House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 2 - 2006 Australia-Norway tax Convention

Outline of chapter

2.1 Schedule 2 amends the International Tax Agreements Act 1953 . This chapter explains the rules that apply in the 2006 Australia-Norway tax Convention.

Context of amendments

2.2 The Convention between Australia and the Kingdom of Norway for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion (referred to as 'the Convention', however, for the remainder of this chapter, referred to as the 'Norway Convention') was signed in Canberra on 8 August 2006.

2.3 Once in force the Norway Convention will replace the Convention between Australia and the Kingdom of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital , and its associated Protocol, signed in 1982 (the existing Norway treaty).

Summary of new law

Main features of the new Convention

2.4 The main features of the Norway Convention are as follows:

•

Income from real property may be taxed in full by the country in which the property is situated. Income from real property for these purposes includes natural resource royalties [ Article 6 ].

•

Business profits (including income derived from furnishing of services) are generally to be taxed only in the country of residence of the recipient unless they are derived by a resident of one country through a branch or other prescribed permanent establishment in the other country, in which case that other country may tax the profits. These rules also apply to business trusts [ Article 7 ].

•

Profits derived from the operation of ships and aircraft in international traffic are generally to be taxed only in the country of residence of the operator [ Article 8 ].

•

Profits of associated enterprises may be taxed on the basis of dealings at arm's length [ Article 9 ].

•

Dividends, interest and royalties may generally be taxed in both countries, but there are limits on the tax that the country in which the dividend, interest or royalty is sourced may charge on such income flowing to residents of the other country who are the beneficial owners of the income [ Articles 10 to 12 ].

•

In the case of dividends:

-

no source country tax is payable on intercorporate dividends where the dividend recipient is a company that holds directly at least 80 per cent of the voting power of the company paying the dividend, subject to certain conditions [ Article 10, paragraph 3 ];

-

a 5 per cent rate limit applies to other intercorporate dividends where the dividend recipient is a company that holds directly at least 10 per cent of the voting power of the company paying the dividend [ Article 10, subparagraph 2(a )]; and

-

a 15 per cent limitation applies to all other dividends [ Article 10, subparagraph 2(b )].

•

The dividend rate limits apply to both franked and unfranked dividends.

•

Source country taxation on interest is limited to 10 per cent [ Article 11, paragraph 2 ]. However, exemptions from source country taxation have been provided for interest paid to:

-

certain government bodies [ Article 11, subparagraph 3(a )]; and

-

financial institutions [ Article 11, subparagraph 3(b )].

•

The rate limit on source country taxation of royalties is 5 per cent [ Article 12, paragraph 2 ].

•

The definition of royalty has also been amended to include payments or credits in respect of the use of, or right to use, some or all of the radiofrequency spectrum specified in a spectrum licence and to exclude payments or credits in respect of the use of, or right to use, industrial, commercial or scientific equipment [ Article 12, paragraph 3 ].

•

Income, profits or gains from the alienation of real property may be taxed in full by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and shares or other interests in land rich entities (which may be taxed in full by the country in which the property is situated), all other capital gains will be taxable only in the country of residence [ Article 13 ].

•

Income from employment, that is, employee's remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited [ Article 14 ].

•

Directors' remuneration may be taxed in the country in which the company of which the person is a director is resident for tax purposes [ Article 15 ].

•

Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed. However, if the visit is mainly supported by public funds of the other country, the income is taxable only in the country of which the person is a resident [ Article 16 ].

•

Pensions and annuities will generally be taxed only in the country of residence of the recipient. Some public service pensions may be taxed only by the paying country. [ Articles 17 and 18 ].

•

Income from government service (including government service pensions) will generally be taxed only in the country that pays the remuneration. However, the remuneration shall only be taxed in the other country where the services are rendered in that other country by a resident of that other country who is a national of that other country or did not become a resident of that other country for the purpose of rendering the services [ Article 18 ].

•

Payments made from abroad to visiting students for the purposes of their maintenance or education will be exempt from tax in the country visited [ Article 19 ].

•

Income (including certain employment income) from offshore activities relating to exploration or exploitation of natural resources will generally be taxed by the country in which the activities are performed. However, where the activities are carried on during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited [ Article 20 ].

•

Other income (ie, income not dealt with by other Articles) derived by a resident of one country from sources in the other country may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief [ Article 21 ].

•

Source rules in the Norway Convention prescribe for domestic law and treaty purposes, the source of income or profits derived by a resident of one country which may be taxed in the other country [ Article 22 ].

•

Double taxation relief for income which, under the Norway Convention, may be taxed by both countries, is required to be provided by the country of which the taxpayer is a resident under the terms of the Convention as follows:

-

in Australia, by allowing a credit for the Norwegian tax against Australian tax payable on income derived by a resident of Australia from sources in Norway [ Article 23, paragraph 1 ]; and

-

in Norway, by allowing a deduction against Norwegian tax for the Australian tax paid on income derived by a resident of Norway from sources in Australia [ Article 23, paragraph 2 ].

•

In the case of Australia, effect will be given to the double tax relief obligations arising under the Norway Convention by application of the general foreign tax credit provisions of Australia's domestic law, or the relevant exemption provisions of that law where applicable.

•

Rules in the new treaty will protect nationals from tax discrimination in the other country and will give them private rights of appeal. However, the Article does not preclude either country from applying its anti-avoidance rules (including thin capitalisation, transfer pricing and controlled foreign companies measures), rebates or credits for dividends paid by resident companies, research and development concessions, consolidation rules or capital gains deferral rules [ Article 24 ].

•

Consultation and exchange of information between the two taxation authorities is authorised by the Norway Convention. The Convention authorises and requires Australia to exchange information where the information relates to taxes administered by the Commissioner of Taxation (Commissioner) [ Articles 25 and 26 ].

•

The Norway Convention ensures the integrity of the tax system by providing for mutual assistance in the collection of tax debts. This will allow the Australian Taxation Office, in certain circumstances, to seek assistance from the Norwegian tax authorities to collect Australian taxation debts [ Article 27 ].

Comparison of key features of new law and current law

Detailed explanation of new law

Article 1 - Persons Covered

Scope

2.5 This Article establishes the scope of the application of the Norway Convention by providing for it to apply to persons (defined to include individuals, companies and any other body of persons) who are residents of one or both of the countries. It generally precludes extra-territorial application of the treaty. [ Article 1 ]

2.6 The Norway Convention also applies to third country residents in relation to the Non-discrimination Article (Article 24) in its application to nationals of one of the treaty countries, the Mutual Agreement Procedure Article (Article 25) so far as the person is a national of one of the treaty countries and in relation to the exchange of information under the Exchange of Information Article (Article 26).

2.7 The application of the Norway Convention to persons who are dual residents (ie, residents of both countries) is dealt with in Article 4 ( Residence ).

Article 2 - Taxes Covered

Taxes covered

2.8 Article 2 specifies the existing taxes of each country to which the Norway Convention applies. These are, in the case of Australia:

•

the Australian income tax (including that imposed on capital gains); and

•

the resource rent tax in respect of offshore petroleum projects.

2.9 The new treaty extends the operation of the treaty to Australian tax on capital gains, which are not covered in the existing Norway treaty.

2.10 Although Australia considers the resource rent tax to be encompassed by the term 'income tax', a specific reference to this has been included in the Norway Convention to put beyond doubt that it is a tax covered. [ Article 2, sub-subparagraph 1(a )( ii )]

2.11 As with the existing Norway treaty, the Norway Convention generally does not cover Australia's goods and services tax (GST), wool tax and levies, customs duties, state taxes and duties and estate tax and duties. However, federal taxes administered by the Commissioner are covered for the purposes of the Exchange of Information and Assistance in the Collection of Taxes Articles while all taxes are covered for the purposes of the Non-discrimination Article. [ Article 2, paragraphs 3 and 4 ]

2.12 It is specifically stated in paragraphs 1 and 2 of this Article that the Norway Convention applies only to taxes imposed under the federal law of Australia. This is to ensure that, except with respect to non-discrimination, the Norway Convention does not bind Australian states and territories and applies only to federal taxes. [ Article 2, subparagraph 1(a ) and paragraphs 2 and 3 ]

2.13 For Norway, the tax treaty applies to:

•

the tax on general income;

•

the national tax on personal income;

•

the special tax on petroleum income;

•

the resource rent tax on income from production of hydro-electric power;

•

the withholding tax on dividends; and

•

the tax on remuneration to non-resident artistes, etc.

[ Article 2, subparagraph 1(b )]

Identical or substantially similar taxes

2.14 The application of the Norway Convention will be automatically extended to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, the existing taxes. The competent authorities (ie, the Commissioner in Australia and the Minister for Finance or an authorised representative of the Minister in Norway, or their authorised representatives) are required to notify each other in the event of a significant change in the taxation law of the respective countries. [ Article 2, paragraph 2 ]

Special provisions

2.15 Paragraphs 3 and 4 specify the taxes to which Article 24 ( Non-discrimination ), Article 26 ( Exchange of Information ) and Article 27 ( Assistance in the Collection of Taxes ) will apply. The taxes to which these Articles apply are:

•

Article 24, all taxes including sub-national taxes such as those imposed by the Australian states or local governments [ Article 2, paragraph 3 ].

•

Articles 26 and 27, in the case of Australia, all federal taxes administered by the Commissioner, and in the case of Norway, all taxes [ Article 2, paragraph 4 ].

Article 3 - General Definitions

Definition of Australia

2.16 As with Australia's other modern tax treaties, 'Australia' is defined to include certain external territories and areas of the continental shelf. By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by non-residents on the seabed and subsoil of the relevant continental shelf areas (under section 6AA of the Income Tax Assessment Act 1936 (ITAA 1936), certain sea installations and offshore areas are to be treated as part of Australia). [ Article 3, subparagraph 1(a )]

Definition of Norway

2.17 For all practical purposes the definition remains unchanged from that in the existing Norway treaty. 'Norway' is defined to include the area over which Norway may exercise rights with respect to the seabed and subsoil and their natural resources under international law, but excludes the territories of Svalbard and Jan Mayen, as well as the Norwegian dependencies 'biland'. [ Article 3, subparagraph 1(b )]

Definition of company

2.18 The definition of 'company' in the Norway Convention accords with Australia's tax treaty practice.

2.19 The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships (limited liability partnerships) as companies for income tax purposes. These trusts and partnerships are included as companies for the purposes of the tax treaty. [ Article 3, subparagraph 1(g )]

Definition of international traffic

2.20 In this Convention, this term is of relevance for taxation of profits from shipping and air transport operations (Article 8 ( Shipping and Air Transport )), income, profits or gains from the alienation of ships and aircraft (paragraph 3 of Article 13 ( Alienation of Property )) and wages of crew (paragraphs 3 and 4 of Article 14 ( Income from Employment )).

2.21 The definition of 'international traffic', covers international transport by a ship or aircraft operated by an enterprise of one country, as well as domestic transport within that country. However, it does not include transport where the ship or aircraft is operated solely between places in the other country, that is, where the place of departure and the place of arrival of the ship or aircraft are both in that other country, irrespective of whether any part of the transport occurs in international waters. For example, a 'voyage to nowhere' which begins and ends in Sydney on a ship operated by a Norwegian enterprise would not come within the definition of international traffic, even if the ship travels through international waters in the course of the cruise. [ Article 3, subparagraph 1(k )]

Definition of national

2.22 The Norway Convention defines 'national' by reference to an individual's nationality or citizenship. A company will be a national if the company derives its status as a company from the laws of one of the countries, that is where it is incorporated. [ Article 3, subparagraph 1(l )]

2.23 The concept of nationality is used in subparagraph (b) of paragraph (3) of Article 4 ( Residence ), Article 18 ( Government Service ) and Article 24 ( Non-discrimination ).

Definition of person

2.24 The definition of 'person' includes individuals, companies and any other body of persons. This includes a partnership (as a body of persons). [ Article 3, subparagraph 1(m )]

Definition of tax

2.25 For the purposes of the Norway Convention, the term 'tax' does not include any amount of penalty or interest imposed under the respective domestic tax law of the two countries. This is important in determining a taxpayer's entitlement to a foreign tax credit under the double tax relief provisions of Article 23 ( Methods of Elimination of Double Taxation ) of the Convention.

2.26 In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of Norway with respect to income that Norway is entitled to tax under the Norway Convention, would not be a creditable 'Norwegian tax' for the purposes of paragraph 1 of Article 23 ( Methods of Elimination of Double Taxation ). This is in keeping with the meaning of 'foreign tax' in subsection 6AB(2) of the ITAA 1936. Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under paragraph 1 of Article 23 (pursuant to Division 18 of Part III of the ITAA 1936 - Credits in respect of foreign tax). [ Article 3, subparagraph 1(n )]

Definition of 'recognised stock exchange'

2.27 The term is used in relation to setting the appropriate withholding tax limits in Article 10 ( Dividends ). No withholding tax will apply to a dividend paid from an Australian resident company to a Norwegian resident company which holds 80 per cent of the voting power of the paying company where its principal class of shares is listed and regularly traded on a recognised stock exchange.

2.28 The stock exchanges that are recognised are the Australian Securities Exchange and any other Australian stock exchange recognised as such under Australian law, the Oslo Stock Exchange and any other Norwegian stock exchange recognised as such under Norwegian law and any other stock exchanges agreed to by the competent authorities under the Norway Convention. [ Article 3, subparagraph 1(o )]

Terms not specifically defined

2.29 Where a term is not specifically defined within this Convention, that term (unless used in a context that requires otherwise) is to be taken to have the same interpretative meaning as it has under the domestic taxation law of the country applying the Norway Convention at the time of its application. In that case the term's meaning under the taxation law of the country will have precedence over the meaning it may have under other domestic laws.

