House of Representatives

International Tax Agreements Amendment (No. 1) Bill 2011

Explanatory Memorandum

Circulated By the Authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP

The Australia-Turkey convention

Outline of chapter

8.1 Schedule 2 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the 2010 Convention between the Government of Australia and the Government of the Republic of Turkey for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion and its Protocol (Turkish convention). Subsection 3AAA(1) of the Agreements Act 1953 will define the Turkish convention and subsection 5(1) will give it the force of law in Australia.

Context of amendments

8.2 The Turkish convention was signed in Ankara on 28 April 2010 and is the first convention of this type between Australia and Turkey. The Turkish convention will:

·
promote closer economic cooperation between Australia and Turkey by reducing taxation barriers; in particular avoiding double taxation on income arising from overlapping jurisdictions; and
·
improve the integrity of the tax system by providing the framework through which the tax administrations of Australia and Turkey can prevent international fiscal evasion.

Summary of new law

Main features of the Turkish convention

8.3 The main features of the Turkish convention are as follows:

·
Dual resident individuals (for example, individuals who are residents of both Australia and Turkey for tax purposes according to the domestic taxation laws of each country) are, in accordance with specified criteria, to be treated for the purposes of the Turkish convention as being residents of only one country [Article 4] .
·
Where a company is a resident of both countries for their domestic tax purposes, the entity is not entitled to the benefits of the Turkish convention except for the benefits provided to nationals under the non-discrimination provisions [Articles 3 and 4] .
·
Income from real property (including the profits of an enterprise from agricultural, pastoral or forestry activities carried out on that real property) may be taxed by the country in which the property is situated. Income from real property includes natural resource royalties [Article 6] .
·
Business profits 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 are generally to be taxed only in the country of residence of the operator [Article 8] .
·
Profits of associated enterprises may be adjusted for tax purposes where transactions have been entered into on other than arm's length terms [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:

-
a 5 per cent limitation applies on certain inter-corporate non-portfolio dividends where the recipient holds directly at least:

:
ten per cent of the voting power of the Australian company paying the dividend [Article 10, sub-subparagraph 2a)(i)] ; or
:
twenty-five per cent of the capital of the Turkish company paying the dividend. In these instances, the profits from which the dividends are paid must have been subjected to the full rate of corporate tax in Turkey and the dividends must be exempt from Australian taxation in the hands of the recipient company. [Article 10, sub-subparagraph 2a)(ii), Protocol, subitem 6a)] ; and

-
a general limit of 15 per cent applies to all other dividends [Article 10, subparagraph 2b)] .

·
In the case of branch profits:

-
a 5 per cent tax rate limitation applies to the after tax profits of the company where the branch profits were subject to the full rate of company tax in the country where the branch is situated [Article 10, subparagraph 4a)] ; and
-
a general limit of 15 per cent applies in all other cases [Article 10, subparagraph 4b)] .

·
In the case of interest:

-
an exemption applies for interest derived from the investment of official reserve assets by a government, its central bank or a bank performing central banking functions [Article 11, paragraph 3] ; and
-
a general limit of 10 per cent applies to all other interest [Article 11, paragraph 2] .

·
The rate limit on source country taxation of royalties is 10 per cent [Article 12, paragraph 2] .
·
Income, profits or gains from the alienation of real property may be taxed 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 certain companies and other entities (including land rich entities), all other capital gains will be taxable only in the country of residence [Article 13] .
·
Income derived from professional services or other activities of an independent nature 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 fixed base or the individual is present in the other country for a specified period [Article 14] .
·
Income from employment (that is, employees' 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 provided that the remuneration for the services is not borne by a permanent establishment of the employer in the country visited [Article 15] .
·
Directors' remuneration may be taxed in the country in which the company of which the person is a director is a resident for tax purposes [Article 16] .
·
Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed [Article 17] .
·
Pensions and annuities and similar periodic remuneration (other than those relating to government service) are taxable only in the country of residence of the recipient. Lump sums paid after the age of 60 in lieu of a right to receive a pension are also generally taxable only in the country of residence of the recipient. However, in respect of other lump sum payments (other than lump sum retirement benefits relating to government service), taxing rights are to be shared between the country of residence and the country of source [Article 18] .
·
Income from government service will generally be taxed only in the country that pays the remuneration. However, the remuneration will be taxed only in the other country where the services are rendered in that other country by a resident of that other country who is also a national of that other country or did not become a resident of that other country for the purpose of rendering the services [Article 19, paragraph 1] .
·
Pensions or annuities paid by, or out of funds created by, a country, to an individual in respect of services rendered to that country are taxable only in that country. However, these payments shall be taxable in the other country if the individual is a resident and a national of that country. Lump sum retirement benefits paid by, or out of funds created by, a country, to an individual in respect of services rendered to a country are taxable only in that country [Article 19, paragraph 2] .
·
Payments made from abroad to visiting students for their maintenance or education will be exempt from tax in the country visited [Article 20, paragraph 1] .
·
Remuneration received by a professor or teacher for the purpose of teaching, study or research at an educational institution for a period not exceeding two years will, under certain conditions, be exempt from tax in the country visited to the extent to which it is subject to tax by the country of residence [Article 20, paragraphs 2 and 3] .
·
Other income (that is, income not dealt with by other Articles) 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 Turkish convention prescribe, for domestic law and treaty purposes, that income, profits or gains derived by a resident of one country, which under certain provisions of the treaty may be taxed in the other country, will be treated as having a source in that other country [Article 22] .
·
Double taxation relief for income which, under the Turkish 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 Turkish convention as follows:

-
in Australia, by allowing a credit for the Turkish tax against Australian tax payable on income derived by a resident of Australia from sources in Turkey [Article 23, paragraph 1] ; and
-
in Turkey, by allowing a deduction for the Australian tax against Turkish tax payable on income derived by a resident of Turkey 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 Turkish convention by application of the general foreign income tax offset provisions of Australia's domestic law, or the relevant exemption provisions of that law where applicable.
·
Rules in the Turkish convention will protect nationals and businesses from tax discrimination in the other country and gives them private rights of appeal. However, Article 24 does not restrict either country from applying provisions designed to prevent avoidance or evasion of taxes (for Australia such measures include thin capitalisation, controlled foreign company rules and measures designed to ensure that taxes can be effectively collected and recovered, including conservancy measures), provisions dealing with capital gains deferral, provisions for the consolidation of resident entities and research and development concessions [Article 24] .
·
The Turkish convention provides for consultation between the two taxation authorities to prevent taxation not in accordance with the treaty [Article 25] .
·
The Turkish convention provides for exchange of information, including bank information, between the two taxation authorities. It authorises and requires Australia to exchange information where the information relates to federal taxes administered by the Commissioner of Taxation (Commissioner) [Article 26] .

Comparison of key features of new law and current law

New law Current law
Implements the 2010 Convention between Australia and Turkey. There is no existing treaty between Australia and Turkey.
Provides rules to treat dual resident individuals (for example, individuals who are residents of both Australia and Turkey for tax purposes according to the domestic taxation laws of each country) as residents of only one country for the purposes of the Turkish convention. No equivalent.
Defines the term 'permanent establishment' in Article 5 ( Permanent Establishment ) for the purposes of the Turkish convention. In particular, under the Turkish convention a building site or installation project constitutes a permanent establishment where it lasts more than six months. An enterprise is deemed to have a permanent establishment in a country if:

·
it carries on supervisory activities in that country for more than six months in connection with a building site, or a construction, installation or assembly project, which is being undertaken in that country;
·
substantial equipment is operated in that country by the enterprise for more than six months in any 12-month period;
·
it performs professional services through one or more individuals for a period or periods exceeding 183 days in any 12-month period; or
·
the enterprise habitually maintains a stock of goods or merchandise for the purpose of regular delivery.

The definition of 'permanent establishment' is set out in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
The Turkish convention treats certain business profits, such as profits from agricultural, pastoral or forestry activities, as income from real property, and ensures that arms' length profits are taxed on a net basis. The definition of 'real property' covers land, and rights relating to exploration for or exploitation of natural resources.
Source taxation of business profits is limited to those profits derived through a branch or other prescribed permanent establishment (Article 5) situated in the source country. In general, foreign residents are taxable on all Australian sourced income.
Source taxation of profits from shipping and airline transport operations is limited to income from domestic transport. Australia's domestic law provides for source country taxation of profits from shipping and airline activities (including non-transport activities).
Dividend withholding tax is limited to 5 per cent on certain inter-corporate non-portfolio dividends where the recipient holds directly at least:

·
ten per cent of the voting power of the Australian company paying the dividend; or
·
twenty-five per cent of the capital of the Turkish company paying the dividend. In these instances, the profits from which the dividends are paid must have been subjected to the full rate of corporate tax in Turkey and the dividends must be exempt from Australian taxation in the hands of the recipient company.

A general limit of 15 per cent applies to all other dividends.
In the case of branch profits:

·
a 5 per cent tax rate limitation applies to the after tax profits of the company where the branch profits were subject to the full rate of company tax in the country where the branch is situated; and
·
a general limit of 15 per cent applies in all other cases.

The rate of non-resident dividend withholding tax in Australia is 30 per cent. There is no tax on branch profits in Australia and the treaty will not change the taxation treatment of branch profits.
In the case of interest:

·
an exemption applies for interest derived from the investment of official reserve assets by a government, its central bank or a bank performing central banking functions; and
·
a general limit of 10 per cent applies to all other interest.

The rate of non-resident interest withholding tax in Australia is 10 per cent.
Reduces the rate of royalty withholding tax from 30 per cent to 10 per cent for all royalties. The rate of non-resident royalty withholding tax in Australia is 30 per cent of the gross payment.
Includes a comprehensive Alienation of Property Article which allocates taxing rights over gains.
The allocation of taxing rights in the Turkish convention is broadly consistent with Australia's capital gains tax arrangements for non-residents.
Non-residents are taxable on their capital gains from the alienation of real property, business assets of a permanent establishment and on indirect holdings of real property. In relation to indirect holdings of real property the non-resident has to have a non-portfolio interest in the entity holding the real property.
Source taxation of independent personal services is limited to those amounts attributable to a fixed base or where a person is present in that country for a period or periods exceeding in the aggregate 183 days in any 12-month period. In general, foreign residents are taxable on all Australian sourced income.
Employment income paid in respect of certain short term visits are taxable only in the country of residence of the employee where the remuneration is borne by a permanent establishment or fixed base of the employer in the employee's country of residence. No equivalent.
Pensions and retirement annuities and similar periodic remuneration (other than those relating to government service) may be taxed only in the country of residence of the recipient. Pensions may be taxable in both countries.
Lump sums (other than those relating to government service) paid after the age of 60 in lieu of a right to receive a pension, may also be taxed only in the country of residence of the recipient. However, in respect of other lump sum payments, taxing rights are to be shared between the country of residence and the country of source. Lump sums may be taxed in both countries.
Income from government service will generally be taxed only in the country that pays the remuneration.
However, the remuneration will be taxed only in the other country where the services are rendered in that other country by a resident of that other country who is a national, or did not become a resident of that other country for the purpose of rendering the services.
Pensions, annuities or lumps sums paid in respect of Government services rendered to a country are taxable only in that country. However, these payments shall be taxable in the other country if the individual is a resident and a national of, that other country.
No equivalent.
Includes a comprehensive article preventing tax discrimination under tax laws. No equivalent.
Includes a framework to allow for mutual agreement procedures between the relevant tax authorities to resolve disputes. No equivalent.
Includes a framework to allow the tax authorities to exchange taxpayer information. No equivalent.

The Turkey convention

8.4 A full transcript of the Turkish convention and detailed explanation follows:


'CONVENTION BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE REPUBLIC OF TURKEY FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME AND THE PREVENTION OF FISCAL EVASION

The Government of Australia and the Government of the Republic of Turkey,

Desiring to conclude a Convention for the avoidance of double taxation with respect to taxes on income and the prevention of fiscal evasion,

Have agreed as follows:

ARTICLE 1

Persons Covered

This Convention shall apply to persons who are residents of one or both of the Contracting States.

ARTICLE 2

Taxes Covered

1. The existing taxes to which this Convention shall apply are:

(a)
in Australia:
the income tax, including the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources, imposed under the federal law of Australia;
(b)
in Turkey:

(i)
the income tax; and
(ii)
the corporation tax.


2. This Convention shall apply also to any identical or substantially similar taxes which are imposed under the federal law of Australia or the law of Turkey after the date of signature of this Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any substantial changes which have been made in the law of their respective States relating to the taxes to which this Convention applies within a reasonable period of time after those changes.

3. For the purposes of Article 26, the taxes to which this Convention shall apply are:

(a)
in the case of Australia, taxes of every kind and description imposed under the federal tax laws administered by the Commissioner of Taxation; and
(b)
in the case of Turkey, taxes of every kind and description imposed under the tax laws administered by Ministry of Finance.


ARTICLE 3

General Definitions

1. For the purposes of this Convention, unless the context otherwise requires:

(a)
the term "Australia", when used in a geographical sense, excludes all external territories other than:

(i)
the Territory of Norfolk Island;
(ii)
the Territory of Christmas Island;
(iii)
the Territory of Cocos (Keeling) Islands;
(iv)
the Territory of Ashmore and Cartier Islands;
(v)
the Territory of Heard Island and McDonald Islands; and
(vi)
the Coral Sea Islands Territory,

and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the seabed and subsoil of the continental shelf;
(b)
the term "Turkey" means the Turkish territory, as well as the (maritime) areas over which it has jurisdiction or sovereign rights for the purpose of exploring and exploiting the natural resources of the seabed and subsoil of the continental shelf in accordance with international law;
(c)
the term "Australian tax" means tax imposed by Australia, being tax to which this Convention applies by virtue of paragraphs 1 or 2 of Article 2, but does not include any penalty or interest imposed under the law of Australia relating to its tax;
(d)
the term "Turkish tax" means tax imposed by Turkey, being tax to which this Convention applies by virtue of paragraphs 1 or 2 of Article 2, but does not include any penalty or interest imposed under the law of Turkey relating to its tax;
(e)
the term "company" means any body corporate or any entity which is treated as a company or body corporate for tax purposes;
(f)
the term "competent authority" means, in the case of Australia, the Commissioner of Taxation or an authorised representative of the Commissioner and, in the case of Turkey, the Minister of Finance or an authorised representative of the Minister;
(g)
the terms "a Contracting State" and "other Contracting State" mean Australia or Turkey, as the context requires;
(h)
the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;
(i)
the term "international traffic" means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely from a place or between places in the other Contracting State;
(j)
the term "Turkish company" means a company which, under the law of Turkey relating to Turkish tax, is a resident of Turkey, and which is not, under the law of Australia relating to Australian tax, a resident of Australia;
(k)
the term "Australian company" means a company which, under the law of Australia relating to Australian tax, is a resident of Australia, and which is not, under the law of Turkey relating to Turkish tax, a resident of Turkey;
(l)
the term "national", in relation to a Contracting State, means:

(i)
any individual possessing nationality or citizenship of that Contracting State; and
(ii)
any company or legal person deriving its status as such from the laws in force in that Contracting State;

(m)
the term "person" includes an individual, a company and any other body of persons.


