CHONG v FC of TJudges:
Federal Court of Australia
MEDIA NEUTRAL CITATION:
 FCA 635
Introduction and background
1. The applicant appeals to the Court from a decision of the Administrative Appeals Tribunal made on 3 April 1998 [reported at 98 ATC 2069] which affirmed the decision by the respondent on 25 February 1997 to disallow the applicant's objection to his tax assessment for the income year ended 30 June 1996.
2. The issue between the parties involves the interpretation of Art 18(2) of the ``Agreement
ATC 4317Between The Government of Australia and The Government of Malaysia For The Avoidance of Double Taxation and The Prevention of Fiscal Evasion With Respect to Taxes on Income'' (``the Malaysian Agreement''). The Malaysian Agreement is set out in Sch 16 of the International Tax Agreements Act 1953 (Cth) (``the Tax Agreements Act''). It was entered into on 20 August 1980 and was incorporated into Australian domestic law on 14 April 1981 by the Income Tax (International Agreements) Amendment Act 1981 (Cth) which inserted s 11F and Sch 16 into the Tax Agreements Act.
3. Section 11F(1) of the Tax Agreements Act provides:
``Subject to this Act, on and after the date of entry into force of the Malaysian agreement, the provisions of the agreement, so far as those provisions affect Australian tax, have, and shall be deemed to have had, the force of law-
- (a) in relation to withholding tax...
- (b) in relation to tax other than withholding tax - in respect of income of any year of income that commenced on or after 1 July 1979 and in relation to which the agreement remains effective.
Section 4 of the Tax Agreements Act provides that the Income Tax Assessment Act 1936 (Cth) (``ITAA'') is to be incorporated into, and read as one with, the Tax Agreements Act and is in the following terms:
``(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.
(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than section 160AO or Part IVA of that Act) or in an Act imposing Australian tax.''
4. Article 18 of the Malaysian Agreement is in the following terms:
1. Remuneration (other than a pension or annuity) paid by a Contracting State or a political subdivision or a local authority thereof to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in that State. However, such 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 citizen or national of that State; or
- (b) did not become a resident of that State solely for the purpose of performing the services.
2. Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to any individual in respect of services rendered to that State or subdivision or local authority thereof shall be taxable in that State.
3. The provisions of paragraphs 1 and 2 shall not apply to remuneration or pensions in respect of services rendered in connection with any trade or business carried on by one of the Contracting States or a political subdivision or a local authority thereof. In such a case, the provisions of Articles 14, 15 and 17 shall apply.''
5. The relevant facts were not in issue between the parties and a statement of agreed facts was placed before the Tribunal. The applicant is a resident of Australia for the purposes of Australian tax and is not a resident of Malaysia for the purposes of Malaysian tax. The applicant receives a Malaysian Civil Service Pension of MR$1,212.50 per month and in the 1996 year he received payments totalling MR$15,762.50. The applicant's entitlement to the pension arose from his previous employment with the Malaysian Inland Revenue Department. The services rendered by him in his capacity as an employee of that Department were not services rendered in connection with a trade or business carried on by the Government of Malaysia. The pension received by the applicant is a pension of the kind referred to in Art 18 of the Malaysian Agreement.
6. In his income tax return for the year ended 30 June 1996 the applicant included Malaysian pension income of A$8,169.00 being the Australian dollar equivalent of the MR$15,762.50 he received during the year. He claimed a foreign tax credit of A$260.98. By notice of assessment issued to the applicant on 11 September 1996 the respondent assessed the applicant for the year ended 30 June 1996 as liable to tax of $991.45 on the Malaysian
ATC 4318pension income of A$8,169.00. In arriving at the liability to tax on the income the respondent allowed a foreign tax credit of A$260.98 in accordance with the provisions contained in Art 23(3) of the Malaysian Agreement.
7. By notice of objection dated 30 October 1996 the applicant objected to the assessment on the grounds that Art 18(2) of the Malaysian Agreement does not allow for his Malaysian Civil Service Pension to be taxed in Australia. The respondent disallowed that objection by notice dated 25 February 1997.
8. The parties agreed before the Tribunal that the following paragraph was an accurate English translation of the Malay language version of Art 18(2):
``Whatever pension which was paid by, or of moneys produced by, a Contracting State or a political small section or a local authority to any individual persons relating to services given to that Contracting State or the political small section or local authority may be taxed in the Contracting State.''