2.30 The same term may have a differing meaning and a varied scope within different Acts relating to specific taxation measures. For example, GST definitions are sometimes broader than income tax definitions. The definition more specific to the type of tax should be applied in such cases. For example, where the matter subject to interpretation is an income tax matter, but definitions exist in either the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997) and the A New Tax System (Goods and Services Tax) Act 1999 (GST Act ), the income tax definition would be the relevant definition to be applied.

2.31 If a term is not defined in the Norway Convention, but has an internationally understood meaning in tax treaties and a meaning under the domestic law, the context would normally require that the international meaning be applied. [ Article 3, paragraph 2 ]

Article 4 - Residence

Residential status

2.32 This Article sets out the basis by which the residential status of a person is to be determined for the purposes of the Norway Convention. Residential status is one of the criteria for determining each country's taxing rights and is a necessary condition for the provision of relief under the Convention. In the case of Australia, the concept of who is a resident is determined according to Australia's taxation law. In the case of Norway, residence is determined by reference to criteria such as domicile, residence, place of management and other similar criteria. [ Article 4, paragraph 1 ]

Residency of Governments and tax-exempt entities

2.33 The Article specifically provides that the government, a political subdivision or a local authority of a country are residents for the purposes of the Norway Convention. This means that the Federal Government, the State Governments and local councils will be residents for the purpose of the Convention. This does not necessarily mean that income, profits or gains derived by these bodies from sources in Norway will be subject to tax in Norway as sovereign immunity principles may apply. [ Article 4, paragraph 1 ]

2.34 The OECD Model Tax Convention on Income and on Capital (OECD Model) Commentary makes it clear that it has always been the understanding of member countries that the OECD Model applied to treat governments as residents even in the absence of an express reference to that effect.

Special residency rules

2.35 Paragraph 2 specifies that a person is not a resident of a country (for purposes of the Norway Convention) if that person is liable to tax in that State in respect only of income from sources in that State.

2.36 This paragraph deals with a person who may be considered to be a resident of a State according to its domestic laws but is only liable to taxation on income from sources in that State, such as, foreign diplomatic and consular staff. In the Australian context, this means that Norfolk Island residents who are generally subject to Australian tax on Australian source income only, will not be residents of Australia for the purposes of the Norway Convention. Accordingly, Norway will not have to forgo tax in accordance with the Norway Convention on income derived by residents of Norfolk Island from sources in Norway (which will not be subject to Australian tax). [ Article 4, paragraph 2 ]

Dual residents

2.37 This Article also includes a set of tie-breaker rules for determining how residency is to be allocated to one or other of the countries for the purposes of the Norway Convention if a taxpayer, whether an individual, a company or other taxable unit, qualifies as a dual resident, that is, as a resident of both countries in accordance with paragraph 1 of the Article.

2.38 The tie-breaker rules for individuals apply certain tests, in a descending hierarchy, for determining the residential status (for the purposes of the Norway Convention) of an individual who is a resident of both countries. These rules, in order of application, are:

•

If the individual has a permanent home available to them in only one of the countries, the person is deemed to be a resident solely of that country for the purposes of the Norway Convention.

•

If the individual has a permanent home available in both countries or in neither, then the person's residential status takes into account the person's personal or economic relations with Australia and Norway, and the person is deemed for the purposes of the Convention to be a resident only of the country with which the person has the closer personal and economic relations.

•

Residency will be determined on the basis of an individual's citizenship or nationality where the foregoing test is not determinative.

•

If the individual is a national (as defined) of both countries or of neither, the competent authority will endeavour to resolve the question of treaty residence by mutual agreement.

[ Article 4, paragraph 3 ]

2.39 A dual resident remains, however, in relation to Australia, a resident for the purposes of Australian domestic law. Accordingly that person remains liable to tax in Australia as a resident, insofar as the Norway Convention allows.

2.40 Where a non-individual (such as a body corporate) is a resident of both countries in accordance with paragraph 1, the entity will be deemed for the purposes of the Norway Convention to be a resident of the country in which its place of effective management is situated. [ Article 4, paragraph 4 ]

Limitation of relief

2.41 The treaty provides that where an individual is a temporary resident of a country and is, for that reason, exempt from tax in that country on certain income or gains in that country, then the other country will not be required to provide any relief specified in the treaty in respect of such income or gains. [ Article 4, paragraph 5 ]

Article 5 - Permanent Establishment

Role and definition

2.42 The application of various provisions of the Norway Convention (principally Article 7 ( Business Profits )) is dependent upon whether a person who is a resident of one country carries on business through a permanent establishment in the other country, and if so, whether income derived by that person is attributable to, or assets of that person are effectively connected with, that permanent establishment.

2.43 The definition of the term 'permanent establishment' in this Article corresponds generally with definitions of the term in Australia's more recent tax treaties. The term also fully encompasses the concept of 'fixed base', which is used in the existing Norway treaty in a separate Article dealing with independent personal services. In this regard the following notes reflect agreement reached during negotiation of the Norway Convention:

'In relation to Article 5 Permanent Establishment , and Article 7 Business Profits , it was agreed that 'permanent establishment' as defined fully encompasses the concept of a 'fixed base' previously used in Article 14 Independent Personal Services of the existing Norway treaty.'

As such services will now be dealt with under Article 7 ( Business Profits ), it is intended that places that constitute a fixed base for purposes of the existing Norway treaty would come within the meaning of permanent establishment for purposes of the new treaty.

Meaning of permanent establishment

2.44 The primary meaning of permanent establishment is expressed as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. To be a permanent establishment within the primary meaning of that term, the following requirements must be met:

•

there must be a place of business;

•

the place of business must be fixed (both in terms of physical location and in terms of time); and

•

the business of the enterprise must be carried on through this fixed place.

[ Article 5, paragraph 1 ]

2.45 Other paragraphs of this Article elaborate on the meaning of the term by giving examples (by no means intended to be exhaustive) of what may constitute a permanent establishment - for example:

•

an office;

•

a factory; or

•

an agricultural property.

2.46 Consistent with Australia's modern treaty practice, the definition also extends to places relating to the exploitation of and exploration for natural resources.

2.47 As paragraph 2 of this Article is subordinate to paragraph 1, the examples listed will only constitute a permanent establishment if the primary definition in paragraph 1 is satisfied. [ Article 5, paragraph 2 ]

Agricultural, pastoral or forestry activities

2.48 Most of Australia's tax treaties include as a permanent establishment an agricultural, pastoral or forestry property. This reflects Australia's policy of retaining taxing rights over exploitation of Australian land for the purposes of primary production. This approach ensures that the arm's length profits test provided for in Article 7 ( Business Profits ) applies to the determination of profits derived from these activities. This position is also reflected in this Convention. [ Article 5, subparagraph 2(g )]

Deemed permanent establishment

Building site or construction or installation project

2.49 Under paragraph 3, an enterprise is deemed to have a permanent establishment and to be carrying on business through that permanent establishment in a country if it has a building site or construction or installation project in that country which exists for more than six months. [ Article 5, subparagraph 3(a )]

Supervisory and consultancy activities

2.50 Supervisory and consultancy activities carried on for more than six months in connection with a building site or a construction or installation project are deemed to constitute a permanent establishment. This provision broadly aligns with Australia's reservation to Article 5 ( Permanent Establishment ) of the OECD Model.

2.51 The term 'building site or construction or installation project' includes not only the construction of buildings but also the construction of roads, bridges or canals, the renovation (involving more than mere maintenance or redecoration) of buildings, roads, bridges or canals, the laying of pipelines and excavating and dredging. Planning and supervision are considered part of the building site if carried out by the construction contractor. However, planning and supervision carried out by another unassociated enterprise will not be taken into account in determining whether the construction contractor has a permanent establishment in Australia. [ Article 5, subparagraph 3(a )]

Anti-avoidance provision

2.52 Given that subparagraph 3(a) contains certain time-frames, an anti avoidance rule is included to ensure that where associated enterprises carry on substantially the same activities, the periods will be aggregated in determining whether the enterprises have a permanent establishment in the country in which the activities are being carried on. Activities will be regarded as connected where, for example, different stages of a single project are carried out by different subsidiaries within a group of companies.

2.53 Paragraph 4 is an anti-avoidance measure aimed at counteracting contract splitting for the purposes of avoiding the application of the permanent establishment rules.

2.54 The Norway Convention provides that an enterprise shall be deemed to be associated with another enterprise if one enterprise is controlled directly or indirectly by the other or if both are controlled directly or indirectly by a third person or persons. It also provides that a period of concurrent activities by such associated enterprises is only counted as one period for aggregation purposes. [ Article 5, paragraph 4 ]

Furnishing of services

2.55 An enterprise will be deemed to have a permanent establishment where it undertakes service activities, including the provision of consultancy services, where those activities continue (for the same or a connected project) within a country for a period or periods aggregating more than six months within any 12 month period. [ Article 5, subparagraph 3(b )]

Substantial equipment

2.56 Under subparagraph 3(c), an enterprise shall be deemed to have a permanent establishment if it has substantial equipment in a country for rental or other purposes for longer than six months, unless the equipment is leased under a 'hire-purchase' agreement. Under Australian law, the lessee under a 'hire-purchase' agreement (a lease accompanied by certain lessee purchase options or rights) is broadly treated for tax purposes as the owner of the leased property.

2.57 This provision reflects Australia's reservation to the OECD Model concerning the use of substantial equipment. Australia's experience is that the permanent establishment provision in the OECD Model may be inadequate to deal with high value mobile activities.

2.58 The meaning of the term 'substantial' depends on the relevant facts and circumstances of each individual case. However, some examples of substantial equipment would include:

•

large industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction;

•

manufacturing or processing equipment used in a factory;

•

oil and drilling rigs, platforms and other structures used in the petroleum/mining industry; and

•

grain harvesters and other large agricultural machinery.

2.59 For the purposes of the Norway Convention the enterprise is deemed to carry on business through the substantial equipment permanent establishment. [ Article 5, subparagraph 3(c )]

Manufacturing or processing on behalf of others

2.60 Subparagraph 3(d) is consistent with another of Australia's reservations to the OECD Model. It deals with situations where a person acts on behalf of another in manufacturing or processing that other person's goods. An example is the situation where a mineral plant refines minerals at cost, so that the plant operations produce no Australian profits. Title to the refined product remains with the mining consortium and profits on sale are realised mainly outside of Australia.

2.61 Subparagraph 3(d) deems such a plant to be a permanent establishment because the manufacturing or processing activity (which gives the processed minerals their real value) is conducted in Australia, and therefore Australia should have taxing rights over the business profits arising from the sale of the processed minerals to the extent that they are attributable to the processing activity carried on in Australia. This subparagraph prevents an enterprise which carries on substantial manufacturing or processing activities in a country through an intermediary from claiming that it does not have a permanent establishment in that country.

2.62 This subparagraph is in the existing Norway treaty. The inclusion of this subparagraph is insisted upon by Australia in its tax treaties and is consistent with Australia's policy of retaining taxing rights over profits from manufacturing or processing on behalf of others including, importantly, in the exploitation of Australia's mineral resources. [ Article 5, subparagraph 3(d )]

Preparatory and auxiliary activities

2.63 Certain activities do not generally give rise to a permanent establishment (eg, the use of facilities solely for storage, display or delivery).

2.64 Generally these activities are of a preparatory or auxiliary character and are unlikely to give rise to substantial profits. The necessary economic link between the activities of the enterprise and the country in which the activities are carried on does not exist in these circumstances.

2.65 Unlike the OECD Model, which provides that the listed activities are deemed not to constitute a permanent establishment, the Norway Convention provides that an enterprise will not be deemed to have a permanent establishment merely by reason of such activities. This is to prevent the situation where enterprises structure their business so that most of their activities fall within the exceptions when, viewed as a whole, the activities ought to be regarded as a permanent establishment.

2.66 Another feature consistent with Australia's tax treaty practice is that subparagraph 4(f) of Article 5 ( Permanent Establishment ) of the OECD Model - dealing with combinations of the activities of the kind referred to in subparagraphs 5(a) to 5(e) of this treaty - is not included. Australia does not consider that an enterprise undertaking multiple functions of the kind indicated in subparagraphs 5(a) to 5(e) would generally be regarded as only engaged in preparatory or auxiliary activities. [ Article 5, paragraph 5 ]

Dependent agents

2.67 Paragraph 6 reflects Australia's tax treaty practice in relation to a person who acts on behalf of an enterprise of another country of deeming that person to constitute a permanent establishment if that person has and habitually exercises an authority to conclude contracts on behalf of the enterprise.

2.68 Consideration ought to be given to all the relevant facts and circumstances in determining whether a person has authority or not to conclude contracts. In this regard the following notes reflect agreement reached during negotiation of the Norway Convention with regard to this provision:

'With respect to paragraph 6 of Article 5 Permanent Establishment , it was agreed that a person who substantially negotiates the essential parts of a contract on behalf of an enterprise will be regarded as exercising an authority to conclude contracts on behalf of that enterprise within the meaning of this provision, even if the contract is subject to final approval or formal signature by another person.'

