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International Tax Agreements Amendment Bill (No. 1) 2011

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2010-2011

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

International Tax AgreemEnts Amendment (n o . 1) bILL 2011

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

 



T able of contents

Glossary.............................................................................................................. 1

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

Chapter 1               Existing agreements............................................................ 9

Chapter 2               Australia-Aruba agreement.............................................. 15

Chapter 3               The Australia-Chile Convention...................................... 37

Chapter 4               Australia-the Cook Islands agreement......................... 143

Chapter 5               Australia-Guernsey agreement..................................... 163

Chapter 6               Malaysian protocol (No. 3).............................................. 181

Chapter 7               Australia-Samoa agreement.......................................... 189

Chapter 8               The Australia-Turkey convention.................................. 209

 



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

Abbreviation

Definition

Agreements Act 1953

International Tax Agreements Act 1953

Aruba agreement

Agreement between the Government of Australia and the Kingdom of the Netherlands, in respect of Aruba for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments

ATO

Australian Taxation Office

Chilean convention

Convention between Australia and the Republic of Chile for the Avoidance of Double Taxation with respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion and its Protocol

Commissioner

Commissioner of Taxation

Cook Islands agreement

Agreement between the Government of Australia and the Government of the Cook Islands on the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments

EOI Article

Exchange of Information Article

existing Malaysian agreement

Third Protocol amending the Agreement between the Government of Australia and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income as amended by the First Protocol of 2 August 1999 and the Second Protocol of 28 July 2002

GATS

General Agreement on Tariff and Trade in Services

GST

goods and services tax

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

OECD

Organisation for Economic Co-operation and Development

OECD Model

OECD Model Tax Convention on Income and on Capital

Samoa agreement

Agreement between the Government of Australia and the Government of Samoa for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments

Samoa

the Government of Samoa

Third Protocol

Agreement between the Government of Australia and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income which was signed on 20 August 1980

Turkish convention

Convention between the Government of Australia and the Government of the Republic of Turkey for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion and its Protocol



Existing agreements

Schedule 1 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to modify and streamline its structure, and remove the majority of the existing Schedules to that Act.  Schedule 1 is not intended to alter the entry into force or application of Australia’s tax treaties.

New agreements

Schedule 2 to this Bill amends the Agreements Act 1953 to give the force of law in Australia to new taxation agreements with Aruba, Chile, the Cook Islands, Guernsey, Malaysia, Samoa and Turkey.

Aruban agreement

This Bill amends the Agreements Act 1953 to give the force of law in Australia to the Agreement between the Government of Australia and the Kingdom of the Netherlands, in respect of Aruba for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Aruban agreement), which was signed in Canberra on 16 December 2009.

Date of effect The Aruban agreement must first enter into force.  For entry into force, Australia and Aruba are required to provide notification on the completion of the necessary domestic procedures.  Once the Aruban agreement enters into force it will apply in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force. 

Proposal announced This measure was announced in the then Assistant Treasurer’s Media Release No. 110 of 16 December 2009.

Financial impact :  M inimal.

Compliance cost impact No significant compliance costs are expected to result from the entry into force of the Aruban agreement.

Chilean convention

This Bill amends the Agreements Act 1953 to give the force of law in Australia to the Convention between Australia and the Republic of Chile for the Avoidance of Double Taxation with respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion and its Protocol(Chilean convention), which was signed in Santiago on 10 March 2010.

Date of effect :  T he Chilean convention must first enter into force.  For entry into force, Australia and Chile are required to provide notification on the completion of the necessary domestic procedures.  Once the Chilean convention enters into force it will take effect in Australia in four stages, namely:

•        in respect of withholding tax, on income derived on or after the first day of the second month following entry into force;

•        in respect of fringe benefits tax, on fringe benefits derived on or after 1 April in the year following entry into force;

•        in respect of other tax, on income derived in the income year beginning 1 July following entry into force; and

•        in respect of administrative provisions, upon entry into force.

Proposal announced This measure was announced in the then Assistant Treasurer’s Media Release No. 038 of 10 March 2010.

Financial impact Minimal.

Compliance cost impact The establishment of a tax treaty between Australia and Chile which is broadly consistent with international norms would generally be expected to reduce compliance costs.

Summary of the regulation impact statement

A copy of the regulation impact statement to the Chilean convention is available on the Joint Standing Committee on Treaties web site at www.aph.gov.au under Joint Committees administered by the House.

Cook Islands agreement

This Bill amends the Agreements Act 1953 to give the force of law in Australia to the Agreement between the Government of Australia and the Government of the Cook Islands on the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Cook Islands agreement), which was signed in Rarotonga, on 27 October 2009.

Date of effect The Cook Islands agreement must first enter into force.  For entry into force, Australia and the Cook Islands are required to provide notification on the completion of the necessary domestic procedures.  Once the Cook Islands agreement enters into force it will apply in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force. 

Proposal announced This proposal was announced in the then Assistant Treasurer’s Media Release No. 082 of 28 October 2009. 

Financial impact :  M inimal.

Compliance cost impact No significant compliance costs are expected to result from the entry into force of the Cook Islands agreement. 

Guernsey agreement

This Bill amends the Agreements Act 1953 to give the force of law in Australia to the Agreement between the Government of Australia and the States of Guernsey for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Guernsey agreement), which was signed in London on 7 October 2009.

Date of effect The Guernsey agreement must first enter into force.  For entry into force, Australia and Guernsey are required to provide notification on the completion of the necessary domestic procedures.  Once the Guernsey agreement enters into force it will apply in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force. 