2. As regards the application of the Convention by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has at that time under the law of that State concerning the taxes to which the Convention applies, any meaning under the applicable tax law of that State prevailing over a meaning given to the term under other law of that State.

ARTICLE 4

Resident

1. For the purposes of this Convention, a person is a resident of a Contracting State:

(a)
in the case of Australia, if the person is:

(i)
an Australian company; or
(ii)
any other person (except a company) who, under the law of Australia relating to Australian tax, is a resident of Australia;

(b)
in the case of Turkey, if the person is:

(i)
a Turkish company; or
(ii)
any other person (except a company) who, under the law of Turkey relating to Turkish tax, is a resident of Turkey.


2. The term "resident of a Contracting State" also includes that State and any political subdivision or local authority of that State.

3. A person is not a resident of a Contracting State for the purposes of this Convention if the person is liable to tax in that State in respect only of income from sources in that State.

4. Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Contracting States, then the person's status shall be determined as follows:

(a)
the individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);
(b)
if the State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national;
(c)
if the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.


ARTICLE 5

Permanent Establishment

1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

2. The term "permanent establishment" includes especially:

(a)
a place of management;
(b)
a branch;
(c)
an office;
(d)
a factory;
(e)
a workshop;
(f)
a mine, an oil or gas well, a quarry or any other place relating to the exploration for or exploitation of natural resources; and
(g)
a building site or construction, installation or assembly project which exists for more than 6 months.


3. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if:

(a)
it carries on supervisory activities in that State for more than 6 months in connection with a building site, or a construction, installation or assembly project, which is being undertaken in that State;
(b)
substantial equipment is operated in that State by the enterprise for more than 6 months in any 12 month period.


4. An enterprise shall not be deemed to have a permanent establishment merely by reason of:

(a)
the use of facilities solely for the purpose of storage, display or irregular delivery of goods or merchandise belonging to the enterprise; or
(b)
the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or irregular delivery; or
(c)
the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; or
(d)
the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; or
(e)
the maintenance of a fixed place of business solely for the purpose of activities which have a preparatory or auxiliary character for the enterprise, such as advertising or scientific research.


5. Notwithstanding the provisions of paragraph 1, 2, and 3, where an enterprise of a Contracting State performs professional services in the other Contracting State for a period or periods exceeding 183 days in any twelve month period, and these services are performed through one or more individuals who are present and performing such services in that other State, the activities carried on in that other State in performing these services shall be deemed to be carried on through a permanent establishment of the enterprise situated in that other State.

6. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than an agent of an independent status to whom paragraph 7 applies is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person:

(a)
has, and habitually exercises in that State, an authority to conclude contracts on behalf of the enterprise, unless the person's activities are limited to the purchase of goods or merchandise for the enterprise; or
(b)
has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which the person regularly delivers goods or merchandise on behalf of the enterprise; or
(c)
in so acting, manufactures or processes in that State for the enterprise goods or merchandise belonging to the enterprise.


7. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a person who is a broker, general commission agent or any other agent of an independent status and is acting in the ordinary course of the person's business as such a broker or agent.

8. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself make either company a permanent establishment of the other.

9. The principles set forth in the preceding paragraphs of this Article shall be applied in determining for the purposes of paragraph 6 of Article 11 and paragraph 5 of Article 12 whether there is a permanent establishment outside both Contracting States, and whether an enterprise, not being an enterprise of a Contracting State, has a permanent establishment in a Contracting State.

ARTICLE 6

Income from Real Property

1. Income from real property (including income from agricultural, pastoral or forestry activities on that real property) may be taxed in the Contracting State in which the real property is situated.

2. In this Article, the term "real property":

(a)
in the case of Australia, has the meaning which it has under the law of Australia and includes:

(i)
a lease of land and any other interest in or over land, whether improved or not, including a right to explore for mineral, oil or gas deposits or other natural resources, and a right to mine those deposits or resources; and
(ii)
a right to receive variable or fixed payments either as consideration for or in respect of the exploitation of, or the right to explore for or exploit, mineral, oil or gas deposits, quarries or other places of extraction or exploitation of natural resources;

(b)
in the case of Turkey, means property which according to the laws of Turkey is immovable property, and includes:

(i)
property accessory to immovable property;
(ii)
livestock and equipment used in agriculture and forestry (including the breeding and cultivation of fish);
(iii)
rights to which the provisions of general law respecting landed property apply; and
(iv)
usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources;

(c)
does not include ships, boats and aircraft.


3. Any interest or right referred to in paragraph 2 shall be regarded as situated where the land, mineral, oil or gas deposits, quarries, natural resources, immovable property, landed property or sources, as the case may be, are situated or where the exploration may take place.

4. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of real property.

5. The provisions of paragraphs 1, 3, and 4 shall also apply to income from real property of an enterprise and to income from real property used for the performance of independent personal services.

ARTICLE 7

Business Profits

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be reasonably expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises with which it deals.

3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses of the enterprise, being expenses which are incurred for the purposes of the permanent establishment (including executive and general administrative expenses so incurred) and which would be deductible if the permanent establishment were an independent entity which paid those expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere.

4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

5. Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person, including determinations in cases where the information available to the competent authority of that State is inadequate to determine the profits to be attributed to a permanent establishment, provided that that law shall be applied, so far as the information available to the competent authority permits, consistently with the principles of this Article.

6. Where profits include items of income or gains which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

7. Nothing in this Article shall affect the operation of any law of a Contracting State relating to tax imposed on profits from insurance with nonresidents provided that if the relevant law in force in either Contracting State at the date of signature of this Convention is varied (otherwise than in minor respects so as not to affect its general character) the Contracting States shall consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate.

8. Where:

(a)
a resident of a Contracting State is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated as a company for tax purposes; and
(b)
in relation to that enterprise, that trustee would, in accordance with the principles of Article 5, have a permanent establishment in that other State,


the enterprise carried on by the trustee shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated therein and that share of business profits shall be attributed to that permanent establishment.

ARTICLE 8

Shipping and Aircraft Operations

1. Profits of an enterprise of a Contracting State derived from the operation of ships or aircraft shall be taxable only in that State.

2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State to the extent that they are profits derived directly or indirectly from ship or aircraft operations confined solely to places in that other State.

3. The provisions of paragraphs 1 and 2 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

4. For the purposes of this Article, profits derived from the carriage by ships or aircraft of passengers, livestock, mail, goods or merchandise which are shipped in a Contracting State and are discharged at a place in that State shall be treated as profits from ship or aircraft operations confined solely to places in that State.

ARTICLE 9

Associated Enterprises

1. Where:

(a)
an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State; or
(b)
the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,


and in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might reasonably be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which, but for those conditions, might reasonably have been expected to accrue to one of the enterprises but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

2. Nothing in this Article shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person, including determinations in cases where the information available to the competent authority of that State is inadequate to determine the profits accruing to an enterprise, provided that that law shall be applied, so far as the information available to the competent authority permits, consistently with the principles of this Article.

3. Where profits on which an enterprise of a Contracting State has been charged to tax in that State are also included, by virtue of the provisions of paragraph 1 or 2, in the profits of an enterprise of the other Contracting State and charged to tax in that other State, and the profits so included are profits which might reasonably have been expected to have accrued to that enterprise of the other State if the conditions operative between the enterprises had been those which might reasonably have been expected to have operated between independent enterprises dealing wholly independently with one another, then the first-mentioned State shall make an appropriate adjustment to the amount of tax charged therein on those profits, if it agrees with the adjustment made by the other Contracting State. In determining such adjustment, due regard shall be had to the other provisions of this Convention and for this purpose the competent authorities of the Contracting States shall if necessary consult each other.

ARTICLE 10

Dividends

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the beneficial owner of the dividends is a resident of the other State the tax so charged shall not exceed:

(a)

(i)
in the case of dividends paid by a company that is a resident of Australia, 5 per cent of the gross amount of the dividends, where those dividends are paid to a company (other than a partnership) which holds directly at least 10 per cent of the voting power in the company paying the dividends; and
(ii)
in the case of dividends paid by a company that is a resident of Turkey, 5 per cent of the gross amount of the dividends which are paid out of profits which have been subjected to the full rate of corporation tax in Turkey, where those dividends are paid to a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; and

(b)
15 per cent of the gross amount of the dividends in all other cases,


provided that if the relevant law in either Contracting State at the date of signature of this Convention is varied, otherwise than in minor respects so as to not affect its general character, the Contracting States shall consult each other with a view to agreeing to any amendment of this paragraph that may be appropriate.

3. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as other amounts which are subjected to the same taxation treatment as income from shares by the law of the State of which the company making the distribution is a resident.

4. Profits of a company which is a resident of a Contracting State and which carries on business in the other Contracting State through a permanent establishment situated therein may, after having been taxed in accordance with Article 7, be taxed on the remaining amount in the Contracting State in which the permanent establishment is situated and in accordance with the law of that State, but the tax so charged shall not exceed:

(a)
5 per cent of the remaining amount where profits of the company are subject to the full rate of corporation tax in that State; and
(b)
15 per cent of the remaining amount in all other cases.


5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with that permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6. Subject to paragraph 4, where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which such dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

ARTICLE 11

Interest

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, that interest may also be taxed in the Contracting State in which it arises and according to the law of that State, but if the beneficial owner of the interest is a resident of the other State the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

3. Interest derived from the investment of official reserve assets by the Government of a Contracting State, its central bank or a bank performing central banking functions in that State shall be exempt from tax in the other Contracting State.

4. The term "interest" in this Article includes interest from Government securities or from bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, interest from any other form of indebtedness and all other income subjected to the same taxation treatment as income from money lent by the law of the Contracting State in which the income arises.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State, in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the indebtedness in respect of which the interest is paid is effectively connected with that permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether the person is a resident of a Contracting State or not, has in a Contracting State or outside both Contracting States a permanent establishment or fixed base in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment or fixed base, then the interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner of the interest, or between both of them and some other person, the amount of the interest paid, having regard to the indebtedness for which it is paid, exceeds the amount which might reasonably have been expected to have been agreed upon by the payer and the beneficial owner in the absence of that relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case the excess part of the amount of the interest paid shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention.

ARTICLE 12

Royalties

1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, those royalties may also be taxed in the Contracting State in which they arise and according to the law of that State, but if the beneficial owner of the royalties is a resident of the other State the tax so charged shall not exceed 10 per cent of the gross amount of the royalties.

3. The term "royalties" in this Article means credits or payments of any kind, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for:

(a)
the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right; or
(b)
the use of, or the right to use, any industrial, commercial or scientific equipment; or
(c)
the supply of scientific, technical, industrial or commercial knowledge or information; or
(d)
the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in subparagraph (a), any such equipment as is mentioned in subparagraph (b) or any such knowledge or information as is mentioned in subparagraph (c); or
(e)
the use of, or the right to use:

(i)
motion picture films; or
(ii)
films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting; or

(f)
the use of, or the right to use, some or all of the part of the radiofrequency spectrum specified in a relevant licence; or
(g)
total or partial forbearance in respect of the use or supply of any property or right referred to in this paragraph.


4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the property or right in respect of which the royalties are paid or credited is effectively connected with that permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties, whether the person is a resident of a Contracting State or not, has in a Contracting State or outside both Contracting States a permanent establishment or fixed base in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment or fixed base, then the royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner of the royalties, or between both of them and some other person, the amount of the royalties paid or credited, having regard to what they are paid or credited for, exceeds the amount which might reasonably have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the amount of the royalties paid or credited shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention.

ARTICLE 13

Alienation of Property

1. Income, profits or gains derived by a resident of a Contracting State from the alienation of real property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.

2. Income, profits or gains from the alienation of property, other than real property, that forms part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or pertains to a fixed base available in that other State to a resident of the first-mentioned State for the purpose of performing independent personal services, including income, profits or gains from the alienation of that permanent establishment (alone or with the whole enterprise) or of that fixed base, may be taxed in that other State.

3. Income, profits or gains of an enterprise of a Contracting State from the alienation of ships or aircraft operated by that enterprise in international traffic, or of property (other than real property) pertaining to the operation of such ships or aircraft, shall be taxable only in that Contracting State.

4. Income, profit or gains derived by a resident of a Contracting State from the alienation of any shares or comparable interests deriving more than 50 per cent of the value directly or indirectly from real property situated in the other Contracting State may be taxed in that other State.

5. Gains of a capital nature from the alienation of any property, other than that referred to in the preceding paragraphs, shall be taxable only in the Contracting State of which the alienator is a resident.

6. Notwithstanding the provisions of paragraph 5, gains of a capital nature derived by a resident of Australia from the alienation of shares or similar rights in a Turkish company or bonds issued by a resident of Turkey may be taxed in Turkey, if the period between acquisition and alienation of such shares, rights or bonds does not exceed 2 years.

ARTICLE 14

Independent Personal Services

1. Income derived by an individual who is a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State. However, such income may also be taxed in the other Contracting State if such services or activities are performed in that other State and:

(a)
the individual has a fixed base regularly available in that other State for the purposes of performing those services or activities; or
(b)
the individual is present in that other State for the purpose of performing those services or activities for a period or periods exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income of that other State.


In such circumstances, only so much of the income as is attributable to that fixed base or is derived from the services or activities performed in that other State, as the case may be, may be taxed in that other State.