2.69 Activities of a dependent agent will not give rise to a permanent establishment where that agent's activities are limited to the preparatory and auxiliary activities mentioned in paragraph 5. [ Article 5, paragraph 6 ]

Independent agents

2.70 Business carried on through an independent agent will not, of itself, give rise to a permanent establishment, provided that the independent agent is acting in the ordinary course of that agent's business as such an agent. [ Article 5, paragraph 7 ]

Subsidiary companies

2.71 Generally, a subsidiary company will not be a permanent establishment of its parent company. A subsidiary, being a separate legal entity, would not usually be carrying on the business of the parent company but rather its own business activities. However, a subsidiary company gives rise to a permanent establishment if the subsidiary permits the parent company to operate from its premises such that the tests in paragraph 1 of Article 5 are met, or acts as an agent of the parent company such that a dependent agent permanent establishment is constituted. [ Article 5, paragraph 8 ]

Other Articles

2.72 The principles set down in this Article are also to be applied in determining whether a permanent establishment exists in a third country or whether an enterprise of a third country has a permanent establishment in Australia (or Norway) when applying the source rule contained in:

•

paragraph 7 of Article 11 ( Interest ); and

•

paragraph 5 of Article 12 ( Royalties ).

[ Article 5, paragraph 9 ]

Article 6 - Income from Real Property

Where income from real property is taxable

2.73 This Article provides that the income of a resident of one country from real property may be taxed by the country in which the real property is situated. Thus, income from real property in Australia will be subject to Australian tax laws. [ Article 6, paragraph 1 ]

Definition

2.74 Income from 'real property' (which is primarily defined as having the meaning which it has under the domestic law of the country where the property is situated) also extends, in the case of Australia, to income from:

•

the direct use, letting or use of any form of real property, a lease of land and any other interest in or over land (including exploration and mining rights); and

•

royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.

2.75 In the case of Norway, the definition generally follows the OECD Model definition of 'immovable property' and includes:

•

property accessory to real property;

•

rights to which the provisions of the general law respecting landed property apply including direct use, letting or any other use of such property;

•

usufruct of real property (generally, a right to use property without degrading it and to retain any profits derived from it); and

•

royalties and other payments relating to the exploitation of mines or quarries or other natural resources, or rights in relation thereto.

2.76 Ships and aircraft are excluded from the definition of real property. Therefore this Article does cover income from their use. [ Article 6, paragraph 2 ]

Deemed situs

2.77 Under Australian law the place where an interest in land, such as a lease, is situated (situs) is not necessarily where the underlying property is situated. This paragraph puts the situation of the interest or right beyond doubt by deeming the situs to be where the underlying real property over which the lease or right is granted is situated or where any exploration may take place. [ Article 6, paragraph 3 ]

Real property of an enterprise

2.78 Paragraph 5 extends the application of this Article to income derived from the use or exploitation of real property of an enterprise.

2.79 Accordingly, this Article (when read with Article 7 ( Business Profits )) ensures that the country in which the real property is situated may impose tax on the income derived from that property by an enterprise of the other country, irrespective of whether or not that income is attributable to a permanent establishment of such an enterprise situated in the first-mentioned country. [ Article 6, paragraph 5 ]

Article 7 - Business Profits

2.80 This Article is concerned with the taxation by one country of business profits derived by an enterprise that is a resident of the other country.

2.81 The taxing of these profits depends on whether they are attributable to the carrying on of a business through a permanent establishment in that country. If a resident of one country carries on business through a permanent establishment (as defined in Article 5 ( Permanent Establishment )) in the other country, the country in which the permanent establishment is situated may tax the profits of the enterprise that are attributable to that permanent establishment. [ Article 7, paragraph 1 ]

2.82 If an enterprise which is a resident of one country derives business profits in the other country other than profits attributable to a permanent establishment in that other country, the general principle of this Article is that the enterprise will not be liable to tax in the other country on such business profits (except where paragraph 7 of this Article applies - see the explanation in paragraphs 2.88 and 2.89).

Determination of business profits

2.83 Profits of a permanent establishment are to be determined for the purposes of this Article on the basis of arm's length dealings. The provisions in the Norway Convention correspond to international practice and the comparable provisions in Australia's other tax treaties. [ Article 7, paragraphs 2 and 3 ]

2.84 In respect of paragraph 3, no deductions are allowed in respect of expenses which would not be deductible if the permanent establishment were an independent enterprise which incurred the expense. [ Article 7, paragraph 3 ]

2.85 No profits are to be attributed to a permanent establishment merely because it purchases goods or merchandise for the enterprise. Accordingly, profits of a permanent establishment will not be increased by adding to them any profits attributable to the purchasing activities undertaken for the head office. It follows, of course, that any expenses incurred by the permanent establishment in respect of those purchasing activities will not be deductible in determining the taxable profits of the permanent establishment. [ Article 7, paragraph 5 ]

Inadequate information

2.86 The domestic law of the country in which the permanent establishment is situated (eg, Australia's Division 13 of Part III of the ITAA 1936) may be applied to determine the tax liability of a person, consistently with the principles of the Article. This is of particular relevance where, due to inadequate information, the correct amount of profits attributable on the arm's length principle basis to a permanent establishment cannot be determined, or can only be ascertained with extreme difficulty. This is of particular relevance, where there is no data available or the available data is not of sufficient quality to rely on the traditional transaction methods for the attribution of arm's length profits. Paragraph 4 explicitly recognises the right of each country to apply its domestic law in these circumstances. This is consistent with Australia's reservation to Article 7 ( Business Profits ) of the OECD Model. [ Article 7, paragraph 4 ]

Method of determining profits attributed to a permanent establishment

2.87 This paragraph follows the OECD Model and has been inserted at the request of Norway to lay down clearly in the treaty that a method of allocation once used should not be changed merely because in a particular year a more favourable result is produced under a different method. It also provides assurances of continuous and consistent tax treatment for business dealings through branches between the two countries, unless there is good and sufficient reason to change. [ Article 7, paragraph 6 ]

Profits dealt with under other Articles

2.88 Where income or gains are specifically dealt with under other Articles of the Norway Convention, the effect of those particular Articles is not overridden by this Article.

2.89 This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other Articles of the Norway Convention (eg, Article 8 ( Shipping and Air Transport ), Article 10 ( Dividends ), Article 11 ( Interest ), Article 12 ( Royalties ) and Article 13 ( Alienation of Property )) are to be treated in accordance with the terms of those Articles (except where otherwise provided, for example, by paragraph 5 of Article 10 ( Dividends ) where the asset in respect of which the income is paid is effectively connected with a permanent establishment). [ Article 7, paragraph 7 ]

Insurance with non-residents

2.90 Each country has the right to continue to apply any provisions in its domestic law relating to the taxation of income from insurance, other than life insurance. However, if the relevant law in force in either country at the date of signature of the treaty is subsequently varied (otherwise than in minor respects so as not to affect its general character), the countries must consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate. An effect of this paragraph is to preserve, in the case of Australia, the application of Division 15 of Part III of the ITAA 1936 (Insurance with Non-residents). This is consistent with Australia's reservation to Article 7 ( Business Profits ) of the OECD Model. [ Article 7, paragraph 8 ]

Trust beneficiaries

2.91 The principles of this Article will apply to profits which under the Norway Convention fall to be taxed under this Article and which are derived by a resident of one of the countries (directly or through one or more interposed trust estates) as a beneficiary of a trust estate other than a trust estate which is treated as a company for tax purposes. [ Article 7, paragraph 9 ]

2.92 In accordance with this provision, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of Norway is beneficially entitled under the trust estate. Article 7 paragraph 9 ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5 ( Permanent Establishment ), the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business. The principles of this paragraph will also apply where relevant to other Articles of the Norway Convention, such as Article 13 ( Alienation of Property ) in its application to income profits or gains arising from the alienation of the assets of a permanent establishment or the permanent establishment itself.

Article 8 - Shipping and Air Transport

Profits from international traffic

2.93 The main effect of this Article is that the right to tax profits from the operation of ships or aircraft in international traffic, including a share of profits attributable to participation in a pool, a joint business, an international operating agency or the Norwegian partner of the air consortium Scandinavian Airline System (SAS), is generally reserved to the country in which the operator is a resident for tax purposes. [ Article 8, paragraphs 1, 3 and 5 ]

2.94 The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic. However, as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to facilitate, or support their international operations. Consistent with the 2005 OECD Model Commentary on Article 8, paragraph 1 also covers profits from activities directly connected with such operations as well as profits from activities which are not directly connected with the operation of the enterprise's ships or aircraft in international traffic but which are ancillary to such operation.

Internal traffic

2.95 Paragraph 2 reflects Australia's treaty policy of reserving to the source country the right to tax profits from internal traffic and profits from other coastal and continental shelf activities, including non-transport shipping and aircraft activities, within its own waters and airspace. Profits derived directly or indirectly by a Norwegian enterprise from the operation of ships or aircraft, to the extent that they relate to operations confined solely to places in Australia, may thus be taxed in Australia. [ Article 8, paragraph 2 ]

2.96 Australia's taxing rights are specifically preserved over profits from the carriage by ships or aircraft of passengers or cargo (including mail) where the passenger or cargo is shipped and discharged in Australia. [ Article 8, paragraph 4 ]

Example 2.1

A ship operated by a Norwegian enterprise, in the course of an international voyage from Bergen to Melbourne, makes a stop in Perth to pick up cargo. Profits derived from the transport of the goods loaded in Perth and discharged in Melbourne would be profits from operations confined solely to places in Australia. Australia would therefore have the right to tax the profits relating to such transport. Five per cent of the amount paid in respect of the transport of those goods would be deemed to be taxable income of the operator for Australian tax purposes pursuant to Division 12 of Part III of the ITAA 1936.

Example 2.2

A Norwegian enterprise operates sightseeing flights to observe whales in the Southern Ocean. Passengers board the aircraft in Hobart and disembark at the same airport later on the same day. These operations would be regarded as operations confined solely to places in Australia, notwithstanding that the aircraft passes through international airspace. Australia would therefore have the right to tax the profits relating to the carriage of these passengers.

2.97 Operations involving the use of ships or aircraft, such as haulage, survey or dredging activities, or other activities that are undertaken in Australia are also regarded as operations confined solely to places in Australia.

2.98 Exclusive residence country taxation will also apply to profits from the use, maintenance and rental of containers used for the transport of goods or merchandise, provided the rental or use is directly connected or ancillary to the operation by the enterprise of ships or aircraft in international traffic. The following notes reflect the agreement reached during renegotiation of the Norway Convention with regard to the application of the Article to containers:

'With reference to Article 8 Shipping and Air Transport , the delegations agreed that profits from the operation of ships or aircraft in international traffic will include profits of an enterprise from the use, maintenance or rental of containers used for the transport of goods or merchandise, provided the rental or use is directly connected or ancillary to the operation by that enterprise of ships or aircraft in international traffic.'

Article 9 - Associated Enterprises

Reallocation of profits

2.99 This Article deals with associated enterprises (such as parent and subsidiary companies and companies under common control). It authorises the reallocation of profits between related enterprises in Australia and Norway 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 unrelated enterprises dealing wholly independently with one another.

2.100 This Article would not generally authorise the rewriting of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms. Consistent with Australia's recent treaty practice, the inclusion of the expression 'dealing wholly independently with one another' in paragraph 1 recognises dealings on a truly independent basis as the appropriate benchmark for determining whether the transactions have taken place on normal, open market commercial terms. [ Article 9, paragraph 1 ]

2.101 The broad scheme of Australia's domestic law provisions relating to international profit shifting arrangements under which profits are shifted out of Australia, whether by transfer pricing or other means, is to impose arm's length standards in relation to international dealings. Where the Commissioner cannot ascertain the arm's length consideration, it is deemed to be such an amount as the Commissioner determines.

2.102 Paragraph 2 of this Article specifically recognises the right of each country to apply its domestic law relating to the determination of the tax liability of a person (eg, Australia's Division 13 of the ITAA 1936) to its own enterprises, including in cases where the available information is inadequate, provided that such provisions are applied, so far as it is practicable to do so, consistently with the principles of the Article. This is of particular relevance where there is no data available or the available data is not of sufficient quality to rely on the traditional transaction methods for the attribution of arm's length profits. This reflects Australia's reservation to Article 9 ( Associated Enterprises ) of the OECD Model. [ Article 9, paragraph 2 ]

Correlative adjustments

2.103 Where a reallocation of profits is made (either under this Article or, by virtue of paragraph 2, under domestic law) so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so reallocated continued to be subject to tax in the hands of an associated enterprise in the other country. To avoid this result, the other country - if it considers the adjustment justified - will make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation.

2.104 During negotiation of the Norway Convention, negotiators reached the following agreement:

'For purposes of paragraph 3 of Article 9 Associated Enterprises , negotiators for Australia and Norway agreed that an adjustment will be justified where a State agrees that the adjustment made by the other State in accordance with paragraph 1 of that Article is justified both in principle and as regards the amount, except in cases involving fraud, gross negligence or wilful default on the part of one or both of the enterprises.'

2.105 Where fraud, gross negligence or wilful default on the part of one or both enterprises is involved, compensatory adjustments are not required.

2.106 It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the reallocation of profits for an appropriate compensatory adjustment to reflect the reallocation of profits made by the other treaty partner country. If necessary, the competent authorities of Australia and Norway will consult with each other to determine the appropriate adjustment. [ Article 9, paragraph 3 ]

Article 10 - Dividends

2.107 This Article allocates taxing rights in respect of dividends flowing between Australia and Norway. The Article provides that:

•

certain cross-border intercorporate dividends will be either exempt or subject to a maximum 5 per cent rate of source country tax;

•

a maximum 15 per cent rate of source country tax may be applied on all other dividends;

•

dividends paid in respect of a holding which is effectively connected with a permanent establishment are to be dealt with under Article 7 ( Business Profits ); and

•

extra-territorial application by either country of taxing rights over dividend income is not permitted.