The parties made their submissions before the Tribunal on the basis that Art 18(2) read as set out in the English language version and it was that paragraph which the Tribunal used for the purpose of reaching its decision.
9. On the hearing of the appeal the respondent sought to rely on an affidavit by an interpreter which provided a translation of Art 18 and also Art 6(1) and 17. The substance of the affidavit was that the Malaysian language uses the same word for ``shall'' and ``may''. I received the affidavit subject to objection by the applicant. As the parties agreed on what was said to be an accurate English translation of the Malay language version of Art 18(2) before the Tribunal, I do not consider it appropriate or relevant to allow the respondent to rely on the affidavit and I therefore rule it inadmissible. In any event for the reasons to which I shall refer its contents would not have required me to reach a different conclusion to that which I have reached.
10. On 2 August 1999 a Protocol amending the Malaysian Agreement was signed. There is nothing in that Protocol which bears upon any of the issues before the Court.
Reasoning of the Tribunal
11. Article 22 provides:
``Income derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, 10 to 16 and 18 may be taxed in the other Contracting State, shall for the purpose of Article 23, and of the income tax law of that State, be deemed to be income from sources in that other State.''
The Tribunal noted that Art 18 was specifically referred to in Art 22 and that the only income that might be subject to tax by each Contracting State was a pension referred to in Art 18(2). Article 23 provides for methods of eliminating double taxation by the granting of credits in respect of the tax paid in the other country.
12. The Tribunal also had regard to Art 23(1) which provides:
``The laws in force in each of the Contracting States shall continue to govern the taxation of income in that Contracting State except where provision to the contrary is made in this Agreement. Where income is subject to tax in both Contracting States, relief from double taxation shall be given in accordance with the following paragraphs.''
The Tribunal took the view that Art 18(2) of the Malaysian Agreement was not a ``provision to the contrary'' as referred to in Art 23(1).
13. The Tribunal regarded the absence of the word ``only'' in Art 18(2) as ``clearly significant'' and noted that it was used elsewhere in the Malaysian Agreement, such as in Art 7(1), 8(1), 14(1), 17(1) and 18(1). The Tribunal also noted that the word ``may'' in relation to a Contracting State's power to tax was used in a number of articles but that the use of the word ``shall'' in Art 18(2) made it clear that government pensions were taxable. The Tribunal found that Art 18(2) did not say that the relevant pension was taxable only in the State which paid it and that the Malaysian Agreement, read as a whole, drew a distinction between situations where the taxing power can only be exercised by one Contracting State to the exclusion of the other and on the other hand situations where both Contracting States exercise their taxing powers in relation to the same subject-matter. The Tribunal concluded that Art 18(2) related to a situation where both Contracting States could exercise their taxing power. The Tribunal said that the ordinary meaning to be given to Art 18(2) is that it meant what it said, that its meaning was plain and that the Tribunal did not need to have recourse to Art 32 of the Vienna Convention on the Law of Treaties (``the Vienna Convention'') in the interpretation of Art 18(2).
Reasoning on the appeal
14. There was little dispute between the parties as to the relevant principles of interpretation to be applied to the Malaysian Agreement. The applicant submitted that the relevant approach to the interpretation of revenue statutes was that tax should only be imposed if there is a clear intention to do so and a liability to tax should not be inferred from ambiguous words. In
Western Australian Trustee Executor & Agency Co Ltd v Commr of State Taxation (WA) 80 ATC 4567; (1980) 147 CLR 119, Gibbs J said at ATC 4571; CLR 126-127:
``... The established rule that no tax can be imposed on a subject by an Act of Parliament without words which clearly show an intention to lay the burden upon him does not mean that the court will strive to find loopholes where none are apparent; the words of the Act must be given a fair and reasonable construction, without leaning one way or the other. However, although, if the terms of the Act plainly impose the tax they should be given effect, equally if they do not reveal a clear intention to do so the liability should not be inferred from ambiguous words. If the words in question are words of exception or exemption the same rules of construction should be applied...''
The applicant submitted that the Tribunal did not apply this principle because it found in Art 18(2) an implied right to tax government pensions in Australia. For the reasons to which I later refer I do not consider that it is a correct analysis of the Tribunal's reasoning to say that it found such an implied right in Art 18(2).