2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

ARTICLE 15

Dependent Personal Services

1. Subject to the provisions of Articles 16, 18, 19 and 20, salaries, wages and other similar remuneration derived by an individual who is a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by an individual who is a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a)
the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income of that other State; and
(b)
the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and
(c)
the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other State.


3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State of which the enterprise is a resident.

ARTICLE 16

Directors' Fees

Directors' fees and other similar payments derived by a resident of a Contracting State in that person's capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

ARTICLE 17

Entertainers

1. Notwithstanding the provisions of Articles 14 and 15, income derived by residents of a Contracting State as entertainers (such as theatrical, motion picture, radio or television artistes and musicians and sportspersons) from their personal activities as such exercised in the other Contracting State, may be taxed in that other State.

2. Where income in respect of the personal activities of an entertainer as such accrues not to that entertainer but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer are exercised.

3. Notwithstanding the provisions of paragraph 1, income derived by an entertainer who is a resident of a Contracting State, from the entertainer's personal activities as such exercised in the other Contracting State, shall be taxable only in the first-mentioned State if the activities in the other State are supported wholly or substantially from the public funds of the first-mentioned State, including any of its political subdivisions or local authorities.

ARTICLE 18

Pensions and Annuities

1. Subject to the provisions of paragraph 2 of Article 19, pensions, annuities and similar periodic remuneration, paid to a resident of a Contracting State shall be taxable only in that State.

2. The term "annuity" means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.

3. Subject to the provisions of paragraph 2 of Article 19, lump sums in lieu of the right to receive a pension, annuity or other similar periodic remuneration, paid to a resident of a Contracting State shall be taxable only in that State. However, such lump sums (other than an amount paid under a pension scheme to a member of that scheme who is aged 60 years or more) may also be taxed in the other State if they arise in that other State.

4. Any alimony or other maintenance payment arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in the first mentioned State.

ARTICLE 19

Government Service

1. Salaries, wages and other similar remuneration, other than a pension or annuity, paid by a Contracting State or a political subdivision or a local authority of that State to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in that State. However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the recipient is a resident of that other State who:

(a)
is a national of that State; or
(b)
did not become a resident of that State solely for the purpose of rendering the services.


2. a)
Notwithstanding the provisions of paragraph 1, pensions, annuities or lump sum retirement benefits paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority of that State to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
b)
However, a pension or annuity referred to in subparagraph (a) shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.


3. The provisions of Articles 15, 16 and 17 shall apply to salaries, wages and other remuneration in respect of services rendered in connection with any trade or business carried on by a Contracting State or a political subdivision or a local authority of that State.

ARTICLE 20

Teachers and Students

1. Where a student who is a resident of a Contracting State or who was a resident of that State immediately before visiting the other Contracting State and who is temporarily present therein solely for the purpose of the student's education, receives payments from sources outside that other State for the purpose of the student's maintenance or education, those payments shall not be taxed in that other State.

2. Where a professor or teacher who is a resident of one of the Contracting States visits the other Contracting State for a period not exceeding 2 years for the purpose of teaching, or carrying out advanced study or research, at a university, college, school or other educational institution therein, any remuneration the person receives for such teaching, advanced study or research shall not be taxed in that other State to the extent to which that remuneration is, or upon the application of this Article will be, subject to tax in the first-mentioned State.

3. Paragraph 2 of this Article shall not apply to remuneration which a professor or teacher receives for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons.

ARTICLE 21

Other Income

1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from real property as defined in paragraph 2 of Article 6, derived by a resident of a Contracting State where that income is effectively connected with a permanent establishment or fixed base situated therein. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in that other Contracting State.

ARTICLE 22

Source of Income

1. Income, profits or gains derived by a resident of a Contracting State which, under any one or more of Articles 6 to 8, 10 to 17 and 19, may be taxed in the other Contracting State shall, for the purposes of the law of that other Contracting State relating to its tax, be deemed to arise from sources in that other Contracting State.

2. Income, profits or gains derived by a resident of a Contracting State which, under any one or more of Articles 6 to 8, 10 to 17 and 19, may be taxed in the other Contracting State shall, for the purposes of Article 23 and of the law of the first mentioned Contracting State relating to its tax, be deemed to arise from sources in the other Contracting State.

ARTICLE 23

Methods of Elimination of Double Taxation

1. Subject to the provisions of the law of Australia from time to time in force which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle of this Article), Turkish tax paid under the law of Turkey and in accordance with this Convention, whether directly or by deduction, in respect of income derived by a person who is a resident of Australia from sources in Turkey shall be allowed as a credit against Australian tax payable in respect of that income.

2. Subject to the provisions of the law of Turkey from time to time in force which relate to the allowance of a credit against Turkish tax paid in a country outside Turkey (which shall not affect the general principle of this Article), Australian tax paid under the law of Australia and in accordance with this Convention in respect of income derived by a resident of Turkey from sources within Australia shall be allowed as a deduction from the Turkish tax on such income. Such deduction shall not, however, exceed that part of the Turkish tax, as computed before the deduction is given, which is attributable to the income which may be taxed in Australia.

3. Where in accordance with any provision of the Convention income derived by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income.

ARTICLE 24

Non-Discrimination

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.

2. Subject to the provisions of paragraph 4 of Article 10 of this Convention, the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in similar circumstances.

3. Except where the provisions of paragraph 1 of Article 9, paragraph 7 of Article 11 or paragraph 6 of Article 12 of this Convention apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.

4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State in similar circumstances are or may be subjected.

5. Nothing contained in this Article shall be construed as obliging a Contracting State to grant to individuals who are residents of the other Contracting State any of the personal allowances, reliefs and reductions for tax purposes which are granted to its own residents.

6. This Article shall not apply to any provision of the laws of a Contracting State which:

(a)
is designed to prevent the avoidance or evasion of taxes;
(b)
does not permit the deferral of tax arising on the transfer of an asset where the subsequent transfer of the asset by the transferee would be beyond the taxing jurisdiction of the Contracting State under its laws;
(c)
provides for consolidation of group entities for treatment as a single entity for tax purposes provided that Australian companies that are owned directly or indirectly by residents of Turkey can access such consolidation treatment on the same terms and conditions as other Australian companies;
(d)
provides deductions to eligible taxpayers for expenditure on research and development; or
(e)
is otherwise agreed to be unaffected by this Article in an Exchange of Notes between the Government of Australia and the Government of the Republic of Turkey.


7. In this Article, provisions of the laws of a Contracting State which are designed to prevent avoidance or evasion of taxes include:

(a)
measures designed to address thin capitalisation, dividend stripping and transfer pricing;
(b)
controlled foreign company, transferor trusts and foreign investment fund rules; and
(c)
measures designed to ensure that taxes can be effectively collected and recovered, including conservancy measures.


8. The provisions of this Article shall apply to the taxes which are the subject of this Convention.

ARTICLE 25

Mutual Agreement Procedure

1. Where a person considers that the actions of one or both of the Contracting States result or will result for the person in taxation not in accordance with this Convention, the person may, irrespective of the remedies provided by the domestic law of those States concerning taxes to which this Convention applies, present a case to the competent authority of the Contracting State of which the person is a resident or, if the case comes under paragraph 1 of Article 24, to that of the Contracting State of which the person is a national. The case must be presented within 3 years from the first notification of the action resulting in taxation not in accordance with this Convention.

2. The competent authority shall endeavour, if the claim appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with this Convention. The agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States. However, in the case of Turkey, the taxpayer must claim the refund resulting from such mutual agreement within a period of 1 year after the tax administration has notified the taxpayer of the result of the mutual agreement.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. They may also consult together for the elimination of double taxation in cases not provided for in this Convention.

4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of giving effect to the provisions of this Convention. When it seems advisable in order to reach a solution to have an oral exchange of opinions, such exchange may take place through a meeting of representatives of the competent authorities of the Contracting States.

5. For purposes of paragraph 3 of Article XXII (Consultation) of the General Agreement on Trade in Services, the Contracting States agree that, notwithstanding that paragraph, any dispute between them as to whether a measure falls within the scope of this Convention may be brought before the Council for Trade in Services, as provided by that paragraph, only with the consent of both Contracting States. Any doubt as to the interpretation of this paragraph shall be resolved under paragraph 3 of this Article or, failing agreement under that procedure, pursuant to any other procedure agreed to by both Contracting States.

ARTICLE 26

Exchange of Information

1. The competent authorities of the Contracting States shall exchange such information as is forseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic law concerning taxes referred to in Article 2, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Article 1.

2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic law of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to, the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

(a)
to carry out administrative measures at variance with the law and administrative practice of that or of the other Contracting State;
(b)
to supply information which is not obtainable by the competent authority under the law or in the normal course of the administration of that or of the other Contracting State;
(c)
to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public).


4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

ARTICLE 27

Members of Diplomatic Missions and Consular Posts

Nothing in this Convention shall affect the fiscal privileges of members of diplomatic missions and consular posts under the general rules of international law or under the provisions of special international agreements.

ARTICLE 28

Entry into Force

1. The Government of Australia and the Government of the Republic of Turkey shall notify each other in writing through the diplomatic channel of the completion of their respective statutory and constitutional procedures required for the entry into force of this Convention. This Convention shall enter into force on the date of the last notification.

2. This Convention shall have effect:

(a)
in Australia:

(i)
in respect of withholding tax on income that is derived by a nonresident, in relation to income derived on or after 1 January in the calendar year next following that in which the Convention enters into force;
(ii)
in respect of other Australian tax, in relation to income, profits or gains of any year of income beginning on or after 1 July next following that in which the Convention enters into force;

(b)
in Turkey:

(i)
with regard to taxes withheld at source, in respect of amounts paid or credited on or after 1 January next following the date upon which this Convention enters into force;
(ii)
with regard to other taxes, in respect of taxable years beginning on or after 1 January next following the date upon which this Convention enters into force.


ARTICLE 29

Termination

1. This Convention shall continue in effect indefinitely, but either of the Government of Australia and the Government of the Republic of Turkey may terminate the Convention, through the diplomatic channel, by giving written notice of termination at least 6 months before the end of any calendar year beginning after the expiration of 5 years from the date of its entry into force.

2. This Convention shall cease to be effective:

(a)
in Australia:

(i)
in respect of withholding tax on income that is derived by a nonresident, 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;
(ii)
in respect of other Australian tax, in relation to income, profits or gains of any year of income beginning on or after 1 July next following that in which the notice of termination is given;

(b)
in Turkey:

(i)
with regard to taxes withheld at source, in respect of amounts paid or credited after the end of the calendar year in which such notice is given;
(ii)
with regard to other taxes, in respect of taxable years beginning after the end of the calendar year in which such notice is given.


IN WITNESS WHEREOF the undersigned, duly authorised thereto by their respective Governments, have signed this Convention.


DONE at Ankara, this 28th day of April 2010, in duplicate in the English and Turkish languages, both texts being equally authentic.

H.E Mr Peter Doyle Mr Mehmet Kilci
For the Government of Australia For the Government of the Republic of Turkey


PROTOCOL TO THE CONVENTION BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE REPUBLIC OF TURKEY FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

The Government of Australia and the Government of the Republic of Turkey,

Having regard to the Convention between the Government of Australia and the Government of the Republic of Turkey for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed today at Ankara (the Convention),

Have agreed as follows:

1. In respect of paragraph 3 of Article 7, no account shall be taken in the determination of the profits of a permanent establishment, of amounts paid or charged, (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on money lent by or to the head office of the enterprise or any of its other offices.

2. In respect of paragraphs 3 and 5 of Article 5,

(a)
The duration of activities will be determined by aggregating the periods during which activities are carried on in a Contracting State by associated enterprises provided that the activities of the enterprise in that State are connected with the activities carried on in that State by its associate.
(b)
The period during which two or more associated enterprises are carrying on concurrent activities will be counted only once for the purpose of determining the duration of activities.
(c)
Under Article 5, an enterprise shall be deemed to be associated with another enterprise if:

(i)
one is controlled directly or indirectly by the other; or
(ii)
both are controlled directly or indirectly by the same person or persons.


3. In respect of paragraph 5 of Article 5, it is understood that where an enterprise of a Contracting State undertakes to perform professional services in the other Contracting State and subcontracts all or part of those services to another enterprise, the period during which such services are performed in that other State by that other enterprise shall be regarded as time spent by the first-mentioned enterprise.

4. In respect of Article 8, and for the avoidance of doubt, it is understood that the operation of ships or aircraft referred to in that Article includes non-transport activities, such as dredging, fishing, and surveying and that such activities conducted in a place or places in a Contracting State are to be treated as ship or aircraft operations confined solely to places in that State.

5. For the purposes of Articles 10, 11 and 12, it is understood that dividends, interest or royalties are paid to a resident of a Contracting State where that person is the beneficial owner of such dividends, interest or royalties.

6. In respect of Article 10,

(a)
Notwithstanding the rate limit specified in subparagraph (a)(ii) of paragraph 2, Turkey may impose tax on dividends to which that provision applies at a rate not exceeding that specified in subparagraph (b) of that paragraph if such dividends are subject to tax in Australia.
(b)
Notwithstanding the rate limit specified in subparagraph (a) of paragraph 4, Turkey may impose tax on amounts to which that provision applies at a rate not exceeding that specified in subparagraph (b) of that paragraph if the profits attributable to a permanent establishment situated in Turkey are subject to tax in Australia.


7. In respect of paragraph 3 of Article 10, it is understood that dividends in the case of Turkey shall include income from "jouissance" shares, "jouissance" rights or founder's shares and income derived from an investment fund or investment trust.

8. In respect of paragraph 3 of Article 18, it is understood that in the case of payments arising in Australia, the term "lump sums in lieu of the right to receive a pension, annuity or other similar periodic remuneration" does not include a departing Australia superannuation payment made to a person who has worked in Australia while visiting on an eligible temporary resident visa.

This Protocol shall form an integral part of the Convention.

IN WITNESS WHEREOF the undersigned, duly authorised thereto by their respective Governments, have signed this Protocol.

DONE at Ankara this 28th day of April 2010, in duplicate in the English and Turkish languages, both texts being equally authentic.


