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International Tax Agreements Amendment Bill (No. 2) 2007

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2004-2005-2006-2007

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

INTERNATIONAL TAX AGREEMENTS AMENDMENT BILL (N o . 2) 2007

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by authority of the

Treasurer, the Hon Peter Costello MP)

 



T able of contents

Glossary                                                                                                               1

General outline and financial impact............................................................ 3

Chapter 1            2006 Australia-Finland Agreement................................... 7

Chapter 2            Regulation impact statement........................................... 81



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

Agreements Act

International Tax Agreements Act 1953

ATO

Australian Taxation Office

CGT

capital gains tax

Commissioner

Commissioner of Taxation

CSIRO

Commonwealth Scientific Industrial Research Organisation

GATS

General Agreement on Trade in Services

GST

goods and services tax

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

MFN

most favoured nation

OECD

Organisation for Economic Co-operation and Development

OECD Model

OECD Model Tax Convention on Income and on Capital

the 1997 Finnish Protocol

the Protocol to Amend the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (signed on 5 November 1997)

the existing Agreement

the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and its associated Protocol (signed on 12 September 1984), as amended by the 1997 Finnish Protocol

the Protocol

the Protocol to the Agreement between the Government of Australia and the Government of Finland for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion (signed on 20 November 2006)

this Agreement

the Agreement between the Government of Australia and the Government of Finland for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion and its associated Protocol (both signed on 20 November 2006 )

UK

United Kingdom of Great Britain and Northern Ireland

US

United States of America

 



What will this Bill do?

This Bill amends the International Tax Agreements Act 1953 (Agreements Act) to give the force of law in Australia to the Agreement between the Government of Australia and the Government of Finland for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion , and its associated Protocol, (together referred to as ‘this Agreement’ for the purposes of this general outline) which was signed in Melbourne on 20 November 2006.

This Agreement is Australia’s second comprehensive tax treaty with Finland.  It will modernise the tax relationship between the two countries and will serve to facilitate trade and investment between Australia and Finland.  This Agreement will replace the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and its associated Protocol which were both signed in Canberra on 12 September 1984, and the Protocol to Amend the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income which was signed in Canberra on 5 November 1997 (together referred to as ‘the existing Agreement’ for the purpose of this general outline).

The existing Agreement contains most favoured nation (MFN) obligations which require the provision of similar taxation treatment in respect of interest and royalties to that provided by Australia to other countries, as well as the inclusion of a Non-Discrimination Article to protect taxpayers from tax discrimination.  The obligation to negotiate was triggered by the entry into effect in 2003 of amendments to the treaty with the United States of America and the renegotiated United Kingdom of Great Britain and Northern Ireland treaty.

Who will be affected by this Bill?

Persons who are residents of Australia and/or Finland and who derive income, profits or gains from Australia or Finland will be affected by this Bill.

How is the legislation structured?

The Agreements Act gives the force of law in Australia to Australia’s tax treaties which appear as Schedules to that Act.  The provisions of the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997) and the Fringe Benefits Tax Assessment Act 1986 are incorporated into and read as one with the Agreements Act.  The provisions of the Agreements Act (including the terms of the tax treaties) take precedence over provisions of the:

·       ITAA 1936 (other than section 160AO which determines maximum foreign tax credits and the general anti-avoidance rules under Part IVA);

·       ITAA 1997; and

·       Fringe Benefits Tax Assessment Act 1986 (other than section 67 which is an anti-avoidance rule).

In what way does this Bill change the International Tax Agreements Act 1953 ?

The Agreements Act is amended to insert the text of this Agreement as a Schedule to that Act.  Australia’s tax treaties appear as Schedules to the above Act, which gives them the force of law.

When will these changes take place?

From the date of Royal Assent.

When will this Agreement enter into force, and from what date will this Agreement have effect?

This Agreement will enter into force 30 days after the date of the last notification by diplomatic notes that the domestic processes to give this Agreement the force of law in the respective countries have been completed.  In Australia, enactment of this Bill giving the force of law to this Agreement is the prerequisite to such notification.

Once it enters into force this Agreement will apply as follows

Application in Australia

For withholding taxes, on income derived:

·       on or after 1 January in the calendar year next following the date on which this Agreement enters into force.

For other Australian taxes, on income, profits or gains:

·       any year of income beginning on or after 1 July in the calendar year next following the date on which this Agreement enters into force.

Application in Finland

For taxes on income withheld at source, on income derived:

·       on or after 1 January in the calendar year next following the year in which this Agreement enters into force.

For other taxes on income, for taxes chargeable for:

·       any tax year beginning on or after 1 January in the calendar year next following the year in which this Agreement enters into force.

Exchange of information application date

From the date of entry into force of this Agreement.

Assistance in the collection of taxes date of application

From the date agreed in an exchange of notes between Australia and Finland.

The financial impact of this Bill

Treasury has estimated the impact of the first round effects on forward estimates as negligible.

Compliance costs

No significant compliance costs will result from the entry into force of this Agreement.

Summary of regulation impact statement

Impact :  Minimal.

Main points :

·       This Agreement is expected to have an impact on Australian residents doing business with Finland and includes Australian investors, banks, suppliers of technology, consultants, exporters, Australian employees working in Finland, and Australian residents receiving pensions from Finland.  This Agreement will also impact on the Australian Government and the Australian Taxation Office (ATO).

·       While source country tax on interest will generally continue to be limited to 10 per cent, there will be no withholding tax charged on interest derived by a financial institution that is resident in the other country, or on interest derived by a government body or central bank of the other country.  No tax is payable on dividends in the source country where the dividend recipient is a company that holds directly at least 80 per cent of the voting power of the company paying the dividend, subject to certain conditions.  A 5 per cent rate limit applies to other dividends where the dividend recipient is a company that holds directly at least 10 per cent of the voting power of the company paying the dividend.  A 15 per cent limitation applies to other dividends.  These limits apply to both franked and unfranked dividends.  The general limit for royalties will be reduced from 10 per cent to 5 per cent.

·       This Agreement will assist the bilateral relationship by updating an important treaty in the network of commercial treaties between the countries and provides for greater cooperation between tax authorities to prevent fiscal evasion and tax avoidance.

Treasury has estimated the impact of the first round effects on forward estimates as negligible.  No material costs to taxpayers have been identified as likely to arise from this Agreement but there is likely to be a small, unquantifiable administration cost.  It is expected that overall, this Agreement will produce a positive economic outcome for Australia.



C hapter 1  

2006 Australia-Finland Agreement

Outline of chapter

1.1         Schedule 1 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act).  This chapter explains the rules that apply in the 2006 Agreement between the Government of Australia and the Government of Finland for the Avoidance of Double Taxation with Respect to Taxes on Income and the Prevention of Fiscal Evasion and its associated Protocol (together referred to as ‘this Agreement’ for the purposes of this chapter).

Context of amendments

1.2         This Agreement was signed in Melbourne on 20 November 2006.

1.3         Once in force, this Agreement will replace:

·       the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and its associated Protocol, that were both signed in Canberra on 12 September 1984; and

·       the Protocol to Amend the Agreement between Australia and Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income signed in Canberra on 5 November 1997,

(together referred to as ‘the existing Agreement’ for the purposes of this chapter).

Summary of new law

Main features of this Agreement

1.4         The main features of this Agreement are as follows:

·       Income from real property may be taxed in full by the country in which the property is situated.  Income from real property for these purposes includes natural resource royalties [Article 6] .

·       Business profits (including 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 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 in international traffic are generally to be taxed only in the country of residence of the operator [Article 8] .

·       Profits of associated enterprises may be taxed on the basis of dealings at arm’s length [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:

-            no source country tax is payable on intercorporate dividends where the dividend recipient is a company that holds directly at least 80 per cent of the voting power of the company paying the dividend, subject to certain conditions [Article 10, paragraph 3] ;

-            a 5 per cent rate limit applies to other intercorporate dividends where the dividend recipient is a company that holds directly at least 10 per cent of the voting power of the company paying the dividend [Article 10, subparagraph 2(a)] ; and

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

·       The dividend rate limits apply to both franked and unfranked dividends.

·       Source country taxation on interest is limited to 10 per cent [Article 11, paragraph 2] .  However, exemptions from source country taxation have been provided for interest paid to:

-            certain government bodies [Article 11, subparagraph 3(a)] ; and

-            financial institutions [Article 11, subparagraph 3(b)] .

·       The rate limit on source country taxation of royalties is 5 per cent [Article 12, paragraph 2] .

·                 The definition of ‘royalty’ has also been amended to include payments or credits in respect of the use of, or right to use, some or all of the radiofrequency spectrum specified in a spectrum licence and to exclude payments or credits in respect of the use of, or right to use, industrial, commercial or scientific equipment [Article 12, paragraph 3] .

·       Income, profits or gains from the alienation of real property may be taxed in full 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 land rich entities (which may be taxed in full by the country in which the property is situated), all other capital gains will be taxable only in the country of residence [Article 13] .

·       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 [Article 14] .

·       Directors’ remuneration may be taxed in the country in which the company of which the person is a director is resident for tax purposes [Article 15] .

·       Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed [Article 16] .

·       Pensions and annuities are taxed only in the country of residence of the recipient other than government service or social security pensions paid to an individual who is a citizen or national of the paying country.  In these latter cases, the paying country may also tax the payment , with the country of residence of the recipient providing double tax relief [Article 17] .

·       Income from government service will generally be taxed only in the country that pays the remuneration.  However, the remuneration shall only be taxed in the other country where the services are rendered in that other country by a resident of that other country who is a national of that other country or did not become a resident of that other country for the purpose of rendering the services [Article 18] .

·       Payments made from abroad to visiting students and business apprentices for the purposes of their maintenance, training or education will be exempt from tax in the country visited [Article 19] .

·       Other income (ie, income not dealt with by other Articles) derived by a resident of one country from sources in the other country may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief [Article 20] .

·       Source rules in this Agreement prescribe for domestic law and treaty purposes that the source of income, profits or gains derived by a resident of one country may be taxed in the other country [Article 21] .

·       Double taxation relief for income which, under this Agreement, 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 this Agreement as follows:

-            in Australia, by allowing a credit for the Finnish tax against Australian tax payable on income derived by a resident of Australia from sources in Finland [Article 22, paragraph 1] ; and

-            in Finland, by allowing a deduction against Finnish tax for the Australian tax paid on income derived by a resident of Finland from sources in Australia [Article 22, subparagraph 2(a)] .   However, dividends paid by a company that is an Australian resident to a company that is a Finnish resident and which controls at least 10 per cent of the voting power in the paying company will be exempt from Finnish tax [Article 22, subparagraph 2(b)] .

·       In the case of Australia, effect will be given to the double tax relief obligations arising under this Agreement by application of the general foreign tax credit provisions of Australia’s domestic law, or the relevant exemption provisions of that law where applicable.

·       Rules in this Agreement will protect nationals and businesses from tax discrimination in the other country and will give them private rights of appeal.  However, the Article does not preclude either country from applying its anti-avoidance rules (including thin capitalisation, dividend stripping, transfer pricing and controlled foreign companies measures), rebates or credits for dividends paid by resident companies, research and development concessions, consolidation rules or capital gains deferral rules [Article 23] .

·       Consultation and exchange of information between the two taxation authorities is authorised by this Agreement.  This Agreement authorises and requires Australia to exchange information where the information relates to federal taxes administered by the Commissioner of Taxation (Commissioner) [Articles 24 and 25] .

·       This Agreement ensures the integrity of the tax system by providing for the mutual assistance in the collection of tax debts.  This would allow the Australian Taxation Office (ATO), in certain circumstances, to seek assistance from the Finnish tax authorities to collect Australian taxation debts [Article 26] .

Comparison of key features of new law and current law

New law

Current law

Updates all Articles, having regard to Australian, Finnish and Organisation for Economic Co-operation and Development (OECD) tax treaty developments since the existing Agreement was entered into.

Not applicable.

Extends the coverage of this Agreement to Australian tax on capital gains and updates the list of taxes to which the new treaty arrangements apply.  In the case of Australia, these taxes are:

·        the income tax (including the petroleum resource rent tax); and

·        any identical or substantially similar taxes imposed under the federal law of Australia.

However, a broader range of taxes apply to certain Articles.  In the case of Australia, the taxes are:

·        taxes of every kind and description for Article 23 ( Non-Discrimination ); and

·        all federal taxes administered by the Commissioner for Article 25 ( Exchange of Information ) and Article 26 ( Assistance in the Collection of Taxes ).

In the case of Australia, the taxes to which all Articles of the existing treaty apply are:

·        the income tax (including the former additional tax upon the undistributed amount of the distributable income of a private company); and

·        any identical or substantially similar taxes imposed under the law of Australia.

Limits the treaty benefits that a country is obliged to provide where income, profits or gains of temporary resident individuals are exempted from tax.

No equivalent.

Updates the meaning of ‘permanent establishment’ in Article 5.  In particular, under this Agreement a building site or construction or instalation project constitutes a permanent establishment only where it lasts for more than six months.  Furthermore, an enterprise is deemed to have a ‘permanent establishment’ if:

·        it carries on supervisory or consultancy activities connected with a building site or construction or instalation project for a period or periods exceeding in the aggregate 183 days in any 12 month period;

·        it carries on activities (including the operation of substantial equipment) in the exploration for or exploitation of natural resources for a period or periods exceeding in the aggregate 90 days in any 12 month period; or

·        it operates substantial equipment (other than in natural resource activities) for a period or periods exceeding in the aggregate 183 days in any 12 month period.

Integrity provisions are included to prevent related parties from circumventing the permanent establishment time thresholds by splitting contracts.

A building site or construction, instalation or assembly project which exists for more than 12 months is included in the list of examples of a permanent establishment.  In addition, an enterprise is deemed to have a ‘permanent establishment’ if:

·        it carries on supervisory activities for more than 12 months in connection with a building site, or construction, instalation or assembly project;

·        substantial equipment is being used for more than 12 months in exploration for, or exploitation of, natural resources, or in activities connected with such exploration or exploitation, by, for or under contract with the enterprise.

Broadens the meaning of ‘real property’ in Article 6 to include exploration for natural resources.

No equivalent.