15. The respondent submitted that a domestic statute which incorporates an international treaty should be interpreted in accordance with the meaning in the treaty in the absence of a contrary intention and that the rules of interpretation applicable to the treaty governed the interpretation of the domestic statutory provisions:
Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225. This principle of interpretation applies to a double tax agreement which has been incorporated into domestic law. In
FC of T v Lamesa Holdings BV 97 ATC 4752; (1997) 77 FCR 597 the Full Court of the Federal Court (Burchett, Hill and Emmett JJ) said at ATC 4758; FCR 604:
``But it is now too late for any distinction to be drawn between the principles of interpretation applicable to double tax treaties on one hand and those applicable to other international treaties on the other: Thiel v FC of T 90 ATC 4717; (1990) 171 CLR 338 is authority for the Court adopting the same approach to the interpretation of double tax treaties as to other international treaties...
The principles thus to be adopted are clearly set out in the judgment of McHugh J in Applicant A (at 396-397)...''
Thiel v FC of T 90 ATC 4717; (1990) 171 CLR 338 the majority of the Court (Mason CJ, Brennan and Gaudron JJ) said (at ATC 4720; CLR 344) it was appropriate to consider the 1977 OECD Model Convention in interpreting the double tax agreement between Australia and Switzerland. Dawson J (at ATC 4723; CLR 349) considered it permissible under the Vienna Convention to have regard to the Model Convention and McHugh J (at ATC 4727; CLR 356) considered it appropriate to have regard to the Vienna Convention to interpret the agreement.
17. Article 31(1) of the Vienna Convention which is headed ``General rule of interpretation'' provides:
``A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.''
18. In Applicant A v Minister for Immigration and Ethnic Affairs (supra) members of the Court interpreted Art 31 of the Vienna Convention as meaning that primacy was to be given to the written text of the treaty but the context, object and purpose of the treaty had also to be considered in a holistic manner. McHugh J set out four propositions in relation to the interpretation of treaties at 254-256:
``First... Art 31 [of the Vienna Convention] is to be interpreted in a holistic manner... Second, taking the text as the starting point is consistent with the basic principle of interpretation that courts should focus their attention on the `four corners of the actual text' in discerning the meaning of that text.
Third, the mandatory requirement that courts look to the context, object and purpose of treaty provisions as well as the text is consistent with the general principle that international instruments should be interpreted in a more liberal manner than would be adopted if the court was required to construe exclusively domestic legislation.
Fourth, international treaties often fail to exhibit the precision of domestic legislation. This is the sometimes necessary price paid for multinational political comity. The lack of precision in treaties confirms the need to adopt interpretive principles...
Accordingly, in my opinion, Art 31 of the Vienna Convention requires the courts of this country when faced with a questions of treaty interpretation to examine both the `ordinary meaning' and the `context... object and purpose' of a treaty.''
19. There was a difference between the parties as to the identification of the issue which arose on the appeal. The applicant couched the issue in terms:
``Whether Article 18(2) of the Malaysian double tax agreement allocates the taxing power over pensions paid by the Malaysian government to:
- (a) the Contracting State paying the pensions;
- (b) the country of residence of the recipient of the pension; or
- (c) both.''
The respondent put the issue somewhat differently:
``Whether Article 18(2) of the Malaysian Agreement precludes Australia from imposing taxation in respect of a pension paid by Malaysia to an individual in respect of services rendered to Malaysia.''
What appeared to be between the parties was the underlying purpose of a double tax agreement. The applicant, relying on FC of T v Lamesa Holdings BV (supra), submitted that a double tax treaty allocates jurisdiction to tax to the contracting states whereas the respondent submitted that a double tax treaty imposes limitations on the power of the contracting state to tax. The respondent referred, in particular, to the text by Vogel, Double Taxation Conventions 3rd ed. 1997 at p 20 where the following passage appears:
``Tax treaty rules assume that both contracting States tax according to their own law; unlike the rules of private international law, therefore, treaty rules do not lead to the application of foreign law. Rather, treaty rules, to secure the avoidance of double taxation, limit the content of the tax law of both contracting States; in other words, the legal consequences derived from them alter domestic law, either by excluding application of provisions of domestic tax law where it otherwise would apply, or by obliging one or both States to allow a credit against their domestic tax for taxes paid in the other State.''
Later, at p 26, the learned author continues:
``Tax treaties, unlike conflict rules in private international law, do not face the problem of choosing between applicable domestic and foreign law. Instead, they recognise that each contracting State applies its own law and then they limit the contracting State's application of that law... Consequently, it would be misleading to designate treaty norms as conflict rules according to the usage of private international law.