H.E Mr Peter Doyle Mr Mehmet Kilci
For the Government of Australia For the Government of the Republic of Turkey

Detailed explanation of the Turkish convention

Article 1 - Persons Covered

Scope

8.5 This Article establishes the scope of the application of the Turkish 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 Turkish convention. [Article 1]

8.6 The Turkish convention also applies in its application to nationals of one of the treaty countries in relation to Article 24 ( Non-Discrimination ), Article 25 ( Mutual Agreement Procedure ) and in relation to the exchange of information under Article 26 ( Exchange of Information ).

8.7 The application of the Turkish convention to persons who are dual residents (that is, residents of both countries for tax purposes) is dealt with in Article 4 ( Resident ).

Article 2 - Taxes Covered

8.8 This Article specifies the existing taxes of each country to which the Turkish convention applies. These are, in the case of Australia, the Australian income tax and the petroleum resource rent tax.

8.9 The term 'income tax' includes Australian income tax imposed on capital gains.

8.10 The Turkish convention generally does not cover Australia's goods and services tax (GST), customs duties, state taxes and duties and estate tax and duties.

8.11 For Turkey, the convention applies to the income tax and the corporation tax.

Extended scope for exchange of information

8.12 While the taxes specified in Article 2 are covered for all purposes of the Turkish convention, a wider range of taxes are covered for the purposes of Article 26 ( Exchange of Information ). Article 26 applies, in Australia, to all federal taxes administered by the Commissioner and in Turkey, to all taxes imposed by the Ministry of Finance. [Article 2, paragraph 3]

Identical or substantially similar taxes

8.13 The application of the Turkish 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 listed in paragraph 1 of this Article (that is, in the case of Australia, the income tax and the petroleum resource rent tax). [Article 2, paragraph 2]

Notification of changes to the tax laws

8.14 The competent authorities (that is, the Commissioner in the case of Australia and the Minister of Finance in the case of Turkey, or their authorised representatives) are required to notify each other in the event of a substantial change in the taxation law of the respective countries, within a reasonable period of time after those changes. [Article 2, paragraph 2]

Article 3 - General Definitions

8.15 This Article provides general definitions and rules of interpretation applicable throughout the Turkish convention. In particular, paragraph 1 defines a number of basic terms used in the Turkish convention. The introduction to paragraph 1 makes clear that these definitions apply for all purposes of the Turkish convention, unless the context requires otherwise.

8.16 Certain other terms are defined in other Articles of the Turkish convention. For example, the terms 'resident of a Contracting State', 'permanent establishment' and 'real property' are defined in Articles 4 ( Resident ), 5 ( Permanent Establishment ) and 6 ( Income from Real Property ) respectively. These definitions are to be applied consistently throughout the Turkish convention. In contrast, a number of terms, such as 'dividends', 'interest' and 'royalties' are defined in specific Articles for use only in those Articles.

Definition of Australia

8.17 As in Australia's other modern tax treaties, Australia is defined to include certain external territories and 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 ITAA 1936, certain sea installations and offshore areas are to be treated as part of Australia). [Article 3, subparagraph 1a)]

Definition of Turkey

8.18 Turkey is defined to mean the Turkish territory, as well as the (maritime) areas over which it has jurisdiction or sovereign rights for the purpose of exploring and exploiting the natural resources of the seabed and subsoil of the continental shelf in accordance with international law. This mirrors the definition of Australia. [Article 3, subparagraph 1b)]

Definition of Australian tax and Turkish tax

8.19 For the purposes of the Turkish convention, the terms Australian tax and Turkish tax do not include any amount of penalty or interest imposed under the respective domestic tax law of the two countries. [Article 3, subparagraphs 1c) and d)]

8.20 In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of Turkey with respect to income that Turkey is entitled to tax under the Turkish convention would not be a creditable Turkish 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 income tax' in subsection 770-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign income tax offset entitlement under paragraph 1 of Article 23 (pursuant to Division 770 of the ITAA 1997 - Foreign income tax offsets).

Definition of company, Turkish company and Australian company

8.21 The definition of company in the Turkish convention accords with the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (OECD Model), and means any body corporate or any entity which is treated as a company or body corporate for tax purposes. [Article 3, subparagraph 1e)]

8.22 The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships (limited liability partnerships) in the same way as companies for income tax purposes. These trusts and partnerships are included as companies for the purposes of the Turkish convention. [Article 3, subparagraph 1e)]

8.23 The terms Turkish company and Australian company are also defined for the purposes of the Turkish convention. Turkish company means a company which, under the law of Turkey relating to Turkish tax, is a resident of Turkey, and which is not under the law of Australia relating to Australian tax, a resident of Australia. Conversely, Australian company means a company which, under the law of Australia relating to Australian tax, is a resident of Australia and which is not, under the law of Turkey relating to Turkish tax, a resident of Turkey. [Article 3, subparagraphs 1j) and k)]

Definition of competent authority

8.24 The competent authority is the person specifically authorised to perform certain actions under the Turkish convention. For instance, the competent authority is required to give certain notifications (for example, in paragraph 2 of Article 2 ( Taxes Covered ), the competent authorities are required to notify each other of any substantial changes to the relevant tax laws of their respective countries) and perform certain tasks (for example, gather and exchange tax information in accordance with Article 26 ( Exchange of Information )).

8.25 In the case of Australia, the competent authority means the Commissioner or an authorised representative of the Commissioner. In the case of Turkey, the competent authority means the Minister of Finance or an authorised representative of the Minister. [Article 3, subparagraph 1f)]

Definition of Contracting State and other Contracting State

8.26 These terms mean Australia or Turkey, as the context requires. [Article 3, subparagraph 1g)]

Definitions of enterprise of a Contracting State and enterprise of the other Contracting State

8.27 The terms enterprise of a Contracting State and enterprise of the other Contracting State are defined as an enterprise carried on by residents of the respective countries. An enterprise of a Contracting State need not be carried on in that State. It may be carried on in the other Contracting State or a third state (that is, an Australian enterprise doing all its business in Turkey would still be an Australian enterprise). [Article 3, subparagraph 1h)]

Definition of international traffic

8.28 In the Turkish convention, this term is of relevance for taxation of income, profits or gains from the alienation of ships and aircraft (paragraph 3 of Article 13 ( Alienation of Property )) and wages of crew (paragraph 3 of Article 15 ( Dependent Personal Services )).

8.29 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, that is, where the journey of a ship or aircraft within that country forms part of a longer voyage of that ship or aircraft involving a place of arrival or departure outside 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 or airspace. For example, a 'voyage to nowhere' which begins and ends in Sydney on a ship operated by a Turkish 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 1i)]

Definition of national

8.30 The Turkish convention defines national by reference to an individual's nationality or citizenship. A company or legal person will be a national if it is created or organised under the laws of Australia or Turkey. For example, a company's nationality is determined by where it is incorporated. [Article 3, subparagraph 1l)]

8.31 The concept of nationality is used in subparagraph c) of paragraph 4 of Article 4 ( Resident ), subparagraph a) of paragraph 1 and subparagraph b) of paragraph 2 of Article 19 ( Government Service ) and paragraph 1 of Article 24 ( Non-Discrimination ).

Definition of person

8.32 The definition of person in the Turkish convention accords with the OECD Model and includes individuals, companies and any other bodies of persons. This includes a partnership (as a body of persons). [Article 3, subparagraph 1m)]

Terms not specifically defined

8.33 Where a term is not specifically defined within the Turkish 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 Turkish convention at the time of its application. In that case, the meaning of the term under the taxation law of the country will have precedence over the meaning it may have under other domestic laws. [Article 3, paragraph 2]

8.34 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 ITAA 1997 and the A New Tax System (Goods and Services Tax) Act 1999 , the income tax definition would be the relevant definition to be applied.

8.35 If a term is not defined in the Turkish 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 - Resident

Residential status

8.36 This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of the Turkish convention. Residential status in one or other country is a necessary condition for the provision of relief under the Turkish convention.

8.37 For a company, 'resident' status is determined by reference to it being an Australian or a Turkish company, terms that are defined in Article 3 (see paragraph 8.22). For persons that are not companies, it can be any other person who is a resident of the country under the tax laws of that country. [Article 4, paragraph 1]

Residency of governments

8.38 Article 4 follows the OECD Model in specifically providing that the State, or a political subdivision, or local authority of the State, are residents for the purposes of the Turkish convention. This means that the Australian Government, the state governments and local councils of Australia will be residents for the purpose of the Turkish convention. This does not necessarily mean that income, profits or gains derived by these bodies from sources in Turkey will be subject to tax in Turkey as sovereign immunity principles may apply. [Article 4, paragraph 2]

Liable to tax in respect of source income only

8.39 Paragraph 3 of the Article deals with a person who may be considered to be a resident of a country according to its domestic laws but is only liable to taxation on income from sources in that country, such as foreign diplomatic and consular staff. In the Australian context, this also means, for example, that Norfolk Island residents, who are generally subject to Australian tax on Australian source income only, are not residents of Australia for the purposes of the Turkish convention. Accordingly, Turkey will not have to forgo tax in accordance with the Turkish convention on income derived by residents of Norfolk Island from sources in Turkey (which will not be subject to Australian tax). [Article 4, paragraph 3]

8.40 The term 'liable to tax' is intended to capture those persons who are subject to comprehensive taxation under a country's domestic taxation laws. A person may be regarded as liable to tax as a resident even where the country does not in fact impose tax. For example, under Australian law charitable institutions are exempt from income tax but only if they meet the requirements for exemption. Such institutions are liable to tax for the purposes of the Article and, therefore, are 'residents' under the Turkish convention. [Article 4]

Dual residents

Individuals

8.41 A set of tie-breaker rules is included for determining how residency for an individual is to be allocated to one or other of the countries for the purposes of the Turkish convention if an individual taxpayer qualifies as a dual resident; that is, as a resident of both countries in accordance with paragraph 1 of the Article.

8.42 The tie-breaker rules for individuals apply certain tests, in a descending hierarchy. These rules, in order of application, are:

·
if the individual has a permanent home available to that individual in only one of the countries, the person is deemed to be a resident solely of that country for the purposes of the Turkish 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 Turkey, and the person is deemed for the purposes of the Turkish convention to be a resident only of the country with which the person has the closer personal and economic relations (centre of vital interests);
·
if the individual's centre of vital interests cannot be determined, the individual shall be deemed to be a resident of the country of which that individual is a national; or
·
if the individual is a national of both countries or is not a national of either of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.

[Article 4, paragraph 4]

8.43 Notwithstanding that the Turkish convention deems a dual resident individual to be a resident only of one country for treaty purposes, that person remains a resident for the purposes of Australian domestic tax law. Accordingly, that individual remains liable to tax in Australia as a resident, insofar as the Turkish convention allows.

Companies

8.44 The definition of 'Turkish company' and 'Australian company' coupled with the definition of a 'resident' disentitles companies that are resident in both Turkey and Australia from the benefits provided by the Turkish convention with the exception of the protection from discrimination afforded under Article 24 (Non-Discrimination). [Article 3, subparagraphs 1j) and 1k); Article 4, paragraph 1]

Article 5 - Permanent Establishment

Role and definition

8.45 The application of various provisions of the Turkish 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.

8.46 The definition of the term permanent establishment in this Article corresponds generally with definitions of the term in Australia's more recent tax treaties. However, the definition in the Turkish convention also includes a provision dealing specifically with professional services.

Meaning of permanent establishment

8.47 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]

8.48 Paragraph 2 of this Article elaborates 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;
·
a workshop; or
·
a place relating to the exploration for or the exploitation of natural resources.

8.49 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]

Building site or construction, installation or assembly project

8.50 A building site or construction, installation or assembly project constitutes a permanent establishment where it exists for more than six months. [Article 5, subparagraph 2g)]

8.51 The phrase 'building site or construction, installation or assembly project' includes not only places used for the construction of buildings but also for 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 surpervision 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, paragraph 2]

Deemed permanent establishment

Building site, or a construction, installation or assembly project

8.52 If an enterprise carries on supervisory activities in a country for more than six months in connection with a building site, or a construction, installation or assembly project the activity will be deemed to be performed through a permanent establishment (unless the activities are of a type described in paragraph 4 of this Article and are of a preparatory or auxiliary nature). [Article 5, subparagraph 3a)]

Substantial equipment

8.53 If an enterprise operates substantial equipment in a country for more than six months in any 12-month period, the activity will be deemed to be performed through a permanent establishment (unless the activities are of a type described in paragraph 4 of this Article and are of a preparatory or auxiliary nature). [Article 5, subparagraph 3b)]

8.54 Subparagraph 3b) reflects Australia's reservation to the OECD Model concerning activities relating to 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; in particular those involving the use of such equipment.

8.55 The word 'operated' has been included to clarify that only active use of substantial equipment assets will be captured by subparagraph 3b). This means that an enterprise that merely leases substantial equipment to another person for that other person's own use in a country, would not be deemed to have a permanent establishment in that country under these provisions. As the definition of 'royalties' in Article 12 includes lease payments for the use of commercial and industrial equipment, the lease payments in such a case will fall to be dealt with under that Article.

8.56 For example, if a Turkish enterprise itself operated a mobile crane at an Australian port for more than six months in a 12-month period, the Turkish enterprise would be deemed to have a permanent establishment in Australia under subparagraph 3b). If, however, that Turkish enterprise merely leased the mobile crane to another person and that other person operated the crane at an Australian port for its own purposes, the Turkish enterprise would not be deemed to have a permanent establishment in Australia under subparagraph 3b). However, if that other person operated the substantial equipment for or on behalf of the Turkish enterprise in Australia, the Turkish enterprise would be considered to have operated the equipment in Australia.

8.57 The meaning of the term 'substantial' depends on the relevant facts and circumstances of each individual case. Factors such as the size, quantity or value of the equipment, or the role of the equipment in income producing activities, are relevant in determining whether the equipment is substantial. However, some examples of substantial equipment would include:

·
industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction;
·
manufacturing or processing equipment used in a factory; or
·
oil or drilling rigs, platforms and other structures used in the petroleum, gas or mining industry.

Preparatory and auxiliary activities

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

8.59 These activities are ordinarily of a preparatory or auxiliary character and are unlikely to give rise to substantial profits. The economic link between the activities of the enterprise and the country in which the activities are carried on is generally insufficient to warrant the allocation of taxing rights to that country in these circumstances.

