are the deletion of paragraphs (8) and (9) of Article 7, and the addition of paragraph (6) to Article 10 of the agreement which has the effect of allowing both countries to impose the branch profits tax provided for in their respective domestic laws. (See notes on Article 3).
Article II - Amendment of Article 9
This article will amend Article 9 of the agreement by adding to it a new paragraph - paragraph (4). This amendment, which will bring the agreement into line with Australia's more recently negotiated agreements, will ensure that each country retains the right to apply its domestic law transfer pricing provisions - in the case of Australia, the provisions of the revised Division 13 of the Assessment Act - to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, in accordance with the principles of paragraph (1) of Article 9.
Article III - Amendment to Article 10
The amendment proposed by this article is related to that proposed by Article I of the protocol and arises as a result of the introduction in Australia of the branch profits tax. As indicated in the notes on Article I, this article will add paragraph (6) to Article 10 of the agreement to preserve the right of each country to impose the branch profits tax provided for in its domestic law. The paragraph also provides for consultation between the two countries with a view to possible amendments to Article 10 where the branch profits tax provisions in either country's domestic law are substantially varied.
Article IV - Amendment of Article 12
By this article, the definition of the term "royalties", which is contained in paragraph (3) of Article 12 of the agreement, is to be omitted and replaced by a revised definition of the term that will take account of two technical deficiencies revealed by a Victorian Supreme Court decision in the case of Aktiebolaget Volvo v Federal Commissioner of Taxation. Firstly, in the revised definition, the term "royalties" is to be expressed to apply to amounts which are credited, in the same way that it applies to those which are actually paid. Secondly, the revised definition will include amounts paid or credited by a person in return for a forbearance to grant to third persons rights to use property covered by the royalty definition. This change is designed to prevent Australian tax being escaped by arrangements under which, instead of amounts being payable for the exclusive right to use property, it is agreed that payments will be made for an undertaking that rights to use the property will not be granted to anyone else.
Article V - Entry into Force
By this article the protocol will form an integral part of the Belgian agreement and will enter into force on the fifteenth day after the date on which notes are exchanged through the diplomatic channel notifying that the last of such things has been done in Australia and in Belgium as is necessary to give the protocol the force of law in both countries. As mentioned earlier in this memorandum, the protocol will be given the force of law in Australia by new section 11CA that is to be inserted in the Income Tax (International Agreements) Act 1953 by clause 4 of the Bill (see notes on that clause).
Upon entering into force, the protocol will have effect in Australia in relation to any year of income beginning on or after 1 July in the calendar year immediately following that in which the protocol enters into force. In Belgium, the protocol will have effect on income of any accounting period beginning on or after 1 January in the calendar year immediately following that in which the protocol enters into force.