Proposal announced This proposal was announced in the then Assistant Treasurer’s Media Release No. 069 of 8 October 2009.

Financial impact Minimal.

Compliance cost impact No significant compliance costs are expected to result from the entry into force of the Guernsey agreement.

Malaysian protocol (No. 3)

This Bill amends the Agreements Act 1953 to give the force of law in Australia to the Third Protocol amending the Agreement between the Government of Australia and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income as amended by the First Protocol of 2 August 1999 and the Second Protocol of 28 July 2002 (Malaysian protocol No. 3) , which was signed on 24 February 2010.

Date of effect :  On the date of entry into force of the Malaysian protocol (No. 3).  For entry into force, Australia and Malaysia are required to provide notification on the completion of the necessary domestic procedures.

Proposal announced This measure was announced in the then Assistant Treasurer’s Media Release No. 027 of 24 February 2010.

Financial impact :  Unquantifiable, but most likely positive.

The updated exchange of information provisions in the Malaysian protocol (No. 3) are expected to increase the Commissioner of Taxation’s access to taxpayer information, but they do not alter Australia’s taxing rights.  Consequently the protocol is expected to result in enhanced taxpayer compliance and additional tax revenue.

Compliance cost impact In terms of the compliance costs, this protocol is expected to result in a low overall compliance cost impact, comprised of a low implementation impact and no change in ongoing compliance costs relative to the affected group.

Samoan agreement

This Bill amends the Agreements Act 1953 to give the force of law in Australia to the Agreement between the Government of Australia and the Government of Samoa for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Samoan agreement), which was signed in Canberra on 16 December 2009.

Date of effect The Samoan agreement must first enter into force.  For entry into force, Australia and Samoa are required to provide notification on the completion of the necessary domestic procedures.  Once the Samoan agreement enters into force it will apply in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force. 

Proposal announced This measure was announced in the then Assistant Treasurer’s Media Release No. 111 of 16 December 2009.

Financial impact Minimal.

Compliance cost impact No significant compliance costs are expected to result from the entry into force of the agreement.

Turkish convention

This Bill amends the Agreements Act 1953 to give the force of law in Australia to the Convention between the Government of Australia and the Government of the Republic of Turkey for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion and its Protocol (Turkish convention), which was signed in Ankara on 28 April 2010.

Date of effect :  T he Turkish convention must first enter into force.  For entry into force, Australia and Turkey are required to provide notification on the completion of the necessary domestic procedures.  Once the Turkish convention enters into force it will take effect in Australia in three stages, namely:

•        in respect of withholding tax, on income derived on or after 1 January in the calendar year next following entry into force;

•        in respect of other tax, on income derived in the income year beginning 1 July following entry into force; and

•        in respect of administrative provisions, upon entry into force.

Proposal announced This measure was announced in the then Assistant Treasurer’s Media Release No. 079 of 29 April 2010.

Financial impact The estimated impact of the Turkish convention on the forward estimates is small.

Compliance cost impact The establishment of a tax treaty between Australia and Turkey, which is broadly consistent with international norms, would generally be expected to reduce compliance costs.

Summary of the regulation impact statement

A copy of the regulation impact statement to the Turkish convention is available on the Joint Standing Committee on Treaties web site at www.aph.gov.au under Joint Committees administered by the House.



Chapter 1          

Existing agreements

Outline of chapter

1.1                   Schedule 1 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to modify and streamline its structure and remove the majority of the existing Schedules to the Act, which contain the texts of Australia’s bilateral tax treaties.  This Bill is not intended to alter the entry into force or application of Australia’s tax treaties.  

Context of amendments

1.2                   The Vienna Convention on the Law of Treaties defines a treaty as ‘... an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation.’  The word ‘treaty’ is, however, a generic term covering all instruments governed by international law and giving rise to international rights and obligations.  Treaties may also be called agreements, conventions, exchanges of notes and letters constituting agreements, and protocols.

1.3                   Much of the Agreements Act 1953 consists of Schedules to the Act that are copies of various tax treaties and similar agreements concluded by Australia.  To a large extent these Schedules reflect treaties based on international standards, for example the Organisation for Economic Co-operation and Development’s (OECD) Model Tax Convention on Income and on Capital .  As a consequence of the expansion of Australia’s tax treaty network, the Agreements Act 1953 has grown to be one of the largest Acts on the Commonwealth’s statute books.

Summary of new law

1.4                   The Agreements Act 1953 will be shortened by omitting almost all of the Schedules to the Act and instead incorporating treaties by reference to other accessible resources, principally the Australian Treaty Series online database of treaties.  This will substantially reduce the size of the Agreements Act 1953.

Comparison of key features of new law and current law

New law

Current law

The majority of the existing Schedules to the Agreements Act 1953, which contain the texts of Australia’s tax treaties, have been removed.

The texts of Australia’s tax treaties are reproduced in full and included as Schedules to the Agreements Act 1953. 

Treaties are defined in alphabetical order, by jurisdiction.

Treaties are defined in a combination of numeric and alphabetical order.

A number of treaties are given the force of law on a consolidated basis.    

Each treaty is given the force of law by a separate provision.

Detailed explanation of new law

What does the Agreements Act 1953 do?

1.5                   The general proposition under Australian law is that treaties which Australia has joined, apart from those terminating a state of war, are not directly and automatically incorporated into Australian law.  Signature and ratification do not, of themselves, make treaties operate domestically.  In the absence of legislation, tax treaties cannot impose obligations on individuals or create rights in domestic law.  To be given effect, tax treaties must be given the force of law by the Federal Parliament. 