8.60 Other examples of activities that are considered to be of a preparatory or auxiliary character for the enterprise are advertising or scientific research. [Article 5, subparagraph 4e)]

8.61 Subparagraph 4f) of Article 5 ( Permanent Establishment ) of the OECD Model - dealing with combinations of activities of the kind referred to in subparagraphs 4a) to e) of this Convention - is not included in this Convention. For the purposes of this Convention, Australia does not consider that an enterprise undertaking multiple functions of the kind indicated in subparagraphs 4a) to e) would generally be regarded as only engaged in preparatory or auxiliary activities. [Article 5, paragraph 4]

Anti-avoidance provision

8.62 Given that Article 5 of the Turkish convention contains certain timeframes, an anti-avoidance rule is included to ensure that where associated enterprises carry on activities that are connected, the duration of activities will be determined by aggregating the periods during which the activities are carried on by the associated enterprises. Activities will be regarded as connected where, for example, different stages of a project are carried out by different subsidiaries within a group of companies or where the nature of the work carried on by the associated enterprises in respect of such project is connected. [Protocol, subitem 2a)]

8.63 For the purposes of calculating the duration of these activities, a period of concurrent activities by such associated enterprises is only counted as one period for aggregation purposes. [Protocol, subitem 2b)]

8.64 An enterprise shall be deemed to be associated with another enterprise if one enterprise participates directly or indirectly in the management, control or capital of the other enterprise or the same persons participate directly or indirectly in the management, control or capital of the enterprises. [Protocol, subitem 2c)]

8.65 Where an enterprise of a Contracting State undertakes to perform professional services in the other Contracting State and subcontracts all or part of those services to another enterprise, the period during which such services are performed in that other State by that other enterprise shall be regarded as time spent by the first-mentioned enterprise. [Article 5, paragraph 5; Protocol, item 3]

8.66 These provisions are aimed at counteracting contract splitting for the purposes of avoiding the application of the permanent establishment rules.

8.67 The OECD Model Commentary recognises that time thresholds in Article 5 may give rise to abuses and notes that countries concerned with this issue may adopt solutions in bilateral negotiations to prevent such abuse.

Diagram 8.3

Diagram 8.3

In the above diagram, each of the subsidiaries may conduct activities that are connected, for example, supervisory activities at a single building site. In determining whether the six-month time threshold has been met, the time spent undertaking those activities by each of the enterprises would be aggregated. However, any period during which more than one of the subsidiaries is carrying on activities concurrently would be counted only once.

For example, if T Sub A was present in Australia from 1 July 2011 to 30 November 2011 conducting supervisory activities at a building site and T Sub B was present in Australia from 1 November 2011 to 31 March 2012 also conducting supervisory activities at the same building site, the time spent by both subsidiaries would be aggregated to produce a nine-month period - that is, as both subsidiaries were in Australia in November 2011 that month is counted only once in determining whether the six-month threshold is met.

Where the time threshold is met, each of the subsidiaries would be deemed to have a permanent establishment through which its activities with respect to the project are conducted. Only the profits derived by each subsidiary from its own activities would be attributed to each company's permanent establishment.

Performance of professional services by an enterprise

8.68 Notwithstanding the provisions of paragraphs 1 to 3, where an enterprise performs professional services in a country for a period exceeding 183 days in any 12-month period, and those services are performed through one or more individuals who are present and performing such services in that country, the enterprise will be deemed to have in that country a permanent establishment through which those activities are performed (unless the activities are of a type described in paragraph 4 of this Article and are of a preparatory or auxiliary nature). [Article 5, paragraph 5]

8.69 For these purposes, an enterprise performs services mainly through the activities of the entrepreneur or persons who are in a paid employment relationship with the enterprise (personnel). These personnel include employees and other persons receiving instructions from the enterprise (for example, dependent agents).

Dependent agents

8.70 An enterprise of one country is deemed to have a permanent establishment in the other country if a person acts on its behalf in that other country where that person has and habitually exercises an authority to conclude contracts on behalf of the enterprise. Such people are referred to as dependent agents. [Article 5, subparagraph 6a)]

8.71 However, activities of a dependent agent will not give rise to a permanent establishment where that agent's activities are limited to the purchase of goods or merchandise for the enterprise. Agents of independent status (such as brokers or commission agents) to whom paragraph 7 of Article 5 applies are also excluded. [Article 5, subparagraph 6a)]

Maintaining a stock of goods or merchandise from which regular deliveries are made

8.72 An enterprise of one country is deemed to have a permanent establishment in the other country, even if a person has no authority to conclude contracts on behalf of the enterprise, provided that person habitually maintains a stock of goods or merchandise from which they regularly deliver goods or merchandise on behalf of the enterprise. [Article 5, subparagraph 6b)]

8.73 This provision is based on subparagraph 5b) of the United Nations Model Double Taxation Convention between Developed and Developing Countries. According to the 2001 United Nations Commentary:


'24. With the addition of subparagraph 5(b ), this paragraph departs substantially from and is considerably broader in scope than Article 5, paragraph 5, of the OECD Model Convention, which the Group considered to be too narrow in scope because it restricted the type of agent who would be deemed to create a permanent establishment of a non-resident enterprise, exposing it to taxation in the source country. Some members from developing countries pointed out that a narrow formula might encourage tax evasion by permitting an agent who was in fact dependent to represent himself as acting on his own behalf. It was the understanding of the Group that the phrase "authority to conclude contracts on behalf of" in subparagraph 5(a) of article 5 means that the agent had legal authority to bind the enterprise for business purposes and not only for administrative purposes (e.g. conclusion of lease or electricity and manpower contracts).

25. The Group of Experts understood that the subparagraph 5( b ) was to be interpreted such that if all the sales-related activities take place outside the host State and only delivery, by an agent, takes place there, such a situation would not lead to a permanent establishment. However, if sales-related activities (e.g. advertising or promotion) are also conducted in that State on behalf of the resident (whether or not by the enterprise itself or by its dependent agents) and have contributed to the sale of such goods or merchandise, a permanent establishment may exist.'

Manufacturing or processing on behalf of others

8.74 Consistent with Australia's reservation to the OECD Model, where a person acts on behalf of another in manufacturing or processing the other's goods, this will give rise to a deemed permanent establishment. [Article 5, subparagraph 6c)]

8.75 An example is the situation where a mineral plant refines minerals for a foreign enterprise at cost, so that the plant operations produce no Australian profits. Title to the refined product remains with the foreign enterprise and profits on sale are realised mainly outside of Australia.

8.76 The refining activities performed for the enterprise through such a plant are deemed to be carried on through a permanent establishment of the enterprise because the manufacturing or processing activity (which gives the processed minerals much of their value) is conducted in Australia on behalf of the enterprise. Accordingly, Australia should have taxing rights over the business profits attributable to the processing activity carried on in Australia. Subparagraph 6c) prevents an enterprise which carries on substantial manufacturing or processing activities in a country through an intermediary from escaping tax in that country.

Independent agents

8.77 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

8.78 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 the subsidiary acts as an agent such that a dependent agent permanent establishment is constituted. [Article 5, paragraph 8]

Other Articles

8.79 The principles set forth in the preceding paragraphs of Article 5 are 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 Turkey) when applying the source rule contained in:

·
paragraph 6 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

8.80 This Article provides that the income of a resident of one country, from real property situated in the other country, may be taxed by that other country. Thus, income from real property in Australia will be subject to Australian tax laws.

8.81 Generally, Australia's tax treaties exclude profits of an enterprise from agricultural, pastoral or forestry activities from the operation of this Article. Such profits are generally dealt with under Article 7 ( Business Profits ) of Australian treaties. However, under the Turkish convention, the allocation of taxing rights over such income is determined by Article 6 ( Income from Real Property ). Accordingly, income from the relevant activities may be taxed in Australia where the real property is situated in Australia, irrespective of whether the enterprise has a permanent establishment in Australia. Nonetheless, an enterprise would generally have a permanent establishment in the country in which the agricultural, pastoral or forestry property is situated. [Article 6, paragraph 1]

Definition

8.82 Real property is primarily defined as having the meaning which it has under the domestic law of the country where the property is situated. In the case of Australia, real property also extends to:

·
a lease of land and any other interest in or over land (including exploration and mining rights over natural resources); and
·
royalties and other payments relating to the exploration for or exploitation of natural resources.

[Article 6, subparagraph 2a)]

8.83 In the case of Turkey, immovable (real) property also extends to:

·
property accessory to immovable property;
·
livestock and equipment used in agriculture and forestry (including the breeding and cultivation of fish);
·
rights to which the provisions of the general law of Turkey respecting landed property apply; and
·
usufruct of immovable property, and royalties and other payments relating to the exploitation of natural resources.

[Article 6, subparagraph 2b)]

Ships, boats and aircraft are excluded from the definition of 'real property'; therefore this Article does not cover income from their use. [Article 6, subparagraph 2c)]

Deemed situs

8.84 Under Australian law, the place where an interest in land or natural resources, such as a lease, is situated (situs) is not necessarily where the underlying property is situated. Paragraph 3 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]

Form of exploitation of real property

8.85 Paragraph 4 makes it clear that the general rule in paragraph 1 applies irrespective of the form of exploitation of the real property. The Article applies to income derived from the direct use, letting or use in any other form of real property. [Article 6, paragraph 4]

Real property of an enterprise

8.86 Paragraphs 1, 3 and 4 of Article 6 are extended to profits derived from the use or exploitation of real property of an enterprise or real property used for the performance of independent personal services.

8.87 Accordingly, this Article provides that the country in which the real property is situated may impose tax on the income derived from that property by a resident of the other country, irrespective of whether or not that income is attributable to a permanent establishment or fixed base situated in the first-mentioned country. [Article 6, paragraph 5]

Article 7 - Business Profits

8.88 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.

8.89 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]

8.90 If an enterprise that is a resident of one country derives business profits in the other country that are not 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 profits (except where paragraph 8 of this Article applies - see the explanation in paragraphs 8.98 and 8.99).

Determination of business profits

8.91 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 Turkish convention correspond to international practice and to comparable provisions in Australia's other tax treaties. [Article 7, paragraphs 2 and 3]

8.92 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. This is specifically clarified by the reference in paragraph 3 to expenses that would be deductible if the permanent establishment were an independent entity which paid those expenses. [Article 7, paragraph 3]

8.93 In respect of paragraph 3 of Article 7, no account shall be taken in the determination of the profits of a permanent establishment, of amounts paid or charged, (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on money lent by or to the head office of the enterprise or any of its other offices. [Protocol, item 1]

8.94 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 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 4]

Application of domestic law

8.95 The domestic law of the country in which the permanent establishment is situated (for example, 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 stated in this 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 especially important 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 the arm's length profits. Paragraph 5 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 5]

Profits or gains dealt with under other Articles

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

8.97 This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other Articles of the Turkish convention (for example, Article 8 ( Shipping and Aircraft Operations ), 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. However, under certain Articles, for example paragraph 5 of Article 10 ( Dividends ), where the holding or asset in respect of which the income is paid is effectively connected with a permanent establishment that income will be dealt with under Article 7 ( Business Profits ). [Article 7, paragraph 6]

Insurance with non-residents

8.98 Each country has the right to continue to apply any provisions in its domestic law relating to the taxation of income from insurance with non-resident insurers provided that if the relevant law in force in either country at the date of signature of the Turkish convention is varied (otherwise than in minor respects) the Contracting States shall consult with a view to agreeing to appropriate amendments.

8.99 An effect of paragraph 8.7 is generally 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 broadly consistent with Australia's reservation to Article 7 ( Business Profits ) of the OECD Model. [Article 7, paragraph 7]

Trust beneficiaries

8.100 The principles of this Article will apply to profits which are derived by a resident of one of the countries (directly or through one or more interposed trusts) as a beneficiary of a trust, except where the trust is treated as a company for tax purposes. [Article 7, paragraph 8]

8.101 In accordance with this Article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust 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 Turkey is beneficially entitled under the trust. Paragraph 8 of this Article ensures that such business profits will be subject to tax in Australia where the trustee of the relevant trust has, or would have if it were a resident of Turkey, a permanent establishment in Australia in relation to that business. Since the outcome provided under this paragraph merely states specifically the position that would apply even in its absence, the principles of this paragraph will also apply where relevant to other Articles of the Turkish 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. That is, the beneficiary of the trust will also have a permanent establishment for the purposes of paragraph 2 of Article 13.

Article 8 - Shipping and Aircraft Operations

8.102 The main effect of this Article is that the right to tax profits from the operation of ships or aircraft, including a share of profits attributable to participation in a pool, joint business or an international operating agency, is generally reserved to the country in which the operator is a resident for tax purposes. [Article 8, paragraphs 1 and 3]

8.103 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 except for profits from shipping and aircraft operations dealt with under paragraph 2. 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 OECD Model Commentary on Article 8 ( Shipping, Inland Waterways Transport and Air Transport ), 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 but which are ancillary to such operation. An example of such ancillary profits would be profits derived by a ship operator in the business of transport who undertakes a one-off bareboat lease of one of their ships.

Profits from internal traffic

8.104 Profits derived directly or indirectly by an enterprise of one country from the operation of ships or aircraft may, to the extent that they relate to operations that are confined solely to places in the other country, be taxed in the other country. [Article 8, paragraph 2]

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

8.106 There is no specified limit on the amount of tax that can be charged on profits from the operation of ships and aircraft in internal traffic. However, for Australian tax purposes, Division 12 of Part III of the ITAA 1936, deems 5 per cent of the amount paid in respect of the transport of passengers, livestock, mail or goods shipped in Australia to be the taxable income of a ship owner or charterer who has their principal place of business outside of Australia.

8.107 The Protocol makes it clear that the operation of ships or aircraft referred to in Article 8 includes non-transport activities such as dredging, fishing and surveying and that such activities conducted in a place or places in a country are to be treated as ship or aircraft operations confined solely to places in that country. [Protocol, item 4]

Example 14.7 A ship operated by a Turkish enterprise, in the course of an international voyage from Istanbul to Melbourne, makes a stop in Hobart to pick up cargo. Profits derived from the transport of the goods loaded in Hobart and discharged in Melbourne would be profits from the carriage of goods shipped in and discharged at a place in Australia under paragraph 2 of Article 8. 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 14.8 A Turkish enterprise operates sightseeing flights over the Southern Ocean. Passengers board the aircraft in Hobart and disembark at the same airport later on the same day. The profits from the carriage of the passengers shipped in and discharged at a place in Australia would be covered by paragraph 2 of Article 8, 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.