Aligns the treatment of income from independent personal services to that of business profits under Article 7 ( Business Profits ) It also clarifies the application of the Business Profits Article to business trusts.

Income from independent personal services is treated under the previous international standard in Article 14 ( Independent Personal Services ).

 

No equivalent.

Formulary apportionment of the enterprise’s total profits is permitted in determining the profits to be attributed to a permanent establishment where it has been the custom in the relevant country to use such a method.

No equivalent.

Profits attributed to the permanent establishment should be determined by the same method year by year.

No treaty limit on the amount of tax that can be charged on profits from the operation of ships and aircraft in internal traffic.

The amount of tax charged by the relevant country on profits from the operation of ships or aircraft in internal traffic is limited to 5 per cent of the amount paid or payable in respect of carriage in such operations.

Dividend withholding tax is limited to:

·        zero for intercorporate dividends on non-portfolio holdings of more than 80 per cent, subject to certain conditions;

·        5 per cent for intercorporate dividends on other non-portfolio holdings; and

·        15 per cent in all other cases.

The rate of dividend withholding tax is limited to 15 per cent.  However, dividends paid out of profits that have borne the normal rate of company tax (which, in the case of Australia, means that the dividends are fully ‘franked’) are exempt from dividend withholding tax.

Reduces the rate of interest withholding tax from a maximum of 10 per cent to zero where interest is paid to:

·        government bodies and central banks; or

·        financial institutions.

No equivalent.

Reduces the rate of royalty withholding tax from a maximum of 10 per cent to 5 per cent of the gross royalty payment and extends the meaning of royalty to include spectrum licences.  Leasing of industrial, commercial or scientific equipment will no longer constitute a royalty.

The rate of royalty withholding tax is limited to 10 per cent of the gross payment.

Definition of ‘royalties’ includes payments for use of industrial, commercial and scientific equipment.

Includes a comprehensive Alienation of Property Article which allocates taxing rights over capital gains.

Coverage is limited to income from alienation of real property and interests in land-rich companies.

Includes a comprehensive article preventing discrimination in relation to tax laws (Article 23 ( Non-Discrimination )).

No Non-Discrimination Article.

Closely aligns Article 25 ( Exchange of Information ) to the 2005 OECD standard.  The effect of the changes is to expand the range of taxes to which the Article applies and to clarify that bank secrecy laws do not limit the exchange of information.

The existing rules apply to a narrower range of taxes.

Includes a new Article 26 ( Assistance in the Collection of Taxes ) which authorises and requires Australia and Finland to provide assistance to each other in collection of cross-border tax debts.

No equivalent.

Detailed explanation of new law

Article 1 — Persons Covered

Scope

1.5         This Article establishes the scope of the application of this Agreement 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 this Agreement.  [Article 1]

1.6         This Agreement also applies to third country residents in relation to Article 23 ( Non-Discrimination ) in its application to nationals of one of the treaty countries, Article 24 ( Mutual Agreement Procedure ) so far as the person is a national of one of the treaty countries and in relation to the exchange of information under Article 25 ( Exchange of Information ).

1.7         The application of this Agreement to persons who are dual residents (ie, residents of both countries) is dealt with in Article 4 ( Residence ).

Article 2 — Taxes Covered

Taxes covered

1.8         This Article specifies the existing taxes of each country to which this Agreement applies.  These are, in the case of Australia, the Australian income tax, including the resource rent tax in respect of offshore petroleum projects.

1.9         The term ‘income tax’ includes Australian income tax imposed on capital gains.  The operation of this Agreement therefore extends to Australian tax on capital gains, which was not covered in the existing Agreement.

1.10       Although Australia considers the resource rent tax to be encompassed by the term ‘income tax’, a specific reference to this has been included in this Agreement to put beyond doubt that it is a tax covered.  [Article 2, subparagraph 1(a)]

1.11       As with the existing Agreement, this Agreement generally does not cover Australia’s goods and services tax (GST), wool tax and levies, customs duties, state taxes and duties and estate tax and duties.  However, federal taxes administered by the Commissioner are covered for the purposes of Article 25 ( Exchange of Information ) and Article 26 ( Assistance in the Collection of Taxes ) while all taxes are covered for the purposes of Article 23 ( Non-Discrimination ).  [Article 2, paragraphs 3 and 4]

1.12       It is specifically stated in paragraphs 1, 2 and 4 of this Article that this Agreement applies only to taxes imposed under the federal law of Australia.  This is to ensure that, except with respect to non-discrimination, this Agreement does not bind Australian states and territories and applies only to federal taxes.  [Article 2, subparagraph 1(a) and paragraphs 2 and 4]

1.13       For Finland, this Agreement applies to:

·       the state income taxes;

·       the corporate income tax;

·       the communal tax;

·       the church tax;

·       the tax withheld at source from interest; and

·       the tax withheld at source from non-residents’ income. 

[Article 2, subparagraph 1(b)]

Identical or substantially similar taxes

1.14       The application of this Agreement 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.  The competent authorities (ie, the Commissioner in Australia and the Ministry of Finance in Finland, or their authorised representatives) are required to notify each other in the event of a significant change in the taxation law of the respective countries, within a reasonable period of time after those changes.  [Article 2, paragraph 2]

Special provisions

1.15       Paragraphs 3 and 4 specify the taxes to which Article 23 ( Non-Discrimination ), Article 25 ( Exchange of Information ) and Article 26 ( Assistance in the Collection of Taxes ) will apply.  The taxes to which these Articles apply are:

·       Article 23 , all taxes including sub-national taxes such as those imposed by the Australian states or local governments [Article 2, paragraph 3] ; and

·       Articles 25 and 26, in the case of Australia, all federal taxes administered by the Commissioner, and in the case of Finland, all taxes [Article 2, paragraph 4] .

Article 3 — General Definitions

Definition of Australia

1.16       As with Australia’s other modern tax treaties, ‘Australia’ is defined to include certain external territories and areas of 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 Income Tax Assessment Act 1936 (ITAA 1936), certain sea instalations and offshore areas are to be treated as part of Australia).  [Article 3, subparagraph 1(a)]

Definition of Finland

1.17       For all practical purposes, the definition remains unchanged from that in the existing Agreement.  ‘Finland’ is defined to include the area over which Finland may exercise rights with respect to the exploration for and exploitation of the natural resources of the sea bed, its subsoil and superjacent waters under domestic and international law.  [Article 3, subparagraph 1(b)]

Definition of person

1.18       The definition of person in this Agreement accords with Australia’s normal tax treaty practice and includes individuals, companies and any other body of persons.  This includes a partnership (as a body of persons).  [Article 3, subparagraph 1(c)]

Definition of company

1.19       The definition of company in this Agreement accords with Australia’s tax treaty practice, and means any body corporate or any entity which is treated as a company or body corporate for tax purposes.

1.20       The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships (limited liability partnerships) as companies for income tax purposes.  These trusts and partnerships are included as companies for the purposes of this Agreement.  [Article 3, subparagraph 1(d)]

Definitions of business and enterprise

1.21        The terms enterprise of a Contracting State and enterprise of the other Contracting State are defined as an enterprise carried on by a resident of the respective countries.  [Article 3, subparagraph 1(e)]

1.22       The term enterprise is stated to apply to the carrying on of any business.  The term business is defined to include the performance of professional services and other activities of an independent character.  Both these definitions are identical to the definitions added to the OECD  Model Tax Convention on Income and on Capital (OECD Model) concurrently with the deletion of Article 14 ( Independent Personal Services ) The inclusion of the two definitions is intended to clarify that income from the performance of professional services or other activities of an independent character is dealt with under Article 7 ( Business Profits ) and not Article 20 ( Other Income ).   [Article 3, subparagraphs 1(j) and (k)] 

Definition of tax

1.23       For the purposes of this Agreement, the term ‘tax’ does not include any amount of penalty or interest imposed under the respective domestic tax law of the two countries.  This is important in determining a taxpayer’s entitlement to a foreign tax credit under the double tax relief provisions of Article 22 ( Relief from Double Taxation ) of this Agreement.

1.24       In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of Finland with respect to income that Finland is entitled to tax under this Agreement would not be a creditable ‘Finnish tax’ for the purposes of paragraph 1 of Article 22 ( Relief from Double Taxation ).  This is in keeping with the meaning of ‘foreign tax’ in subsection 6AB(2) of the ITAA 1936.  Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer’s foreign tax credit entitlement under paragraph 1 of Article 22 (pursuant to Division 18 of Part III of the ITAA 1936 — Credits in respect of foreign tax).  [Article 3, subparagraph 1(f)]

Definition of competent authority

1.25        The competent authority is the person or institution specifically authorised to perform certain actions under this Agreement.  For instance, the competent authority is required to give certain notifications (eg, in paragraph 2 of Article 2 ( Taxes Covered ), the competent authorities are required to notify each other of any significant changes to the relevant tax laws of their respective countries) and perform certain tasks (eg, exchange tax information in accordance with Article 25 ( Exchange of Information )).

1.26        In the case of Australia, the competent authority is the Commissioner or an authorised representative of the Commissioner.   In the case of Finland, the competent authority is the Ministry of Finance or a representative authorised by the Ministry of Finance.  [Article 3, subparagraph 1(i)]

Definition of international traffic

1.27       In this Agreement, this term is of relevance for taxation of profits from shipping and air transport operations (Article 8 ( Ships and Aircraft )), income 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 14 ( Income from Employment )).

1.28       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.  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.  For example, a ‘voyage to nowhere’ which begins and ends in Sydney on a ship operated by a Finnish 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 1(l)]

Definition of national

1.29       This Agreement defines ‘national’ by reference to an individual’s nationality or citizenship.  A company will be a national if the company derives its status as a national from the laws of one of the countries, that is, where the company is incorporated.  In the case of Finland, a company incorporated in Finland must also be registered there.  [Article 3, subparagraph 1(m)]

1.30       The concept of nationality is used in subparagraph (b) of paragraph 3 of Article 4 ( Residence ), paragraph 3 of Article 17 ( Pensions and Annuities ), Article 18 ( Government Service ) and Article 23 ( Non-Discrimination ).

Definition of recognised stock exchange

1.31       The term is used in relation to setting the appropriate withholding tax limits in Article 10 ( Dividends ).  No withholding tax will apply to a dividend paid from an Australian resident company to a Finnish resident company which holds 80 per cent of the voting power of the paying company where its principal class of shares is listed and regularly traded on a recognised stock exchange.

1.32       The stock exchanges that are recognised are the Australian Securities Exchange and any other Australian stock exchange recognised as such under Australian law, the Helsinki Stock Exchange and any other Finnish stock exchange recognised as such under Finnish law and any other stock exchanges agreed to by the competent authorities under this Agreement.  [Article 3, subparagraph 1(n)]

Definition of statutory authority

1.33       In this Agreement, the term statutory authority is used in paragraph 1 of Article 4 ( Residence ), paragraph 3 of Article 17 ( Pensions and Annuities ) and Article 18 ( Government Service ).

1.34       The term means any legal entity of a public character created by the laws of either State in which no person other than that State itself (or its political subdivisions or local authorities) has an interest.  This would exclude, for example, any legal entities in which private entities or individuals have a share of the ownership.

1.35       In the case of Finland, the term specifically includes the Bank of Finland, the Helsinki University and the Social Insurance Institution of Finland.  [Protocol, item 2]

1.36       In Australia, a statutory authority would include an entity incorporated for public purposes by a law of Australia, as well as an entity which is entrusted by a law of Australia with functions to be performed in the public interest or for a public purpose.  This would include, for example, entities that satisfy the definition of ‘Commonwealth authority’ in the Commonwealth Authorities and Companies Act 1997 , such as the Reserve Bank of Australia and the Australian National University.

Terms not specifically defined

1.37       Where a term is not specifically defined within this Agreement, 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 this Agreement at the time of its application.  In that case, the term’s meaning under the taxation law of the country will have precedence over the meaning it may have under other domestic laws.

1.38       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 Income Tax Assessment Act 1997 (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.

1.39       If a term is not defined in this Agreement, 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 — Residence

Residential status

1.40       This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of this Agreement.  Residential status is one of the criteria for determining each country’s taxing rights and is a necessary condition for the provision of relief under this Agreement.  In the case of Australia, the concept of who is a resident is determined according to Australia’s taxation law.  In the case of Finland, residence is determined by reference to criteria such as domicile, residence, place of management, place of incorporation (registration) and other similar criteria.  [Article 4, paragraph 1]

Residency of Governments

1.41       This Article specifically provides that the government, a political subdivision, a local authority or a statutory authority of the country are residents for the purposes of this Agreement.  (The term ‘statutory authority’ is defined in item 2 of the Protocol.)  This means that the Australian Government, the State governments and local councils of Australia will be residents for the purpose of this Agreement.  This does not necessarily mean that income, profits or gains derived by these bodies from sources in Finland will be subject to tax in Finland as sovereign immunity principles may apply.  [Article 4, paragraph 1]

1.42       The OECD Model Commentary makes it clear that it has always been the understanding of member countries that the OECD Model applied to treat governments as residents even in the absence of an express reference to that effect.

Special residency rules

1.43       A person is not a resident of a country (for the purposes of this Agreement) if that person is liable to tax in that State in respect only of income from sources in that State.

1.44       This paragraph deals with a person who may be considered to be a resident of a State according to its domestic laws but is only liable to taxation on income from sources in that State, such as, foreign diplomatic and consular staff.  In the Australian context, this 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 this Agreement.  Accordingly, Finland will not have to forgo tax in accordance with this Agreement on income derived by residents of Norfolk Island from sources in Finland (which will not be subject to Australian tax).  [Article 4, paragraph 2]

Dual residents

1.45       A set of tie-breaker rules is included for determining how residency is to be allocated to one or other of the countries for the purposes of this Agreement if a taxpayer, whether an individual, a company or other taxable unit, qualifies as a dual resident, that is, as a resident of both countries in accordance with paragraph 1 of the Article.

1.46       The tie-breaker rules for individuals apply certain tests, in a descending hierarchy, for determining the residential status (for the purposes of this Agreement) of an individual who is a resident of both countries.  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 this Agreement;

·       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 Finland, and the person is deemed for the purposes of this Agreement to be a resident only of the country with which the person has the closer personal and economic relations;

·       residency will be determined on the basis of an individual’s nationality where the foregoing test is not determinative; or

·       if the individual is a national (as defined in subparagraph (m) of paragraph 1 of Article 3 of this Agreement) of both countries or of neither, the competent authorities will endeavour to resolve the question of treaty residence by mutual agreement.