2.108 However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

Permissible rate of source country taxation

Exemption for certain cross-border intercorporate dividends

2.109 No tax will be payable in the source country on dividends paid to a company that is the beneficial owner of those dividends and is resident in the other country where:

•

the recipient company holds 80 per cent or more of the voting power of the company paying the dividend; and

•

satisfies a 12-month holding requirement at the time of the declaration of the dividend in relation to the shares in respect of which the dividend is payable.

[ Article 10, paragraph 3 ]

2.110 To qualify for the exemption, the company that is the beneficial owner of the dividends must either be:

•

a company that has its principal class of shares;

-

listed on specified Australian or Norwegian stock exchanges; and

-

regularly traded on one or more recognised stock exchanges (as defined under Article 3 ( General Definitions ) of the treaty); or

•

a company that is owned either directly or indirectly by such a company.

2.111 Dividends which are beneficially owned by a company that does not meet the conditions in the previous paragraph will also be exempt from tax in the source country if the competent authority of that country determines, in accordance with its domestic law, that the recipient company was established, acquired, or maintained for reasons other than obtaining benefits under the treaty. Before concluding that a company is not entitled to benefits under this subparagraph (eg, because the arrangements had a principal purpose of obtaining such benefits), the competent authority is required to consult with the competent authority of that company's country of residence. [ Article 10, subparagraphs 3(a ) to ( c )]

2.112 For the purpose of the above tests, a recognised stock exchange includes:

•

in Australia's case, the Australian Securities Exchange or any other Australian stock exchange recognised under Australian domestic law; and

•

in Norway, the Oslo Stock Exchange or any other stock exchange recognised under Norwegian domestic law.

2.113 Under sub-subparagraph 1(o)(iii) of Article 3 ( General Definitions ), provision has been made to allow the competent authorities to reach agreement that other stock exchanges constitute a recognised stock exchange for the purpose of the treaty. [ Article 3, sub-subparagraph 1(o )( iii )]

Five per cent rate limit on source country tax of certain cross-border intercorporate dividends

2.114 This Article allows both countries to tax other dividends flowing between them but limits the rate of tax that the country of source may impose on dividends paid by companies that are residents of that country under its domestic law to residents in the other country who are the beneficial owners of the dividends. [ Article 10, paragraphs 1 and 2 ]

2.115 A rate limit of 5 per cent will apply for dividends paid in respect of shareholdings of companies (other than partnerships) that do not qualify for the intercorporate dividend exemption under paragraph 3 of this Article, but constitute a direct voting interest of at least 10 per cent. [ Article 10, subparagraph 2(a )]

2.116 In relation to the exclusion of partnerships that are taxed like companies from the benefit of the source country tax rate limitation the following note reflects agreement reached during negotiation of the Norway Convention with respect to the treatment of Australian limited liability partnerships (corporate limited partnerships):

'With respect to paragraph 2(a) of Article 10, the two delegations noted that under Australian taxation law, Australian corporate limited partnerships are effectively treated as companies for tax purposes and that a reference to a partnership does not include a reference to a limited partnership. It is therefore understood that the reference to a partnership in paragraph 2(a) does not apply to such corporate limited partnerships.'

Fifteen per cent rate limit for all other dividends

2.117 In all other cases, the treaty provides that the source country will generally limit its tax to 15 per cent of the gross amount of the dividend. In the case of Australia, this will mean that the domestic rate of withholding tax imposed on unfranked dividends will be reduced from 30 per cent to 15 per cent. [ Article 10, subparagraph 2(b )]

2.118 Despite the provisions described above, the dividend withholding tax exemption provided by Australia under its domestic law for franked dividends paid to non-residents will continue to apply.

Future changes to either country's domestic tax treatment of dividends

2.119 If there is a material change to either country's general approach to taxing dividends (eg, a change to Australia's domestic law arrangements for franked dividends flowing overseas), the two countries are obliged to consult with each other to consider whether any amendment to paragraphs 2 and 3 of this Article would be appropriate as a consequence of the change to domestic law. [ Article 10, paragraph 2 ]

Dividends effectively treated as business profits

2.120 The limitation on the tax of the country in which the dividend is sourced does not apply to dividends derived by a resident of the other country who has a permanent establishment in the source country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that permanent establishment.

2.121 Where the holding is so effectively connected, the dividends are to be treated as business profits and therefore subject to the full rate of tax applicable in the country in which the dividend is sourced in accordance with the provisions of Article 7 ( Business Profits ).

2.122 Franked and unfranked dividends paid by an Australian company will be included in the assessable income of a non-resident company or individual where the dividends are attributable to a permanent establishment situated in Australia. Expenses incurred in deriving the dividend income are allowable as a deduction from that income when calculating the taxable income of the non-resident. Further, a non-resident company or individual may be entitled to tax offsets in respect of any franked dividends under Australia's domestic law. [ Article 10, paragraph 5 ]

Extra-territorial application precluded

2.123 The extra-territorial application by either country of taxing rights over dividend income is precluded. Broadly, one country (the first country) will not tax dividends paid by a company resident solely in the other country, unless:

•

the person deriving the dividends is a resident of the first country; or

•

the shareholding giving rise to the dividends is effectively connected with a permanent establishment in the first country.

2.124 For example, Australia may not tax dividends paid by a Norwegian company to a resident of Norway out of profits derived from Australian sources, unless the Norwegian shareholder has a permanent establishment in Australia with which the holding is effectively connected.

2.125 These restrictions do not apply when the company is, for tax purposes, a resident of both Australia and Norway under the respective laws of the two countries. [ Article 10, paragraph 6 ]

Definition of dividends

2.126 The term dividends in this Article means income from:

•

shares or other rights which participate in profits and are not debt-claims; and

•

other amounts that are subject to the same taxation treatment as income from shares in the country of which the distributing company is resident.

[ Article 10, paragraph 4 ]

Limitation of benefits

2.127 The source country rate limits and exemptions available under this Article will not apply where a creation or assignment of shares or other rights in respect of which dividends are paid, has been made with the main objective of, or one of the main objectives of, accessing the relief otherwise available under this Article. [ Article 10, paragraph 7 ]

Article 11 - Interest

2.128 This Article allocates taxing rights in respect of interest flows between Australia and Norway. The Article provides that:

•

an exemption from source country tax applies to certain cross-border interest flows to:

-

the government, its monetary institutions or central banks; or

-

financial institutions;

•

a maximum 10 per cent rate of source country tax may be applied on all other interest income;

•

interest paid on an indebtedness which is effectively connected with a permanent establishment shall be subject to Article 7 ( Business Profits );

•

interest payments are deemed to have an Australian source (and may therefore be taxed in Australia) where:

-

the interest is paid by an Australian resident to a Norwegian resident; or

-

the interest is paid by a non-resident to a Norwegian resident and it is an expense of the payer in carrying on business in Australia through a permanent establishment;

•

relief will be restricted to the gross amount of interest which would be expected to be paid on an arm's length dealing between independent parties.

2.129 However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

Permissible rate of source country taxation

Ten per cent rate limit

2.130 This Article provides for interest income to be taxed by both countries but requires the country in which the interest arises to generally limit its tax to 10 per cent of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. [ Article 11, paragraphs 1 and 2 ]

Exemptions for interest paid to the Government

2.131 The exemption for interest paid to the Australian and Norwegian Governments reflects the principle of sovereign immunity and will apply to interest derived from the investment of the Government's official reserve assets. Similar exemptions apply in a number of Australia's tax treaties. [ Article 11, subparagraph 3(a )]

Exemptions for interest paid to financial institutions

2.132 The exemption for interest paid to financial institutions recognises that the agreed 10 per cent withholding tax rate on gross interest can be excessive given their cost of funds. The exemption will also broadly align the treatment of interest paid to Norwegian financial institutions with the Australian domestic law exemption for interest paid on widely distributed arm's length corporate debenture issues (section 128F of the ITAA 1936). [ Article 11, subparagraph 3(b )]

2.133 The term financial institution means a bank or other enterprise substantially raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on the business of providing finance. It does not include a corporate treasury or a member of a group that performs the financing services of the group. [ Article 11, subparagraph 3(b )]

2.134 The exemption will not be available for interest paid as part of an arrangement involving back-to-back loans or other arrangement that is economically equivalent and structured to have a similar effect. The denial of the exemption for these back-to-back loan type arrangements is directed at preventing related party and other debt from being structured through financial institutions to gain access to a withholding tax exemption. The exemption will only be denied for interest paid on the component of a loan that is considered to be back-to-back. [ Article 11, paragraph 4 ]

2.135 A back-to-back arrangement would include, for instance, a transaction or series of transactions structured in such a way that:

•

a Norwegian financial institution receives or is credited with an item of interest arising in Australia; and

•

the financial institution pays or credits, directly or indirectly, all or substantially all of that interest (at any time or in any form, including commensurate benefits) to another person who, if it received the interest directly from Australia, would not be entitled to similar benefits with respect to that interest.

2.136 However, a back-to-back arrangement would generally not include a loan guarantee provided by a related party to a Norwegian financial institution.

Definition of interest

2.137 The term interest is defined for the purposes of this Article to include interest from:

•

government securities;

•

bonds and debentures;

•

any other forms of indebtedness; and

•

income which is subjected to the same taxation treatment as income from money lent by the law of the Contracting State in which the income arises.

[ Article 11, paragraph 5 ]

Interest effectively treated as business profits

2.138 Interest derived by a resident of one country which is paid in respect of an indebtedness which is effectively connected with a permanent establishment of that person in the other country, will form part of the business profits of that permanent establishment and be subject to the provisions of Article 7 ( Business Profits ). Accordingly, the rate limitation of 10 per cent and the exemption for financial institutions do not apply to such interest in the country in which the interest is sourced. [ Article 11, paragraph 6 ]

Deemed source rules

2.139 The source rules which determine where interest arises for purposes of the Article are set out in paragraph 7. They operate to allow Australia to tax interest paid by a resident of Australia to a resident of Norway who is the beneficial owner of that interest. Australia may also tax interest paid by a non-resident, being interest which is beneficially owned by a Norwegian resident, if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment.

2.140 However, consistent with Australia's interest withholding tax provisions, an Australian source is not deemed in respect of interest that is an expense incurred by an Australian resident in carrying on a business through a permanent establishment outside both Australia and Norway (ie, the permanent establishment is in a third country). In that case the interest is deemed to arise in the country in which the permanent establishment is situated. [ Article 11, paragraph 7 ]

2.141 In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply. [ Article 5, paragraph 9 ]

Related persons

2.142 This Article includes a general safeguard against payments of excessive interest where a special relationship exists between the persons associated with a loan transaction - by restricting the amount on which the 10 per cent source country tax rate limitation applies to an amount of interest which might have been expected to have been agreed upon if the parties to the loan agreement were dealing with one another at arm's length. Any excess part of the interest remains taxable according to the domestic law of each country but subject to the other Articles of the tax treaty. [ Article 11, paragraph 8 ]

2.143 Examples of cases where a special relationship might exist include payments to a person (either individual or legal):

•

who controls the payer (whether directly or indirectly);

•

who is controlled by the payer; or

•

who is subordinate to a group having common interests with the payer.

2.144 It also covers relationships of blood or marriage and, in general, any community of interests.

Limitation of benefits

2.145 The source country rate limit and exemptions available under this Article will not apply where a creation or assignment of the indebtedness in respect of which interest paid has been made with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article. [ Article 11, paragraph 9 ]

Article 12 - Royalties

2.146 This Article allocates taxing rights in respect of royalties paid or credited between Australia and Norway. The Article provides that:

•

a maximum 5 per cent rate of source country tax may be levied on the gross amount of the royalties;

•

royalties paid in respect of a right or property which is effectively connected with a permanent establishment are subject to Article 7 ( Business Profits );

•

equipment royalties are not included within the definition of royalties and will be taxed in accordance with either Article 7 ( Business Profits ) or Article 8 ( Shipping and Air Transport );

•

royalties include payments for spectrum licences;

•

royalties are deemed to have an Australian source (and may therefore be taxed in Australia) where:

-

the royalties are paid by an Australian resident to a Norwegian resident; or

-

the royalties are paid by a non-resident to a Norwegian resident and are an expense of the payer in carrying on business in Australia through a permanent establishment; and

•

relief will be restricted to the gross amount of royalties which would be expected to be paid on an arm's length dealing between independent parties.

2.147 However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

Permissible rate of source country taxation

2.148 This Article in general allows both countries to tax royalty flows but limits the tax of the country of source to 5 per cent of the gross amount of royalties beneficially owned by residents of the other country. [ Article 12, paragraphs 1 and 2 ]

2.149 In the absence of a tax treaty, Australia taxes royalties paid to non-residents at 30 per cent of the gross royalty.

2.150 The 5 per cent rate limitation does not apply to natural resource royalties, which, in accordance with Article 6 ( Income from Real Property ), remain taxable in the country of source without limitation of the tax that may be imposed.

Definition of royalties

2.151 The definition of 'royalties' in the Norway Convention reflects most elements of the definition in Australia's domestic income tax law. It includes payments for the supply of scientific, technical, industrial or commercial know-how but not payments for services rendered, except as provided for in subparagraph 3(c). The definition also includes payments for the use of intellectual property stored on various mediums and used in connection with television, radio or other broadcasting (eg, satellite, cable and Internet broadcasting). [ Article 12, paragraph 3 ]

2.152 Payments for the use of, or the right to use industrial, commercial or scientific equipment, which are included in the definition of royalties in the existing Norway treaty, are not included in the definition under the Norway Convention. Such payments for equipment leasing will either be treated as business profits under Article 7 ( Business Profits ) or as profits from international transport operations (for certain leases of ships, aircraft and containers) under Article 8 ( Shipping and Air Transport ). The exclusion of payments for the use of equipment from the Royalties Article reflects common international tax treaty practice and recognises that source country taxation on a gross basis may be excessive given low profit margins.