Article 9 - Associated Enterprises

Reallocation of profits

8.108 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 Turkey on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate or be made between unrelated enterprises dealing wholly independently with one another. [Article 9, paragraph 1]

8.109 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. The term 'might reasonably be expected to operate' in paragraph 1 is included to conform to Australia's treaty practice and allows adjustments where it is not possible to determine the conditions that 'would have been made or occurred' between the associated enterprises.

8.110 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.

8.111 Each country has the right to apply its domestic law relating to the determination of the tax liability of a person (for example, Australia's Division 13 of Part III of the ITAA 1936) to 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

8.112 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, economic double taxation (that is, taxation of the same income in the hands of different persons) 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 is required, if it agrees with the primary adjustment, to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved in order to relieve any such double taxation.

8.113 It is therefore 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 Turkey will consult with each other to determine the appropriate adjustment. [Article 9, paragraph 3]

Article 10 - Dividends

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

·
certain cross-border inter-corporate dividends will be subject to a maximum 5 per cent rate of source taxation where the recipient holds directly at least:

-
ten per cent of the voting power of the Australian company paying the dividend [Article 10, sub-subparagraph 2a)(i)] ; or
-
twenty five per cent of the capital of the Turkish company paying the dividend. In these instances, the profits from which the dividends are paid must have been subjected to the full rate of corporate tax in Turkey and the dividends must be exempt from Australian taxation in the hands of the recipient [Article 10, sub-subparagraph 2a)(ii); Protocol, subitem 6a)] ;

·
a maximum 15 per cent rate of source country tax applies to all other dividends [Article 10, subparagraph 2b)] ;
·
in the case of branch profits:

-
a 5 per cent tax rate limitation applies to the after tax profits of the company where the branch profits were subject to the full rate of company tax in the country where the branch is situated [Article 10, subparagraph 4a)] ; and
-
a general limit of 15 per applies in all other cases [Article 10, subparagraph 4b)] ;

·
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 ) [Article 10, paragraph 5] ;
·
dividends paid in respect of a holding which is effectively connected with a fixed base are to be dealt with under Article 14 ( Independent Personal Services ) [Article 10, paragraph 5] ; and
·
the extra-territorial application by either country of taxing rights over dividend income is not permitted [Article 10, paragraph 6] .

8.115 For the purposes of Article 10, it is understood that dividends are paid to a resident of a Contracting State where that person is the beneficial owner of such dividends. [Protocol, item 5]

Permissible rate of source country taxation

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

8.116 This Article allows both Australia and Turkey to tax dividends flowing between them but limits the rate of tax that the country of source may impose on dividends paid by companies that are resident of that country under its domestic law to companies resident in the other country who are the beneficial owners of the dividends. [Article 10, paragraph 1, subparagraph 2a)]

8.117 A rate limit of 5 per cent will apply in Australia for dividends paid to a company (other than a partnership) which holds a direct voting interest of at least 10 per cent in the company paying the dividends. [Article 10, sub-subparagraph 2a)(i)]

8.118 A rate limit of 5 per cent will apply in Turkey for dividends paid to a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends which are paid out of profits that have been subject to the full rate of corporation tax in Turkey. [Article 10, sub-subparagraph 2a)(ii)]

8.119 In the course of negotiations, the two delegations agreed that: '... the exclusion of partnerships in subparagraphs 2(a)(i) and (ii) of Article 10 does not exclude from the application of those provisions partnerships subject to the same tax treatment as companies in the respective countries.'

8.120 The Protocol makes it clear that, notwithstanding the rate specified in sub-subparagraph 2a)(ii) of Article 10, Turkey may impose tax on dividends at the rate of 15 per cent should such dividends be subject to tax in Australia. Australia does not currently impose any additional taxation on inter-corporate dividends (section 23AJ of ITAA 1936). [Protocol, subitem 6a)]

Fifteen per cent rate limit for all other dividends

8.121 For other dividends, the Turkish convention provides that the source country may tax dividends that are beneficially owned by residents of the other country, but will limit its tax to 15 per cent of the gross amount of the dividend. [Article 10, subparagraph 2b)]

8.122 Although the provisions in Article 10 would allow Australia to impose withholding tax on both franked and unfranked dividends in the specified circumstances, the dividend withholding tax exemption provided by Australia under its domestic law for franked dividends paid to non-residents will continue to apply.

Requirement for consultation

8.123 To ensure that the rate of withholding tax provided for under paragraph 2 remains competitive in the future, Australia and Turkey are required to consult each other with a view to agreeing to any amendment of paragraph 2 of this Article if the relevant law in either Contracting State at the date of signature of the Turkish convention is varied (otherwise than in minor respects). [Article 10, paragraph 2]

Definition of dividends

8.124 The term dividends in this Article means income from:

·
shares or other rights which participate in profits and are not debt-claims; and
·
income or other distributions which are subject to the same taxation treatment as income from shares in the country of which the distributing company is a resident.

8.125 In the case of Australia, the definition is consistent with subsection 3(2A) of the Agreements Act 1953 which clarifies that a reference to income from shares, or to income from other rights participating in profits, does not include a reference to a return on a debt interest as defined in Subdivision 974-B of the ITAA 1997. [Article 10, paragraph 3]

8.126 In respect of paragraph 3 of Article 10, it is understood that dividends in the case of Turkey shall include income from 'jouissance' shares, 'jouissance' rights or founder's shares and income derived from an investment fund or investment trust. [Protocol, item 7]

Branch profits tax

8.127 Profits of a company which is a resident of a country and which carries on business in the other country through a permanent establishment, after having been taxed in accordance with Article 7 ( Business Profits ), may be taxed on the remaining amount in the country in which the permanent establishment is situated. The tax so charged on the branch profits shall not exceed:

·
five per cent of the remaining amount where profits of the company are subject to the full rate of company tax in the country in which the branch is situated [Article 10, subparagraph 4a)] ; and
·
fifteen per cent of the remaining amount in all other cases [Article 10, subparagraph 4b)] .

8.128 This rule will benefit Australian business operating in Turkey through a branch as it reduces the rate of Turkish tax from 15 per cent to 5 per cent on qualifying profits.

8.129 Subitem 6b) of the Protocol makes it clear that, notwithstanding the rate specified in subparagraph a) of paragraph 4, Turkey may impose tax on dividends at the rate of 15 per cent should such dividends be subject to tax in Australia. Australia does not currently impose tax on foreign branch profits of Australian resident companies (section 23AH of the ITAA 1936). [Protocol, subitem 6b)]

Dividends effectively treated as either business profits or profits from independent personal services

8.130 Limitations on the tax of the country in which the dividend is sourced do not apply to dividends derived by a resident of the other country who has a permanent establishment or fixed base in the source country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with such permanent establishment or fixed base.

8.131 Where the holding is effectively connected with such permanent establishment or fixed base, the dividends are to be treated as business profits and profits from independent personal services respectively, 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 Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ).

8.132 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 or fixed base of that non-resident 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

8.133 Subject to paragraph 4, 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 or fixed base situated in the first country.

[Article 10, paragraph 6]

Diagram 8.4

Diagram 8.4

In the diagram above, paragraph 6 would, but for the exception, preclude Turkey from taxing the dividend paid by Australian resident company 2 to Australian resident company 1 out of profits derived from Turkish sources. However, as the dividends relate to the Australian shareholder's permanent establishment in Turkey with which the holding is effectively connected, Turkey may tax the dividends.

Article 11 - Interest

8.134 This Article allocates taxing rights in respect of interest flows between Australia and Turkey. Article 11 provides that:

·
an exemption applies for interest derived from the investment of official reserve assets by a government, its central bank or a bank performing central banking functions [Article 11, paragraph 3] ;
·
a maximum 10 per cent rate of source country tax may be applied to all other interest income [Article 11, paragraph 2] ;
·
interest paid on a debt-claim which is effectively connected with a permanent establishment or fixed base shall be subject to Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively [Article 11, paragraph 5] ;
·
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 Turkish resident other than where the indebtedness in respect of which the interest is paid is effectively connected with a permanent establishment or fixed base situated in Turkey; or
-
the interest is paid by a non-resident to a Turkish resident and it is an expense of the payer in connection with a permanent establishment or fixed base situated in Australia [Article 11, paragraph 6] ; and

·
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 [Article 11, paragraph 7] .

8.135 For the purposes of Article 11, it is understood that interest is paid to a resident of a Contracting State where that person is the beneficial owner of such interest. [Protocol, item 5]

Permissible rate of source country taxation

8.136 This Article provides for interest income to be taxed by both countries but requires the country in which the interest arises (that is, the source country) to limit its tax where a resident of the other country is the beneficial owner of the interest. [Article 11, paragraphs 1 to 3]

Ten per cent rate limit

8.137 Source country taxation is not to exceed 10 per cent of the gross amount of interest in all cases where a resident of the other country is the beneficial owner of the interest. [Article 11, paragraph 2]

Exemption for interest paid to Government on investment of official reserve assets

8.138 The exemption for interest paid to the government of a country in respect of the investment of official reserve assets will apply to interest derived by the Australian or Turkish governments, or the government of any political subdivision or local authority (including government investment funds) in either Australia or Turkey.

8.139 The exemption also applies to banks performing central banking functions in Australia and Turkey. [Article 11, paragraph 3]

Definition of interest

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

·
interest from Government securities or from bonds or debentures whether or not secured by mortgage and whether or not carrying a right to participate in profits;
·
interest from any other form of indebtedness; and
·
all other income subjected to the same taxation treatment as income from money lent by the law of the country in which the income arises.

[Article 11, paragraph 4]

Interest effectively treated as business profits or profits derived from independent personal services

8.141 Interest derived by a resident of one country which is paid in respect of indebtedness which is effectively connected with a permanent establishment or fixed base of that person in the other country, will form part of the profits of that permanent establishment or fixed base and be subject to the provisions of Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively. Accordingly, the rate limitations on source taxation provided in paragraphs 2 to 3 of this Article do not apply to such interest in the country in which the interest is sourced. [Article 11, paragraph 5]

Deemed source rules

8.142 The source rules which determine where interest arises for the purposes of this Article are set out in paragraph 6. They operate to allow Australia to tax interest paid by a resident of Australia to a resident of Turkey 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 Turkey resident, if it is an expense incurred by the payer of the interest in connection with a permanent establishment or fixed base situated in Australia.

8.143 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 in Turkey, or outside both Australia and Turkey. Similarly, interest connected with a fixed base situated in a third State is deemed to be sourced in the country in which the fixed base is situated. [Article 11, paragraph 6]

8.144 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

8.145 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 source country tax rate limits apply to an amount of interest paid, having regard to the indebtedness for which it is paid, 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 Turkish convention. [Article 11, paragraph 7]

8.146 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.

A special relationship also covers relationships of blood or marriage and, in general, any community of interests.

Article 12 - Royalties

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

·
a maximum 10 per cent rate of source country tax may be levied on the gross amount of royalties [Article 12, paragraph 2] ;
·
royalties paid in respect of a right or property which is effectively connected with a permanent establishment or fixed base are subject to Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively [Article 12, paragraph 4] ;
·
royalties are deemed to have an Australian source (and may therefore be taxed in Australia) where:

-
the royalties are paid to a Turkish resident by a person who is a resident of Australia for purposes of Australian tax other than a payment made in respect of a right or property which is effectively connected with a permanent establishment or fixed base situated in Turkey; or
-
the royalties are paid by a non-resident to a Turkish resident and are an expense of the payer in connection with a permanent establishment or fixed base situated in Australia [Article 12, paragraph 5] ; 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 [Article 12, paragraph 6] .

8.148 For the purposes of Article 12, it is understood that royalties are paid to a resident of a Contracting State where that person is the beneficial owner of such royalties. [Protocol, item 5]

Permissible rate of source country taxation

8.149 This Article in general allows both countries to tax royalty flows but limits the tax of the country of source, in respect of royalties beneficially owned by residents of the other country to 10 per cent of the gross amount of royalties. [Article 12, paragraphs 1 and 2]

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

8.151 The specific source country taxation rate limit above 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

8.152 The definition of royalties in this Article reflects most elements of the definition in Australia's domestic income tax law. The definition encompasses credits or payments of any kind for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right or for the use of, or right to use, industrial, commercial or scientific equipment. It also includes payments (or credits) for the supply of information concerning scientific, technical, industrial, or commercial knowledge or information but not payments for services rendered, except as provided for in subparagraph 3d). [Article 12, paragraph 3]

Image or sound reproduction or transmission

8.153 The 'royalties' definition includes credits or payments of any kind made for the use of, or the right to use, motion picture films. It also covers credits or payments for the use of, or the right to use, films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting. Such images or sounds may be transmitted electronically, such as by satellite, cable or Internet. [Article 12, subparagraph 3e)]

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

8.154 The OECD Model Commentary deals with the need to distinguish these two types of payments in paragraph 11.3 of the Commentary on Article 12 ( Royalties ). 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 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.

8.155 Payments or credits for design, engineering or construction of a 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.

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

8.157 Depending on the circumstances, payments for services rendered are to be treated under either Articles 7 ( Business Profits ) or 14 ( Independent Personal Services ).