[Article 4, paragraph 3]

1.47       In relation to Australia, a dual resident remains a resident for the purposes of Australian domestic law.  Accordingly, that person remains liable to tax in Australia as a resident, insofar as this Agreement allows.

1.48       Where a non-individual (such as a body corporate) is a resident of both countries in accordance with paragraph 1, the entity will be deemed for the purposes of this Agreement to be a resident of the country in which it is incorporated (registered).  The reference to ‘registered’ has been retained because under Finnish law, entities that are incorporated in Finland are also required to formally register in Finland.  [Article 4, paragraph 5]

Limitation of relief

1.49       This Agreement provides that where an individual is a temporary resident of a country and is, for that reason, exempt from tax in that country on certain income, profits or gains in that country, then the other country will not be required to provide any relief specified in this Agreement in respect of such income, profits or gains.  [Article 4, paragraph 4]

Article 5 — Permanent Establishment

Role and definition

1.50       The application of various provisions of this Agreement (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.

1.51       The definition of the term ‘permanent establishment’ in this Article corresponds generally with definitions of the term in Australia’s more recent tax treaties.  The term also fully encompasses the concept of ‘fixed base’, which is used in the existing Agreement in a separate Article dealing with independent personal services.  As such services will now be dealt with under Article 7 ( Business Profits ), it is intended that places that constitute a fixed base for purposes of the existing Agreement would come within the meaning of permanent establishment for the purposes of this Agreement.

Meaning of permanent establishment

1.52       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]

1.53       Other paragraphs of this Article elaborate 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; or

·                 an agricultural property situated in Australia.

1.54       As is the case under the existing Agreement, the list of examples does not include an agricultural, pastoral or forestry property situated in Finland.  This is because under Finnish law, any income from such property is regarded as income from immovable property which is dealt with under Article 6 ( Income from Real Property ).  Finland, nevertheless, taxes income from such property on a net basis.

1.55       Consistent with Australia’s modern treaty practice, the definition also extends to places relating to the exploitation of and exploration for natural resources. 

1.56       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]

Australian agricultural, pastoral or forestry activities

1.57       Most of Australia’s tax treaties include as a permanent establishment an agricultural, pastoral or forestry property.  This reflects Australia’s policy of retaining taxing rights over exploitation of Australian land for the purposes of primary production.  This approach ensures that the arm’s length profits test provided for in Article 7 ( Business Profits ) applies to the determination of profits derived from these activities.  This position is also reflected in this Agreement in relation to such properties situated in Australia.  [Article 5, subparagraph 2(g)]

Building site or construction or instalation project

1.58       A building site or construction or instalation project constitutes a permanent establishment only if it lasts more than six months.  This differs from the existing Agreement in that it, consistently with Australia’s more recent treaty practice, reduces the period from 12 to six months.  The provision is also relocated to a separate paragraph which aligns with the OECD Model formatting and ensures that sites or projects which last less than six months will not constitute a permanent establishment.

1.59       The term ‘building site or construction or instalation project’ includes not only the construction of buildings but also 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 supervision 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 3]

Deemed permanent establishment

Supervisory and consultancy activities

1.60       Supervisory and consultancy activities carried on for more than 183 days in any 12 month period in connection with a building site or a construction or instalation project are deemed to be performed through a permanent establishment, unless the activities are of a type described in paragraph 6 and are of a preparatory or auxiliary nature.  This provision broadly aligns with Australia’s reservation to Article 5 ( Permanent Establishment ) of the OECD Model.  [Article 5, subparagraph 4(a)]

Natural resource activities

1.61       Where an enterprise carries on activities (including the operation of substantial equipment) in the exploration for, or exploitation of, natural resources within a country for a period or periods aggregating more than 90 days in any 12 month period, it will be deemed to have a permanent establishment in that country through which those activities are performed (unless the activities are of a type described in paragraph 6 and are of a preparatory or auxiliary nature).  [Article 5, subparagraph 4(b)]

Substantial equipment

1.62       If an enterprise operates substantial equipment in a country for longer than 183 days 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 6 and are of a preparatory or auxiliary nature).  This does not include substantial equipment used in the exploitation of or exploration for natural resources, for which the time period is 90 days in any 12 month period.  [Article 5 subparagraph 4(c)]

1.63       Subparagraphs 4(b) and (c) together reflect Australia’s reservation to the OECD Model concerning 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 involving the use of such equipment.

1.64       The terms ‘operation’ and ‘operates’ have been included to clarify that only active use of substantial equipment assets will be captured by subparagraphs 4(b) and (c).  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.  However, if that other person operates the substantial equipment for or on behalf of the enterprise, the enterprise would be considered to operate the equipment in the country.  For example, if a Finnish enterprise itself operates a mobile crane at an Australian port for more than 183 days in a 12 month period, the Finnish enterprise would be deemed to have a permanent establishment in Australia under subparagraph 4(c).  If, however, that Finnish enterprise merely leases the mobile crane to another person and that other person operates the crane at an Australian port for its own purposes, the Finnish enterprise would not be deemed to have a permanent establishment in Australia under subparagraph 4(c).

1.65       The meaning of the term ‘substantial’ depends on the relevant facts and circumstances of each individual case.  However, some examples of substantial equipment would include:

·       large industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction;

·       manufacturing or processing equipment used in a factory; and

·       grain harvesters and other large agricultural machinery.

Anti-avoidance provision

1.66       Given that this Article contains certain timeframes, an anti-avoidance rule is included to ensure that where associated enterprises carry on substantially the same activities, the periods will be aggregated in determining whether an enterprise has a permanent establishment in the country in which the activities are being carried on.

1.67       This provision is an anti-avoidance measure aimed at counteracting contract splitting for the purposes of avoiding the application of the permanent establishment rules.

1.68       This Agreement provides that an enterprise shall be deemed to be associated with another enterprise if one enterprise is controlled directly or indirectly by the other or if both are controlled directly or indirectly by a third person or persons.  It also provides that a period of concurrent activities by such associated enterprises is only counted as one period for aggregation purposes.  [Article 5, paragraph 5]

Preparatory and auxiliary activities

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

1.70       Generally these activities are of a preparatory or auxiliary character and are unlikely to give rise to substantial profits.  The necessary economic link between the activities of the enterprise and the country in which the activities are carried on does not exist in these circumstances.

1.71       Unlike the OECD Model, which provides only that the listed activities are deemed not to constitute a permanent establishment, this Agreement provides that the activities will be deemed not to constitute a permanent establishment only if the activities are, in relation to the enterprise, of a preparatory or auxiliary character.  This is to prevent the situation where enterprises structure their business so that their activities fall within the exceptions with a view to avoiding taxation in that country.  It also means that where the listed activities are not preparatory or auxiliary in relation to the enterprise but instead constitute core business activities of the enterprise, the enterprise will not be excluded from having a permanent establishment if it satisfies the primary meaning in paragraph 1.  [Article 5, paragraph 6]

Dependent agents

1.72       A person who acts on behalf of an enterprise of another country is deemed to constitute a permanent establishment of that enterprise if that person has and habitually exercises an authority to substantially negotiate or conclude contracts on behalf of the enterprise. 

1.73       Consideration will be given to all the relevant facts and circumstances in determining whether a person has authority or not to substantially negotiate or conclude contracts.

1.74        The term ‘substantially negotiate’ has been included to remove any doubt as to the existence of a permanent establishment where contracts that have been negotiated in one country by an agent are formally concluded in the other country by signature in that other country.  [Protocol, item 3]

1.75       Activities of a dependent agent will not give rise to a permanent establishment where that agent’s activities are limited to the preparatory and auxiliary activities mentioned in paragraph 6.  [Article 5, subparagraph 7(a)]

Manufacturing or processing on behalf of others

1.76       Consistent with Australia’s reservations 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 unless the activities are of a preparatory or auxiliary character.  An example is the situation where a mineral plant refines minerals at cost, so that the plant operations produce no Australian profits.  Title to the refined product remains with the mining consortium and profits on sale are realised mainly outside of Australia.

1.77       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 their real 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.  This subparagraph prevents an enterprise which carries on substantial manufacturing or processing activities in a country through an intermediary from escaping tax in that country.

1.78       This subparagraph is in the existing Agreement.  The inclusion of this subparagraph is insisted upon by Australia in its tax treaties and is consistent with Australia’s policy of retaining taxing rights over profits from manufacturing or processing on behalf of others including, importantly, in the exploitation of Australia’s mineral resources.  [Article   5, subparagraph  7(b) ]

Independent agents

1.79       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 8]

Subsidiary companies

1.80       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 9]

Other Articles

1.81       The principles set down in this Article are also 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 Finland) when applying the source rule contained in:

·       paragraph 7 of Article 11 ( Interest ); and

·       paragraph 5 of Article 12 ( Royalties ).

[Article 5, paragraph 10]

Article 6 — Income from Real Property

Where income from real property is taxable

1.82       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.  [Article 6, paragraph 1]

1.83        The following notes reflect agreement reached during the negotiation of this Agreement with regard to this provision.

‘It was acknowledged that income from agricultural, pastoral or forestry property is considered to be income from immovable property under Finland’s domestic law.’ 

Finland, nevertheless, taxes income from agricultural, pastoral or forestry property on a net basis.

1.84       As in the existing Agreement, income from carrying on an agricultural, pastoral or forestry business on real property situated in Australia does not fall for consideration under this Article, but is dealt with under Article 5 ( Permanent Establishment ) and the related ‘business profits’ provisions of Article 7 ( Business Profits ) of this Agreement. 

Definition

1.85       Income from real property (which is primarily defined as having the meaning which it has under the domestic law of the country where the property is situated) also extends, in the case of Australia, to income from:

·       a lease of land and any other interest in or over land (including exploration and mining rights); and

·       royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.

1.86       In the case of Finland, the definition generally follows the OECD Model definition of ‘immovable property’ and includes:

·       buildings;

·       property accessory to real property;

·       livestock and equipment used in agriculture and forestry;

·       rights to which the provisions of the general law respecting landed property apply;

·       usufruct of real property (generally, a right to use property without degrading it and to retain any profits derived from it); and

·       rights to variable or fixed payments as consideration for the working of or right to work mineral deposits, sources and other natural resources.

1.87       Ships and aircraft are excluded from the definition of ‘real property’.  Therefore this Article does not cover income from their use.  [Article 6, paragraph 2]

Deemed situs

1.88       Under Australian law the place where an interest in land, such as a lease, is situated (situs) is not necessarily where the underlying property is situated.  This paragraph 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]

Shares or other rights to enjoyment of real property

1.89        In accordance with Finnish treaty practice, paragraph 5 of this Article provides that income from use of a right to enjoyment of real property situated in a country which arises from ownership of shares or other rights in a company, trust or comparable institution may be taxed in that country. 

1.90       Paragraph 5 would apply, for example, if a Finnish resident owns a share in a company, where that share gives rise to an entitlement to stay in an apartment in Australia, often referred to as a time share arrangement.  In such a situation, Australia would have a taxing right over the income the Finnish resident received from letting the Australian apartment to another person to occupy.  This paragraph applies notwithstanding that the Finnish resident may not be carrying on business in Australia through a permanent establishment, as required by Article 7 ( Business Profits ).  A similar provision is included in the existing Agreement.  [Article 6, paragraph 5]

Real property of an enterprise

1.91       Paragraphs 1, 3 and 4 of this Article are extended to income derived from the use or exploitation of real property of an enterprise.

1.92       Accordingly, this Article (when read with Article 7 ( Business Profits )) ensures that the country in which the real property is situated may impose tax on the income derived from that property by an enterprise of the other country, irrespective of whether or not that income is attributable to a permanent establishment of such an enterprise situated in the first-mentioned country.  [Article 6, paragraph 6]

Form of exploitation of real property

1.93        Paragraphs 4 and 7 make it clear that the general rule in paragraph 1 and the additional rule in paragraph 5 apply 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, paragraphs 4 and 7]

Article 7 — Business Profits

1.94       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.

1.95       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]

1.96       If an enterprise which is a resident of one country derives business profits in the other country other than profits 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 its business profits (except where paragraph 6 of this Article applies — see the explanation in paragraphs 1.103 and 1.104).

Determination of business profits

1.97       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 this Agreement correspond to international practice and the comparable provisions in Australia’s other tax treaties.  [Article 7, paragraphs 2 and 3]

1.98       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.  [Article 7, paragraph 3]

1.99       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 adding to them 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]

1.100     Unlike the existing Agreement, no provision dealing with formulary apportionment of profits (such as paragraph 4 of Article 7 ( Business Profits ) of the OECD Model) has been included as neither country seeks to use such a method in determining the profits to be attributed to a permanent establishment.  Also, there is no requirement for the enterprise to use the same method for attributing profits to a permanent establishment each year (such as appears in paragraph 6 of Article 7 ( Business Profits ) of the OECD Model) as the enterprise is expected to use the most appropriate method each year.

Application of domestic law

1.101     The domestic law of the country in which the permanent establishment is situated (eg, 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 of 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 relevant 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.

1.102     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 dealt with under other Articles

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

1.104     This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other Articles of this Agreement (eg, Article 8 ( Ships and Aircraft ), 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 (except where otherwise provided, eg, by paragraph 5 of Article 10 ( Dividends ) where the asset in respect of which the income is paid is effectively connected with a permanent establishment).  [Article 7, paragraph 6]

Insurance with non-residents

1.105     Each country has the right to continue to apply any provisions in its domestic law relating to the taxation of income from insurance.  However, if the relevant law in force in either country at the date of signature of this Agreement is subsequently varied (otherwise than in minor respects so as not to affect its general character), the countries must consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate.  An effect of this paragraph is 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 consistent with Australia’s reservation to Article 7 ( Business Profits ) of the OECD Model.  [Article 7, paragraph 7]

Trust beneficiaries

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

1.107     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 estate 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 Finland is beneficially entitled under the trust estate.  Paragraph 8 of this Article ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5 ( Permanent Establishment ), the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business.  The principles of this paragraph will also apply where relevant to other Articles of this Agreement, 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.