Payments for the supply of know-how versus payments for services rendered

2.153 The OECD Model Commentary deals with the need to distinguish these two types of payments at paragraph 11.3 of the Commentary on Article 12. The Commentary cites the following criteria as relevant for the purpose of making the distinction:

•

Contracts for the supply of know-how concern information of the kind described in paragraph 11 (of the Commentary) that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information.

•

In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party.

•

In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform their contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services.

2.154 Payments for design, engineering or construction of plant or building, feasibility studies, component design and engineering services may generally be regarded as being in respect of a contract for services, unless there is some provision in the contract for imparting techniques and skills to the buyer.

2.155 In cases where both know-how and services are supplied under the same contract, if the contract does not separately provide for payments in respect of know-how and services, an apportionment of the two elements of the contract may be appropriate.

2.156 Payments for services rendered are to be treated under Article 7 ( Business Profits ).

Image or sound reproduction or transmission

2.157 The royalty definition includes payments made for the use of, or the right to use, motion picture films. It also covers payments for the use of, or the right to use images or sounds, however reproduced or transmitted, for use in connection with broadcasting. Such images or sounds may be reproduced on any form of media, such as film, tape, CD or DVD, or transmitted electronically, such as by satellite, cable or Internet. Where the images or sounds are for use in connection with any form of broadcasting, such as television, radio or web-casting, the payments will constitute a royalty. [ Article 12, subparagraph 3(d )]

Spectrum licences

2.158 Under the Norway Convention payments made for the use of, or right to use, radiofrequency spectrum are treated as royalties. This provision preserves Australia's ability to tax payments for the use in Australia of any part of the radiofrequency spectrum (within the meaning of the Radiocommunications Act 1992 ) specified in such a licence. [ Article 12, subparagraph 3(e )]

Forbearance

2.159 Consistent with the existing Norway treaty and Australian tax treaty practice, subparagraph 3(f) expressly treats as a royalty, amounts paid or credited in respect of forbearance to grant to third persons, rights to use property covered by this Article. This is designed to address arrangements along the lines of those contained in Aktiebolaget Volvo v Federal Commissioner of Taxation (1978)
8 ATR 747 ;
78 ATC 4316 , where instead of amounts being payable for the exclusive right to use the property they were made for the undertaking that the right to use the property will not be granted to anyone else. This provision ensures that such payments are subject to tax as a royalty payment under the terms of the Royalties Article. [ Article 12, subparagraph 3(f )]

Other royalties effectively treated as business profits

2.160 As in the case of interest income, the withholding tax rate limitation does not apply to royalties paid in respect of property or rights which are effectively connected with a permanent establishment in the country in which the income is sourced. Such income is subject to full taxation under Article 7 ( Business Profits ). [ Article 12, paragraph 4 ]

Deemed source rules

2.161 The source rules which determine where royalties arise for purposes of this Article effectively correspond, in the case of Australia, with the deemed source rule contained in section 6C (source of royalty income derived by a non-resident) of the ITAA 1936 for royalties paid to non-residents of Australia. They broadly mirror the source rule for interest income contained in paragraph 7 of Article 11 ( Interest ).

2.162 Consistent with Australia's royalty withholding tax provisions, royalty payments that are an expense incurred by an Australian resident in carrying on a business through a permanent establishment outside both Australia and Norway (ie, the permanent establishment is in a third country) will not be subject to tax in Australia. Those royalties are deemed to be sourced in the country in which the permanent establishment is situated. [ Article 12, paragraph 5 ]

2.163 In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply. [ Article 5, paragraph 9 ]

Related persons

2.164 Where a special relationship exists between the payer and the beneficial owner of the royalties, the 5 per cent source country tax rate limitation will apply only to the extent that the royalties are not excessive. Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other Articles of the Norway Convention.

2.165 Examples of special relationships have been provided in respect of the corresponding paragraph in Article 11. [ Article 12, paragraph 6 ]

Limitation of benefits

2.166 The source country rate limit available under this Article will not apply where a creation or assignment of the rights in respect of which royalties paid or credited has been made with the main objective, or one of the main objectives of accessing the relief available under this Article. [ Article 12, paragraph 7 ]

Article 13 - Alienation of Property

Taxing rights

2.167 This Article allocates between the respective countries taxing rights in relation to income, profits or gains arising from the alienation of real property and other items of property.

2.168 The reference to 'income, profits or gains' in this Article is designed to put beyond doubt that a gain from the alienation of property which in Australia is income or a profit under ordinary concepts, will also be taxed in accordance with this Article, rather than Article 7 ( Business Profits ), together with relevant capital gains.

Real property

2.169 Income, profits or gains from the alienation of 'real property' may be taxed by the country in which the property is situated. For the purpose of this Article, the term 'real property' has the same meaning as it has under paragraph 2 of Article 6. Where the property is situated is determined in accordance with paragraph 3 of Article 6 ( Income from Real Property ). [ Article 13, paragraph 1 ]

Permanent establishment

2.170 Paragraph 2 deals with income, profits or gains arising from the alienation of property (other than real property covered by paragraph 1) forming part of the business assets of a permanent establishment of an enterprise. It also applies where the permanent establishment itself (alone or with the whole enterprise) is alienated. Such income, profits or gains may be taxed in the country in which the permanent establishment is situated. This corresponds to the rules for taxation of business profits contained in Article 7 ( Business Profits ). [ Article 13, paragraph 2 ]

Disposal of ships or aircraft

2.171 Income, profits or gains derived by a resident of a country from the disposal of ships or aircraft operated by that resident in international traffic, or of associated property (other than real property covered by paragraph 1), are taxable only in that country. This rule corresponds to the operation of Article 8 ( Ships and Air Transport ) in relation to profits from the international operation of ships or aircraft. [ Article 13, paragraph 3 ]

2.172 For the purposes of this Article, the term 'international traffic' does not include any transportation which commences at a place in a country and returns to another place in that country, after travelling through international airspace or waters (eg, so-called 'voyages to nowhere' by cruise ships). [ Article 3, subparagraph 1(k )]

Shares and other interests in land-rich entities

2.173 Paragraph 4 applies to situations involving the alienation of shares or other interests in companies and other entities, where more than 50 per cent of the value of the assets of that company or other entity is derived, whether directly or indirectly through one or more other interposed entities, from real property situated in the other country. Income, profits or gains from alienation of such shares or interests may be taxed by the country in which the real property is situated. This paragraph complements paragraph 1 of this Article and is designed to cover arrangements involving the effective alienation of incorporated real property, or like arrangements.

2.174 This provision is in line with international practice and ensures that capital gains on a non-resident's indirect, as well as direct, interests in certain targeted assets are taxable by Australia. (Such treatment applies whether the real property is held directly or indirectly through a chain of interposed entities.) While not limited to chains of companies, or even chains of entities, only some of which are companies, the example of chains of companies is used to make clear that the corporate veil should be lifted in examining direct or indirect ownership.

2.175 This provision responds to the tax planning opportunities exposed by the decision of the Full Federal Court in the Commissioner of Taxation v Lamesa Holdings BV (1997)
77 FCR 597 . It is designed to protect Australian taxing rights over income or gains on the alienation or effective alienation of Australian real property (as defined) despite the presence of interposed bodies corporate or other entities. [ Article 13, paragraph 4 ]

Capital gains

2.176 This Article contains a sweep up provision which reserves the right to tax any capital gains from the alienation of other types of property to the country in which the person deriving the gains is a resident. These would include, for example, gains from the disposal of shares or other interests in an entity (other than a land-rich entity). Such gains derived by Australian residents will be taxable only in Australia, regardless of where the property is situated, and will not be taxed in Norway. The liability of the Australian resident to taxation on such gains will be determined in accordance with Australia's domestic law. [ Article 13, paragraph 5 ]

Article 14 - Income from Employment

Basis of taxation

2.177 This Article generally provides the basis upon which the remuneration of visiting employees is to be taxed. However this Article does not apply in respect of income dealt with separately in:

•

Article 15 ( Directors' Fees );

•

Article 16 ( Entertainers and Sportspersons );

•

Article 17 ( Pensions and Annuities ); and

•

Article 18 ( Government Service ).

2.178 Generally, salaries, wages and similar remuneration derived by a resident of one country from an employment exercised in the other country may be taxed in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where visits of only a short-term nature are involved. [ Article 14, paragraphs 1 and 2 ]

2.179 The following notes reflect agreements reached during the renegotiation of the Norway Convention with regard to the meaning of the term 'employer':

'For purposes of paragraph 2 of Article 14 Income from Employment , the two delegations agreed that the term "employer" refers to the person having the rights on the work produced and bearing the relative responsibility and risks. In this context, the substance of any labour hire arrangement will prevail over the form.

Where an intermediary hirer is involved, such as in cases of international hiring out of labour, the employer for purposes of paragraph 2 will be determined having regard to whether the functions of employer were exercised mainly by the hirer or by the user of the labour. Relevant factors that may lead to a conclusion that the user, and not the hirer, is the employer include:

•

the hirer does not bear the responsibility or risk for the results produced by the employee's work;

•

the authority to instruct the worker lies with the user;

•

the work is performed at a place which is under the control and responsibility of the user;

•

the remuneration to the hirer is calculated on the basis of the time utilised, or there is in other ways a connection between this remuneration and wages received by the employee;

•

tools and materials are essentially put at the employee's disposal by the user;

•

the number and qualifications of the employees are not solely determined by the hirer.'

Short-term visit exemption

2.180 The conditions for the exemption for short-term visits are that:

•

the period of the visit or visits does not exceed, in the aggregate, 183 days in any 12-month period commencing or ending in the year of income of the visited country;

•

the remuneration is paid by, or on behalf of, an employer who is a resident of the same country as the employee; and

•

the remuneration is not borne by a permanent establishment which the employer has in the country being visited.

2.181 Where all of these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient. [ Article 14, paragraph 2 ]

2.182 Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from employment in Norway may be taxed in Norway. However, this Article does not allocate sole taxing rights to Norway in that situation.

2.183 Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the ITAA 1997 that a resident of Australia remains subject to tax on worldwide income. However, in accordance with Article 23 ( Methods of Elimination of Double Taxation ) Australia would be required to in this situation relieve the double taxation.

2.184 Although Article 23 provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Norwegian tax paid, the exemption with progression method of providing double tax relief in relation to employment income derived in the situation described would normally be applicable in practice pursuant to the foreign service income provisions of section 23AG of the ITAA 1936. This method exempts the income from foreign employment from tax in Australia, but takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.

Employment on a ship or aircraft

2.185 Income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of which the enterprise operating the ship or aircraft is a resident.

2.186 However, income derived in respect of employment exercised aboard either:

•

a ship registered in the Norwegian International Ships' register; or

•

a Scandinavian Airlines System (SAS) aircraft,

may be taxed only in the country of which the employee is resident. [ Article 14, paragraphs 3 and 4 ]

Article 15 - Directors' Fees

2.187 This Article relates to remuneration received by a resident of one country in the person's capacity as a member of a board of directors, or of a body which performs a similar role to that of a board of directors, 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 consequently where the 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. [ Article 15 ]

Article 16 - Entertainers and Sportspersons

Personal activities

2.188 Under this Article, income derived by visiting entertainers and sportspersons from their personal activities as such may be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The term 'entertainer' is intended to have a broad meaning and would include, for example, actors and musicians as well as other performers whose activities have an entertainment character, such as comedians, talk-show hosts, participants in chess tournaments or racing drivers. The application of this Article extends to income generated from promotional and associated kinds of activities engaged in by the entertainer or sportsperson while present in the visited country. [ Article 16, paragraph 1 ]

Safeguard

2.189 Paragraph 2 is designed to ensure that income in respect of personal activities exercised by an entertainer or sportsperson, where derived by another person (eg, a separate enterprise which formally provides the entertainer's or sportsperson's services), may be taxed in the country in which the entertainer or sportsperson performs, whether or not that other person has a permanent establishment in that country. [ Article 16, paragraph 2 ]

Government supported events

2.190 Consistent with the existing Norway treaty, paragraph 3 excludes from the scope of paragraphs 1 and 2 income derived by entertainers or sportspersons from activities performed in a country where the event is wholly or mainly supported by government funds of the other country. In such a case, the income is taxable only in the country of which the entertainer or sportsperson is a resident. [ Article 16, paragraph 3 ]

Article 17 - Pensions and Annuities

2.191 Pensions (not including government service pensions) and annuities (the term 'annuity' as used in this Article is defined in paragraph 2) are taxable only by the country of which the recipient is a resident. The application of this Article extends to pensions and annuity payments made to dependants, for example, a widow, widower or children of the person in respect of whom the pension or annuity entitlement accrued where, upon that person's death, such entitlement has passed to that person's dependants. [ Article 17, paragraphs 1 and 2 ]

Eligible termination payments

2.192 Lump sum payments on the termination of employment are not considered to be pensions and are not covered by this Article. Article 21 ( Other Income ) applies to such payments.