Further, treaty rules neither authorize... nor `allocate' jurisdiction to tax to the contracting States. Moreover, the opinion that DTCs resolve cases of conflicting jurisdiction... is obsolete. And even less do they attribute `the right to tax' as some earlier DTCs appear to indicate...''
20. The Full Court of the Federal Court appears to have taken a different approach in FC of T v Lamesa Holdings BV (supra) where it considered the provisions of the Netherlands- Australia Double Taxation Agreement 1976 which had been incorporated into Australia domestic law pursuant to s 4 of the Tax Agreements Act. At ATC 4755; FCR 600 the Full Court said:
``The Agreement is an agreement for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Although, therefore, the Agreement has this dual object, the Agreement substantially concerns allocation of taxing power.
Thus, as will be seen, the Agreement allocates to the State, where business is carried on or through a permanent establishment, the right to tax business
ATC 4321profits of that State (Art 7). It allocates to the country of residence the power to tax aircraft and ship profits (Art 8). Sometimes, as with Art 7 and Art 8, the power allocated to the jurisdiction named is exclusive. Sometimes, as is the case with interest, both jurisdictions may tax but with a nominated limit of 10% in one (Art 11). The allocation is of the right to tax. There is nothing in the Agreement which compels a jurisdiction to exercise that right. Australia, for example, does not tax `exempt income', although such income could fall within the business profits Article.
Save as to its operation to allocate taxing power, the Agreement is little concerned directly with fiscal evasion....
Commencing with Art 6, the Agreement allocates the jurisdiction to tax in respect of particular kinds of income. Art 6 is concerned with income from real property. Not surprisingly, the power to tax income from real property is allocated to the State in which the real property (including mines, quarries or natural resources) is situated.''
The Full Court concluded that the language of the Agreement should be given effect and said at ATC 4761; FCR 608:
``... This is not to adopt a narrow or `illiberal' view of the Agreement. It is merely to interpret the language of the Agreement in the light of the broad purposes of juridical allocation which the Agreement embodies.''
21. It was central to the applicant's submissions that the use of the expression in Art 18(2) ``shall be taxable in that state'' was an allocation of taxing powers. The applicant submitted that in FC of T v Lamesa Holdings BV (supra) the Court was concerned with Art 13 of the Netherlands Agreement which provided that ``Income from the alienation of real property may be taxed in the State in which that property is situated'' and submitted that the Full Court approached such language as an allocation of the right or power to tax. It was said that a fortiori the expression ``shall be taxable'' in Art 18(2) was an allocation of a taxing power.
22. The respondent did not accept that the Malaysian Agreement allocated taxing powers. It was said that double tax agreements were designed to limit problems which might arise and that double tax agreements accordingly limited the content of the tax laws of the contracting states. The respondent relied on the passages in Double Tax Conventions to which I have referred in par 23 above. The respondent contended that FC of T v Lamesa Holdings BV (supra) did not stand for the proposition that a double tax agreement concerns the allocation of taxing powers and that when the Full Court used the term ``allocation'' it was not precluding a shared power to tax.
23. The respondent submitted that where the Full Court had said that the Netherlands Agreement allocated the right to tax the Court was using loose language. I do not accept this submission. The Court was careful to explain the nature and purpose of a double tax agreement and was deliberate in its use of the concept of allocation. The Court repeated the use of the expression ``allocate'' in the passage to which I have referred and specifically analysed Art 6 of the Netherlands Agreement in terms of an allocation of the jurisdiction to tax.
24. The respondent submitted that double tax agreements do not allocate the right to tax as such a right already exists by domestic law. Rather, it was said that double tax agreements qualify or limit that right by imposing limitations on the right to tax. The respondent said that a more accurate way to describe the purpose and effect of a double tax agreement was the language used by the Full Court at ATC 4760; FCR 607 where it said:
``... If Art 13 applies, then profit from the alienation is authorised to be taxed in the place where the realty referred to in the Article is.''
25. I do not consider that there is a significant difference between the concept of allocating taxing power and authorising the subject to be taxed in this context. When the Full Court in FC of T v Lamesa Holdings BV (supra) referred to the allocation of taxing power it was referring to the fact that as between two sovereign States with power to impose taxation on particular persons, receipts and events, the agreement was concerned to identify those areas where such power would not be applied. The Full Court saw the concept of the allocation of taxing power as involving the acceptance, if so agreed, of a limitation on an existing taxing power. This view is demonstrated by Art 23 of the Malaysian Agreement which recognises that
ATC 4322the taxation laws of each Contracting State continue to govern the taxation of income in that State except where the Agreement provides otherwise.