Article 8 — Ships and Aircraft

Profits from international traffic

1.108     The main effect of this Article is that the right to tax profits from the operation of ships or aircraft in international traffic, including a share of profits attributable to participation in a pool service or other profit sharing arrangement, is generally reserved to the country in which the operator is a resident for tax purposes.  [Article 8, paragraphs 1 and 3]

1.109     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 in international traffic.  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 2005 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 in international traffic but which are ancillary to such operation.  The following notes reflect agreement reached during the negotiation of this Agreement with regard to containers .

‘Both delegations confirmed that, consistent with the Commentary on Article 8 of the OECD Model, the wording agreed to in the Article on ships and aircraft would provide for residence country taxation of profits derived by an enterprise from the use, maintenance or rental of containers directly connected or ancillary to the enterprise’s operation of ships and aircraft in international traffic.’

Internal traffic

1.110     Profits derived directly or indirectly by a Finnish enterprise from the operation of ships or aircraft, to the extent that they relate to operations confined solely to places in Australia, may be taxed in Australia.  This reflects Australia’s treaty policy of reserving to the source country, the right to tax profits from internal traffic and profits from other coastal and continental shelf activities, including non-transport shipping and aircraft activities, within its own waters and airspace.  [Article 8, paragraph 2]

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

1.112     Unlike the existing Agreement (which prescribes that the amount of tax charged by the relevant country on profits from the operation of ships or aircraft in internal traffic is limited to 5 per cent of the amount paid or payable in respect of carriage in such operations), 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, under Division 12 of Part III of the ITAA 1936, only 5 per cent of the amount paid in respect of the transport of passengers, livestock, mails or goods would be deemed to be taxable income of the Finnish ship operator.

Example 1.1

A ship operated by a Finnish enterprise, in the course of an international voyage from Hanko to Melbourne, makes a stop in Perth to pick up cargo.  Profits derived from the transport of the goods loaded in Perth and discharged in Melbourne would be profits from operations confined solely to places in Australia.  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 1.2

A Finnish enterprise operates sightseeing flights to observe whales in the Southern Ocean.  Passengers board the aircraft in Hobart and disembark at the same airport later on the same day.  These operations would be regarded as operations confined solely to places in Australia, 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. 

1.113     Operations involving the use of ships or aircraft, such as haulage, survey or dredging activities, or other activities that are undertaken in Australia (including coastal waters, the continental shelf areas and external territories) are also regarded as operations confined solely to places in Australia.

Article 9 — Associated Enterprises

Reallocation of profits

1.114     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 Finland on an arm’s length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between unrelated enterprises dealing wholly independently with one another.

1.115     This Article does 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.  Consistent with Australia’s recent treaty practice, the inclusion of the expression ‘dealing wholly independently with one another’ in paragraph 1 recognises dealings on a truly independent basis as the appropriate benchmark for determining whether the transactions have taken place on normal, open market commercial terms.  [Article 9, paragraph 1]

1.116     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.

1.117     Each country has the right to apply its domestic law relating to the determination of the tax liability of a person (eg, Australia’s Division 13 of the ITAA 1936) to its own 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

1.118     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, a form of double taxation 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, if it considers the adjustment justified, will make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation.

1.119     It would generally be 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 Finland will consult with each other to determine the appropriate adjustment.  [Article 9, paragraph 3]

Article 10 — Dividends

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

·                 certain cross-border intercorporate dividends will be either exempt or subject to a maximum 5 per cent rate of source country tax;

·                 a maximum 15 per cent rate of source country tax may be applied on all other dividends;

·                 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 ); and

·                 the extra-territorial application by either country of taxing rights over dividend income is not permitted.

1.121     However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

Permissible rate of source country taxation

Exemption for certain cross-border intercorporate dividends

1.122     No tax will be payable in the source country on dividends paid to a company that is the beneficial owner of those dividends and is resident in the other country where:

·                 the recipient company holds 80 per cent or more of the voting power of the company paying the dividend; and

·                 satisfies a 12 month holding requirement at the time of the declaration of the dividend in relation to the shares in respect of which the dividend is payable.

[Article 10, paragraph 3]

1.123     To qualify for the exemption, the company that is the beneficial owner of the dividends must either be:

·                 a company that has its principal class of shares;

-            listed on specified Australian or Finnish stock exchanges; and

-            regularly traded on one or more recognised stock exchanges (as defined under Article 3 ( General Definitions ) of this Agreement); or

·                 a company that is owned either directly or indirectly by such a company.

1.124     Dividends which are beneficially owned by a company that does not meet the conditions in the previous paragraph will also be exempt from tax in the source country if the competent authority determines, in accordance with its domestic law, that the recipient company was established, acquired, or maintained for reasons other than obtaining benefits under this Agreement.  Before concluding that a company is not entitled to benefits under this subparagraph (eg, because the arrangements had a principal purpose of obtaining such benefits), the competent authority is required to consult with the competent authority of that company’s country of residence.  [Article 10, subparagraphs 3(a) to (c)]

1.125     For the purpose of the above tests, a recognised stock exchange includes:

·                 in Australia’s case , the Australian Securities Exchange or any other Australian stock exchange recognised under Australian domestic law; and

·                 in Finland, the Helsinki Stock Exchange or any other Finnish stock exchange recognised as such under Finnish law.

1.126     Provision has been made to allow the competent authorities to reach agreement that other stock exchanges constitute a recognised stock exchange for the purpose of this Agreement.  [Article 3, sub-subparagraph 1(n)(iii)]

5 per cent rate limit on source country tax of certain cross-border intercorporate dividends

1.127     This Article allows both countries to tax other dividends flowing between them but limits the rate of tax that the country of source may impose on dividends paid by companies that are residents of that country under its domestic law to companies resident in the other country who are the beneficial owners of the dividends.  [Article 10, paragraphs 1 and 2]

1.128     A rate limit of 5 per cent will apply for dividends paid in respect of company shareholdings that do not qualify for the intercorporate dividend exemption under paragraph 3 of this Article, but constitute a direct voting interest of at least 10 per cent.  [Article 10, subparagraph 2(a)]

15 per cent rate limit for all other dividends

1.129     In all other cases, this Article provides that the source country will generally limit its tax to 15 per cent of the gross amount of the dividend.  In the case of Australia, this will mean that the domestic rate of withholding tax imposed on unfranked dividends will be reduced from 30 per cent to 15 per cent.  [Article 10, subparagraph 2(b)]

1.130     Although the provisions described above 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.

Future changes to either country’s domestic tax treatment of dividends

1.131     If there is a material change to either country’s general approach to taxing dividends, the two countries are obliged to consult with each other to consider whether any amendment to paragraphs 2 and 3 of this Article would be appropriate as a consequence of the change to domestic law.  [Article 10, paragraph 2]

Dividends effectively treated as business profits

1.132     The limitation on the tax of the country in which the dividend is sourced does not apply to dividends derived by a resident of the other country who has a permanent establishment in the source country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that permanent establishment.

1.133     Where the holding is so effectively connected, the dividends are to be treated as business profits 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 Article 7 ( Business Profits ).

1.134     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 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

1.135     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 in the first country.

1.136     For example, Australia may not tax dividends paid by a Finnish company to a resident of Finland out of profits derived from Australian sources, unless the Finnish shareholder has a permanent establishment in Australia with which the holding is effectively connected.

1.137     These restrictions do not apply when the company is, for tax purposes, a resident of both Australia and Finland under the respective laws of the two countries.  [Article 10, paragraph 6]

Definition of dividends

1.138     The term dividends in this Article means income from:

·                 shares or other rights which participate in profits and are not debt-claims; and

·                 other amounts that are subject to the same taxation treatment as income from shares in the country of which the distributing company is resident.

[Article 10, paragraph 4]

Limitation of benefits

1.139     The source country rate limits and exemptions available under this Article will not apply where a creation or assignment of shares or other rights in respect of which dividends are paid, has been made with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article.  [Article 10, paragraph 7]

Article 11 — Interest

1.140     This Article allocates taxing rights in respect of interest flows between Australia and Finland.  The Article provides that:

·                 an exemption from source country tax applies to certain cross-border interest flows to:

-            government bodies or central banks; or

-            financial institutions;

·                 a maximum 10 per cent rate of source country tax may be applied on all other interest income;

·                 interest paid on an indebtedness which is effectively connected with a permanent establishment shall be subject to Article 7 ( Business Profits );

·                 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 Finnish resident; or

-            the interest is paid by a non-resident to a Finnish resident and it is an expense of the payer in carrying on business in Australia through a permanent establishment; 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.

1.141     However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

Permissible rate of source country taxation

10 per cent rate limit

1.142     This Article provides for interest income to be taxed by both countries but requires the country in which the interest arises to generally limit its tax to 10 per cent of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest.  [ Article 11, paragraphs 1 and 2]

Exemptions for interest paid to government bodies and central banks

1.143     The exemption for interest paid to the Finnish Government reflects the principle of sovereign immunity and will apply to interest derived by Finland, or any political or administrative subdivision or local authority in Finland, in addition to any other body exercising governmental functions, or Finland’s central bank.  The following notes reflect agreement reached during the negotiation of this Agreement with regard to this provision.

‘With reference to subparagraph 3(a) of Article 11 ( Interest ), it was agreed that the term “any other body exercising governmental functions,” encompasses any legal entity of a public character created by the laws of a Contracting State in which no person other than the State itself, or a local authority thereof, has an interest.  It was further agreed that the application of this subparagraph is limited to investments of a non-commercial nature.’

[Article 11, subparagraph 3(a)]

1.144     This would mean, for example, that a statutory authority that exercises governmental functions would qualify for the exemption.  However, if that authority carries on commercial or business activities, interest derived on investments that form part of those commercial or business activities would be subject to interest withholding tax.

Exemptions for interest paid to financial institutions

1.145     The exemption for interest paid to financial institutions recognises that the agreed 10 per cent withholding tax rate on gross interest can be excessive given their cost of funds.  The exemption will also broadly align the treatment of interest paid to Finnish financial institutions with the Australian domestic law exemption for interest paid on widely distributed arm’s length corporate debenture issues (section 128F of the ITAA 1936).  [Article 11, subparagraph 3(b)]

1.146     The term financial institution means a bank or other enterprise substantially raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on the business of providing finance.  It does not include a corporate treasury or a member of a group that performs the financing services of the group.  [Article 11, subparagraph 3(b)]

1.147     The exemption will not be available for interest paid as part of an arrangement involving back-to-back loans or other arrangement that is economically equivalent and structured to have a similar effect.  The denial of the exemption for these back-to-back loan type arrangements is directed at preventing related party and other debt from being structured through financial institutions to gain access to a withholding tax exemption.  The exemption will only be denied for interest paid on the component of a loan that is considered to be back-to-back.  [Article 11, paragraph 4]

1.148     A back-to-back arrangement would include, for instance, a transaction or series of transactions structured in such a way that:

·                 a Finnish financial institution receives or is credited with an item of interest arising in Australia; and

·                 the financial institution pays or credits, directly or indirectly, all or substantially all of that interest (at any time or in any form, including commensurate benefits) to another person who, if it received the interest directly from Australia, would not be entitled to similar benefits with respect to that interest.

1.149     However, a back-to-back arrangement would generally not include a loan guarantee provided by a related party to a Finnish financial institution.

Definition of interest

1.150     The term ‘interest’ is defined for the purposes of this Article to include income from:

·                 government securities;

·                 bonds and debentures;

·                 any other forms of indebtedness; and

·       income which is subjected to the same taxation treatment as income from money lent by the law of the Contracting State in which the income arises.

[Article 11, paragraph 5]

Interest effectively treated as business profits

1.151     Interest derived by a resident of one country which is paid in respect of an indebtedness which is effectively connected with a permanent establishment of that person in the other country, will form part of the business profits of that permanent establishment and be subject to the provisions of Article 7 ( Business Profits ).  Accordingly, the rate limitation of 10 per cent and the exemption for financial institutions do not apply to such interest in the country in which the interest is sourced.  [Article 11, paragraph 6]

Deemed source rules

1.152     The source rules which determine where interest arises for the purposes of this Article are set out in paragraph 7.  They operate to allow Australia to tax interest paid by a resident of Australia to a resident of Finland 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 Finnish resident, if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment.

1.153     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 outside both Australia and Finland (ie, the permanent establishment is in a third country).  In that case, the interest is deemed to arise in the country in which the permanent establishment is situated.  [Article 11, paragraph 7]

1.154     In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply.   [Article 5, paragraph 10]

Related persons

1.155     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 10 per cent source country tax rate limitation applies to an amount of interest 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 this Agreement.  [Article 11, paragraph 8]

1.156     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.

1.157     It also covers relationships of blood or marriage and, in general, any community of interests.

Limitation of benefits

1.158     The source country rate limit and exemptions available under this Article will not apply where a creation or assignment of the indebtedness in respect of which interest paid has been made with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article.  [Article 11, paragraph 9]

Article 12 — Royalties

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

·                 a maximum 5 per cent rate of source country tax may be levied on the gross amount of the royalties;

·                 royalties paid in respect of a right or property which is effectively connected with a permanent establishment are subject to Article 7 ( Business Profits );

·                 equipment royalties are not included within the definition of ‘royalties’ and are subject to either Article 7 ( Business Profits ) or Article 8 ( Ships and Aircraft );

·                 royalties include payments for spectrum licences;

·                 royalties are deemed to have an Australian source (and may therefore be taxed in Australia) where:

-            the royalties are paid by an Australian resident to a Finnish resident; or

-            the royalties are paid by a non-resident to a Finnish resident and are an expense of the payer in carrying on business in Australia through a permanent establishment; 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.