1.6                   The Agreements Act 1953 gives the force of law in Australia to Australia’s tax treaties, which currently appear as Schedules to that Act. 

1.7                   The Income Tax Assessment Act 1936 , the Income Tax Assessment Act 1997 and the Fringe Benefits Tax Assessment Act 1986 are incorporated into and read as one with the Agreements Act 1953.  By subsection 4(2) of the Agreements Act 1953, the provisions of the Agreements Act 1953 (including the terms of tax treaties) take precedence over inconsistent provisions of the:

•        Income Tax Assessment Act 1936 (other than the general anti-avoidance rules under Part IVA);

•        Income Tax Assessment Act 1997 ; and

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

1.8                   Historically, the texts of Australia’s tax treaties have been included as Schedules to the Agreements Act 1953 (currently there are 50 such Schedules).  This practice, however, is not strictly necessary to give those treaties the force of law in Australia.  The effect of including the treaty texts as Schedules to the Agreements Act 1953 is essentially only presentational.  By way of comparison, the texts of Australia’s tax information exchange agreements are not included as Schedules to the Agreements Act 1953 but are given effect by section 23 of the Agreements Act 1953.  Likewise, the texts of treaties in respect of earlier periods are not included as separate Schedules but continue to have the force of law for relevant income.

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

1.9                   This Bill will modify and streamline the structure of the Agreements Act 1953 and remove the majority of the existing Schedules to the Act which contain the texts of Australia’s tax treaties. 

Title

1.10               The title of the Agreements Act 1953 will be amended to replace the phrase ‘Conventions and Agreements’ with the phrase ‘Treaties and other Agreements’.  This more closely reflects the common usage of the term ‘treaty’ to describe the agreements covered by the Agreements Act 1953.  [Schedule 1, item 1, title]

What is an agreement?

1.11               An ‘agreement’ is a current tax treaty or other agreement, or an agreement for an earlier period, covering Australia and another jurisdiction.  [Schedule 1, item 2 subsection 3(1)]

1.12               For greater ease of reference, these agreements, which include protocols and notes, will be categorised as ‘current agreements’ and ‘agreements for earlier periods’ and presented in the new law in alphabetical order, by country name.  By comparison, the current law lists the agreements in a less convenient combination of numeric and alphabetical order.  [Schedule 1, item 5, sections 3AAA and 3AAB]

1.13               An agreement includes a treaty, agreement, convention, protocol or exchange of notes dealing with the allocation of taxing rights.  The words ‘agreement’ and ‘convention’ are considered to be synonymous in the context of this Bill.  Typically an agreement would include:

•        a comprehensive tax treaty for the elimination of double taxation and/or the prevention of fiscal evasion; for example, the Mexican agreement (signed on 9 September 2002);

•        a protocol signed in conjunction with a comprehensive tax treaty, for example, the Protocol to the Japanese convention (signed on 31 January 2008);

•        a protocol that subsequently amends a comprehensive tax treaty, for example, the United States protocol (No. 1) (signed on 27 September 2001);

•        an agreement for the allocation of taxing rights over certain income of individuals and to establish a mutual agreement procedure in respect of transfer pricing adjustments, for example, the Isle of Man agreement (signed on 29 January 2009); and

•        an exchange of notes conducted in conjunction with a comprehensive tax treaty, for example, the 2003 Notes exchanged in conjunction with the signature of the United Kingdom convention (signed on 21 August 2003). 

Current practice

1.14               Under current practice, each treaty is defined in section 3 of the Agreements Act 1953 by the title of the treaty and a reference to the particular Schedule where the text of the treaty is reproduced, for example:

•        the Austrian agreement means the Agreement between Australia and the Republic of Austria for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, being the agreement a copy of which in the English language is set out in Schedule 27.

1.15               A new section is included in the Agreements Act 1953 (section 11R in the case of the Austrian agreement) which sets out when and to what extent the treaty is given the force of law.

1.16               Where a treaty is superseded by a new treaty, the previous treaty continues to be defined in section 3, and a provision is included which gives it the force of law only in respect of income to which it remains effective.  As mentioned, the superseded treaty is not reproduced in a Schedule to the Agreements Act 1953.

New approach

1.17               Amendments contained in this Bill will give Australia’s tax treaties the force of law through streamlined arrangements.  This Bill is not intended to change the effect of the Agreements Act 1953 or the extent to which Australia’s tax treaties are given the force of law in Australia.

•        An ‘agreement’ is a current tax treaty or other agreement, or an agreement for an earlier period, covering Australia and another jurisdiction.  Current agreements and earlier agreements are specifically listed in new sections 5 and 5A respectively [Schedule 1, item 2, subsection 3(1)] .

•        All treaties are defined — in alphabetical order by country name — by reference to their full title and the place and date of signature.  There are separate provisions defining current agreements and agreements for earlier periods.  By comparison, the current law lists the agreements in a less convenient combination of numeric and alphabetical order [Schedule 1, item 5, sections 3AAA and 3AAB] .

•        There is no reference to a schedule in each definition and all Schedules containing a treaty text have been repealed, with the exception of the Taipei agreement, which has been retained as Schedule 1 due to the specific nature of that agreement.  The parties to the Taipei agreement are the Australian Commerce and Industry Office and the Taipei Economic and Cultural Office [Schedule 1, item 5, section 3AAA under the ‘Taipei agreement’ and Schedule 1, item 68] .

