ATO Interpretative Decision
ATO ID 2005/260
Income Tax
Exemption from Interest Withholding Tax: US resident - providing financeFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer, a United States (US) resident, 'providing finance' within the meaning of Article 11(3)(b) of Schedule 2 of the International Tax Agreements Act 1953 (Agreements Act) as amended by Schedule 2A of the US Protocol (the US Convention) (and thereby exempt from interest withholding tax on Australian-sourced interest) where its business activities involve the purchase of established loans or debt instruments (receivables) from an originating entity or other holder under a securitisation arrangement?
Decision
Yes. Where the entity purchases such receivables under a securitisation arrangement, the activity will be considered to be 'providing finance' within the meaning of Article 11(3)(b) of the US Convention.
Facts
The taxpayer is a resident of the US within the meaning of the US Convention.
The taxpayer is not a bank for the purposes of Article 11(3)(b) of the US Convention.
The taxpayer is carrying on a business.
The taxpayer substantially derives its profits by issuing commercial paper to investors in the financial markets and using those funds:
- (a)
- to purchase established loans or debt instruments (receivables) from an originating entity or other holder issued by either Australian resident or non-resident borrowers under a securitisation arrangement, and
- (b)
- to make loans or purchase debt instruments as a primary lender.
The taxpayer meets all other requirements for the application of Article 11(3)(b) of the US Convention and the interest arising in Australia is not effectively connected with a permanent establishment nor paid as part of a back to back loan arrangement.
Reasons for Decision
The term 'providing finance', as it appears in Article 11(3)(b) of the US Convention, is not specifically defined in the treaty. As such, it takes on its domestic law meaning (see Article 3(2) of the US Convention).
The term 'providing finance' within the meaning of Article 11(3)(b) of the US Convention is considered in Taxation Ruling TR 2005/5 and is broadly defined at paragraph 22.
Having regard to the treaty context in which the term 'providing finance' appears, it is considered that the purchase of an established loan or debt instrument (receivable) from an originating entity or other holder under a typical securitisation arrangement falls within the meaning of 'providing finance' under Article 11(3)(b) of the US Convention.
Hence, the taxpayer substantially derives its profits by raising debt finance in the finance markets and using those funds to carry on a business of providing finance.
Given that the taxpayer meets all other conditions for the operation of Article 11(3)(b) of the US Convention and the interest arising in Australia is not effectively connected with a permanent establishment nor paid as part of an arrangement involving back to back loans, Australia has no taxing rights under Article 11(3) of the US Convention in respect of Australian-sourced interest paid to the taxpayer.
As there is an inconsistency between the effective exemption provided for under Article 11(3) of the US Convention and subsection 128B(2) of the Income Tax Assessment Act 1936 which prima facie subjects interest derived by a non-resident to withholding tax, the Agreements Act prevails.
Date of decision: 23 August 2005Year of income: Year ended 30 June 2006
Legislative References:
Income Tax Assessment Act 1936
section 128B
Schedule 2
Related Public Rulings (including Determinations)
Taxation Ruling TR 2005/5
Keywords
Double tax agreements
International finance
International tax
Non resident interest withholding tax
Treaties
United States
ISSN: 1445-2782