1.160     However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

Permissible rate of source country taxation

1.161     This Article in general allows both countries to tax royalty flows but limits the tax of the country of source to 5 per cent of the gross amount of royalties beneficially owned by residents of the other country.  [Article 12, paragraphs 1 and 2]

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

1.163     The 5 per cent rate limitation 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

1.164     The definition of ‘royalties’ in this Article reflects most elements of the definition in Australia’s domestic income tax law.  It includes payments for the supply of scientific, technical, industrial or commercial know-how but not payments for services rendered, except as provided for in subparagraph 3(c).  The definition also includes payments for the use of intellectual property stored on various mediums and used in connection with television, radio or other broadcasting (eg, satellite, cable and Internet broadcasting).  [Article 12, paragraph 3]

1.165     Payments for the use of, or the right to use industrial, commercial or scientific equipment have been removed from the definition under this Agreement.  Such amounts will either be treated as business profits under Article 7 ( Business Profits ) or as profits from international transport operations (for certain leases of ships, aircraft and containers) under Article 8 ( Ships and Aircraft ).  The exclusion of payments for the use of equipment from the Royalties Article reflects common international tax treaty practice and recognises that source country taxation on a gross basis may be excessive given low profit margins.

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

1.166     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.

1.167     Payments for design, engineering or construction of 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.

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

1.169     Payments for services rendered are to be treated under Article 7 ( Business Profits ).

Image or sound reproduction or transmission

1.170     The royalties definition includes payments made for the use of, or the right to use, motion picture films.  It also covers payments for the use of, or the right to use, images or sounds, however reproduced or transmitted, for use in connection with broadcasting.  Such images or sounds may be reproduced on any form of media, such as film, tape, CD or DVD, or transmitted electronically, such as by satellite, cable or Internet.  Where the images or sounds are for use in connection with any form of broadcasting, such as television, radio or web-casting, the payments will constitute a royalty.   [Article 12, subparagraph 3(d)]

Spectrum licences

1.171     Under this Agreement, 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 payments that arise in Australia for the use in Australia of any part of the radiofrequency spectrum (within the meaning of the Radiocommunications Act 1992) specified in such a licence [Article 12, subparagraph 3(e)]

Forbearance

1.172     Consistent with the existing Agreement and Australian tax treaty practice, subparagraph 3(f) 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 3(f)]

Other royalties effectively treated as business profits

1.173     As in the case of 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 in the country in which the income is sourced.  Such income is subject to full taxation under Article 7 ( Business Profits ).  [Article 12, paragraph 4]

Deemed source rules

1.174     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 7 of Article 11 ( Interest ).

1.175     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 outside both Australia and Finland (ie, the permanent establishment is in a third country) 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.  [Article 12, paragraph 5]

1.176     In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply.  [Article 5, paragraph 10]

Related persons

1.177     Where a special relationship exists between the payer and the beneficial owner of the royalties, the 5 per cent source country tax rate limitation will 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 this Agreement.

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

Limitation of benefits

1.179     The source country rate limit available under this Article will not apply where a creation or assignment of the rights in respect of which royalties paid or credited has been made with the main objective, or one of the main objectives, of accessing the relief available under this Article.  [Article 12, paragraph 7]

Article 13 — Alienation of Property

Taxing rights

1.180     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.

1.181     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 is 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

1.182     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]

1.183     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 determined in accordance with paragraph 3 of Article 6 ( Income from Real Property ).

Permanent establishment

1.184     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.  It also applies where the permanent establishment itself (alone or with the whole enterprise) is alienated.  Such income, profits, or gains may be taxed in the country in which the permanent establishment 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

1.185     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.  This rule corresponds to the operation of Article 8 ( Ships and Aircraft ) in relation to profits from the international operation of ships or aircraft.  [Article 13, paragraph 3]

1.186     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 (eg, so-called ‘voyages to nowhere’ by cruise ships).  [Article 3, subparagraph 1(l)]

Shares and other interests in land-rich entities

1.187     Paragraph 4 applies to situations involving the alienation of shares or other interests in companies and other entities, where more than half of the value of the assets of that company or other entity is derived, whether directly or indirectly through one or more other interposed entities, from real property situated in the other country.  Income, profits or gains from the alienation of such shares or interests may be taxed by the country in which the real property is situated.  This paragraph complements paragraph 1 of this Article and is designed to cover arrangements involving the effective alienation of incorporated real property, or like arrangements.

1.188     This provision is in line with international practice and ensures that capital gains on a non-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.)

1.189     This provision responds to tax planning opportunities exposed by the decision of the Full Federal Court in the Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597.  It is designed to protect Australian taxing rights over income or gains on the alienation or effective alienation of Australian real property (as defined) despite the presence of interposed bodies corporate or other entities.  [Article 13, paragraph 4]

Capital gains

1.190     This Article 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 in which the person deriving the gains is a resident.  These would include, for example, gains from the disposal of shares or other interests in an entity (other than a land-rich entity).  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 Finland.  The liability of the Australian resident to taxation on such gains will be determined in accordance with Australia’s domestic law.  [Article 13, paragraph 5]

Article 14 — Income from Employment

Basis of taxation

1.191     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 15 ( Directors’ Fees );

·                 Article 16 ( Entertainers and Sportspersons );

·                 Article 17 ( Pensions and Annuities ); and

·                 Article 18 ( Government Service ).

1.192     Generally, salaries, wages and similar 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 14, paragraphs 1 and 2]

Short-term visit exemption

1.193     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 a resident of the same country as the employee; and

·                 the remuneration is not borne by a permanent establishment which the employer has in the country being visited.

1.194     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 14, paragraph 2]

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

1.196     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 22 ( Relief from Double Taxation ) Australia would be required in this situation to relieve the double taxation.

1.197     Although Article 22 provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Finnish tax paid, the exemption with progression method of providing double tax relief in relation to employment income derived in the situation described would normally be applicable in practice pursuant to the foreign service income provisions of section 23AG of the ITAA 1936.  This method exempts the income from foreign employment from tax in Australia, but takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.

Employment on a ship or aircraft

1.198     Income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of which the enterprise operating the ship or aircraft is a resident.  [Article 14, paragraph 3]

Article 15 — Directors’ Fees

1.199     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, or of a body which performs a similar role to that of a board of directors, of a company which is a resident of the other country.  To avoid difficulties in such cases of ascertaining in which country a director’s services are performed, and consequently where the remuneration is to be taxed, the Article provides that directors’ fees and similar payments may be taxed in the country of residence of the company.  [Article 15]

Article 16 — Entertainers and Sportspersons

Personal activities

1.200     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 ‘entertainer’ 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 the entertainer or sportsperson while present in the visited country.  [Article 16, paragraph 1]

Safeguard

1.201     Income in respect of personal activities exercised by an entertainer or sportsperson, where derived by another person (eg, 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 16, paragraph 2]

Article 17 — Pensions and Annuities

1.202     Pensions (other than government service pensions and social security pensions) and annuities (the term ‘annuity’ as used in this Article is defined in paragraph 2) are taxable only by the country of which the recipient is a resident.  The application of this Article extends to pensions and annuity payments made to dependants, for example, a widow, widower or children of the person in respect of whom the pension or annuity entitlement accrued where, upon that person’s death, such entitlement has passed to that person’s dependants.  [Article 17, paragraphs 1 and 2]

Government service pensions and social security pensions and payments

1.203     As is the case under the existing Agreement, pensions paid by a government (including a political subdivision, local authority or statutory authority) of one of the countries to an individual in respect of services rendered to that government (or political subdivision or authority), may be taxed by that country.  Likewise, pensions and other payments made under the social security legislation of a country may also be taxed by that country.  However, these rules only apply if the individual receiving the pension is a citizen or national of the country making the payment.

1.204     Accordingly, a Finnish social security pension paid to an Australian resident individual may be taxed by Finland if the person is a Finnish national.  In such a case, Australia is also entitled to tax the Finnish social security pension but is obliged, in accordance with Article 22 ( Relief from Double Taxation ), to relieve the double taxation.  If, however, the Australian resident is not a Finnish national, then the Finnish social security pension is only taxable in Australia.  The same treatment would also apply to a Finnish government service pension paid to an Australian resident individual, with Finland only entitled to tax the pension if the person is a Finnish national.

1.205     In the reverse situation, an Australian social security pension paid to a Finnish resident individual may be taxed by Australia if the person is an Australian citizen.  Finland is also entitled to tax the pension but is obliged to relieve the double taxation.  If the Finnish resident is not an Australian citizen, then the Australian social security pension is only taxable in Finland.  Again, the same treatment would also apply to an Australian government service pension paid to a Finnish resident individual, with Australia only entitled to tax the pension if the person is an Australian citizen.  [Article 17 paragraph 3]

Lump sum payments

1.206     Paragraph 5 of the 2005 OECD Model Commentary on Article 18 ( Pensions ) notes that the word ‘pension’, under the ordinary meaning of the word, covers only periodic payments.  Superannuation lump sum payments are not considered to be pensions and are not covered by this Article.  Article 20 ( Other Income ) applies to such payments.

Alimony payments

1.207     Consistent with the existing Agreement, the taxing right in respect of alimony and other maintenance payments is allocated solely to the country of residence of the payer.  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, such payments by an Australian resident will generally remain exempt from Australian tax under the ITAA 1936 and the ITAA 1997 in the hands of the recipient and non-deductible to the payer.  [Article 17, paragraph 4]

Article 18 — Government Service

Salary and wage income

1.208     Salary and wage type income, other than government service pensions or annuities, paid to an individual for services rendered to a government (including a political subdivision, local authority or statutory authority) of one of the countries, is 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 (eg, if the recipient is a permanent resident of that other country).

[Article 18, paragraph 1]

Business income

1.209     Remuneration in respect of services rendered in connection with a 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 14 ( Income from Employment ), Article 15 ( Directors’ Fees ) or Article 16 ( Entertainers and Sportspersons ).   [Article 18, paragraph 2]

Article 19 — Students

Exemption from tax

1.210     This Article applies to students or business apprentices who are temporarily present in one of the countries solely for the purpose of their education or training if they are, or immediately before the visit were, resident in the other country.  In these circumstances, payments from abroad received by the students or business apprentices solely for their maintenance, education or training will be exempt from tax in the country visited.  This will apply even though the student or apprentice may qualify as a resident of the country visited during the period of their visit.  [Article 19]

1.211     The exemption from tax provided by the visited country is treated as extending to maintenance payments received by the student or apprentice that are made for maintenance of dependent family members who have accompanied the student or apprentice to the visited country.

Employment income

1.212     Where, however, a Finnish 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 14 ( Income from Employment ), be subject to tax in Australia.

1.213     For business apprentices, this Article only applies where the apprentice’s remuneration consists solely of subsistence payments to cover training or maintenance.  Remuneration for service, that is, salary equivalents, fall for consideration under Article 14.

1.214     In the case of a Finnish business apprentice visiting Australia solely for training purposes, it may therefore be necessary to distinguish between remuneration for service and a payment for the apprentice’s maintenance or training.  The quantum of the payment will be relevant in such cases.

1.215     A payment for maintenance or training would not be expected to exceed the level of expenses likely to be incurred to ensure the apprentice’s maintenance and training (ie, a subsistence payment).  Whereas, if the remuneration is similar to the amounts paid to persons who provide similar services that are not business apprentices (ie, a salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under Article 14.  Likewise, if that business apprentice undertakes any other employment in Australia, the income earned from that employment may be subject to tax in Australia in accordance with Article 14.

1.216     In these situations, the payments received from abroad for the student’s or apprentice’s maintenance, education or training will not, however, 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 or apprentice qualifies as a resident of Australia during the visit and the taxable income of the student or apprentice does not exceed the tax-free threshold applicable to Australian residents for income tax purposes.

Article 20 — Other Income

Allocation of taxing rights

1.217     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 this Agreement.  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.

1.218     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 Australia’s reservation to Article 21 ( Other Income ) of the OECD Model.  [Article 20, paragraphs 1 and 3]

1.219     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 22 ( Relief from Double Taxation ) to provide double taxation relief.

1.220     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 which a resident of one country has in the other country.  In such a case, Article 7 ( Business Profits ) will apply.  [Article 20, paragraph 2]

Article 21 — Source of Income

Deemed source

1.221     This Article effectively deems income, profits or gains derived by a resident of a country which, in accordance with this Agreement, may be taxed in the other country, to have a source in 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 this Agreement over income derived by residents of Finland.  [Article 21, paragraph 1]

Source of income — double taxation relief

1.222     Income, profits or gains of a resident of one country that are taxable in the other country under this Agreement are deemed to arise in that other country.  This applies for both the purposes of Article 22 ( Relief from Double Taxation ) and for the purposes of the domestic tax laws of the country in which the recipient of the income is resident.  [Article 21, paragraph 2]

1.223     This provision is variously included in Article 21 ( Source of Income ) or Article 22 ( Relief from Double Taxation ) of Australia’s tax treaties.  It is intended to ensure that where an item of income, profit or gain is taxable in both countries, double taxation relief will be given by the recipient’s country of residence in accordance with Article 22, regardless of whether the amount would be regarded as having a source in the country of residence under its ordinary source rules.  In this way, income, profits or gains derived by a resident of Australia, which is taxable by Finland under this Agreement, will be treated as being foreign income for the purposes of the ITAA 1936 and the ITAA 1997, including the foreign tax credit provisions of the ITAA 1936.

Article 22 — Relief from Double Taxation

1.224     Double taxation does not arise in respect of income flowing between Australia and Finland:

·                 where the terms of this Agreement provide for the income to be taxed only in one country; or

·                 where the domestic taxation law of one of the countries exempts the income from its tax.

Tax credit

1.225     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 this Agreement, remain subject to tax in both countries.  In accordance with international practice, Australia’s tax treaties provide for double tax relief to be provided by the country of residence of the taxpayer by way of a credit basis of relief against its tax for the tax of the country of source.  This Article also reflects that approach.

Australian method of relief

1.226     This Article requires Australia to provide Australian residents a credit against their Australian tax liability for Finnish tax paid in accordance with this Agreement on income derived from Finnish sources which are 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 22, paragraph 1]

1.227     Australia’s general foreign tax credit system, together with the terms of this Article and of this Agreement generally, will form the basis of Australia’s arrangements for relieving a resident of Finland from double taxation on income, profits or gains arising from sources in Finland.

1.228     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 tax credit provisions (Division 18 of Part III) of the ITAA 1936.

1.229     Notwithstanding the credit basis of relief provided for by paragraph 1 of this Article, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of ‘foreign service’ (as defined in subsection 23AG(7) of the ITAA 1936) in Finland, the exemption with progression method of relief will be applicable.