•        Each definition contains a note directing the reader to the treaty text by reference to the relevant Australian Treaty Series number.  Any treaty entering into force for Australia is printed in the Australian Treaty Series.  The series is held in major public and university libraries and is also published on the Internet, for example, the Australasian Legal Information Institute (AustLII).  Copies of Australian treaties are also available online via the Department of Foreign Affairs and Trade’s Australian Treaties Database.  Copies of Australia’s tax treaties are also available via the Treasury’s public website.

•        A new provision will give the force of law to most current tax treaties, which are listed in a table.  It is expected that most new treaties will be incorporated into this table and their provisions given the force of law ‘according to their tenor’ [Schedule 1, item 8, subsection 5(1)] .

•        ‘Force of law’ rules for earlier treaties are consolidated in a separate table [Schedule 1, item 8, section 5A] .

•        Not all of Australia’s existing tax treaties are included in the tables contained in new sections 5 and 5A.  Arguably, some of the existing ‘force of law’ provisions contained in the Agreements Act 1953 qualify, to some extent, the force of law given to a treaty.  To remove any potential doubt in such cases, those existing force of law provisions have been retained.  This applies to certain treaties concluded with the following countries:

Austria (section 11R)

Korea (Republic of) (section 11L)

Canada (section 6A)

Malaysia (section 11F)

China (section 11Q)

Malta (section 11N)

Denmark (section 11H)

the Philippines (section 11D)

Germany (section 11)

Singapore (section 7)

Ireland (section 11K)

Sweden (section 11G)

Italy (section 10A)

Switzerland (section 11E)

Application and transitional provisions

1.18               Transitional rules will apply to ensure the prospective application of the amendments contained in this Bill.  That is, notwithstanding the operation of new section 5 to give the provisions of a treaty the force of law, those provisions will continue to have effect for the purposes of the Agreements Act 1953 as it was prior to these amendments.  [Schedule 1, item 71, subsections (1) and (2)]

1.19               In addition, transitional rules will ensure that the legal operation of a treaty provision that was in force prior to the application of these amendments, and which is not covered by new section 5 or 5A, will continue to have the force of law following these amendments.  This will apply regardless of any change in the description of an agreement resulting from these amendments.  [Schedule 1, item 72, subsections (1) and (2)]



Chapter 2          

Australia-Aruba agreement

Outline of chapter

2.1                   Schedule 2 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the 2009 Agreement between the Government of Australia and the Kingdom of the Netherlands, in respect of Aruba for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Aruba agreement).  Subsection 3AAA(1) of the Agreements Act 1953 will define the Aruba agreement and subsection 5(1) will give it the force of law in Australia.  This chapter explains the rules that apply in the Aruba agreement.

Context of amendments

2.2                   The Aruba agreement was signed in Canberra on 16 December 2009.  There is no pre-existing agreement of this type between Australia and the Kingdom of the Netherlands, in respect of Aruba (Aruba).

Summary of new law

Main features of the Aruba agreement

2.3                   The main features of the Aruba agreement are as follows:

•        Income from pensions and retirement annuities will generally be taxed only in the country of residence of the recipient, provided the income is subject to tax in that country [Article 5] .

•        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 6] .

•        Payments made from abroad to visiting students and business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited [Article 7] .

•        A non-binding administrative mechanism will be established to assist taxpayers to seek resolution of transfer pricing disputes [Article 8] .

Comparison of key features of new law and current law

New law

Current law

Australian source pensions and retirement annuities derived by residents of Aruba will be exempt from Australian tax, provided they are taxed in Aruba.

Australian source income of foreign residents is generally subject to Australian tax.

Certain income derived by residents of Aruba from government service in Australia will be exempt from Australian tax.  

Australian source income of foreign residents is generally subject to Australian tax.

Certain payments received by visiting students and business apprentices from Aruba will be exempt from Australian tax.

Some payments received by foreign students and business apprentices may be taxable in Australia, depending on the circumstances.

The competent authorities of Australia and Aruba will endeavour to resolve taxpayers’ transfer pricing disputes arising from transfer pricing adjustments that contravene the arm’s length principle through mutual agreement.

No equivalent.

The Aruban agreement

2.4                   A full transcript of the Aruban agreement and detailed explanation follows:

‘AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE KINGDOM OF THE NETHERLANDS, IN RESPECT OF ARUBA, FOR THE ALLOCATION OF TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF INDIVIDUALS AND to establish a MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

(Canberra, 16 December 2009)

 

Agreement between the Government of Australia and the Kingdom of the Netherlands, in respect of Aruba, for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments

The Government of Australia and the Kingdom of the Netherlands, in respect of Aruba ( " the Parties " ),

Recognising that the Parties have concluded an Agreement on the Exchange of Information with Respect to Taxes, and

Desiring to conclude an Agreement for the allocation of taxing rights with respect to certain income of individuals and to establish a mutual agreement procedure in respect of transfer pricing adjustments,

Have agreed as follows:

ARTICLE 1

persons covered

            This Agreement shall apply to persons who are residents of one or both of the Parties.

ARTICLE 2

Taxes covered

1.         The existing taxes to which this Agreement shall apply are:

(a)          in Australia, the income tax imposed under the federal law of Australia;

   (hereinafter referred to as "Australian tax").

(b)          in Aruba, the following taxes:

(i)              the income tax (inkomstenbelasting);

(ii)             the wages tax (loonbelasting); and

(iii)            the profit tax (winstbelasting);

( hereinafter referred to as "Aruban tax ").