26. As a matter of principle it is appropriate to describe the purpose and effect of a double tax agreement, where there are two existing tax systems in two contracting states, as one where areas of taxation are allocated between the two contracting states. The allocation of taxing power in a double tax agreement is predicated on the existence of a sovereign right by a contracting state to impose taxation and the existence of taxation legislation. When one refers to an allocation of taxing power one is doing no more than saying that in an area where both contracting states have the right to impose taxation, and may have already imposed taxation, they have agreed that one contracting state, rather than the other or, as the case may be, both contracting states, shall have the right to impose taxation in that area. Whether one uses the language of allocation of power or the language of limitation of power, the result is the same; there is designated or agreed who shall have the right under the agreement to impose taxation in the particular area.
27. In any event, I am bound by the decision in FC of T v Lamesa Holdings BV (supra) and have only undertaken a comparison of the Full Court's reasoning compared to the reasoning in Double Tax Conventions as the respondent submitted that FC of T v Lamesa Holdings BV (supra) did not stand for the proposition that a double tax agreement allocates areas of taxing powers.
28. Characterisation of the Malaysian Agreement as a mechanism for allocating taxing power does not easily resolve the issue before the Court. Although the expression ``shall be taxable in that State'' suggests that the power to tax has been allocated to the Contracting State paying the pension, it does not, by its terms, allocate that power on an exclusive basis unlike other provisions in the Malaysian Agreement. Such an allocation would have occurred if the expression in Art 18(2) had been ``shall be taxable only in that State'' which expression is found in other articles in the Malaysian Agreement. When one looks at the Malaysian Agreement as a whole one finds indicia that tell against the proposition that such a construction was intended. Further, a consideration of the context, object and purpose of the Malaysian Agreement, consistently with the authorities to which I have referred, does not easily resolve the issue as, whichever interpretation is adopted, relief from double taxation will be achieved, albeit to a different extent depending upon the relevant rate of taxation in each Contracting State.
29. The applicant submitted that it was clear from the legislative history of the Malaysian Agreement that the intention of Parliament was that the pension was to be taxed in the country of source and not in Australia. The applicant relied upon the Explanatory Memorandum which accompanied the Bill which became the Income Tax (International Agreements) Amendment Act 1981 (Cth) which gave legislative effect to the Malaysian Agreement and the double tax agreement with Sweden. The applicant also relied upon the Second Reading Speech introducing the Amendment Bill.
30. The passage in the Explanatory Memorandum which referred to Art 18(2) is equivocal and of little assistance. It stated:
``Under paragraph 2, any pension paid in respect of services rendered to a government (including a State or local government) of one of the countries are [sic] to be taxed in that country.''
The Second Reading Speech is more relevant. It stated:
``So far as Australian residents are concerned, income in respect of which a limit is imposed by the agreements on the tax of the country of source - dividends, interest and royalties - will be taxed here with credit being allowed for the tax of the country of source, apart from dividends received from abroad by Australian companies, which are effectively tax-free here. Other income that is taxed in full in the country of source will be exempt from our tax.''
The applicant relied upon this statement as evidence of Parliament's intention that government pensions were to be taxed only in the country of source and were to be exempt from tax in Australia. However the statement is equivocal because it is not clear whether it is referring to the exemption arising because of the terms of Art 18(2) or because of the particular provisions of Australian domestic taxation law at the time which, by virtue of s
ATC 432323(q) of the ITAA, exempted from taxation foreign source income taxed at source.
31. The applicant relied upon the fact that prior to the introduction of the foreign tax credit system in 1986 foreign source income was exempt from tax in Australia pursuant to s 23(q) of the ITAA if tax on that income was paid in the country of source. Section 23(q) was repealed as a result of the introduction of the foreign tax credit system by the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth). The applicant referred to the Second Reading Speech which introduced the Bill for that Act and relied upon the following passages:
``Under it [the foreign tax credit system], all foreign source income derived by Australian resident taxpayers - apart from certain salary and wages that I will mention shortly - will be subject to Australian tax, and a credit will be allowed against that tax for analogous foreign tax paid on that income.