1.230     Dividends and branch profits derived from Finland by an Australian resident company that are exempt from Australian tax under the foreign source income measures (eg, 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.

Finnish relief

1.231     In the case of a resident of Finland who is taxable in Finland on income which is also taxable in Australia under this Agreement, this Article requires Finland to allow the Finnish resident a deduction from the Finnish tax payable for the amount of Australian tax paid on that income.  [Article 22, subparagraph 2(a)]

1.232      Dividends paid by an Australian resident company to a Finnish resident company which directly controls at least 10 per cent of the voting power in the company paying the dividends are exempt from Finnish tax.  [ Article 22 subparagraph 2(b)]

1.233     In the case of income derived by a resident of Finland which is exempted in Finland under this Agreement, Finland may nevertheless take into account the exempted income in calculating the Finnish tax on any other income of that Finnish resident.  [Article 22, subparagraph 2(c)]

Article 23 — Non-Discrimination

1.234     This Agreement includes rules to prevent tax discrimination.  The Australian tax system is generally non-discriminatory.  However, for clarity this Article provides that certain features of the Australia tax system should not be seen as coming within the Article’s terms.  The measures identified can be characterised as being an integral part of today’s administration of Australia’s economic and tax policy and the collection of its taxes.  As such, it has been recognised that the measures carved out do not offend the spirit or intendment of a Non-Discrimination Article based on the OECD Model Article 24 ( Non-Discrimination ).

Discrimination based on nationality

1.235     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 23, paragraph 1]

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

1.237     The term national is defined in Article 3 ( General Definitions ) of this Agreement and covers both an individual who is a citizen or national of one country or the other and a company which derives 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 and registered under a law of Finland would be a national of Finland for the purposes of this paragraph.  [Article 3, subparagraph 1(m)]

The meaning of ‘in the same circumstance’ and ‘in particular with respect to residence’

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

1.239     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.

1.240     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 Finnish resident compared to an Australian resident will not constitute discrimination for 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 Finland.

The meaning of ‘other’ and ‘more burdensome’

1.241     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).

1.242     The phrase 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-residents of Australia/Finland

1.243     In accordance with paragraph 1 of Article 24 ( Non-Discrimination ) of the OECD Model, paragraph 1 of this Article applies to persons who are residents of neither Australia nor Finland.  Consequently, residents of third countries are able to seek the benefits of this provision.  Paragraph 1 does not, however, extend to residents of either country who are not ‘nationals’ (as defined in Article 3 ( General Definitions )) of either country.

Non-discrimination and permanent establishments

1.244     The tax on permanent establishments of enterprises of the other country shall 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.  [Article 23, paragraph 2]

1.245     For this paragraph to apply, the enterprises of both countries 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.

1.246     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.

Non-resident individuals

1.247     Non-resident individuals do not have to be granted the personal allowances, reliefs or reductions available to residents of the tax treaty countries.  [Article 23, paragraph 2]

1.248     This means that Australia will continue to be able to grant only to resident individuals rebates such as the dependent spouse rebate (under section 159J of the ITAA 1936).

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

Deductions paid to non-residents

1.250     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 8 of Article 11 ( Interest ), and paragraph 6 of Article 12 ( Royalties ).  [Article 23, paragraph 3]

Companies owned or controlled abroad

1.251     A country must not give less favourable treatment to an enterprise, 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 Finnish residents may not be given other or more burdensome treatment than locally owned or controlled Australian companies.  [Article 23, paragraph 4]

1.252     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 company as resident shareholders.  Accordingly, there is no obligation under paragraph 4 or any other provision of this Article to allow imputation credits to non-resident shareholders.

Exclusions

1.253     Certain provisions of the law of both countries that are important for purposes of economic regulation and integrity of the tax system are excluded from the operation of this Article.  Although most are generally recognised by the international community as not being discriminatory, 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 Finland to be excluded 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;

·                 do not allow tax rebates or credits in relation to dividends paid by a company;

·                 provide for deductions for research and development expenditure; or

·                 are agreed in an Exchange of Notes between the two Governments to be unaffected by the Article.

[Article 23, paragraph 5]

Avoidance or evasion provisions

1.254     The operation of domestic measures to combat avoidance and evasion is not affected by this Article.   [Article 23, subparagraph 5(a)

1.255      The reference to ‘laws … designed to prevent avoidance or evasion of taxes’ includes thin capitalisation, dividend stripping, transfer pricing, controlled foreign company, transferor trust and 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 this Agreement by the exclusion of such rules from the operation of this Article.  [Article 23, paragraph 6]

1.256     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 221YRA (Recovery of amounts by the Commissioner) of the ITAA 1936 provides that where interest or royalties are paid to a non-resident and the payer fails to deduct withholding tax, the interest or royalty cannot be claimed as a deduction.  No similar measure exists in relation to payments from a resident to another resident.  [Article 23, subparagraph 5(a) and paragraph 6]

Capital gains roll-over relief

1.257     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.  [Article 23, subparagraph 5(b)]

1.258     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 with the necessary connection with Australia is transferred to a non-resident if the asset is not an asset with the necessary connection with Australia in the hands of the transferee.  Australia will be able to continue to deny roll-over relief in these circumstances.  [Article 23, subparagraph 5(b)]

Consolidation

1.259     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.

1.260     Australia’s consolidation measures are restricted to wholly-owned Australian resident groups.  The 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 23, subparagraph 5(c)]

Rebates or credits paid by a company

1.261     Domestic law rules of either country which allow an intercorporate dividend rebate or credit are excluded from the operation of this Article.  In relation to credits, Australia does not permit non-residents to offset imputation credits against their Australian source income, or to seek a refund of any excess imputation credits.  This Article does not operate to preclude this treatment.  [Article 23, subparagraph 5(d)]

Research and development expenditure

1.262     The domestic law research and development provisions are excluded from the operation of this Article.  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 23, subparagraph 5(e)]

Power to carry out an Exchange of Notes

1.263     The two Governments may agree in an Exchange of Notes that other domestic law provisions will not be affected by the requirements of the Article.  [Article 23, subparagraph 5(f)]

Taxes to which this Article applies

1.264     This Article applies to the taxes referred to in paragraph 3 of Article 2 ( Taxes Covered ) of this Agreement.  These are, ‘taxes of every kind and description imposed on or behalf of the Contracting States, or their political subdivision or local authorities’.  [Article 23, paragraph 7]

1.265     In the case of Australia, the relevant taxes include the income tax (including the petroleum resource rent tax and tax on capital gains), and the GST and the fringe benefits tax.  The provisions of this Article also apply to taxes imposed by the Australian states and territories.

1.266     In the case of Finland, the relevant taxes include the state income taxes, the corporate income tax, the communal tax, the church tax, the tax withheld at source from interest, and the tax withheld at source from non-residents’ income.

More favourable treatment

1.267     Nothing in this Article prevents either country from treating residents of the other country more favourably than its own residents.

Article 24 — Mutual Agreement Procedure

Consultation on specific cases

1.268     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 this Agreement.  [Article 24, paragraph 2]

1.269     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 23 ( Non-Discrimination ) of this Agreement, the person must present a case to the competent authority of the country of which the person is a national.

1.270     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 this Agreement.  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 24, paragraph 1]

1.271     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 this Agreement.  [Article 24, paragraph 2]

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

Implementation of a solution

1.273     The solution reached by mutual agreement between the competent authorities of the relevant countries shall be implemented notwithstanding any time limits in the domestic laws of the tax treaty countries.  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 24, paragraph 2]

Consultation on general problems

1.274     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 this Agreement and to give effect to it.  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.

1.275     The competent authorities may also consult together with a view to eliminating double taxation in cases where this Agreement does not provide a solution.  [Article 24, paragraph 3]

Methods of communication between competent authorities

1.276     The competent authorities are permitted to communicate directly with each other without having to go through diplomatic channels.  This may be done by letter, facsimile transmission, telephone, direct meetings or any other convenient means.  [Article 24, paragraph 4]

General Agreement on Trade in Services (GATS) dispute resolution process

1.277     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 GATS.  [Article 24, paragraph 5]

Background

1.278     Australia and Finland 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.

1.279     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.

1.280     Notwithstanding paragraph 3 of Article XXII ( Consultation ) of the GATS, Australia and Finland have agreed that the consent of both countries is required before a dispute as to whether a measure falls within the scope of this Agreement may be brought before the Council on Trade in Services.  This is seen as the most effective way of dealing with such disputes, and avoids difficult questions as to when a disputed issue falls within the dispute resolution mechanism of this Agreement or of the GATS.

1.281     This provision is based, in all essential respects, on an OECD Model Commentary recommendation, and is common in recent international treaty practice.  [Article 24, paragraph 5]

Article 25 — Exchange of Information

1.282     This Agreement aligns the information exchange provisions to the 2005 OECD standard.  The Article differs from the previous approach in the following ways:

·                 the scope is expanded to a wider range of taxes;

·                 the new provision clarifies that the Commissioner is obliged to obtain information for Finnish tax authorities regardless of whether Australia has a domestic tax interest in the information sought; and

·                 bank secrecy laws do not limit the exchange of information.

Foreseeably relevant information

1.283     Article 25 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 is not restricted by Article 1 ( Persons Covered ) of this Agreement, and may therefore cover persons who are not residents of Australia or Finland.

1.284     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 25, paragraph 1]

1.285     The change in wording from ‘necessary’ used in the corresponding Article in the existing Agreement to a ‘foreseeably relevant’ standard reflects the wording in Article 26 ( Exchange of Information ) of the OECD Model and no difference in effect is intended.

Taxes to which this Article applies

1.286     Under the corresponding Article in the existing Agreement, the information that could be requested and obtained between the two countries was limited to information in relation to taxes to which that Agreement applied (generally income taxes).

1.287     Under this Agreement, the range of taxes for which information may be exchanged has been expanded.  The Australian competent authority can now request and obtain information concerning all federal taxes administered by the Commissioner from the competent authority in Finland.  This means, for example, that information concerning Australian indirect taxes (ie, the GST) may be requested and obtained from Finland.  [Article 25, paragraph 1]

1.288     Similarly, in the case of Finland, the Finnish competent authority can now request and obtain information concerning taxes of every kind and description imposed under Finnish tax laws, from the Australian competent authority to the extent that the requested information relates to taxes administered by the Commissioner.

Use of exchanged information

1.289     The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted consistent with the former Article and 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 25, paragraph 2]

No domestic tax interest required

1.290     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

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

·                 it would be required to carry out administrative procedures incompatible with its own law or the domestic law and administrative practice of either Australia or Finland; or

·                 such information is not obtainable by the competent authority under the domestic law or in the normal course of administration.  For example, where information requested by Finland is not obtainable by the Commissioner, Australia is not obliged to obtain the requested information using other information gathering powers (such as those of a corporate regulator), although information gathered in this way which is already in the possession of the Commissioner may be exchanged.

[Article 25, subparagraphs 3(a) and (b)]

1.292     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 25, subparagraph 3(c)]

Information held by banks, other financial institutions, nominees etc

1.293     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 banks, other financial institutions, nominees etc.  The inclusion of this paragraph should not be interpreted as suggesting the corresponding Article of the existing Agreement did not cover the exchange of such information.  Inclusion of paragraph 5 merely clarifies Australia’s current treaty practice, and reflects recent changes to Article 26 ( Exchange of Information ) of the OECD Model.  [Article 25, paragraph 5]

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

1.294      The terms of this Article will apply from the date of entry into force of this Agreement.  [Article 28, subparagraph 1(c)]

1.295      This Article will also apply to the exchange of information after the date of entry into force where the relevant information existed prior to that date.  This confirms, for instance, that the competent authorities can exchange information regarding transactions that occurred prior to the entry into force of this Agreement and that the terms of the new Article apply to such an information exchange.  [Protocol, item 1, paragraph (b)]

Article 26 — Assistance in the Collection of Taxes

Assistance in the collection of taxes

1.296     Australia and Finland are authorised and required to provide assistance to each other in the collection of revenue claims.  This assistance is not to be restricted by the terms of Article 1 ( Personal Scope ) of this Agreement.  Assistance must therefore be provided as regards a revenue claim owed to either country by any person, whether or not a resident of Australia or Finland.  The form of the assistance is set out in paragraphs 3 and 4 of this Article.  [Article 26, paragraph 1]

1.297     The term revenue claim is defined for the purposes of this Article to mean an amount owed in respect of taxes referred to in Article 2 ( Taxes Covered ) of this Agreement.  A revenue claim may cover any Finnish tax, or any Australian federal tax administered by the Commissioner, but only insofar as the imposition of such taxes is not contrary to this Agreement or any other instrument in force between Australia and Finland.  It also applies to interest, administrative penalties and costs of collection or conservancy related to such amount.  [Article 26, paragraph 2]

1.298     This Article will apply from the date agreed in an Exchange of Notes through the diplomatic channel.  [Article 28, paragraph 1]

Enforceable revenue claims

1.299     Assistance in collection will only be provided by Australia in relation to a revenue claim that is enforceable in Finland.  Similarly, Finland is not required to provide assistance in collection in respect of an Australian revenue claim that is not enforceable in Australia.  A revenue claim will be enforceable where the requesting country has the right, under its domestic law, to collect the revenue claim.  Further, the revenue claim must be owed by a person who, at that time, under the law of that country, has no administrative or judicial rights to prevent its collection.

1.300     The way in which the revenue claim of the requesting country is to be collected by the requested country is stipulated.  Other than in relation to time limits and priority (see paragraphs 1.304 to 1.307), the requested country is required to collect the revenue claim as though it were its own revenue claim.  This obligation applies even if, at that time, the requested country has no need to undertake collection actions related to that taxpayer for its own tax purposes.  [Article 26, paragraph 3]

1.301     Where a request from Finland concerns a tax that does not exist in Australia, Australia will follow the procedure applicable to a claim for a similar Australian tax or any other appropriate procedure if no similar tax exists.

Measures of conservancy

1.302     Australia or Finland may request the other country to take measures of conservancy even where it cannot yet ask for assistance in collection, such as where the revenue claim is not yet enforceable or when the debtor still has the right to prevent its collection.  An example of a conservancy measure is the seizure or the freezing of assets before final judgment to guarantee that the assets will still be available when collection can subsequently take place.