Credits or payments for the supply of ancillary assistance

8.158 Consistent with Australia's treaty practice and paragraph 11.6 of the OECD Model Commentary on Article 12, credits or payments made for the supply of any assistance as a means of enabling the application or enjoyment of the property, right or information referred to in subparagraphs 3a) to 3c) fall within the meaning of the term royalties where the assistance is both ancillary and subsidiary to the use or supply of the relevant property or right, equipment, or knowledge or information. [Article 12, subparagraph 3d)]

Spectrum licences

8.159 Under the Turkish convention, credits or payments made for the use of, or right to use, the radiofrequency spectrum specified in a spectrum licence are treated as royalties. This provision preserves Australia's ability to tax credits or payments that arise in Australia for the use in Australia of any part of the radiofrequency spectrum specified in an Australian spectrum licence. [Article 12, subparagraph 3f)]

Forbearance

8.160 Consistent with Australian tax treaty practice and international standards (see paragraph 8.5 of the OECD Model Commentary on Article 12), subparagraph 3g) 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 3g)]

Other royalties effectively treated as business profits or profits derived from independent personal services

8.161 As in the case of dividend or interest income, it is specified that 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 or fixed base in the country in which the income is sourced. Such income is subject to the full rate of tax applicable in the country in which the royalty is sourced in accordance with the provisions of Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively. [Article 12, paragraph 4]

Deemed source rules

8.162 The source rules which determine where royalties arise for the 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 6 of Article 11 ( Interest ) and operate to allow Australia to tax royalties paid by a resident of Australia to a resident of Turkey who is the beneficial owner of those royalties. Australia may also tax royalties paid by a non-resident, being royalties which are beneficially owned by a Turkish resident, if the royalties are an expense incurred by the payer in connection with a permanent establishment or fixed base situated in Australia.

8.163 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 in Turkey, or outside both Australia and Turkey 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. Similarly, royalties connected with a fixed base situated in a third State are deemed to be sourced in the country in which the fixed base is situated. [Article 12, paragraph 5]

8.164 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

8.165 Where a special relationship exists between the payer and the beneficial owner of the royalties, the source country tax rate limits 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 Turkish convention.

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

Article 13 - Alienation of Property

Taxing rights

8.167 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.

8.168 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 may be income or a profit under ordinary concepts, will be taxed in accordance with this Article, rather than Article 7 ( Business Profits ), together with relevant capital gains.

Real property

8.169 Income, profits or gains from the alienation of real property may be taxed by the country in which the property is situated. [Article 13, paragraph 1]

8.170 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 clarified under paragraph 3 of Article 6 ( Income from Real Property ).

Permanent establishment or fixed base

8.171 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 or pertaining to a fixed base for the performance of independent personal services. It also applies where the permanent establishment or fixed base are themselves (alone or with the whole enterprise) alienated. Such income, profits or gains may be taxed in the country in which the permanent establishment or fixed base 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

8.172 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. [Article 13, paragraph 3]

8.173 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 (for example, so-called 'voyages to nowhere' by cruise ships). [Article 3, subparagraph l(i)]

Shares and other interests in land-rich entities

8.174 Paragraph 4 applies to situations involving the alienation of shares or comparable interests that derive more than 50 per cent of their value directly or indirectly from real property situated in the other country. Income, profits or gains from the alienation of such shares, comparable interests or other rights may be taxed in the country in which the real property is situated. Paragraph 4 complements paragraph 1 of this Article and is designed to cover arrangements involving the effective alienation of incorporated real property, or like arrangements.

8.175 This provision ensures that capital or revenue gains on disposal of a foreign 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. [Article 13, paragraph 4]

Resident country sweep-up provision

8.176 Paragraph 5 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 of which the person deriving the gains is a resident. 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 Turkey. The liability of the Australian resident to taxation on such capital gains will be determined in accordance with Australia's domestic law. [Article 13, paragraph 5]

Exception to resident country sweep-up for certain shares, similar rights or bonds issued by Turkish companies or residents

8.177 Notwithstanding the resident country sweep-up in paragraph 5 of this Article, Turkey has reserved its taxing right in relation to gains of a capital nature derived by a resident of Australia from the alienation of shares or rights in a Turkish company or bonds issued by a resident of Turkey. Such gains will be taxable if the period between acquisition and alienation of such shares, rights or bonds does not exceed two years. [Article 13, paragraph 6]

Double tax relief

8.178 In the event that the operation of this Article should result in an item of income or gain being subjected to tax in both States, the country of which the person deriving the income or gain is a resident (as determined in accordance with Article 4 ( Resident )) would be obliged by Article 23 ( Methods of Elimination of Double Taxation ) to provide double tax relief for the tax imposed by the other country.

Article 14 - Independent personal services

8.179 Under this Article, income derived by an individual in respect of professional services or other activities of an independent character will be subject to tax in the country in which the services or activities are performed if either:

·
the individual has a fixed base regularly available in the other country for the purpose of performing those services or activities; or
·
the individual is present in the other country for the purpose of performing those services or activities for a period or periods exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned.

8.180 If either of these conditions is met, the country in which the services or activities are performed will be able to tax so much of the profits as is attributable to the activities performed during such period or periods or through that fixed base. [Article 14, paragraph 1]

8.181 If the above tests are not met, the income will be taxed only in the country of residence of the individual.

8.182 The term professional services includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. [Article 14, paragraph 2]

8.183 Remuneration derived as an employee and income derived by entertainers and sportspersons are the subject of other Articles of the tax treaty and are not covered by this Article.

8.184 Article 14 deals with the provision of services by individuals of a typical type (that is professional services). The threshold test of establishing whether professional services are caught are if the individual has a fixed base available (a permanent establishment) or if the individual is present in the country in which the services are performed for 183 days or more. [Article 14]

Article 15 - Dependent Personal Services

Basis of taxation

8.185 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 16 ( Directors' Fees );
·
Article 17 ( Entertainers );
·
Article 18 ( Pensions and Annuities );
·
Article 19 ( Government Service ); and
·
Article 20 ( Teachers and Students ).

8.186 Generally, salaries, wages and other 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 15, paragraphs 1 and 2]

Short-term visit exemption

8.187 The conditions for this exemption 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 not a resident of the visited country; and
·
the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the country being visited.

8.188 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 15, paragraph 2]

Where the short-term visit exemption does not apply

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

8.190 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 in this situation to relieve any resulting double taxation.

Employment on a ship or aircraft

8.191 Income derived by crew members from employment exercised aboard a ship or aircraft operated in international traffic may be taxable in the country of which the entity operating the ship or aircraft is a resident. Thus, for example, an Australian resident pilot employed by a Turkish resident airline would be taxable in Turkey on his or her remuneration in respect of services rendered on international flights and entitled to a tax credit for the Turkish tax paid under Article 23 ( Methods of Elimination of Double Taxation ). [Article 15, paragraph 3]

Article 16 - Directors' Fees

8.192 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, of a company which is a resident of the other country. To avoid difficulties in such cases of ascertaining which country a director's services are performed, and consequently where the remuneration is to be taxed, the Article provides that directors' fees may be taxed in the country of residence of the company. [Article 16]

Article 17 - Entertainers

Personal activities

8.193 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 'entertainers' 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 entertainers or sportspersons while present in the visited country. [Article 17, paragraph 1]

Safeguard

8.194 Income in respect of personal activities exercised by an entertainer or sportsperson, where derived by another person (for example, a separate enterprise which formally enters into the contractual arrangements relating to the provision of 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 17, paragraph 2]

Exception for activities supported wholly or substantially from public funds

8.195 Income derived by an entertainer or sportsperson from their personal activities performed in a country, which would be ordinarily taxable in the country of performance under paragraph 1 of this Article, will be taxable in the entertainer or sportsperson's country of residence only where the activities are supported wholly or substantially from public funds of the country of residence, including any of its political subdivisions or local authorities. [Article 17, paragraph 3]

Article 18 - Pensions and Annuities

General scope

8.196 Pensions, annuities and similar periodic remuneration are generally taxable only by the country of which the recipient is a resident.

8.197 The term annuity means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.

8.198 The application of this Article extends to pensions, annuities and similar periodic remuneration made to dependants, for example, a widow, widower or children of the person in respect of whom the pension, annuity or periodic remuneration entitlement accrued where, upon that person's death, such entitlement has passed to that person's dependants. [Article 18, paragraphs 1 and 2]

8.199 Certain lump sums may be taxed in both countries. Pensions and retirement annuities and similar periodic remuneration (other than those relating to government service) may be taxed only in the country of residence of the recipient. Lump sums paid after the age of 60 in lieu of a right to receive a pension, may also be taxed only in the country of residence of the recipient. However, in respect of other lump sum payments (other than lump sum retirement benefits relating to government service), taxing rights are to be shared between the country of residence and the country of source. [Article 18, paragraph 3]

8.200 In respect of paragraph 3 of Article 18, it is understood that in the case of payments arising in Australia, the term 'lump sums in lieu of the right to receive a pension, annuity or other similar periodic remuneration' does not include a departing Australia superannuation payment made to a person who has worked in Australia while visiting on an eligible temporary resident visa. [Article 18, paragraph 3; Protocol, item 8]

Alimony payments

8.201 Alimony and other maintenance payments are taxable only in the country of which the recipient is a resident. 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 in the hands of the recipient and are non-deductible to the payer. [Article 17, paragraph 4]

Article 19 - Government Service

Salary and wage income

8.202 Salary, wage and other similar remuneration, 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, are 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 and;

·
the recipient is a resident of, and a national of, that other country; or
·
the recipient is a resident of that other country and did not become a resident of that other country solely for the purpose of rendering the services (for example, if the recipient was a permanent resident of that other country prior to rendering the services).

[Article 19, paragraph 1]

Government pensions, annuities or lump sums

8.203 Pensions, annuities or lump sum retirement benefits paid by, or out of funds created by a government (including a political subdivision or local authority) of one of the countries to an individual in respect of services rendered to that State are taxable only in that State. [Article 19, subparagraph 2a)]

8.204 However, such pensions or annuities shall be taxable only in the other Contracting State if the individual is a resident and a national of that state. Lump sum retirement benefits paid by, or out of funds created by, a country, to an individual in respect of services rendered to a country are taxable only in that country. [Article 19, subparagraphs 2a) and b)]

Business income

8.205 Remuneration paid in respect of services rendered in connection with any trade or business carried on by any governmental authority referred to in paragraph 1 of this Article is excluded from the scope of the Article. Such remuneration will remain subject to the provisions of Article 15 ( Dependent Personal Services ), Article 16 ( Directors' Fees ) or Article 17 ( Entertainers ). [Article 19, paragraph 3]

Article 20 - Teachers and Students

Students

8.206 This Article applies to students who are temporarily present in one of the countries solely for the purpose of their education if they are, or immediately before the visit were, a resident of the other country. In these circumstances, payments received from sources outside that country for the purpose of the student's maintenance or education will be exempt from tax in the country visited. This will apply even though the student may qualify as a resident of the country visited during the period for their visit. [Article 20, paragraph 1]

8.207 The exemption from tax provided by the visited country extends to maintenance payments received by the student that are made for maintenance of dependent family members who have accompanied the student to the visited country. [Article 20]

Employment income

8.208 Where a Turkish student visiting Australia solely for educational purposes undertakes any employment in Australia, for example:

·
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 15 ( Dependent Personal Services ), be subject to tax in Australia.

8.209 A payment for maintenance or education would not be expected to exceed the level of expenses likely to be incurred to ensure the student's maintenance or education (that is, a subsistence payment).

8.210 In these situations, the payments received from abroad for the student's maintenance or education will not 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 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.

Professors and teachers

8.211 This Article applies to exempt remuneration received by professors or teachers in certain circumstances. In order for the exemption to apply:

·
the professor or teacher is a resident of one country who visits the other country for a period not exceeding two years;
·
the visit to the other country is for the purpose of teaching, or carrying out advanced study or research at a university, college, school or other educational institution in the country visited; and
·
the remuneration received is for the teaching, advanced study or research.

8.212 Provided that these requirements are fulfilled, any remuneration the professor or teacher receives for such teaching, advanced study or research in the visited country shall be exempt to the extent to which the remuneration is or upon the application of Article 20, subject to tax in the other country. [Article 20, paragraph 2]

8.213 Where a professor or teacher remains or intends to remain in Australia for a period in excess of two years the exemption from Australian income tax will cease. Any income that was received that was initially exempt under the Article from the beginning of the visit to the date of the change of intention to stay in Australia beyond two years, will remain exempt because the initial purpose and intentions of the visiting professor or teacher satisfied the two-year condition. [Article 20, paragraph 2]

8.214 Research that is undertaken primarily for the benefit of a specific person or persons will not qualify for the exemption. [Article 20, paragraph 3]

8.215 In the course of negotiations, the two delegations agreed that:


'[I]n respect of teachers, the Teachers and Students Article in the draft treaty would take precedence in application over the Government Services Article in cases where the terms of both Articles could apply to the taxpayer.'

Article 21 - Other Income

Allocation of taxing rights

8.216 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 Turkish 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.

8.217 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 the position expressed by Australia on Article 21 ( Other Income ) of the OECD Model. [Article 21, paragraphs 1 and 3]

8.218 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.

8.219 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 or fixed base which a resident of one country has in the other country. In such a case, Articles 7 ( Business Profits ) or 14 ( Independent Personal Services ) will apply. [Article 21, paragraph 2]

8.220 This Article does not apply in the situation where business profits are not taxed in the country of source because of the absence of a permanent establishment. That is, in the absence of a permanent establishment, paragraph 1 of Article 7 ( Business Profits ) provides that the profits of an enterprise of a country shall be taxable only in that country.

Example 14.9 Esk Co, an Australia resident company, derives business profits from the sale of merchandise through an independent agent located in Turkey. As Esk Co does not have a permanent establishment in Turkey, the business profits will be taxable in Australia pursuant to Article 7 ( Business Profits ) and not under Article 21 ( Other Income ).

8.221 Similarly, this Article does not apply in the situation where profits derived by an individual in respect of professional services or other activities of an independent character are not taxed in the country where the activities are performed because of the absence of a fixed base or insufficient 'presence in terms of time'. That is, in the absence of a fixed base or sufficient presence, paragraph 1 of Article 14 ( Independent Personal Services ) provides that the profits derived by an individual who is a resident of a country shall be taxable only in that country.