2.         This Agreement shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes .   The competent authorities of the Parties shall notify each other within a reasonable period of time of any substantial changes to the taxation laws covered by this Agreement.

3.         This Agreement shall not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions, or possessions of a Party.

ARTICLE 3

Definitions

1.         For the purposes of this Agreement, unless the context otherwise requires:

(a)     the term "Australia", when used in a geographical sense, excludes all external territories other than:

(i)              the Territory of Norfolk Island;

(ii)             the Territory of Christmas Island;

(iii)            the Territory of Cocos (Keeling) Islands;

(iv)            the Territory of Ashmore and Cartier Islands;

(v)             the Territory of Heard Island and McDonald Islands; and

(vi)            the Coral Sea Islands Territory,

and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the exclusive economic zone or the seabed and subsoil of the continental shelf;

(b)     the term " Aruba " means that part of the Kingdom of the Netherlands that is situated in the Caribbean area and consisting of the Island of Aruba;

(c)     the term "competent authority" means in the case of Australia, the Commissioner of Taxation or an authorised representative of the Commissioner and, in the case of Aruba , the Minister of Finance and Economic Affairs or an authorised representative of the Minister ;

(d)     the term " Party" means Australia or the Kingdom of the Netherlands in respect of Aruba, as the context requires;

(e)     the term "national", in relation to a Party, means any individual possessing the nationality or citizenship of that Party;

(f)      the term "person" includes an individual, a company and any other body of persons;

(g)     the term "tax" means Australian tax or Aruban tax as the context requires; and

(h)     the term "transfer pricing adjustment" means an adjustment made by the competent authority of a  Party to the profits of an enterprise as a result of applying the domestic law concerning taxes referred to in Article 2 of that Party regarding transfer pricing.

2.         As regards the application of this Agreement at any time by a Party, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that Party, for the purposes of the taxes to which this Agreement applies, with any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

ARTICLE 4

Resident

1.         For the purposes of this Agreement, the term "resident of a Party" means:

(a)          in the case of Australia, a person who is a resident of Australia for the purposes of Australian tax; and

(b)          in the case of Aruba, a person who is a resident of Aruba for the purposes of Aruban tax.

2.         A person is not a resident of a  Party for the purposes of this Agreement if the person is liable to tax in that Party in respect only of income from sources in that Party.

3.         Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Parties, then the person's status shall be determined as follows:

(a)     the individual shall be deemed to be a resident only of the Party in which a permanent home is available to that individual; if a permanent home is available in both Parties, or in neither of them, that individual shall be deemed to be a resident only of the Party with which the individual's personal and economic relations are closer (centre of vital interests);

(b)     if the Party in which the individual has their centre of vital interests cannot be determined, the individual shall be deemed to be a resident only of the Party of which the individual is a national;

(c)     if the individual is a national of both Parties or of neither of them, the competent authorities of the  Parties shall endeavour to resolve the question by mutual agreement. 

4.         Where, by reason of paragraph 1, a person other than an individual is a resident of both  Parties, then it shall be deemed to be a resident only of the Party in which its place of effective management is situated.

ARTICLE 5

Pensions and rETIREMENT Annuities

1.         Pensions (excluding government pensions) and retirement annuities paid to an individual who is a resident of a Party shall be taxable only in that Party. However, pensions and retirement annuities arising in a Party may be taxed in that Party where such income is not subject to tax in the other Party.

2.         The term "retirement annuity" means:

(a)     in the case of Australia, a superannuation annuity payment within the meaning of the taxation laws of Australia;

(b)     in the case of Aruba, a stated sum payable in consequence of retirement and paid periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth; and

(c)     any other similar periodic payment agreed upon by the competent authorities.

ARTICLE 6

Government Service

1.  (a)     Salaries, wages and other similar remuneration, other than a pension, paid by a  Party or a political subdivision or a local authority thereof to an individual in respect of services rendered to that Party or subdivision or authority shall be taxable only in that Party.

          (b)     However, such salaries, wages and other similar remuneration shall be taxable only in the other Party if the services are rendered in that Party and the individual is a resident of that Party who:

(i)              is a national of that Party; or

(ii)             did not become a resident of that Party solely for the purpose of rendering the services.

2.  (a)     Notwithstanding the provisions of paragraph 1, pensions and other similar remuneration paid by, or out of funds created by, a Party or a political subdivision or a local authority thereof to an individual in respect of services rendered to that Party or subdivision or authority shall be taxable only in that Party.

(b)     However, such pensions and other similar remuneration shall be taxable only in the other Party if such income is subject to tax in that Party and if the individual is a resident of, and a national of, that Party and is also not a national of the first-mentioned Party.

3.         Notwithstanding the provisions of paragraphs 1 and 2, salaries, wages and other similar remuneration in respect of services rendered in connection with any trade or business carried on by a Party or a political subdivision or a local authority thereof may be taxed in accordance with the laws of a Party.  The provisions of Article 5 shall apply to pensions in respect of services rendered in connection with any trade or business carried on by a Party or a political subdivision or a local authority thereof .

ARTICLE 7

Students

            Payments which a student or business apprentice, who is or was immediately before visiting a Party a resident of the other Party and who is temporarily present in the first-mentioned Party solely for the purpose of their education or training, receives for the purpose of their maintenance, education or training shall not be taxed in that Party, provided such payments arise from sources outside that Party.