Alimony payments

2.193 Consistent with the existing Norway treaty, the taxing right in respect of alimony and other maintenance payments is allocated solely to the country of residence of the payer. The purpose of this paragraph is to remove any possibility of double taxation of such payments arising by reason of the treatment accorded such payments under the respective domestic law of the two countries. In the case of Australia, those payments will generally remain exempt from Australian tax under the ITAA 1936 and the ITAA 1997 in the hands of the recipient and non-deductible to the payer. [ Article 17, paragraph 3 ]

Article 18 - Government Service

Salary and wage income

2.194 Salary and wage type income, other than government service pensions or annuities, paid to an individual for services rendered to a government (including a political subdivision or local authority) of one of the countries, is to be taxed only in that country. However, such remuneration will be taxable only in the other country if:

•

the services are rendered in that other country;

•

the recipient is a resident of, and a national of, that other country; and

•

the recipient did not become a resident of that other country solely for the purpose of rendering the services.

[ Article 18, paragraph 1 ]

Government service pensions

2.195 Similarly, any pension (including, in the case of Norway, any national insurance element of that pension) paid to an individual in respect of services rendered to a government (including a political subdivision or local authority) of one of the countries, is to be taxed only in that country. However, such pensions will be taxable only in the other country if the recipient is both a resident and a national of that country. [ Article 18, paragraph 2 ]

Business income

2.196 Remuneration or pensions in respect of services rendered in connection with a business carried on by any governmental authority referred to in paragraph 1 or 2 of this Article is excluded from the scope of the Article. Such remuneration will remain subject to the provisions of Article 14 ( Income from Employment ), Article 15 ( Directors' Fees ) or Article 16 ( Entertainers and Sportspersons ) or Article 17 ( Pensions or Annuities ). [ Article 18, paragraph 3 ]

Article 19 - Students

Exemption from tax

2.197 This Article applies to students who are temporarily present in one of the countries solely for the purpose of their education if the students are, or immediately before the visit were, resident in the other country. In these circumstances, payments from abroad received by the students solely for their maintenance or education will be exempt from tax in the country visited. This will apply even though the student may qualify for tax purposes as a resident of the country visited during the period of their visit.

2.198 The exemption from tax provided by the visited country is treated as extending to payments received by the student for the maintenance of dependent family members who have accompanied the student to the visited country.

Employment income

2.199 Where, however, a student from Norway who is visiting Australia solely for educational purposes undertakes any employment in Australia, for example:

•

undertakes some part-time work with a local employer; or

•

during a semester break undertakes work with a local employer,

the income earned by that student as a consequence of that employment may, as provided for in Article 14 ( Income from Employment ), be subject to tax in Australia. In this situation, the payments received from abroad for the student's maintenance or education will not, however, be taken into account in determining the tax payable on the employment income that is subject to tax in Australia. No Australian tax would be payable on the employment income if the student qualifies as a resident of Australia for tax purposes during the visit and the taxable income of the student does not exceed the tax-free threshold applicable to Australian residents for income tax purposes.

Article 20 - Offshore Activities

2.200 This Article largely reflects the Offshore Activities Article in the existing Norway treaty and gives both countries broad taxing rights over income from offshore activities in connection with exploration for, or exploitation of, natural resources.

Relationship to other Articles

2.201 The Offshore Activities Article governs the taxation treatment to apply to activities undertaken in either country's territorial waters or on either country's continental shelf. Where activities fall within the provisions of the Article, this Article will apply over other provisions of the Convention where taxation of the income arising from those activities differs from the result that applies under Article 20 (eg, Article 5 ( Permanent Establishment ) and Article 14 ( Income from Employment )). [ Article 20, paragraph 1 ]

Deemed permanent establishment and carrying on of business

2.202 A person who is resident in one country and who is carrying on offshore activities in the other country is deemed in relation to the activities to be carrying on business in the other country through a permanent establishment in the other country, where the activities are carried on for a period or periods of more than 30 days in any 12-month period.

2.203 The provision ensures that an enterprise engaged in the exploration for, or exploitation of, natural resources will be treated as having a permanent establishment where, for example, it operates a drilling rig or carries on activities on such a rig, in circumstances where it may not satisfy the definition of permanent establishment contained in Article 5 ( Permanent Establishment ). The provision reflects the importance Australia and Norway place on being able to tax the substantial profits that can flow from offshore activities in the resources sector. [ Article 20, paragraph 2 ]

2.204 The scope of the Article is confined to activities connected with the exploration or exploitation of the seabed or subsoil of the territorial sea and continental shelf of both countries or to the exploration or exploitation of the natural resources of the seabed or subsoil. For the purpose of this Article the term 'natural resources' is not defined and it would accordingly be interpreted having regard to the rules in paragraph 2 of Article 3 ( General Definitions ). Natural resource is, in the case of Australia, defined under the ITAA 1936 as meaning 'minerals or any other non-living resource of the land, sea-bed or sea'.

Exception to the deemed permanent establishment rule

2.205 Offshore activities will not be deemed to constitute the carrying on of a business through a permanent establishment where the period or periods during which the activities are carried on do not in aggregate exceed 30 days in any 12-month period commencing or ending in the year of income of the country in which the activities are carried out.

2.206 The Article includes an anti-avoidance rule, similar to that in paragraph 4 of Article 5 ( Permanent Establishment ), aimed at countering contract-splitting by related enterprises. This rule ensures that, where associated enterprises carry on substantially the same activities in a country, the periods will be aggregated in determining whether the enterprises have a permanent establishment in the country in which the activities are being carried on.

2.207 As with paragraph 4 of Article 5, concurrent activities of the enterprise and its associates are only counted once, and enterprises are deemed to be associated for the purposes of this paragraph if one is controlled directly or indirectly by the other or if both are controlled directly or indirectly by the same third person or persons. [ Article 20, paragraph 3 ]

Offshore employment income

2.208 Residents of one country who are employed in offshore activities may be taxed in both countries if the employment is exercised offshore in the other country for an aggregate period in excess of 30 days in any 12-month period beginning or ending in the income year of the country in which the employment is exercised. [ Article 20, paragraph 4 ]

2.209 The country of which the employee is a resident will provide a credit for tax paid in the country in which the employment is performed in accordance with Article 23 ( Methods of Elimination of Double Taxation ). In Australia, the provisions of section 23AG will apply to exempt from Australian tax income of a resident from employment that occurs over a continuous period of 91 days or more. In cases where the continuous period or periods is less than 91 days a credit will be allowed by Australia for Norwegian tax on offshore activities employment income against the Australian tax paid on such income.

2.210 No source country tax will be payable by an employee resident in one country and employed in offshore activities exercised in the other if the employee exercises the employment in the other country for a period or periods of 30 days or less and the employer is resident outside the other country. This is measured in the same way as for business activities (see paragraph 2.205). In these circumstances the employee's remuneration will be subject to tax only in the country of which the employee is a resident.

Article 21 - Other Income

Allocation of taxing rights

2.211 This Article provides rules for the allocation between the two countries of taxing rights with respect to items of income not dealt with in the preceding Articles of the Norway Convention. The scope of the Article is not confined to such items of income arising in one of the countries - it extends also to income from sources in a third country.

2.212 Broadly, such income derived by a resident of one country is to be taxed only in the country of residence unless it is from sources in the other country, in which case the income may also be taxed in the other country. This is consistent with Australia's reservation to Article 21 ( Other Income ) of the OECD Model. [ Article 21, paragraphs 1 and 3 ]

2.213 Where the income may be taxed in both countries in accordance with this provision, the country of residence of the recipient of the income is obliged by Article 23 ( Methods of Elimination of Double Taxation ) to provide double taxation relief.

2.214 This Article does not apply to income (other than income from real property as defined in paragraph 2 of Article 6 ( Income from Real Property ) where the right or property in respect of which the income is paid is effectively connected with a permanent establishment which a resident of one country has in the other country. In such a case, Article 7 ( Business Profits ) will apply. [ Article 21, paragraph 2 ]

Article 22 - Source of Income

Deemed source

2.215 This Article effectively deems income, profits or gains derived by a resident of a country which, in accordance with the Norway Convention, may be taxed in the other country, to have a source in that other country. It therefore avoids any difficulties arising under domestic law source rules in respect of the exercise by Australia of the taxing rights allocated to Australia by the Convention over income derived by residents of Norway. [ Article 22, paragraph 1 ]

Source of income - double taxation relief

2.216 Paragraph 2 of this Article deems income, profits or gains of a resident of one country to arise in the other country if those amounts are taxable in the other country under the treaty. The paragraph applies for the purposes of Article 23 ( Methods of Elimination of Double Taxation ) and for the purposes of the domestic tax laws of the country in which the recipient of the income is resident. [ Article 22, paragraph 2 ]

2.217 This provision is variously included in Article 21 ( Source of Income ) or Article 22 ( Elimination of Double Taxation ) of Australia's tax treaties. It is intended to ensure that where an item of income, profit or gain is taxable in both countries, double taxation relief will be given by the recipient's country of residence in accordance with Article 23, regardless of whether the amount would be regarded as having a source in the country of residence under its ordinary source rules. In this way, income, profits or gains derived by a resident of Australia, which is taxable by Norway under this Convention, will be treated as being foreign income for the purposes of the ITAA 1936 and the ITAA 1997, including the foreign tax credit provisions of the ITAA 1936.

Article 23 - Methods of Elimination of Double Taxation

2.218 Double taxation does not arise in respect of income flowing between Australia and Norway:

•

where the terms of the tax treaty provide for the income to be taxed only in one country; or

•

where the domestic taxation law of one of the countries exempts the income from its tax.

Tax credit

2.219 It is necessary, however, to prescribe a method for relieving double taxation for other classes of income, profits or gains which, under the terms of the tax treaty, remain subject to tax in both countries. In accordance with international practice, Australia's tax treaties provide for double tax relief to be provided by the country of residence of the taxpayer by way of a credit basis of relief against its tax for the tax of the country of source. This Article also reflects that approach.

Australian method of relief

2.220 This Article requires Australia to provide Australian residents a credit against their Australian tax liability for Norwegian tax paid in accordance with the Norway Convention on income derived from Norwegian sources which are taxable in Australia. The term 'income' in this context is intended to have a broad meaning and includes items of profit or gains which are dealt with under the income tax law. [ Article 23, paragraph 1 ]

2.221 Australia's general foreign tax credit system, together with the terms of this Article and of the Norway Convention generally, will form the basis of Australia's arrangements for relieving a resident of Norway from double taxation on income, profits or gains arising from sources in Norway.

2.222 Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraph 1 of this Article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA 1936.

2.223 Notwithstanding the credit basis of relief provided for by paragraph 1 of this Article, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of foreign service (as defined in subsection 23AG(7) of the ITAA 1936) in Norway, the exemption with progression method of relief will be applicable.

2.224 Dividends and branch profits derived from Norway by an Australian resident company that are exempt from Australian tax under the foreign source income measures (eg, sections 23AH or 23AJ of the ITAA 1936) will continue to qualify for exemption from Australian tax under those provisions. As double taxation does not arise in these cases, the credit form of relief will not be relevant.

Norwegian relief

2.225 In the case of a resident of Norway who is taxable in Norway on income which is also taxable in Australia under this Convention, this Article requires Norway to allow the Norwegian resident a deduction for the amount of Australian tax paid on that income. The deduction shall not exceed that part of the Norwegian tax which is attributable to the income that is taxable in Australia. [ Article 23, subparagraph 2(a )]

2.226 In the case of income derived by a resident of Norway, which is exempted in Norway under the Norway Convention, Norway may nevertheless include such income in the tax base, but shall allow the Norwegian resident a deduction from Norwegian tax for the amount of Norwegian tax attributable to that income. [ Article 23, subparagraph 2(b )]

Article 24 - Non-discrimination

2.227 The Norway Convention includes rules to prevent tax discrimination. The Australian tax system is generally non-discriminatory. However, for clarity the Article provides that certain pillars of the Australia tax system should not be seen as coming within the Article's terms. The measures identified can be characterised as being an integral part of today's administration of Australia's economic and tax policy and the collection of its taxes. As such it has been recognised that the measures carved out do not offend the spirit or intendment of a Non-discrimination Article based on the OECD Model Article 24 ( Non-discrimination ).

Discrimination based on nationality

2.228 This Article prevents discrimination on the grounds of nationality by providing that nationals of one country may not be less favourably treated than nationals of the other country in the same circumstances. [ Article 24, paragraph 1 ]

2.229 The discrimination that the Article precludes applies to both taxation and any requirement connected therewith. Accordingly, discrimination in the administration of the tax law is also generally precluded.

2.230 The term national is defined in Article 3 ( General Definitions ) of the Norway Convention and covers both individuals who have the nationality or citizenship of one country or the other, and companies which 'derive their status as such from the laws in force in that Contracting State'. Accordingly, a company that is incorporated in Australia would be a national of Australia while a company that is incorporated or otherwise constituted under a law of Norway would be a national of Norway for the purposes of this paragraph. [ Article 3, subparagraph 1(l )]

The meaning of 'in the same circumstances' and 'in particular with respect to residence'

2.231 The expression 'in the same circumstances' refers to persons who, from the point of the application of the ordinary taxation laws and regulations, are in substantially similar circumstances both in law and in fact.

2.232 Where a person operates in an industry that is subject to government regulation such as prudential oversight, another person operating in the same industry but not subject to the same oversight, would not be in the same circumstances.

2.233 The inclusion of the further clarification 'in particular with respect to residence' makes clear that the residence of the taxpayer is one of the factors that are relevant in determining whether taxpayers are placed in similar circumstances. Therefore, different treatment accorded to a Norwegian resident compared to an Australian resident will not constitute discrimination for purposes of this Article. A potential breach of paragraph 1 of this Article only arises if two persons who are residents of the same country are treated differently solely by reason of one being a national of Australia and the other a national of Norway.