1.303     If requested to do so by Finland, Australia is required to take measures of conservancy in respect of the revenue claim in accordance with the provisions of Australian law as if the revenue claim were an Australian revenue claim.  Although Australia does not have specific conservancy measures, the Commissioner may apply for a Mareva injunction, which would prevent the taxpayer and the taxpayer’s associates from dealing with certain assets.  [Article 26, paragraph 4]

Time limits

1.304     The requested country’s domestic law time limitations beyond which a revenue claim cannot be enforced or collected do not apply to a revenue claim in respect of which the other country has made a request for assistance in collection.  Rather, the time limits of the requesting country apply.  [Article 26, paragraph 5]

1.305     This paragraph follows the OECD provision but has no practical effect in Australia as there is currently no time limit imposed on the collection of a revenue claim.

Priority of claims

1.306     Any rules of Australia and Finland which give priority to tax debts over the claims of other creditors do not apply to a revenue claim of the other country.  This restriction applies regardless of the fact that the requested country must generally treat the claim as its own revenue claim.

1.307     The words ‘by reason of its nature as such’ in paragraph 5 indicate that any time limits and priority rules to which the paragraph applies are only those that are specific to unpaid taxes.  Consequently, paragraph 5 does not prevent the application of general rules concerning time limits or priority which would apply to all debts, such as rules giving priority to a claim by reason of that claim having arisen or having been registered before another one.  [Article 26, paragraph 5]

Restriction on judicial and administrative proceedings

1.308     Any legal or administrative objection concerning the existence, validity or the amount of a revenue claim of the requesting country is to be exclusively dealt with in that country.  For example, no legal or administrative proceedings, such as a request for judicial review, may be initiated in Australia with respect to the existence, validity or amount of a Finnish revenue claim.  [Article 26, paragraph 6]

Change in circumstances

1.309     Where the relevant conditions in paragraph 3 or 4 of this Article are no longer satisfied after a request for assistance has been made, but before the revenue claim has been collected and remitted by the requested country, the competent authority of the requesting country is required to promptly notify the competent authority of the other country of that fact [Article 26, paragraph 7]

1.310     An example of such a situation would be where a request for assistance in collection has been made by Finland, but the revenue claim ceases to be enforceable in Finland prior to its collection by Australia.

1.311     Following such notification, the requested country has the option to ask the requesting country to either suspend or withdraw its request for assistance.  If the request is suspended, the suspension applies until such time as the requesting country informs the other country that the conditions necessary for making a request as regards the revenue claim are again satisfied or that it withdraws its request.  [Article 26, paragraph 7]

Limitations

1.312     The requested country is permitted to refuse the request for assistance in certain circumstances.

1.313     The first limitation on the obligations of the country receiving the request is that it is not required to exceed the bounds of its own domestic laws and administrative practice or those of the other country in fulfilling its obligations under the Article.  [Article 26, subparagraph 8(a)]

1.314     However, this does not prevent Australia from applying administrative measures to collect a Finnish revenue claim, even though invoked solely to provide assistance in the collection of Finnish taxes.

1.315     The second limitation provides that the country is not required to satisfy a request where it would require the carrying out of measures that are contrary to public policy, such as where providing assistance may affect the vital interests of the country itself.  [Article 26, subparagraph 8(b)]

1.316     The third limitation provides that neither country is obliged to satisfy a request for assistance if the other country has not pursued all reasonable measures of collection or conservancy that are available under its own laws or administrative practice.  [Article 26, subparagraph 8(c)]

1.317     Either country may reject a request for assistance on the basis of practical administrative considerations such as when the costs of recovering a revenue claim would exceed the amount of the revenue claim itself.  [Article 26, subparagraph 8(d)]

1.318     The final limitation allows either country to refuse to provide assistance if it considers that the taxes with respect to which assistance is requested are imposed contrary to generally accepted taxation principles.  [Article 26, subparagraph 8(e)]

Article 27 — Members of Diplomatic Missions and Consular Posts

1.319     The purpose of this Article is to ensure that the provisions of this Agreement 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

1.320     This Article provides for the entry into force of this Agreement.  This Agreement will enter into force 30 days after the last date on which diplomatic notes are exchanged notifying that the domestic processes to give this Agreement the force of law in the respective countries has been completed.  In Australia, enactment of the legislation giving the force of law in Australia to this Agreement along with tabling this Agreement in Parliament are prerequisites to the exchange of diplomatic notes.  [Article 28, paragraph 1]

Date of application for Australian taxes

Withholding taxes

1.321     Once it enters into force, this Agreement 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 this Agreement enters into force.  [Article 28, sub-subparagraph 2(a)(i)]

Other Australian taxes

1.322     This Agreement will first apply to other Australian taxes on income, profits or gains of the Australian year of income beginning on or after 1 July in the calendar year next following the date on which this Agreement enters into force.

1.323     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 in the calendar year next following the date on which this Agreement enters into force will be the relevant year of income for the purposes of the application of such Australian tax.  [Article 28, sub-subparagraph 2(a)(ii)]

Date of application in Finland

Withholding taxes

1.324     In Finland, this Agreement will apply to taxes withheld at source on income derived on or after 1 January in the calendar year next following the year in which this Agreement enters into force.  [Article 28, sub-subparagraph 2(b)(i)]

Other Finnish taxes

1.325      This Agreement will first apply to other Finnish taxes on income for taxes chargeable for any tax year beginning on or after 1 January in the calendar year next following the year this Agreement enters into force.  [Article 28, sub-subparagraph 2(b)(ii)]

Exchange of information application date

1.326     Article 25 ( Exchange of Information ) will first apply from the date of entry into force of this Agreement.  It applies to requests for exchange of information in respect of taxes of every kind and description imposed under the federal tax laws administered by the Commissioner, received on or after that date.  [Article 28, subparagraph 1(c)]

1.327      The information to be exchanged may relate to the income tax affairs of a taxpayer that predates the entry into force of this Agreement.  [Protocol, item 1, paragraph (a)]

Assistance in collection of taxes application date

1.328     Article 26 ( Assistance in the Collection of Taxes ) will first have effect from the date agreed in an Exchange of Notes between Australia and Finland.  [Article 28, paragraph 1]

Termination of the existing Agreement

1.329     The existing Agreement shall cease to have effect from the dates on which this Agreement commences to have application for the respective taxes.  The existing Agreement shall be terminated on the last of those dates.  [Article 28, paragraph 2)]

Article 29 — Termination

1.330     This Agreement is to continue in effect indefinitely.  However, either country may give written notice of termination of this Agreement through the diplomatic channel at least six months before the end of any calendar year beginning after the expiration of five years from the date of its entry into force.  [Article 29]

Cessation in Australia

1.331     In the event of either country terminating this Agreement, this Agreement 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 in relation to income, profits or gains in the Australian year of income commencing on or after 1 July in the calendar year next following that in which the notice of termination is given.

[Article 29, paragraph (a)]

Cessation in Finland

1.332     This Agreement would correspondingly cease to be effective in Finland for the purposes of:

·       taxes withheld at source on income derived on or after 1 January in the calendar year next following that in which the notice of termination is given; and

·        other Finnish taxes on income for taxes chargeable for any Finnish tax year commencing on or after 1 January in the calendar year next following that in which the notice of termination is given.

[Article 29, paragraph (b)]

Item 1(a) of the Protocol — this Agreement does not take precedence over domestic provisions designed to prevent the avoidance or evasion of taxes

1.333     Tax treaty provisions generally prevail over inconsistent provisions in the domestic law.  In Australia, this principle is recognised in subsections 4(2) and 4AA(2) of the Agreements Act.  However, subsection 4(2) of the Agreements Act preserves the operation of Part IVA (Schemes to reduce income tax) of the ITAA 1936.

1.334     Paragraph (a) of Item 1 of the Protocol ensures that nothing in this Agreement shall be construed as restricting or limiting in any way the general application of any provisions under Australian or Finnish domestic law that are designed for the purpose of preventing the avoidance or evasion of taxes.  Such provisions would include, in the case of Australia, the provisions noted in paragraph 6 of Article 23 ( Non-Discrimination ).  [Protocol, item 1, paragraph (a)]

 



C hapter 2  

Regulation impact statement

Background

How tax treaties operate

2.1         Tax treaties reduce or eliminate double taxation caused by the exercise of source and residence country taxing rights on cross-border income flows.  They do so by treaty partners agreeing (in certain situations) to limit taxing rights over various types of income.  The respective countries also agree on methods of reducing double taxation where both countries exercise their right to tax.

2.2         In addition, tax treaties provide an agreed basis for determining the allocation of profits within a multinational company and whether the profits on related party dealings by members of a multinational group operating in both countries reflect the pricing that would be adopted by independent parties.  Tax treaties are therefore an important tool in dealing with international profit shifting through transfer pricing.

2.3         To prevent fiscal evasion, tax treaties include provision for exchange of information held by the respective revenue authorities.  Treaties may also provide for cross-border collection of tax debts, and may preclude certain types of tax discrimination.  Taxpayers can also avail themselves of the mutual agreement procedures provided for in treaties which allow the two revenue authorities to consult with a view to developing a common interpretation and to resolving differences arising out of application of the treaty.

2.4         Australia seeks an appropriate balance between source and residence country taxing rights.  Generally the allocation of taxing rights under Australian tax treaties is similar to international practice as set out in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital (OECD Model) (Australia being a member of the OECD and involved in the development of that Model).  There are, however, a few instances where Australian practice favours source country taxing rights rather than the residence approach of the OECD Model.

The Finnish tax treaty

2.5         The existing Australia-Finland tax treaty was signed on 12 September 1984 and has been in effect in Australia since the income year commencing 1 July 1987 in respect of income taxes and 1 January 1987 in respect of withholding taxes.  The treaty was amended by a Protocol signed on 5 November 1997 and has had effect in Australia since the income year commencing 1 July 2001 in respect of income taxes and 1 July 2001 in respect of withholding taxes.

2.6         With the entry into force of the Protocol to the United States of America (US) tax treaty on 12 May 2003, Australia was obliged, under the existing Finnish treaty to provide most favoured nation (MFN) treatment in respect of the rates of tax applicable to interest and royalties [1] .  With the subsequent entry into force of the revised United Kingdom of Great Britain and Northern Ireland (UK) tax treaty on 17 December 2003, Australia was also obliged under the existing Finnish treaty to provide MFN treatment in respect of a Non-Discrimination Article, to protect taxpayers from tax discrimination in Australia and Finland.

2.7         While the triggering of the most favoured nation clauses imposes certain obligations on Australia, it also presents an opportunity to update certain aspects of the current treaty including clarifying Australia’s rights to apply capital gains tax (CGT).

Australia’s investment and trade relationship with the Republic of Finland [2]

2.8         In 2005-06, Finland was ranked Australia’s 29th largest market for merchandise products.

2.9         Bilateral trade in 2005-06 totalled A$1.64 billion, with the balance of trade in Australia’s favour.

2.10       Australia’s exports to Finland have steadily increased over the past five years and in 2005-06 totalled A$828 million.  Key exports include nickel ores (A$409.6 million), metallic salts (A$104.4 million), coal (A$61 million), and alcoholic beverages, mainly wine (A$12 million).  The proportion of nickel ore in Australia’s exports to Finland reflects Finnish mining company Outokumpu Oy’s presence in Australia.  The company exports nickel ore and concentrates to smelters in Finland.  Finnish students are also increasingly looking to study in Australia.

2.11       Finland’s exports to Australia in 2005-06 totalled A$818 million.  The main imports by Australia are paper and paperboard (A$220 million), civil engineering equipment (A$116 million), telecommunications equipment (A$59.1 million), and mechanical handling equipment (A$40.9 million).

Investment

2.12       In 2005, Finnish investment in Australia totalled A$370 million and Australian investment in Finland totalled A$629 million.

2.13       Around 50 Finnish companies have representation in Australia, with 30 having subsidiaries (of which 22 are in manufacturing).  The Commonwealth Scientific Industrial Research Organisation (CSIRO) and the Technical Research Centre of Finland have cooperated closely on more than a dozen projects in recent years, including on commercial applications for an environmental-friendly process to bleach eucalypt pulp.  The CSIRO and the Geological Survey of Finland have also collaborated on mapping possible mineral deposits in Finland.

Specification of policy objectives

2.14       The objective of this measure is to:

·       meet Australia’s MFN obligations;

·       promote closer economic cooperation between Australia and Finland by reducing barriers to trade and investment between the two countries; and

·       upgrade the framework through which the tax administrations of Australia and Finland can prevent international fiscal evasion.

Identification of implementation option(s)

2.15       The internationally accepted approach to meeting the policy objectives specified above is to:

·       amend the existing treaty to reflect current policies (amending Protocol); or

·       conclude a new bilateral tax treaty.

Option 1:  Limited amending Protocol (most favoured nation obligations) — rely on the existing tax treaty measures

2.16       In general terms, Option 1 relies on the existing tax treaty measures with an amending Protocol covering Australia’s MFN obligations (interest and royalty withholding tax rates and a Non-Discrimination Article).

Option 2:  Conclude a new tax treaty

2.17       Option 2 is to replace the existing treaty with a new bilateral tax treaty that reflects the current policies and practices of both countries.

2.18       A new tax treaty would be largely based on the current OECD Model and the United Nations Model Double Taxation Convention between Developed and Developing Countries , with some mutually agreed variations reflecting the economic, legal and cultural interests of the two countries.

2.19       Both countries have particular policy objectives to achieve in updating the tax treaty and the end result ultimately represents compromises necessary to achieve a mutually acceptable agreement.  The key changes in a new treaty include:

·       a reduction in the maximum royalty withholding tax rates from 10 per cent to 5 per cent;

·       a reduction in interest withholding tax from 10 per cent to zero where interest is paid to a financial institution or body performing governmental functions;

·       a reduction of dividend withholding tax from 15 per cent to zero for intercorporate dividends on non-portfolio holdings of more than 80 per cent, subject to certain conditions and 5 per cent dividend withholding tax for other intercorporate non-portfolio holdings;

·       inclusion of a comprehensive Alienation of Property Article which allocates taxing rights over capital gains;

·       improved integrity measures — in particular, rules to allow for the cross-border collection of tax debts and updated rules for the exchange of information on tax matters; and

·       new rules to prevent tax discrimination against Australian nationals and businesses operating in Finland and vice versa.