In most cases, the taxation treatment of foreign pensions received by Australian residents is governed by the terms of an existing double taxation agreement, and this position will not be altered by the foreign tax credit system. The new system will therefore apply only to foreign pension income in the limited number of cases where pensions are derived from non-treaty countries.''
In 1986 Malaysia was not a ``non-treaty country''. The applicant submitted that if the intention of Parliament was not to alter the taxation treatment of foreign pensions received by Australian residents, the respondent's position that there was nothing in Art 18(2) which precluded Australia from also taxing the pension where it was derived from an Australian resident, could not be reconciled with this intention. However, that intention, albeit expressed in the Second Reading Speech, cannot determine the proper construction of an agreement entered into and incorporated into domestic legislation some five years earlier.
32. The applicant submitted that the respondent was, in effect, changing his interpretation of Art 18(2) as a result of the change in the law in 1986 when s 23(q) of the ITAA was repealed and the system of foreign tax credits was introduced. Prior to 1986 the applicant's pension was exempt income under the ITAA by virtue of s 23(q). The agreement was entered into in 1980 at which time s 23(q) formed part of the ITAA. The applicant pointed to Taxation Ruling IT 2575 which provided that:
``With the repeal of paragraph 23(q) of the Act it has become necessary to clarify the taxation treatment of such pensions for recipients in Australia.''
It was submitted that the respondent was thereby interpreting the Malaysian Agreement by reference to subsequent legislation, which was an improper method of interpretation.
33. In this context the applicant referred to a decision of the Supreme Court of Canada in
The Queen v Melford Developments Inc (1982) 82 DTC 6281 where the Court considered the provisions of the Canada-Germany income tax agreement. The agreement was incorporated into domestic law and contained a provision similar to s 4(2) of the Tax Agreements Act. Certain guaranty fees paid by the taxpayer were exempted from withholding tax by virtue of the provisions of the agreement but subsequent Canadian legislation contained provisions which made the fees subject to withholding tax.
34. The issue before the Court was whether the later legislation amended the agreement so as to expose the taxpayer to the burden of withholding tax when the terms of the agreement did not require withholding tax to be deducted from the fees. The Court found that the later legislation did not set out expressly to amend the statute which incorporated the agreement into Canadian domestic law and that the agreement was not amended by later legislation which redefined terms in the agreement. The particular issue before the Court was whether the expression ``laws in force'' in the agreement included laws enacted subsequent to the agreement. The Court decided this issue in the negative. The point was whether a subsequent change in the tax law, after the agreement was entered into, changing the definition of interest to include guaranty fees had the effect of changing the agreement. The Court said at 6285:
``The next question is, with reference to Article II(2) of the Agreement whether the term `laws in force' in Canada `relating to the taxes which are the subject of this Convention' means the laws as they existed in 1956 or the laws of Canada from time to time in force. Specifically the question is
ATC 4324whether or not that expression includes the 1974 amendments to the Income Tax Act. This takes us first of all to an interpretation of the expression `relating to the taxes which are the subject of this Convention' as found at the end of subs. (2). The Convention makes industrial and commercial profits earned by a permanent establishment taxable in the country where the permanent establishment exists and where those earnings arose, and it also authorizes the taxation of `income' including dividends, interest etc. However, the Treaty does not authorize the taxation of industrial and commercial profits of a non-resident where those profits were not earned through a permanent establishment in Canada. The guaranty fee falls into the latter category. The revenue received by the non-resident bank by reasons of its guaranty of a Canadian lender represents industrial and commercial profits received from within Canada but not earned in an enterprise carried on through a Canadian permanent establishment. Laws enacted by Canada to redefine taxation procedures and mechanisms with reference to income not subjected to taxation by the Agreement are not, in my view, incorporated in the expression `laws in force' in Canada as employed by the Agreement. To read this section otherwise would be to feed the argument of the appellant, which in my view is without foundation in law, that subs. (2) authorizes Canada or Germany to unilaterally amend the tax Treaty from time to time as their domestic needs may dictate.''
35. I do not consider this case is of assistance in resolving the present issue. It is not suggested by the respondent that the 1986 legislation which repealed s 23(q) and brought in the foreign tax credit system changed the terms of the Malaysian Agreement. Rather, the respondent's case is that at all times from the date of the agreement Australia had the right to tax Malaysian government pensions but that it had not exercised that right whilst s 23(q) was on the statute book. What happened in 1986 was the exercise of that right and not a change in the interpretation of the agreement.