The meaning of 'other' or 'more burdensome'

2.234 The words 'more burdensome' taxation refer to the quantum of taxation while 'other' taxation may refer to some form of income tax other than the form of income tax to which a national of the country is subject ( Woodend Rubber Co. v Commissioner of Inland Revenue [1971] A.C. 321 at 332).

2.235 The phrase is also applicable to administrative or compliance requirements that a taxpayer may be called upon to meet where those requirements differ based on nationality grounds.

Non-residents of Australia/Norway

2.236 Unlike paragraph 1 of Article 24 ( Non-discrimination ) of the OECD Model, paragraph 1 of this Article does not apply to persons who are not residents of either Australia or Norway. It follows that residents of third countries cannot seek the benefits of this provision. The provision also does not extend to residents of either country who are not nationals (as defined in Article 3 ( General Definitions )) of either country.

Non-discrimination and permanent establishments

2.237 Paragraph 2 of this Article provides that the tax on permanent establishments of enterprises of the other country shall not be levied less favourably than on the country's own enterprises carrying on the same activities in similar circumstances. This provision applies to all residents of a treaty country, irrespective of their nationality, who have a permanent establishment in the other country. [ Article 24, paragraph 2 ]

2.238 Paragraph 2 of this Article contains the additional proviso that, for this paragraph to apply, the enterprises of both countries must be 'in similar circumstances'. Therefore, the comparison must be made between a permanent establishment and local enterprises which are not only carrying on the same activities but are also carrying on those activities 'in similar circumstances'. This is to address situations where resident and non-resident enterprises may be carrying on the same activities but the circumstances in which they do so are very different. For example, one may be conducting dealings on a non-arm's length basis and the other on an arm's length basis. The provision recognises that appropriate differences in taxation treatment are not precluded because of the differing circumstances.

2.239 Permanent establishments of non-resident enterprises may be treated differently from resident enterprises as long as the treatment does not result in more burdensome taxation for the former than for the latter. That is, a different mode of taxation may be adopted with respect to non-resident enterprises, to take account of the fact that they often operate in different conditions to resident enterprises. The provision would not affect, for example, domestic law provisions that tax a non-resident by withholding, provided that calculation of the tax payable is not greater than that applying to a resident taxpayer.

Deductions paid to non-residents

2.240 Paragraph 3 of this Article requires the treaty partner countries to allow the same deductions for interest, royalties and other disbursements paid to residents of the other country as it does for such payments to its own residents. However, the paragraph allows the treaty countries to reallocate profits between related enterprises on an arm's length basis under Article 9 ( Associated Enterprises ) and to limit deductions in accordance with paragraph 8 of Article 11 ( Interest ), and paragraph 6 of Article 12 ( Royalties ). [ Article 24, paragraph 3 ]

Companies owned or controlled abroad

2.241 Paragraph 4 of this Article prevents a country from giving less favourable treatment to an enterprise, the capital of which is owned or controlled, wholly or partly, directly or indirectly, by one or more residents of the other country. That is, Australian companies owned or controlled by Norwegian residents may not be given other or more burdensome treatment than locally owned or controlled Australian companies. [ Article 24, paragraph 4 ]

2.242 Differential tax treatment based on residency is not affected by this paragraph. Nor does the paragraph require the same treatment of non-resident shareholders in the company as resident shareholders. Accordingly, there is no obligation under this provision or any other provision of the Article to allow imputation credits to non-resident shareholders.

Exclusions

2.243 Non-resident individuals do not have to be granted the personal allowances, reliefs or reductions available to residents of the tax treaty countries. [ Article 24, paragraph 5 ]

2.244 This means that Australia will continue to be able to grant to resident individuals rebates such as the dependent spouse rebate that are not available to non-residents.

2.245 Unlike paragraph 3 of Article 24 ( Non-discrimination ) of the OECD Model, paragraph 5 of this Article is not just limited to those benefits conferred by a country relating to civil status or family responsibilities of the individual. For Australian tax purposes, it also extends, for example, to the tax-free threshold which may be considered not to be based either on civil status or family responsibilities.

2.246 Paragraph 6 of this Article excludes from the operation of the Article certain provisions of the law of both countries that are important for purposes of economic regulation and integrity of the tax system. Although most are generally recognised by the international community as not being discriminatory, the specific exclusion of these provisions will ensure that they can continue to operate for their intended purpose. The provisions of the law of Australia and Norway to be excluded are those that:

•

prevent the avoidance or evasion of taxes;

•

defer tax where an asset is transferred out of the jurisdiction;

•

provide for consolidation of group entities;

•

do not allow tax rebates or credits in relation to dividends paid by a company;

•

provide for deductions for research and development expenditure; or

•

are agreed in an Exchange of Notes between the two Governments to be unaffected by the Article.

[ Article 24, paragraph 6 ]

Avoidance or evasion provisions

2.247 Subparagraph 6(a) of this Article ensures that the operation of domestic measures to combat avoidance and evasion is not affected by this Article. Paragraph 7 of this Article provides that the reference to laws designed to prevent avoidance or evasion of taxes includes thin capitalisation, dividend stripping, transfer pricing, controlled foreign company, transferor trust and foreign investment fund provisions, and collection measures including conservancy. Although it is commonly accepted by most OECD member countries that such provisions do not contravene Non-discrimination Articles, this outcome is specifically provided for in this Convention by the exclusion of such rules from the operation of this Article. [ Article 24, subparagraph 6(a ) and paragraph 7 ]

2.248 The enforcement and operation of the various aspects of the withholding tax provisions relating to non-residents are preserved by the operation of subparagraph 6(a) and paragraph 7 of this Article. For example, section 221YRA (Recovery of amounts by the Commissioner) of the ITAA 1936 provides that where interest or royalties are paid to a non-resident and the payer fails to deduct withholding tax that the interest or royalty cannot be claimed as a deduction. No similar measure exists in relation to payments from a resident to another resident.

Capital gains roll-over relief

2.249 This Article will not affect the operation of any provision of domestic tax legislation which does not permit the deferral of tax arising on the transfer of an asset where the transfer of the asset by the transferee would take the asset beyond the taxing jurisdiction of the country. [ Article 24, subparagraph 6(b )]

2.250 Under Australia's domestic tax legislation permanent establishments generally enjoy the same tax treatment as resident enterprises. However, roll-over relief is denied to a permanent establishment where an asset with the necessary connection with Australia is transferred to a non-resident if the asset is not an asset with the necessary connection with Australia in the hands of the transferee. Subparagraph 6(b) ensures that Australia will be able to continue to deny roll-over relief in these circumstances.

Consolidation

2.251 Domestic law rules which provide for single entity treatment of a group of entities are excluded from the operation of this Article, provided that there is no discrimination regarding access to consolidation treatment between Australian resident companies on the basis of ownership of the company.

2.252 Australia's consolidation measures are restricted to wholly-owned Australian resident groups. The Article will not apply to these measures, with the result that domestic law provisions continue to operate to preclude permanent establishments of non-resident companies from consolidating with resident entities that may be wholly-owned by a non-resident. [ Article 24, subparagraph 6(c )]

Rebates or credits paid by a company

2.253 Domestic law rules of either country which allow an intercorporate dividend rebate or credit are excluded from the operation of this Article. In relation to credits, Australia does not permit non-residents to offset imputation credits against their Australian source income, or to seek a refund of any excess imputation credits. Subparagraph 6(d) ensures that this Article does not operate to preclude this treatment. [ Article 24, subparagraph 6(d )]

Research and development expenditure

2.254 The domestic law research and development provisions are excluded from the operation of this Article. It follows that Australia will be able to continue to apply its domestic law rules concerning access to concessions in respect of research and development expenditure. Currently, these concessions are only available to companies that are incorporated in Australia. [ Article 24, subparagraph 6(e )]

Power to carry out an Exchange of Notes

2.255 Subparagraph 6(f) of this Article provides a mechanism for the two Governments to exclude other provisions of domestic law from the operation of the Article. The two countries may agree in an Exchange of Notes that other domestic law provisions will not be affected by the requirements of the Article. [ Article 24, subparagraph 6(f )]

Taxes to which the Non-discrimination Article applies

2.256 In the case of Australia, the relevant taxes are primarily the income tax (including the petroleum resource rent tax and tax on capital gains) and the GST and fringe benefits tax. The provisions of this Article also apply to taxes imposed by the Australian states and territories (see also commentary to Article 2 ( Taxes Covered )).

2.257 In the case of Norway, the relevant taxes are primarily the tax on general income, the tax on personal income, the special tax on petroleum income, the resource rent tax on income from production of hydro-electric power, the withholding tax on dividends and the tax on remuneration to non-resident artistes, etc.

More favourable treatment

2.258 Nothing in this Article prevents either country from treating residents of the other country more favourably than its own residents.

Article 25 - Mutual Agreement Procedure

Consultation on specific cases

2.259 This Article provides for consultation between the competent authorities of the two countries with a view to reaching a solution in cases where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the Norway Convention. [ Article 25, paragraph 2 ]

2.260 A person wishing to use this procedure may present a case to the competent authority of the country of which the person is a resident. If the case comes under paragraph 1 of Article 24 ( Non-discrimination ) of this Convention, the person must present a case to the competent authority of the country of which the person is a national.

2.261 Presentation of a case by a person to a competent authority must be made within three years of the first notification of the action which the taxpayer considers gives rise to taxation not in accordance with the Norway Convention. Presentation of a case does not deprive the person of access to, or affect their rights in relation to, other legal remedies available under the domestic laws of the countries. [ Article 25, paragraph 1 ]

2.262 If the person's claim seems to the competent authority to which the case has been presented to be justified, and that competent authority is not itself able to solve the problem, then the competent authority is required to seek to resolve the case by mutual agreement with the competent authority of the other country, with a view to avoiding taxation not in accordance with the treaty. [ Article 25, paragraph 2 ]

2.263 If, after consideration by the competent authorities, a solution is reached, it shall be implemented in accordance with the provisions of the Article.

Implementation of a solution

2.264 The solution reached by mutual agreement between the competent authorities of the relevant countries shall be implemented notwithstanding any time limits in the domestic laws of the tax treaty countries. This allows the competent authorities the flexibility to reach a satisfactory solution and avoids problems that might arise where each country has a different time limit in their domestic law. [ Article 25, paragraph 2 ]

Consultation on general problems

2.265 This Article also authorises consultation between the competent authorities of the two countries for the purpose of resolving any difficulties that arise regarding the interpretation or application of the treaty and to give effect to it. This may allow, for example, the competent authorities to agree to apply an agreed solution to a broader range of taxpayers, notwithstanding that the original uncertainty may have arisen in connection with an individual case that comes under the procedure outlined in paragraphs 1 and 2 of this Article.

2.266 Paragraph 3 of this Article also enables the competent authorities to deal with cases of double taxation that do not come within the scope of the Norway Convention. [ Article 25, paragraph 3 ]

Methods of communication between competent authorities

2.267 The competent authorities are permitted to communicate directly with each other without having to go through diplomatic channels. This may be done by letter, facsimile transmission, telephone, direct meetings or any other convenient means. [ Article 25, paragraph 4 ]

General Agreement on Trade in Services (GATS) dispute resolution process

2.268 Paragraph 5 of this Article deals with disputes that may be brought before the World Trade Organisation Council for Trade in Services under the dispute resolution processes of the GATS. [ Article 25, paragraph 5 ]

Background

2.269 Australia and Norway are both parties to the GATS. Article XVII ( National Treatment ) of the GATS requires a party to accord the same treatment to services and service suppliers of other parties as it accords to its own like services and service suppliers.

2.270 Articles XXII ( Consultation ) and XXIII ( Dispute Settlement and Enforcement ) of the GATS provide for discussion and resolution of disputes. Where a measure of another party falls within the scope of a tax treaty, paragraph 3 of Article XXII ( Consultation ) provides that the other party to the tax treaty may not invoke Article XVII ( National Treatment ). However, if there is a dispute as to whether a measure actually falls within the scope of a tax treaty, either country may take the matter to the Council on Trade in Services for referral to binding arbitration.

2.271 Notwithstanding paragraph 3 of Article XXII ( Consultation ) of the GATS, Australia and Norway have agreed that the consent of both countries is required before a dispute as to whether a measure falls within the scope of this Convention may be brought before the Council on Trade in Services. This is seen as the most effective way of dealing with such disputes, and avoids difficult questions as to when a disputed issue falls within the dispute resolution mechanism of this Convention or of the GATS dispute.

2.272 This provision is based, in all essential respects, on an OECD Model commentary recommendation, and is common in recent international treaty practice. [ Article 25, paragraph 5 ]

Article 26 - Exchange of Information

2.273 The Norway Convention aligns the information exchange provisions to the 2005 OECD standard. The Article differs from the previous approach in the following ways:

•

The scope is expanded to a wider range of taxes.

•

The new provision clarifies that the Commissioner is obliged to obtain information for Norwegian tax authorities regardless of whether Australia has a domestic tax interest in the information sought.

•

Bank secrecy laws do not limit the exchange of information.

Foreseeably relevant information

2.274 Article 26 authorises and limits the exchange of information by the two competent authorities to information foreseeably relevant to the administration or enforcement of the relevant taxes. The exchange of information is not restricted by Article 1 ( Persons Covered ) of the treaty, and may therefore cover persons who are not residents of Australia or Norway.

2.275 The standard of foreseeable relevance is intended to ensure that information may be exchanged to the widest possible extent. However, competent authorities are not entitled to request information from the other country which is unlikely to be relevant to the tax affairs of a taxpayer, or to the administration and enforcement of tax laws. [ Article 26, paragraph 1 ]

2.276 The change in wording from that used in the corresponding Article in the existing Norway treaty to a 'foreseeably relevant' standard reflects the wording in Article 26 of the OECD Model and no difference in effect is intended.

