ATO Interpretative Decision

ATO ID 2007/177

Income Tax

Obtaining of treaty benefits under US Convention
FOI status: may be released

This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

For the purposes of Article 16(5) of the tax treaty between Australia and the United States of America (the US Convention) contained in Schedules 2 and 2A to the International Tax Agreements Act 1953, did the establishment, acquisition or maintenance of the taxpayer, a United States (US) resident company, and the conduct of its operations not have as one of its principal purposes the obtaining of benefits under the US Convention?

Decision

Yes. The establishment, acquisition or maintenance of the taxpayer and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the US Convention.

Facts

The taxpayer is a US resident company that is a holding company of a company group. One of the taxpayer's subsidiaries is an Australian resident company.

The taxpayer is not a qualified person for the purposes of the Limitation of Benefits Article (Article 16) of the US Convention.

The taxpayer was incorporated in the US several years before the US Convention entered into force and has been maintained as a holding company since its incorporation.

The taxpayer's investment in the Australian resident subsidiary was made to facilitate the conduct in Australia of the business of the taxpayer's group. The conduct of the taxpayer's operations includes its on-going investment in its Australian subsidiary.

The taxpayer's group provided certain business services. For a number of years, the taxpayer has held its investment in its Australian subsidiary which provided those business services to Australian customers and still continues to do so.

Reasons for Decision

Article 16(5) of the US Convention provides that a US resident that is not a qualified person under Article 16(2) of the US Convention shall, nevertheless, be granted benefits of the US Convention if the Australian competent authority determines, in accordance with Australian law, that the establishment, acquisition or maintenance of the US resident and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the US Convention.

Paragraph 2.112 of the Explanatory Memorandum to the International Tax Agreements Amendment Bill (No 1) 2002 states that the discretion in Article 16(5) of the US Convention recognises that there may be cases where significant participation by third country residents in an enterprise resident in one of the treaty countries may be warranted by sound business practice or long-standing business structures and does not necessarily indicate a treaty shopping motive.

Similarly, there may also be cases where significant participation by a resident of one Contracting State in an enterprise resident in the other State may be warranted by the same things as stated above and not necessarily indicate a treaty shopping motive.

The taxpayer company was established prior to the US Convention coming into force and has held shares in the Australian resident subsidiary company since that time. The subsidiary formed part of the business structure of the group and there is no evidence pointing to treaty shopping as being one of the motives for establishing the taxpayer company.

The taxpayer's investment in the Australian resident subsidiary was made to facilitate the conduct in Australia of the business of the taxpayer's group. There is no evidence indicating that the purpose behind maintaining the taxpayer or the conduct of its operations is to obtain benefits under the US Convention.

Accordingly, for the purposes of Article 16(5) of the US Convention, the establishment, acquisition or maintenance of the taxpayer and the conduct of the taxpayer's operations, did not have as one of its principal purposes the obtaining of benefits under the US Convention.

Date of decision: 30 August 2007

Year of income: Year ended 30 June 2007

Legislative References:
International Tax Agreements Act 1953
   Schedule 2
   Schedule 2A
   Schedule 2, Article 16(2)
   Schedule 2, Article 16(5)

Keywords
Double tax agreements
International law
Non resident dividend withholding tax
Unfranked dividends
United States

Siebel/TDMS Reference Number: 5272874

Business Line: Public Groups and International

Date of publication: 7 September 2007

ISSN: 1445-2782

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