ARTICLE 8

Mutual agreement procedure IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

1.         Where a resident of a Party considers the actions of the other Party results or will result in a transfer pricing adjustment not in accordance with the arm’s length principle, the resident may, irrespective of the remedies provided by the domestic law of those Parties, present a case to the competent authority of the first-mentioned Party.  The case must be presented within three years of the first notification of the adjustment.

2.         The competent authorities shall endeavour to resolve any difficulties or doubts arising as to the application of the arm’s length principle by a Party regarding transfer pricing adjustments.  They may also communicate with each other directly for the purposes of this Article.

ARTICLE 9

EXCHANGE OF INFORMATION

The competent authorities of the Parties shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement. Information may be exchanged by the competent authorities for the purposes of this Article in accordance with the provisions of the Agreement on the Exchange of Information with Respect to Taxes concluded by the Parties (whether or not this Agreement, in whole or in part, forms part of the domestic law of either Party).

ARTICLE 10

ENTRY INTO FORCE

          The Parties shall notify each other, in writing, through the diplomatic channel of the completion of their constitutional and legal procedures for the entry into force of this Agreement.  This Agreement shall enter into force on the date of the last notification, and shall, provided an Agreement on the Exchange of Information with Respect to Taxes is in force between the Parties, thereupon have effect:

(a)          in respect of Australian tax, for any year of income beginning on or after 1 July in the calendar year next following the year in which this Agreement enters into force; and

(b)          in respect of Aruban tax, for any year of income beginning on or after 1 January in the calendar year next following the year in which this Agreement enters into force.

Article 11

Termination

1.         This Agreement shall continue in effect indefinitely, but either of the Parties may, give to the other Party through the diplomatic channel written notice of termination.

2.         Such termination shall become effective:

(a)          in respect of Australian tax, in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given;

(b)          in respect of Aruban tax, for any year of income beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.

3.         Notwithstanding the provisions of paragraph 1 or 2, this Agreement shall, on receipt through the diplomatic channel of written notice of termination of the Agreement on the Exchange of Information with Respect to Taxes between the Parties, terminate and cease to be effective on the first day of the month following the expiration of a period of 6 months after the date of receipt of such notice.

            IN WITNESS WHEREOF the undersigned, being duly authorised thereto by their respective Governments, have signed this Agreement.

            DONE at Canberra in duplicate, on this sixteenth day of December 2009.

For the Government of

Australia:

 

 

The Hon. Nick Sherry

Assistant Treasurer

 

 

For the Kingdom of the Netherlands,

in respect of Aruba:

 

 

Cornelis Wilhelmus Andreæ

Ambassador

Detailed explanation of new law

Article 1 — Persons Covered

2.5                   This Article establishes the scope of the application of the Aruba agreement by providing for it to apply to persons who are residents of one or both of the countries [Article 1] .   For the purposes of the agreement person includes an individual, company and other body of persons (see paragraph 2.17). 

2.6                   The application of the Aruba agreement to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 (Resident) (see paragraph 2.22).

Article 2 — Taxes Covered

2.7                   This Article specifies the existing taxes of each country to which the Aruba agreement applies.  This is, in the case of Australia, the federal income tax.  [Article 2, subparagraph 1a)]

2.8                   For Aruba, the Aruba agreement applies to taxes on income, wages or profits.  [Article 2, subparagraph 1b)]

2.9                   The application of the Aruba 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 of Australia and Aruba are required to notify each other in the event of a substantial change to the taxation laws covered by the Aruba agreement of the respective countries, within a reasonable period of time after any such changes.  [Article 2, paragraph 2]

2.10               The Aruba agreement does not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions or possessions.  [Article 2, paragraph 3]

Article 3 — Definitions

Definition of Australia

2.11               The definition of ‘Australia’ follows corresponding definitions in Australia’s modern tax treaties.  ‘Australia’ is defined to include certain external territories and areas of the continental shelf.  [Article 3, subparagraph 1a)]

Definition of the Aruba

2.12               Aruba is defined to mean that part of the Kingdom of the Netherlands that is situated in the Caribbean area and consisting of the Island of Aruba.  [Article 3, subparagraph 1b)]

Definition of competent authority

2.13               The ‘competent authority’ is the person or institution specifically authorised to perform certain actions under the Aruba agreement.  For example, to notify each other of any significant changes to the tax law of their respective countries, Article 2 ( Taxes Covered ), to communicate for the purposes of Article 8 (Mutual Agreement Procedure) and to exchange information in accordance with Article 9 (Exchange of Information) .

2.14               In the case of Australia, the competent authority is the Commissioner of Taxation (Commissioner) or an authorised representative of the Commissioner.  In the case of Aruba, the competent authority is the Minister of Finance and Economic Affairs or an authorised representative of the Minister .  [Article 3, subparagraph 1c)]

Definition of contracting party

2.15               ‘Party’ means Australia or Aruba, as the context requires.  [Article 3, subparagraph 1d)]

Definition of national

2.16               ‘National’ means any individual possessing the nationality or citizenship of Australia or Aruba, as the context requires.  [Article 3, subparagraph 1e)]

Definition of person

2.17               ‘Person’ includes an individual, a company and any other body of persons [Article 3, subparagraph 1f)] .  However, Article 8 (Mutual Agreement Procedure) is the only substantive article of the Aruba agreement that will affect persons that are non-individuals. 

Definition of transfer pricing adjustment

2.18               A transfer pricing adjustment is an adjustment made by the tax authorities of Australia or Aruba to the profits of an enterprise, based on the application of domestic transfer pricing laws [Article 3, subparagraph 1h)] .  For Australia, such laws are contained in Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). 