36. The proper interpretation of Art 18(2) cannot be influenced by subsequent domestic legislative changes. I do not regard the existence of s 23(q) at the time of the signing of the Malaysian Agreement and its incorporation into Australian domestic law and the subsequent repeal of s 23(q) in 1986 as being relevant to the proper interpretation of Art 18(2). Certainly the repeal of s 23(q) and the introduction of the foreign tax credit system cannot affect the interpretation of Art 18(2) in any way. A distinction must be drawn between the content of Australian domestic tax legislation as it existed at the time of the signing of the Malaysian Agreement and, as between the two Contracting States, Malaysia and Australia, what were agreed to be the areas in which taxation powers were to be exercised, constrained, limited or shared in their operation. It is not incongruous or inconsistent for Australia at one and the same time to exempt from taxation government pensions derived from overseas sources and to assert the right, if desired to be exercised, to tax such pensions. Any inconsistency between the terms of domestic tax law and the terms of the Malaysian Agreement are resolved by s 4 of the Tax Agreements Act (par 3 above) and Art 23(1) of the Malaysian Agreement which provides:
``The laws in force in each of the Contracting States shall continue to govern the taxation of income in that Contracting State except where provision to the contrary is made in this Agreement. Where income is subject to tax in both Contracting States, relief from double taxation shall be given in accordance with the following paragraphs.''
37. In the context of the applicant's reliance upon the former s 23(q) of the ITAA, it is significant to note that Art 17(1) of the agreement provided:
``Any pension (other than a pension of the kind referred to in Article 18) or other similar payment or any annuity paid to a resident of one of the Contracting States shall be taxable only in that Contracting State.''
At the time the agreement was entered into such pensions were not taxable in Australia if derived by a Australian resident from a foreign source: s 23(q). Nevertheless, Art 17(1) allowed Australia to impose taxation in respect of pensions falling within the terms of that article.
38. Reference to the OECD Model Convention is of little assistance. Article 18 of that treaty provided that, subject to Art 19(2),
ATC 4325pensions paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State. However, Australia reserved its position on this article on the basis of a proposal that all pensions be taxable only in the country of residence of the recipients. At the time of the OECD Model Convention s 23(q) exempted pensions from taxation. Article 19 provided:
``2(a) Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.''
As can be seen from the addition of the word ``only'' in the phrase ``shall be taxable only in that State'' in par 2(a), reference to the OECD Model Convention is of little assistance to the applicant.
39. A consideration of the Malaysian Agreement read as a whole shows that its terms recognise and draw a distinction between circumstances where the taxing power is to be exercised only by one Contracting State to the exclusion of the other Contracting State and circumstances where each Contracting State has the power or opportunity to exercise its taxing power in respect of the same subject-matter.
40. A significant pointer in this respect is that the word ``only'' appears in several other articles in the Malaysian Agreement but does not appear in Art 18(2). Article 18(2) does not purport, in its terms, to provide that the Contracting State referred to is to have the sole or exclusive right to tax government pensions. The expression ``shall be taxable in that State'' does not preclude the other Contracting State from imposing tax on government pensions. That could easily have been achieved by the use of an expression such as ``shall be taxable only in that State''. This expression is found in Art 7(1), 8(1), 14(2), 17(1), 17(3), 18(1) and 21. These articles show that where there was an intention for a taxing power to be exclusive to a particular State, that intention was made clear by the use of explicit language. In particular one contrasts the two expressions in Art 18 itself. In Art 18(1) one finds ``shall be taxable only in that State'', whereas in Art 18(2) one finds ``shall be taxable in that State''. The absence of ``only'' in Art 18(2) leads to the conclusion that the intention in Art 18(2) was not that the Contracting State paying the pension had the exclusive power to tax the pension but rather that both Contracting States had the power to tax government pensions. In this context ``shall be taxable in that State'' meant no more than that the pension was capable of being taxed in that State if it so desired.