Taxes to which this Article applies

2.277 Under the corresponding Article in the existing Norway treaty, the information that could be requested and obtained between the two countries was limited to information in relation to taxes to which the treaty applied (generally income taxes).

2.278 Under this Convention, the range of taxes for which information may be exchanged has been expanded. The Australian competent authority can now request and obtain information concerning all federal taxes administered by the Commissioner from their counterpart in Norway. This means, for example, that information concerning Australian indirect taxes (ie, the GST) may be requested and obtained from Norway. [ Article 26, paragraph 1 ]

2.279 Similarly, in the case of Norway, the Norwegian competent authority can now request and obtain information concerning taxes of every kind and description imposed under Norwegian tax laws, from the Australian competent authority to the extent that the requested information relates to taxes administered by the Commissioner.

Use of exchanged information

2.280 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted consistent with the former Article and the approach taken in the OECD Model. Any information received by a country must be treated as secret in the same manner as information obtained under the domestic law of that country and can only be disclosed to the persons identified in paragraph 2 of the Article. [ Article 26, paragraph 2 ]

No domestic tax interest required

2.281 When requested, a country is required to obtain information in the same manner as if it were administering its domestic tax system, notwithstanding that the country may not require the information for its own purposes. Australia would recognise this obligation to obtain relevant information for treaty partner countries, even in the absence of an explicit provision to this effect. [ Article 26, paragraph 4 ]

Limitations

2.282 The country requested to provide information under this Article is not obliged to do so where:

•

it would be required to carry out administrative procedures incompatible with its own law or the domestic law and administrative practice, of either Australia or Norway; or

•

such information is not obtainable under the domestic law or in the normal course of administration by the competent authority in either Australia or Norway. Australia is not obliged, for example, to use police powers to obtain information requested by Norway, although information gathered in that way which is already in the possession of the Commissioner may be exchanged.

[ Article 26, subparagraphs 3(a ) and ( b )]

2.283 Also, in no case is the country receiving the request obliged to supply information under this Article that would:

•

disclose any trade, business, industrial, commercial or professional secret or trade process; or

•

be contrary to public policy.

[ Article 26, subparagraph 3(c )]

Information held by banks, other financial institutions, nominees etc

2.284 This paragraph ensures that paragraph 3 of this Article cannot be used to prevent the supply of information solely because the information is held by banks, other financial institutions, nominees etc. The inclusion of this paragraph in the Norway Convention should not be interpreted as suggesting the corresponding Article of the existing Norway treaty did not cover the exchange of such information. Inclusion of paragraph 5 merely clarifies Australia's current treaty practice, and reflects recent changes to Article 26 ( Exchange of Information ) of the OECD Model. [ Article 26, paragraph 5 ]

Article 27 - Assistance in the Collection of Taxes

Assistance in the collection of taxes

2.285 Article 27 ( Assistance in the Collection of Taxes ) authorises and requires Australia and Norway to provide assistance to each other in the collection of revenue claims. This assistance is not to be restricted by the terms of Article 1 ( Personal Scope ) of the treaty. Assistance must therefore be provided as regards a revenue claim owed to either country by any person, whether or not a resident of Australia or Norway. The form of the assistance is set out in paragraphs 3 and 4 of this Article. [ Article 27, paragraph 1 ]

2.286 The term revenue claim is defined for the purposes of this Article to mean an amount owed in respect of taxes referred to in Article 2 ( Taxes Covered ) of the treaty. A revenue claim may cover any Norwegian tax, or any Australian federal tax administered by the Commissioner, but only insofar as the imposition of such taxes is not contrary to this treaty or any other instrument in force between Australia and Norway. It also applies to interest, administrative penalties and costs of collection or conservancy related to such amount. [ Article 27, paragraph 2 ]

2.287 This Article will apply from the date agreed in an exchange of notes through the diplomatic channel. [ Article 29, subparagraph 1(d )]

Enforceable revenue claims

2.288 Assistance in collection will only be provided by Australia in relation to a revenue claim that is enforceable in Norway. Similarly, Norway is not required to provide assistance in collection in respect of an Australian revenue claim that is not enforceable in Australia. A revenue claim will be enforceable where the requesting country has the right, under its domestic law, to collect the revenue claim. Further, the revenue claim must be owed by a person who, at that time, under the law of that country, has no administrative or judicial rights to prevent its collection.

2.289 Paragraph 3 of this Article regulates the way in which the revenue claim of the requesting country is to be collected by the requested country. Other than in relation to time limits and priority (see paragraphs 2.293 to 2.294), the requested country is required to collect the revenue claim as though it were its own revenue claim. This obligation applies even if, at that time, the requested country has no need to undertake collection actions related to that taxpayer for its own tax purposes. [ Article 27, paragraph 3 ]

2.290 Where a request from Norway concerns a tax that does not exist in Australia, Australia will follow the procedure applicable to a claim for a similar Australian tax or any other appropriate procedure if no similar tax exists.

Measures of conservancy

2.291 Paragraph 4 of this Article enables Australia or Norway to request the other country to take measures of conservancy even where it cannot yet ask for assistance in collection, such as where the revenue claim is not yet enforceable or when the debtor still has the right to prevent its collection. An example of a conservancy measure is the seizure or the freezing of assets before final judgment to guarantee that the assets will still be available when collection can subsequently take place.

2.292 If requested to do so by Norway, Australia is required to take measures of conservancy in respect of the revenue claim in accordance with the provisions of Australian law as if the revenue claim were an Australian revenue claim. Although Australia does not have specific conservancy measures, the Commissioner may apply for a Mareva injunction, which would prevent the taxpayer and the taxpayer's associates from dealing with certain assets. [ Article 27, paragraph 4 ]

Time limits

2.293 Paragraph 5 of this Article provides that the requested country's domestic law time limitations beyond which a revenue claim cannot be enforced or collected do not apply to a revenue claim in respect of which the other country has made a request for assistance in collection. Rather, the time limits of the requesting country apply. [ Article 27, paragraph 5 ]

Priority of claims

2.294 Paragraph 5 of this Article also provides that any rules of Australia and Norway which give priority to tax debts over the claims of other creditors do not apply to a revenue claim of the other country. This restriction applies regardless of the fact that the requested country must generally treat the claim as its own revenue claim.

2.295 The words 'by reason of its nature as such' in paragraph 5 indicate that any time limits and priority rules to which the paragraph applies are only those that are specific to unpaid taxes. Consequently, paragraph 5 does not prevent the application of general rules concerning time limits or priority which would apply to all debts, such as rules giving priority to a claim by reason of that claim having arisen or having been registered before another one. [ Article 27, paragraph 5 ]

Restriction on judicial and administrative proceedings

2.296 Paragraph 6 of this Article ensures that any legal or administrative objection concerning the existence, validity or the amount of a revenue claim of the requesting country is to be exclusively dealt with in that country. For example, no legal or administrative proceedings, such as a request for judicial review, may be initiated in Australia with respect to the existence, validity or amount of a Norwegian revenue claim. [ Article 27, paragraph 6 ]

Change in circumstances

2.297 Paragraph 7 of this Article deals with the situation where the conditions in paragraph 3 or 4 are no longer satisfied after a request for assistance has been made, but before the revenue claim has been collected and remitted by the requested country. An example of such a situation would be where a request for assistance in collection has been made by Norway, but the revenue claim ceases to be enforceable in Norway prior to its collection by Australia.

2.298 Where the relevant conditions in paragraph 3 or 4 of this Article are no longer satisfied, paragraph 7 requires the competent authority of the requesting country to promptly notify the competent authority of the requested country of that fact.

2.299 Following such notification, the requested country has the option to ask the requesting country to either suspend or withdraw its request for assistance. If the request is suspended, the suspension applies until such time as the requesting country informs the other country that the conditions necessary for making a request as regards the revenue claim are again satisfied or that it withdraws its request. [ Article 27, paragraph 7 ]

Limitations

2.300 Paragraph 8 of this Article contains certain limitations to the obligations imposed on the country which receives a request for assistance. The requested country is permitted to refuse the request for assistance where those limitations apply.

2.301 The first limitation is that the requested country is not required to exceed the bounds of its own domestic laws and administrative practice or those of the other country in fulfilling its obligations under the Article. [ Article 27, subparagraph 8(a )]

2.302 However, subparagraph 8(a) of this Article does not prevent Australia from applying administrative measures to collect a Norwegian revenue claim, even though invoked solely to provide assistance in the collection of Norwegian taxes.

2.303 Subparagraph 8(b) limits the application of this Article where it would require the carrying out of measures that are contrary to public policy, such as where providing assistance may affect the vital interests of the country itself. [ Article 27, subparagraph 8(b )]

2.304 The third limitation provides that neither country is obliged to satisfy a request for assistance if the other country has not pursued all reasonable measures of collection or conservancy that are available under its own laws or administrative practice. [ Article 27, subparagraph 8(c )]

2.305 Under subparagraph 8(d) of this Article either country may reject a request for assistance on the basis of practical administrative considerations such as when the costs of recovering a revenue claim would exceed the amount of the revenue claim itself. [ Article 27, subparagraph 8(d )]

2.306 The final limitation allows either country to refuse to provide assistance if it considers that the taxes with respect to which assistance is requested are imposed contrary to generally accepted taxation principles. [ Article 27, subparagraph 8(e )]

Article 28 - Members of Diplomatic Missions and Consular Posts

2.307 The purpose of this Article is to ensure that the provisions of the tax treaty do not result in members of diplomatic missions, permanent missions and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international conventions. Such persons are entitled, for example, to certain fiscal privileges under the Diplomatic Privileges and Immunities Act 1967 and the Consular Privileges and Immunities Act 1972 which reflect Australia's international diplomatic and consular obligations. [ Article 28, paragraph 1 ]

Prevention of double non-taxation

2.308 Consistent with Norwegian treaty practice, paragraph 2 ensures that double non-taxation does not arise where income is not subject to tax in the country to which the diplomat or consular official is posted as a result of tax privileges granted to diplomats and consular officers under general rules of international law or under international agreements. In these circumstances, paragraph 2 provides that the country of which the diplomat or consular official is a representative will have the right to tax that income. [ Article 28, paragraph 2 ]

Article 29 - Entry into Force

Date of entry into Force

2.309 This Article provides for the entry into force of the Norway Convention. The treaty will enter into force on the last date on which diplomatic notes are exchanged notifying that the domestic processes to give the Convention the force of law in the respective countries has been completed. In Australia, enactment of the legislation giving the force of law in Australia to the Convention along with tabling the treaty in Parliament are prerequisites to the exchange of diplomatic notes. [ Article 29, paragraph 1 ]

Date of application for Australian taxes

Withholding taxes

2.310 Once it enters into force, the Norway Convention will apply in Australia in respect of withholding tax on income that is derived by a non-resident in relation to income derived on or after 1 January in the calendar year next following the date on which the tax treaty enters into force. [ Article 29, sub-subparagraph 2(a )( i )]

Other Australian taxes

2.311 The Norway Convention will first apply to other Australian taxes on income, profits or gains of the Australian year of income beginning on or after 1 July in the calendar year next following the date on which the tax treaty enters into force.

2.312 Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the accounting period that has been substituted for the year of income beginning on 1 July in the calendar year next following the date on which the Norway Convention enters into force will be the relevant year of income for the purposes of the application of such Australian tax. [ Article 29, sub-subparagraph 2(a )( ii )]

Date of application in Norway

2.313 In Norway, the Norway Convention will have effect in relation to taxes on income, in the calendar year next following that in which the treaty enters into force and subsequent years. A calendar year includes accounting periods beginning in any such year. [ Article 29, subparagraph 2(b )]

Exchange of information application date

2.314 Article 26 ( Exchange of Information ) will first apply from the date of entry into force of the treaty. It applies to requests for exchange of information in respect of taxes of every kind and description imposed under the federal tax laws administered by the Commissioner, received on or after that date. However, information that may relate to the income tax affairs of a taxpayer may predate entry into force of the Convention. [ Article 29, subparagraph 2(c )]

Assistance in collection of taxes date of application

2.315 Article 27 ( Assistance in the Collection of Taxes ) will first have effect from the date agreed in an exchange of notes between Australia and Norway. [ Article 29, subparagraph 2(d )]

Termination of the existing Norway treaty

2.316 The existing Norway treaty shall be terminated and cease to have effect from the dates on which the Norway Convention commences to have application for the respective taxes. [ Article 29, paragraph 3 ]

Article 30 - Termination

2.317 The Norway Convention is to continue in effect indefinitely. However, either country may give written notice of termination of the Convention through the diplomatic channel at least six months before the end of any calendar year beginning after the expiration of five years from the date of its entry into force. [ Article 30 ]

Cessation in Australia

2.318 In the event of either country terminating the Norway Convention, the tax treaty would cease to be effective in Australia for the purposes of:

•

withholding tax on income derived by a non-resident in relation to income derived on or after 1 January in the calendar year next following that in which the notice of termination is given; and

•

other Australian taxes in relation to income, profits or gains in the Australian year of income commencing on or after 1 July in the calendar year next following that in which the notice of termination is given.

[ Article 30, subparagraph ( a )]

Cessation in Norway

2.319 The Norway Convention would correspondingly cease to be effective in Norway for the purposes of taxes on income relating to the calendar year (including accounting periods beginning in such year) next following that in which the notice is given. [ Article 30, subparagraph ( b )]