Article 22 - Source of Income

Deemed source

8.222 Consistent with Australia's treaty practice, this Article effectively deems income, profits or gains derived by a resident of a country which, in accordance with the Turkish convention, may be taxed in the other country, to have a source in that other country for the purposes of the law of 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 Turkish convention over income derived by residents of Turkey. [Article 22, paragraph 1]

Source of income - double taxation relief

8.223 This Article also ensures that where an item of income, profits or gains is taxable in both countries, double taxation relief will be given by the taxpayer's country of residence (pursuant to Article 23 ( Methods of Elimination of Double Taxation )) for tax levied by the other country in accordance with the tax treaty. In this way, income derived by a resident of Australia, which is taxable by Turkey under the tax treaty, will be treated as being foreign income for the purposes of the ITAA 1936 and the ITAA 1997, including the foreign income tax offset provisions of the ITAA 1997. [Article 22, paragraph 2]

Article 23 - Methods of Elimination of Double Taxation

8.224 Double taxation does not arise in respect of income flowing between Australia and Turkey:

·
where the terms of the Turkish convention provide for the income to be taxed only in one country; or
·
where the domestic taxation law of one of the States exempts the income from its tax.

8.225 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 Turkish convention, remain subject to tax in both countries. In accordance with international practice, Australia's tax treaties provide for double tax relief to be afforded by the country of residence of the taxpayer by way of an exemption of the foreign income, or a credit or deduction against its tax for the tax of the country of source. This Article also reflects that approach.

Australian method of relief

8.226 This Article requires Australia to provide Australian residents a credit against their Australian tax liability for Turkish tax paid under Turkish laws and in accordance with the Turkish convention, on income which is 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]

8.227 Australia's general foreign income tax offset rules, together with the terms of this Article and of the Turkish convention generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income, profits or gains that are also taxed in Turkey.

8.228 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 income tax offset provisions (Division 770 of the ITAA 1997).

8.229 Dividends and branch profits derived from Turkey by an Australian resident company that are exempt from Australian tax under the foreign source income measures (for example, section 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.

Turkish relief

8.230 This Article also requires Turkey to provide Turkish residents relief by way of a deduction against their Turkish tax liability for Australian tax paid under Australian laws and in accordance with the Turkish convention, on income which is taxable in Turkey. The deduction is made against the Turkish tax payable on the same income, subject to that deduction not exceeding an amount which bears to the total Turkish tax payable the same ratio as the income concerned bears to the total income. [Article 23, paragraph 2]

Consideration of exempt amounts

8.231 Paragraph 3 permits each country to take into account income which is exempt from tax in that country under the Turkish convention in calculating the amount of tax on other income. [Article 23, paragraph 3]

Article 24 - Non-Discrimination

8.232 The Turkish convention includes rules to prevent tax discrimination.

Discrimination based on nationality

8.233 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]

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

8.235 The term 'national' is defined in subparagraph (l) of paragraph 1 of Article 3 ( General Definitions ) of the Turkish convention and covers both an individual who is a citizen or national of one country or the other, and any company or legal person 'deriving its 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 under a law of Turkey would be a national of Turkey for the purposes of this paragraph. [Article 3, subparagraph 1l)]

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

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

8.237 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.

8.238 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 Turkish resident compared to an Australian resident will not constitute discrimination for the 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 Turkey.

The meaning of 'other or more burdensome' taxation

8.239 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).

8.240 The phrase 'other or more burdensome' taxation 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-discrimination and permanent establishments

8.241 The tax on permanent establishments of enterprises of the other country will not be levied less favourably than on the country's own enterprises carrying on the same activities in similar circumstances. This applies to all residents of a treaty country, irrespective of their nationality, who have a permanent establishment in the other country. The application of this paragraph, however, is subject to paragraph 4 of Article 10 of the Turkish convention, which permits the imposition of branch profits tax by Turkey. [Article 24, paragraph 2]

8.242 For this paragraph to apply, the enterprises of both States 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.

8.243 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.

8.244 In determining whether taxation has been less favourably levied, regard would be had only to the rules applicable to the taxation of the permanent establishment's own activities, and how those rules compare with those applicable to the taxation of similar activities carried on by a local enterprise. As noted in paragraph 41 of the OECD Model Commentary on Article 24, the equal treatment principle in this paragraph 'does not extend to rules that take account of the relationship between an enterprise and other enterprises (for example, rules that allow consolidation, transfer of losses or tax-free transfers of property between companies under common ownership), since the latter rules do not focus on the taxation of an enterprise's own business activities similar to those of the permanent establishment'. Accordingly, this paragraph does not affect Australia's roll-over rules for capital gains, consolidation rules or loss transfer rules. Nor does it affect rules concerning the allowance of rebates or credits in relation to dividends, since these do not relate to the business activities of the permanent establishment.

Deductions for payments to foreign residents

8.245 The treaty partner countries must allow the same deductions for interest, royalties and other disbursements paid to residents of the other country as it does for payments to its own residents. However, the treaty countries are allowed 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 7 of Article 11 ( Interest ), and paragraph 6 of Article 12 ( Royalties ). [Article 24, paragraph 3]

Enterprises owned or controlled abroad

8.246 A country must not give less favourable treatment to enterprises, 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 Turkish residents may not be given other or more burdensome treatment than locally owned or controlled Australian enterprises. [Article 24, paragraph 4]

8.247 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 enterprise as resident shareholders. Accordingly, there is no obligation under paragraph 5 or any other provision of this Article to allow imputation credits to non-resident shareholders.

Non-resident individuals

8.248 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]

8.249 This means that Australia will continue to be able to grant certain tax offsets only to resident individuals, such as the tax offset for dependents contained in Division 13 of the ITAA 1997.

8.250 Unlike paragraph 3 of Article 24 ( Non-Discrimination ) of the OECD Model, the 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.

Exclusions

8.251 Certain provisions of the law of both countries are not restricted in their application by this Article. 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 Turkey which are not restricted in their application by this Article 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;
·
provide for deductions to eligible taxpayers for expenditure on research and development; or
·
are agreed in an Exchange of Notes between the two Governments to be unaffected by the Article.

Avoidance or evasion provisions

8.252 The operation of domestic measures to combat avoidance and evasion is not affected by this Article. [Article 24, subparagraph 6a)]

8.253 The reference to 'laws...designed to prevent avoidance or evasion of taxes' includes, in the case of Australia, thin capitalisation, dividend stripping, transfer pricing, controlled foreign companies provisions, transferor trust provisions, 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 the Turkish convention by the exclusion of such rules from the operation of the Article. [Article 24, paragraph 7]

8.254 The enforcement and operation of the various aspects of the withholding tax provisions relating to non-residents are preserved by this Article. For example, section 26-25 (interest or royalty) of the ITAA 1997 provides that where interest and royalties are paid to a non-resident and the payer fails to deduct withholding tax, the interest or royalty expense cannot be claimed as a deduction. No similar measure exists in relation to payments from a resident to another resident. [Article 24, subparagraphs 6a) and 7c)]

Capital gains roll-over relief

8.255 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.

8.256 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 that is taxable Australian property is transferred to a non-resident if the asset is not taxable Australian property in the hands of the transferee. Australia will be able to continue to deny roll-over relief in these circumstances. [Article 24, subparagraph 6b)]

Consolidation

8.257 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.

8.258 Australia's consolidation measures are restricted to wholly-owned Australian resident entities. This 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 6c)]

Research and development expenditure

8.259 The domestic law research and development provisions are excluded from the operation of Article 24. 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 6d)]

Power to carry out an Exchange of Notes

8.260 The two Governments may agree in an Exchange of Notes that other domestic law provisions will not be affected by the requirements of Article 24. [Article 24, subparagraph 6e)]

Taxes to which this Article applies

8.261 This Article applies to taxes which are the subject of the Turkish convention (see paragraphs 8.8 and 8.12 for a list of the taxes covered). It is intended that the Article extend to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, these taxes, where those taxes are covered by the Turkish convention in accordance with paragraph 2 of Article 2. [Article 24, paragraph 8]

More favourable treatment

8.262 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

8.263 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 Turkish convention. [Article 25, paragraph 2]

8.264 In the case of Australia, the competent authority is the Commissioner or an authorised representative of the Commissioner. [Article 3, subparagraph 1f)]

8.265 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 the Turkish convention, the person may present a case to the competent authority of the country of which the person is a national.

8.266 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 Turkish 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]

8.267 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 Turkish convention. [Article 25, paragraph 2]

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

Implementation of a solution

8.269 The solution reached by mutual agreement between the competent authorities of the relevant countries must be implemented notwithstanding any time limits in the domestic laws of the tax treaty countries, provided that, in the case of Turkey, the taxpayer must claim the refund resulting from such mutual agreement within a period of one year after the tax administration has notified the taxpayer of the result of the mutual agreement. 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

8.270 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 Turkish convention. 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.

8.271 The competent authorities may also consult together with a view to eliminating double taxation in cases where the Turkish convention does not provide a solution. However, in eliminating such double taxation, the competent authorities must act within their statutory powers. [Article 25, paragraph 3]

Methods of communication between competent authorities

8.272 The competent authorities are permitted to communicate directly with each other without having to go through diplomatic channels. This may be done by electronic means (for example, facsimile transmission, e-mail or web conferencing), letter, telephone, direct meetings or any other convenient means.

8.273 This provision also envisages that, where advisable, an oral exchange of opinions through a meeting of representatives of the competent authorities of the Contracting States may take place. [Article 25, paragraph 4]

General Agreement on Trade in Services dispute resolution process

8.274 This Article also deals with disputes that may be brought before the World Trade Organisation Council for Trade in Services under the dispute resolution processes of the General Agreement on Trade in Services (GATS).

8.275 Australia and Turkey 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.

8.276 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.

8.277 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

8.278 The Turkish convention allows for the competent authorities to exchange information on a wide range of taxes and irrespective of whether the country of whom the information is requested has a domestic tax interest in the information sought. The information allowed to be exchanged does not have to concern a resident of either Australia or Turkey.

Foreseeably relevant information

8.279 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 concerns taxes referred to in Article 2 ( Taxes Covered ) of the Turkish convention, and is not restricted by Article 1 ( Persons Covered ). It may, therefore, cover persons who are not residents of Australia or Turkey.

8.280 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]

Taxes to which this Article applies

8.281 Under the Turkish convention, the Australian competent authority can request and obtain information concerning all federal taxes from the competent authority in Turkey. This means, for example, that information concerning Australian indirect taxes (that is, the GST) may be requested and obtained from Turkey.

8.282 Similarly, in the case of Turkey, the Turkish competent authority can request and obtain information concerning taxes of every kind and description imposed under Turkish tax laws from Australia.

Use of exchanged information

8.283 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted in a manner which is consistent with 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

8.284 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 25, paragraph 4]

Limitations

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

·
it would be required to carry out administrative measures at variance with the law and administrative practice of either Australia or Turkey; or
·
such information is not obtainable by the competent authority under the domestic law or in the normal course of administration of Australia or Turkey.

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

8.286 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 3c)]

Information held by institutions such as banks, other financial institutions or nominees

8.287 Paragraph 5 ensures that paragraph 3 of this Article cannot be used to prevent the supply of information solely because the information is held by institutions such as banks, other financial institutions or nominees. This reflects the 2005 changes to Article 26 ( Exchange of Information ) of the OECD Model. [Article 26, paragraph 5]

Information that exists prior to the entry into force of this convention

8.288 Under this Article, the competent authorities can exchange information that relates to transactions or events occurring prior to entry into force of this convention. This approach conforms with the international practice contained in paragraph 10.3 of the Commentary on Article 26 ( Exchange of Information ) of the OECD Model.

8.289 In the course of negotiations the Turkish delegation advised that, in relation to the Turkish Free Zones:


'...Turkish tax authorities were able to obtain tax information on businesses operating in those zones and benefiting from the tax concessions available. Such information may be exchanged under the terms of the Exchange of Information Article...(that is, such information is not subject to secrecy or confidentiality requirements preventing the Turkish competent authority from exchanging such information) providing the terms of the Exchange of Information Article are met in other respects.'

Article 27 - Members of Diplomatic Missions and Consular Posts

8.290 The purpose of this Article is to ensure that the provisions of the Turkish convention do not result in members of diplomatic missions or 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 27]

Article 28 - Entry into Force

Date of entry into force

8.291 This Article provides for the entry into force of the Turkish convention. The Turkish convention will enter into force on the last date on which diplomatic notes are exchanged notifying that the statutory and constitutional procedures required for the entry into force of the Turkish convention in the respective countries have been completed. In Australia, enactment of the legislation giving the force of law in Australia to the Turkish convention along with tabling the Turkish convention in Parliament are prerequisites to the exchange of diplomatic notes. [Article 28]

Date of application for Australian taxes

Withholding taxes

8.292 Once it enters into force, the Turkish 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 Turkish convention enters into force. [Article 28, sub-subparagraph 2a)(i)]

Other Australian taxes

8.293 The Turkish convention will first apply to other Australian taxes as regards any year of income beginning on or after 1 July next following the date on which the Turkish convention enters into force.

8.294 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 next following the date on which the Turkish 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 2a)(ii)]

Date of application for Turkish taxes

Taxes withheld at source

8.295 In Turkey, the Turkish convention will apply with regard to taxes withheld at source, in respect of amounts paid or credited on or after 1 January next following the date upon which the Turkish convention enters into force. [Article 28, sub-subparagraph 2b)(i)]

Other Turkish taxes

8.296 The Turkish convention will first apply to Turkish taxes in respect of taxable years beginning on or after 1 January next following the date upon which the Turkish convention enters into force. [Article 28, sub-subparagraph 2b)(ii)]

Exchange of information

8.297 Article 26 ( Exchange of Information ) is intended to have effect from the date of entry into force of the Turkish convention, irrespective of the year of income to which the information relates (subject to any domestic law time limits).

Article 29 - Termination

8.298 The Turkish convention is to continue in effect until terminated. Either country may terminate the Turkish convention after the expiration of five years from the date of its entry into force. Termination is by notice in writing of termination through the diplomatic channel, at least six months before the end of any calendar year beginning after the expiration of that five-year period.

Cessation in Australia

8.299 In the event of either country terminating the Turkish convention, the Turkish convention 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, as regards any year of income, profits or gains in the Australian year of income commencing on or after 1 July next following that in which the notice of termination is given.

[Article 30, subparagraph 2a)]

Cessation in Turkey

8.300 In the event of either country terminating the Turkish convention, the Convention would cease to be effective in Turkey for the purposes of:

·
taxes withheld at source, in respect of amounts paid or credited after the end of the calendar year in which notice is given; and
·
other Turkish taxes, in respect of taxable years beginning after the end of the calendar year in which such notice is given.

[Article 30, subparagraph 2b)]


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