41. The applicant criticised the Tribunal's reliance on Art 22 of the agreement (par 11 above). The Tribunal placed weight on the fact that because Art 22 referred to the fact that income derived by a resident of one of the Contracting States under, inter alia, Art 18 may be taxed in the other Contracting State this demonstrated that the only income which might be taxed under Art 18 were the pensions referred to in Art 18(2). The Tribunal said [at 2076]:
``Regard must also be had to Article 18(2) in the context of the terms of the Malaysian Agreement. It is clear that for the purpose of allowing for the elimination of taxation by the credit method which is only applicable where a payment may be taxable in both Contracting States, that Article 22 of the Malaysian Agreement deems income derived by a resident of one of the Contracting States, which under any one or more of Articles 6 to 8, 10 to 16 and 18 may be taxed in other Contracting State shall, for the purposes of Article 23 and of the income tax law of that other State, be deemed to be income from sources in that other State. Article 18 is specifically referred to in Article 22 and the only income that might be said to allow for each Contracting State to tax are the pensions referred to in Article 18(2).''
That criticism is not warranted as Art 22 supports the proposition that under Art 18(2) both Contracting States have the power to tax government pensions.
42. The applicant submitted that the Tribunal's reasoning was incorrect on two grounds. First, at the time the agreement was entered into foreign source income derived by Australian residents was exempt from tax in Australia so that it was inapposite to refer to the ``credit method'' in respect of such income.
ATC 4326Secondly, the reference to Art 18 in Art 22 could be a reference to Art 18(1) as if the recipient was an Australian resident, a pension received by that resident in certain circumstances might be taxed in Australia. I do not accept these submissions and do not consider that the Tribunal's reliance on Art 22 was misconceived or erroneous.
43. The Tribunal's reference to ``allowing for the elimination of taxation by the credit method'' was an appropriate description of the manner in which Art 22 and 23 operated. It is irrelevant in this context that at the time of the signing of the Malaysian Agreement foreign source income derived by Australian residents was exempt from tax in Australia. The Tribunal was also correct in finding that the only income in Art 18 which was allowed to be taxed by each Contracting State was the pension referred to in Art 18(2). Article 22 only has operation and effect in situations where both Contracting States are able to tax particular income as otherwise there is no need to make any provision in Art 22 ``for the purpose of Article 23''. Accordingly, as Art 18 is included in Art 22 it is necessary to look in Art 18 for any situation where income is capable of being taxed in both Contracting States. Article 18(1) does not provide for such a situation. It only provides for a situation where income is taxable ``only in that State'' - or is taxable ``only in the other Contracting State''. Article 22 proceeds on the basis, and assumes, that a pension referred to in Art 18(2) is taxable in both Contracting States, Malaysia and Australia.
44. I consider that on the proper construction of Art 18(2) a pension paid by Malaysia is taxable in Australia. Article 18(2) does not provide that Malaysia alone is to have the power to tax government pensions; nor does it restrict or limit Australia from so doing. Rather it provided for the Contracting State paying the pension to have the power to tax the pension if it so desired and it did not limit or restrict the taxing power of the other Contracting State in that respect.
45. I do not consider that Art 18(2) should be read on the basis that it provides that a Malaysian pension ``shall be taxable in that State and may also be taxable in Australia'' and so imply a taxing power in a provision where that power is not explicit. The applicant submitted that the Tribunal adopted this interpretation because in par 45 of its Reasons [ at 2077] it indicated, that in conclusion, it was:
``... in agreement with the submissions made by the respondent and rejects the submissions made by the applicant for the reasons outlined above...''
One of the submissions made by the respondent to the Tribunal was that ``where a taxation treaty is silent on a particular right, it is to be implied that the treaty does not limit domestic taxing law''. I do not consider that the Tribunal specifically adopted this submission. Although the Tribunal set out the submissions of the applicant and respondent in some detail, the Tribunal did not simply adopt the respondent's submissions without any reasoning process. The Tribunal, after setting out the various submissions turned ``to a consideration of the matters at hand''. It formed no part of the Tribunal's reasoning process that the Tribunal implied into Art 18(2) the words ``but may also be taxable in Australia''.
46. Reference to the objects and purposes of the Malaysian Agreement, namely the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes and income, does not assist in the resolution of the issue of interpretation. The avoidance of double taxation is achieved, whichever construction of Art 18(2) is adopted. If the respondent is correct then the mechanism in Art 23 achieves that result although, depending on the rate of taxation in Australia, there may be more tax paid overall than if only Malaysia taxes the pension. If the applicant is correct, it is achieved by only one Contracting State taxing the pension.
47. Recourse to the Malay language version of the Malaysian Agreement does not lead to any different conclusion. That version is of no assistance to the applicant but rather confirms the conclusion I have reached by the use of the expression as translated ``may be taxed in the Contracting State''.
48. The appeal will be dismissed with no order as to costs.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. There will be no order as to costs.
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