Assessment of impacts (costs and benefits) of each option

Difficulties in quantifying the impacts of tax treaties

2.20       Only a partial analysis of costs and benefits can be provided because all the impacts of tax treaties cannot be quantified.  While the direct cost to Australian revenue of withholding tax changes can be quantified relatively easily, other cost impacts such as compliance costs are inherently difficult to quantify.  There are also efficiency and growth gains and losses to Australia that provide estimation problems.  Analysis has been conducted to establish plausible impacts on Australian economic activity and consequent tax revenue flowing from implementation of the tax treaty.  The tax revenue estimates are subject to more uncertainty than the estimates of costs but are best estimates given the technology of estimation, the availability of estimates of behavioural responses, and data.

2.21       Benefits that flow to business are generally equally difficult to quantify.  The evidence from international consideration (eg, the OECD) and from consultation with business strongly indicates, however, that while the quantum of benefits is very difficult to assess, a modern tax treaty provides a clear positive benefit to trade and investment relationships.  Tax treaties provide increased certainty and reduce complexity and compliance costs for business.

Impact group identification

2.22       A revised tax treaty with Finland is likely to have an impact on:

·       Australian residents doing business with Finland, including principally:

-            Australian residents investing directly in Finland (either by way of a subsidiary or a branch);

-            Australians borrowing from Finnish banks;

-            Australian residents using technology and know-how supplied by Finnish residents;

-            Australian residents supplying consultancy services to Finland; and

-            Australian residents exporting to Finland;

·       Australian employees working in Finland;

·       Australian residents receiving pensions from Finland;

·       the Australian Government; and

·       the Australian Taxation Office (ATO).

Assessment of benefits

2.23       Both options would address long term business concerns about the lack of competitiveness of Australia’s tax treaty network with business particularly seeking reductions in withholding tax rates.  However, only Option 2 would reduce dividend withholding tax rates.

2.24       These issues were addressed in the 2003 Convention with the UK and the 2001 Protocol amending the Convention with the US.  Extending similar treatment to Finland aligns treatment, where possible, in Australia’s recent tax treaties, maintains the integrity of Australia’s treaty network and discourages treaty shopping (and the consequent degradation of the tax base of countries where the costs of capital and intellectual property are higher under their treaties as a result of the higher withholding tax rates).  While a reduction in maximum withholding tax rates will involve a cost to revenue, there are expected to be benefits to the revenue and to the wider economy arising out of increased business and investment activity, with the most direct benefits accruing to business.

Economic benefits of Option 1

2.25       The economic benefits of the expected major changes from the existing tax treaty by way of a limited amending protocol are summarised in paragraphs 2.26 to 2.29.

Interest

2.26       A zero Australian interest withholding tax rate on interest derived by Finnish financial institutions will be consistent with the exemption currently provided for interest derived from widely distributed arm’s length debenture issues.  It also recognises that a 10 per cent interest withholding tax rate on gross interest derived by financial institutions may be excessive given their cost of funds.  It should, accordingly, lower the costs of borrowing in those cases where the financial institution can pass the cost represented by the withholding tax on to the Australian borrower.

Royalties

2.27       Australian residents required to meet the cost of Australian royalty withholding tax on royalty payments made to Finnish residents would benefit from a reduced royalty withholding tax rate.  Commercial practice indicates that, as with interest, the cost represented by the royalty withholding tax is commonly passed on to the payer of the royalty.  This means that they may bear the cost of higher rates of withholding tax and place them at a competitive disadvantage in competing with businesses from other countries with lower rates.  The effect of lowering the cost of new technology and intellectual property may encourage the development of Australia’s economy through use of the most up to date technology and processes.  Conversely, it may encourage Finnish residents to use Australian technology and intellectual property.

Non-Discrimination

2.28       Inclusion of a Non-Discrimination Article will insert rules to prevent tax discrimination against Australian nationals and businesses operating in Finland and vice versa.

Compliance and administrative cost reduction benefits

2.29       Tax exemptions in respect of withholding taxes are likely to reduce compliance and administration costs associated with remitting and claiming credits for such tax.

Comparative advantage of Option 1

2.30       Option 1 involves minimal changes to the existing treaty.

Comparative advantages of Option 2

2.31       The advantages of Option 1 are also common to Option 2.  However, under Option 2 Australia would, in addition to addressing the MFN obligations, be able to modernise and update the treaty.

2.32       Australia would also be able to achieve improved integrity measures — in particular, rules to allow for the cross-border collection of tax debts and updated rules for the exchange of information on tax matters.

2.33       This option represents an advance on Option 1 and recognises that the rates of withholding tax negotiated in the US Protocol were agreed as part of an overall package of measures (including CGT coverage).  It would allow Australia to seek a more balanced update of the existing treaty.

2.34       The economic benefits of the expected major changes from the existing tax treaty by way of a new bilateral tax treaty are summarised in paragraphs 2.35 to 2.45.

Renegotiation provides a better outcome for all stakeholders

2.35       While the existing tax treaty has provided a good measure of protection against double taxation and prevention of fiscal evasion since coming into force, it has become outdated (eg, no coverage of CGT) and no longer adequately reflects current tax treaty policies and practices of either Australia or Finland.

2.36       A new tax treaty would provide benefits to Australian business and to the Australian revenue by ensuring certainty of legislative outcomes based on the treaty.  It would be another step forward in providing Australian business with an internationally competitive tax treaty network and business tax system.

2.37       A renegotiated treaty will provide a better outcome for all stakeholders.  Given the long-term nature of such arrangements, a revised tax treaty is expected to promote greater certainty than the existing tax treaty.  It would also be consistent with the Government’s decision in response to the Review of International Taxation Arrangements, to move towards a more residence-based tax treaty policy, and would contribute to the updating of Australia’s ageing treaty network.

Dividends

2.38       An outcome such as that provided to the US and UK (no withholding tax on dividends paid to a company with an 80 per cent or greater voting interest in a listed company in the other jurisdiction; 5 per cent withholding tax where the interest is at least 10 per cent of the voting power and 15 per cent withholding tax in other cases) would remove distortions in the raising of capital that results from the more favourable terms that currently apply bilaterally in the case of the US and the UK.

Alienation of property

2.39       The updating of the Alienation of Property Article to address taxing rights over capital gains would provide certainty to taxpayers and reduce the risk of double taxation.  Australia’s source country taxing rights over capital gains on real property, land-rich companies and assets which form the business property of a permanent establishment in Australia would be retained.  More generally, the changes bring into line Australia’s treaty practice with international practice.  This will encourage investment in Australia and result in generally lower compliance costs.

Other benefits

2.40       Where Australians carry on business activities in Finland, the existing treaty prevents Finland from taxing the business profits of an Australian resident unless that Australian resident carries on business through a permanent establishment in Finland.  A new tax treaty would further refine the concept of when a permanent establishment should be taken to exist and the level of activity that would constitute a permanent establishment.  This principle also applies where a Finnish enterprise carries on business activities in Australia.  Other benefits also include:

·       the clarification of the residency rules;

·       clarifying that treaty relief is not available on certain income, profits or gains that are exempt in a country because the recipient is a temporary resident of that country;

·       clarifying the treatment of income derived through trusts;

·       the inclusion of anti-avoidance rules; and

·       coverage of royalties from radiofrequency spectrum licences.

Revenue benefits

2.41       New treaty arrangements with Finland would represent another step in facilitating a competitive and modern treaty network for Australian companies and would help to maintain Australia’s status as an attractive place for business and investment.  While a reduction in maximum withholding tax rates will involve a small cost to revenue, there are expected to be benefits to the revenue and to the wider economy arising out of increased business and investment activity, with the most direct benefits accruing to business.

2.42       Small revenue benefits should also result from enhanced tax integrity measures over a broader range of taxes.

Compliance and administration cost reduction benefits

2.43       The closer alignment with more recent Australian and international treaty practice would generally be expected to reduce compliance costs.  In particular, interpretative issues relating to the extent Australia can tax capital gains under the existing treaty arrangements has resulted in considerable uncertainty and risks costly legal arguments.

2.44       Administrative costs in explaining the ATO view and responding to legal arguments would also be significantly reduced.  Clarifying other areas of uncertainty, such as tax treaty tests of ‘residency’ and updating the treaty text, should also decrease compliance costs and uncertainty.

Improved international relationships

2.45       New treaty arrangements with Finland will also assist the bilateral relationship by updating an important treaty in the existing network of commercial treaties between the two countries.  It would also promote greater cooperation between taxation authorities to prevent fiscal evasion and tax avoidance.  Updating the tax treaty to take account of changes to the OECD Model would also help to maintain Australia’s status as an active OECD member, which in turn would maintain Australia’s position in the international tax community.

Assessment of costs — types of costs

Revenue costs

2.46       Treasury has estimated the impact of the first round effects on forward estimates as negligible.  The two options do not present material differences in estimated direct cost to revenue as the only identifiable costs to revenue are associated with the reductions in dividend, interest and royalty withholding tax rates.

Administration costs

2.47       The administrative impacts on the ATO from the changes made by any new treaty arrangements are considered to be minimal.  Some formal interpretive advice may be required, for example, private binding rulings, concerning the application of the treaty.  Staff from the ATO, clients and tax professionals will need to be made aware of the entry into force and changes from the previous treaty.  Therefore a number of ATO information products will need to be updated.

2.48       The cost of negotiation and enactment of new tax treaty arrangements with Finland is minimal and have mostly been borne by Treasury and the ATO.  There will also be an unquantified but small cost in terms of parliamentary time and drafting resources in enacting the proposed new tax treaty arrangements.

2.49       There are also ‘maintenance’ costs to the ATO associated with tax treaties in terms of dealing with enquiries, rulings and other interpretative decisions and mutual agreement procedures (including advance pricing arrangements).  These costs also apply to the existing arrangements.  By bringing the Finnish treaty into basic conformity with modern treaty practice these costs would be reduced.  However, as treaties are deals struck between the two countries that reflect specific features of the bilateral relationship, some level of differential treatment or wording between treaties, which may require interpretation or explanation by the ATO, is inevitable.

Other costs

2.50       Government policy flexibility in relation to taxation of Finnish residents would be further constrained by changes to treaty obligations, for example, with respect to taxation of capital gains.  However, as the more significant changes accord with the Government’s tax treaty policy, the cost of such constraints is outweighed by the benefits.  Ultimately, the tax treaty could be terminated if it became out of step with Government policy.  Such termination is very rare in international tax treaty practice, however, and could be expected to be resisted by the business community and others who benefit from the treaty.

2.51       The impact of new tax treaty arrangements on tax policy flexibility is generally quite minimal as tax treaties are based on broad and generally accepted taxation principles.

Assessment of costs — costs associated with Option 1

2.52       Option 1 primarily represents a continuation of the current treaty position subject to adjustment to withholding tax rates.  Accordingly, administration and compliance costs that apply to the existing tax treaty would not change materially.

Assessment of costs — costs associated with Option 2

Taxpayer costs

2.53       No material additional costs to taxpayers have been identified as likely to arise from the renegotiation of the Finnish treaty.

Administration costs

2.54       The requirement on the ATO to exchange information on a broader range of taxes and to provide assistance in the collection of tax debts are also considered to be of minimal impact.  In most cases the ATO will already have the required information in its possession, and safeguards in the treaty which limit the obligations to provide collection assistance will limit the related administrative costs.

Consultation

2.55       The Board of Taxation consulted widely during the Review of International Taxation Arrangements on the direction of Australia’s tax treaty policy.  The Board’s recommendations supported a move towards a more residence-based treaty policy in substitution for treaty policies (reflected in most of Australia’s treaties, including the existing Finland treaty) based on the source taxation of income.

2.56       The then Minister for Revenue and Assistant Treasurer’s Press Release No. C101 of 6 November 2003 announced proposed tax treaty negotiations, and invited submissions from stakeholders and the wider community in relation to issues that might be raised during negotiations with MFN countries such as Finland.  Prior to this announcement, Treasury had already sought comments from the business community through the Tax Treaties Advisory Panel.

2.57       In general, business and industry groups support outcomes which are consistent to those in the 2003 Australia-UK Convention and the updated Australia-US tax treaty.

2.58       The state and territory governments have been consulted through the Commonwealth/State Standing Committee on Treaties.  Information on the negotiation of this treaty was included in the Schedules of treaties to state and territory representatives from October 2003.

2.59       The proposed treaty arrangements have also been considered by the Commonwealth Joint Standing Committee on Treaties, which provides for public consultation in its hearings.

Conclusion and recommended option

2.60       While the existing tax treaty has provided a good measure of protection against double taxation and prevention of fiscal evasion since coming into force, it has become outdated and no longer adequately reflects current tax treaty policies and practices of either Australia or Finland, nor modern international norms.

2.61       Both options would address long term business concerns about the lack of competitiveness of withholding tax rate limits in Australia’s tax treaty network, although only Option 2 ensures that all of the withholding tax rate limits, including dividends, are adjusted.  They also address Australia’s MFN obligations in the existing treaty.

2.62       However, developments in both countries’ domestic law, commercial practices, and treaty policies and practices support a full revision of the treaty (Option 2).  This option also provides an opportunity to update the text in accordance with modern OECD practice.

2.63       The proposed new treaty arrangements with Finland are consistent with the Government’s response to the Review of International Taxation Arrangements, moving towards a more residence-based tax treaty policy and contributing to the updating of Australia’s ageing treaty network.  It would bring Australia’s arrangements with Finland more into line with international norms, as set out in the OECD Model and would provide outcomes similar to Australia’s treaties with the US and the UK.

2.64       There is a direct cost to revenue common to both options, largely sourced in reduced withholding tax collections.  The additional costs associated with Option 2 are considered to be minimal.  On balance, the benefits of concluding a new treaty outweigh the cost to revenue.

2.65       Option 2 is therefore recommended as the preferred option.

2.66       Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis



 




[1]              Most favoured nation clauses require a country to enter into negotiations with a view to providing similar treatment to its treaty partner if it subsequently agrees with a third country to a certain specified tax treatment.

[2]               Source:  Department of Foreign Affairs and Trade.