Terms not specifically defined

2.19               A term that is not specifically defined in the Aruba agreement shall have (unless the context requires otherwise) the meaning that it has under the domestic law of the country applying the Aruba agreement at the time of its application.  In that case, the term’s domestic taxation law meaning will have precedence over any meaning it may have under that country’s other domestic laws.  [Article 3, paragraph 2]

Article 4 — Resident

2.20               This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of the Aruba agreement.  Residential status is a criterion for determining each country’s taxing rights and is a necessary condition for the provision of relief under the Aruba agreement.  In the case of Australia, a person’s residence is determined according to Australia’s taxation law [Article 4, subparagraph 1a)] .  In the case of Aruba, residence is determined according to Aruba’s taxation law [Article 4, subparagraph 1b)]

Special residency rules

2.21               A person is not a resident of a country, for the purposes of the Aruba agreement, if that person is liable to tax in that country in respect only of income from sources in that country [Article 4, paragraph 2] .  In the Australian context, this would mean, for example, that Norfolk Island residents, who are generally only subject to Australian tax on Australian source income, are not residents of Australia for the purposes of the Aruba agreement.  Accordingly, Aruba will not have to forego tax in accordance with the Aruba agreement on income derived by Norfolk Island residents (which will not be subject to Australian tax). 

Dual residents

2.22               Tie-breaker rules are included for determining residency of a person, for the purposes of the Aruba agreement, if the person qualifies as a resident of both countries in accordance with paragraph 1 of Article 4.  In the case of an individual the rules, in order of application, are:

•        if the individual has a permanent home available to himself or herself in only one of the countries, the person is deemed to be a resident solely of that country [Article 4, subparagraph 3a)] ;

•        if the individual has a permanent home available in both countries or in neither, then the person’s residential status takes into account their personal or economic relations with Australia and Aruba, and the person is deemed for the purposes of the Aruba agreement to be a resident only of the country with which they have the closer personal and economic relations [Article 4, subparagraph 3a)] ;

•        residency will be determined on the basis of an individual’s nationality where the foregoing tests are not determinative [Article 4, subparagraph 3b)] ; or

•        if the individual is a ‘national’ (as defined in subparagraph 1e)) of Article 3 of the Aruba agreement) of both countries, or of neither, the competent authorities will endeavour to resolve the question of treaty residence by mutual agreement [Article 4, subparagraph 3c)] .

2.23               In the case of a non-individual, that is a company, partnership or other body or person, which would under paragraph 1 of Article 4 be a resident of both Australia and Aruba, then the entity will be deemed to be a resident of the country in which the place of effective management is situated.   [Article 4, paragraph 4]

2.24               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 Australian as a resident, insofar as the Aruba agreement allows.

Article 5 — Pensions and Retirement Annuities

2.25               Pensions (excluding government pensions) and retirement annuities are taxable only by the country of which the recipient is a resident, provided such income is subject to tax in that country.  If such income is not subject to tax in that country, the income may be taxed by the country from which the relevant payments were made.  [Article 5, paragraph 1]

Meaning of retirement annuity

2.26               In the case of Australia, retirement annuity means a superannuation annuity payment within the meaning of the taxation laws of Australia [Article 5, subparagraph 2a)] .  A superannuation annuity as defined by Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 , which took effect from 1 July 2007 is a retirement annuity. 

2.27               In the case of Aruba, a retirement annuity means a stated sum payable in consequence of retirement and paid periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.  [Article 5, subparagraph 2b)]

Article 6 — Government Service

2.28               Salary and wage type income, other than a pension, paid to an individual for services rendered to a government of one of the countries (including a political subdivision or local authority), 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 country solely for the purpose of rendering the services (for example, if the recipient is a permanent resident of that other country).

[Article 6, subparagraph 1b)]

Business income

2.29               Remuneration in respect of services rendered in connection with a trade or business carried on by a governmental authority is excluded from the scope of the Article.  Such remuneration will remain subject to the domestic taxation laws of the two countries.  [Article 6, paragraph 3]

Article 7 — Students

Exemption from tax

2.30               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 7]

Employment income

2.31               Where an Aruban student visiting Australia solely for educational purposes undertakes employment in Australia, for example, part-time work with a local employer, the income earned by that student as a consequence of that employment may be subject to tax in Australia.

2.32               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, falls for consideration under domestic taxation law.

2.33               In the case of an Aruban 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. 

2.34               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 (that is, a subsistence payment).  If the remuneration is similar to the amounts paid to persons who provide similar services who are not business apprentices (that is, salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under domestic taxation law.  Likewise, if that business apprentice undertakes any other employment in Australia, the income earned from that employment may be subject to tax in Australia.

2.35               Where a taxpayer receives exempt income and assessable income, the exempt income may in some cases be taken into account in determining the rate of tax payable on the assessable income.  However, the payments received from abroad for a student’s or apprentice’s maintenance, education or training will not be taken into account in determining the tax payable on the employment income that is subject to tax in Australia.

Article 8 — Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments

2.36               This Article provides for consultation between the competent authorities of the two countries for the purpose of endeavouring to resolve disputes concerning transfer pricing adjustments purportedly made not in accordance with the arm’s length principle.  [Article 8, paragraph 2]

2.37               The term ‘arm’s length principle’ refers to the requirement that businesses price their related party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation.  In Australia the Commissioner would apply the arm’s length principle when reviewing business transactions in the context of Division 13 of Part III of the ITAA 1936. 

