Edited version of your written advice

Authorisation Number: 1012805807363

Ruling

Subject: Sovereign Immunity

Question 1

Will the Australian Taxation Office (ATO) impose liability to income tax or withholding tax on the entity on Australian sourced income and capital gains derived from its investments in:

• time deposits, certificates of deposit and sight accounts

• spot and forward foreign exchange transactions, and

• government and semi-government bonds and commercial papers?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 June 20XX

Relevant facts and circumstances

The scheme the subject of this ruling is described below:

Background

The entity is governed by the Constitution, the Entity Act and the General Law.

Under Article X of the Entity Act, the entity is a corporate entity under public law and is autonomous in conformity with its General Law.

The authorised capital of the entity is subscribed and paid up by the Government. No shares shall be issued and the amount of capital shall be registered only in the Capital Account.

Principal objects of the entity

The purpose of the entity is to preserve the monetary stability of the country. Its functions are to regulate the money supply, administer the international reserves, issue notes and coins and report on the nation's finances.

Day to day management

The entity is managed by a Board of Directors.

The Board of Directors do not represent any particular entity or interest. Congress may remove them for misconduct.

The Board of Directors is responsible for the establishment of the policies to be applied in order to achieve the purpose of the entity and is responsible for the general administration of its activities.

The powers and duties of the Board of Directors are detailed in the General Law.

The General Manager is in charge of the immediate direction of the entity's operations in their technical and administrative aspects, for which he is answerable to the Board of Directors.

Reporting and additional controls over the entity

The Board of Directors must submit to the Government a report regarding all aspects of the economic policy that negatively affect each endeavour.

The financial statements are prepared in accordance with generally accepted accounting principles and rules.

The entity is subject to further control in matters concerning the execution of the budget.

Foreign investments

Under the General Law, the entity is empowered to perform with other Central Banks or the relevant institutions, as well as with international financial institutions and foreign banks the following actions:

a. Receive and make deposits in domestic or foreign currency …

For the purposes of administering the international reserves, the Board of Directors shall take into account the criteria of security, liquidity and profitability and evaluate them in the light of the condition and perspectives of the country's economy and the international context, following standard and healthy banking practices.

The General Law provides for the types of investments that constitute international reserves of the entity.

Distribution of profits

The General Law states that the net profit of the entity shall be distributed annually to the Public Treasury and for capitalisation purposes to be used for future investments.

Australian investments

The Board of Directors has approved Australia as an authorised financial centre for the investment of the international reserves.

The entity will directly invest in the Australian investments.

The entity has determined that the investments it will make in Australia will consist of:

a. time deposits, certificates of deposit and sight accounts

b. spot and forward foreign exchange transactions, and

c. fixed income securities: government and semi-government bonds and commercial papers.

The funds that will be used to invest in the Australian investments will be sourced from:

d. the entity's international reserves

e. current investments held by the entity (in other financial centres) which are denominated in Australian dollars, and

f. the reinvestment of funds upon the maturity and/or sale of Australian dollar denominated investments.

The expected income and gains that the entity will derive from its investments in Australia will be:

g. interest on deposits

h. coupons from securities (fixed income)

i. principal appreciation from securities (Fixed income) purchased at a discount

j. foreign exchange gains from spot and forward exchange transactions, and

k. capital gains realised upon the disposal of securities (fixed income).

The entity investment policy requires capital preservation and liquidity as the necessary criteria for all investments. Once these criteria are met, the entity seeks to maximise the return on its foreign assets.

The Australian investments as at 31 March 2015, consist of AUD denominated government and semi-government bonds.

All spot and forward exchange transactions are undertaken to minimise exposure to exchange risk as part of the normal management of international reserves. The entity does not at any stage enter into such transactions for trading or profit undertaking reasons.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

Reasons for decision

For Australian income tax and withholding tax purposes it is accepted that the doctrine of sovereign immunity applies to a foreign government or an agency of a foreign government that engage in governmental functions. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or an agency of a foreign government from Australian income tax and/or withholding tax, it is necessary to establish the following:

1. that the person making the investment (and therefore deriving the income or gain) is a foreign government or an agency of a foreign government;

2. that the moneys being invested are and will remain government moneys; and

3. that the income or gain is being derived from a non-commercial activity.

If these three conditions are satisfied, the Australian sourced income or gains will not be subject to Australian income and/or withholding taxes.

Condition 1: a 'foreign government' or an 'agency' of a foreign government

The entity is the central bank of the country created and governed by the Constitution and the General Law. It is a corporate entity under public law.

The purpose of the entity is to preserve the monetary stability of the country. Its functions are to regulate the money supply, administer the international reserves, issue notes and coins and report on the nation's finances.

The entity enjoys considerable operational autonomy within the framework of the law.

The entity is managed by a Board of Directors.

The Board of Directors is responsible for the establishment of the policies to be applied in order to achieve the purpose of the entity and is responsible for the general administration of its activities.

The Directors do not represent any entity or particular interest and their votes must only take into account the accomplishment of the entity's purpose and functions. The Directors cannot hold any post or executive position in the entity, nor have any individual administrative responsibility.

The General Manager has the responsibility for the day to day management of the operations of the entity and is answerable to the Board of Directors.

The entity must also report to the Government on all aspects of the economic policy that negatively affects such endeavour.

The above indicates that the entity is an agency or instrumentality of the Government and consequently a separate entity of a foreign state.

Condition 2: commercial transaction

ATO ID 2002/45 states that a holding of 10% or less of the equity in a company will generally be accepted as a passive investment, and therefore a non-commercial activity.

Whether a holding in an entity represents a commercial activity depends on the particular circumstances of the investment.

Factors relevant to whether or not an activity is commercial in nature include:

• level of direct and indirect involvement (or potential involvement) that the entity will have in the affairs of the business

• the size and type of investment, and

• timeframe of the investment.

The current entity investments into Australia consist of government and semi-government bonds. These bonds are not considered commercial in nature. There are no interests held in companies.

The spot and forward exchange transactions are undertaken to minimise foreign exchange risk and are never entered into for trading or profit reasons.

The entity's investments into Australia are not considered to be commercial transactions.

Condition 3: monies are and will remain government monies

In line with the principle that sovereign immunity applies to foreign states performing only governmental functions, an entity claiming sovereign immunity must establish that the monies being invested in the scheme are and will remain government monies.

The authorised capital of the entity was contributed by the Government. In accordance with the General Law, income derived by the entity from its investments is distributed annually to the Government or retained for future investment.

There is no evidence to suggest that the invested monies will not remain government monies.

Accordingly, the monies that are invested by the entity are, and will remain, government monies.

Conclusion

As the three conditions have been satisfied, the ATO will not impose liability to income tax and withholding tax on the entity with respect to income and capital gains derived from its investments in:

• time deposits, certificates of deposit and sight accounts

• spot and forward foreign exchange transactions, and

• government and semi-government bonds and commercial papers.