2.38               A person wishing to use this mutual agreement procedure must present their case to the competent authority of their country of residence within three years of the first notification of the transfer pricing adjustment.  This procedure operates independently of, and in addition to, domestic legal remedies available to taxpayers.  [Article 8, paragraph 1]

Article 9 — Exchange of Information

2.39               This Article authorises and limits the exchange of information by the competent authorities to information that is foreseeably relevant to the administration of the Aruba agreement.

2.40               The exchange of information is subject to the provisions of the Agreement on the Exchange of Information with Respect to Taxes , which was signed by the two countries on 16 December 2009.  After it takes effect, that agreement will provide for exchange of information that is foreseeably relevant to the administration of the taxation laws of the two countries.  It also contains safeguards to protect taxpayers’ rights.  For example:

•        confidentiality rules to ensure that information exchanged is only disclosed to authorised recipients; and

•        limitations to ensure that the competent authorities do not exceed domestic laws and administrative procedures in the course of obtaining and supplying information.

Article 10 — Entry into Force

Date of entry into force

2.41               The Aruba agreement will enter into force on the date of the last exchange of diplomatic notes notifying that the domestic procedures to give it the force of law have been completed.  In Australia, enactment of the legislation giving the Aruba agreement the force of law along with tabling the Aruba agreement in Parliament are prerequisites to the exchange of diplomatic notes.  Entry into force is also conditional upon the related Agreement on the Exchange of Information with Respect to Taxes between the two countries being in force at that time.

Date of application in Australia

2.42               Following entry into force, the Aruba agreement will take effect in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force.  [Article 10, subparagraph 1a)]

Date of application in Aruba

2.43               Following entry into force, the Aruba agreement will take effect in Aruba in respect of any income year beginning on or after 1 January in the calendar year next following the date on which it enters into force.  [Article 10, subparagraph 1b)]

Article 11 — Termination

2.44               The Aruba agreement is to continue in effect indefinitely.  However, either country may give the other country written notice of termination of the agreement through the appropriate channel.  [Article 11, paragraph 1]

Cessation in Australia

2.45               In the event of either country terminating the Aruba agreement, it would cease to be effective in Australia in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.  [Article 11, subparagraph 2a)]

Cessation for Aruba

2.46               The Aruba agreement would correspondingly cease to be effective in Aruba for any year of income beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.  [Article 11, paragraph 2b)]

Cessation in other circumstances

2.47               The Aruba agreement will also terminate and cease to be effective if the Agreement for the Exchange of Information with Respect to Taxes between Australia and Aruba is terminated.  In that event, the Aruba agreement would terminate on the first day of the month following the expiration of six months after receipt of notification of termination of the Agreement for the Exchange of Information with Respect to Taxes [Article 11, paragraph 3]



Chapter 3          

The Australia-Chile convention

Outline of chapter

3.1                   Schedule 2 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the 2010 Convention between Australia and the Republic of Chile for the Avoidance of Double Taxation with respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion and its Protocol (Chilean convention).  Subsection 3AAA(1) of the Agreements Act 1953 will define the Chilean convention and subsection 5(1) will give it the force of law in Australia.  This chapter explains the rules that apply in the Chilean convention.

Context of amendments

3.2                   The Chilean convention was signed in Santiago on 10 March 2010 and is the first convention of this type between Australia and Chile.  The Chilean convention will:

•        promote closer economic cooperation between Australia and Chile by reducing taxation barriers; in particular avoiding double taxation on income arising from overlapping jurisdictions; and

•        improve the integrity of the tax system by providing the framework through which the tax administrations of Australia and Chile can prevent international fiscal evasion.

Summary of new law

Main features of the Chilean convention

3.3                   The main features of the Chilean convention are as follows:

•        Dual resident individuals (for example, individuals who are residents of both Australia and Chile according to the domestic taxation laws of each country) are, in accordance with specified criteria, to be treated for the purposes of the Chilean convention as being residents of only one country.   Where a non-individual such as a company is a resident of both countries for their domestic tax purposes, the entity is not entitled to the benefits of the Chilean convention except for benefits under the non-discrimination provisions [Article 4] .

•        Income from real property (including the profits of an enterprise from agriculture or forestry) may be taxed by the country in which the property is situated.  Income from real property includes natural resource royalties [Article 6] .

•        Business profits are gen erally 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 adjusted for tax purposes where transactions have been entered into on other than arm’s length terms [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:

-       a 5 per cent limitation applies to intercorporate dividends where the beneficial owner of those dividends is a company that holds directly at least 10 per cent of the voting power of the company paying the dividends [Article 10, subparagraph 2a)] ;

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

-        notwithstanding these limitations the Chilean convention preserves Chile’s right to impose its Additional Tax on corporate profits [Article 10, paragraph 2] .

•        In the case of interest:

-       a 5 per cent limitation applies to interest paid to financial institutions that are unrelated and dealing wholly independently with the payer, subject to certain conditions [Article 11, subparagraph 2a)] ;

-       a 10 per cent limitation applies to other Australian sourced interest [Article 11, subparagraph 2b)] ; and

-       a 15 per cent limitation applies to other Chilean sourced interest [Article 11, paragraph 4] .

•        The rate limit on source country taxation of royalties is 5 per cent for equipment royalties and 10 per cent for all others [Article 12, paragraph 2] .

•        Income, profits or gains from the alienation of real property may be taxed 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 certain companies and other entities (including land rich entities), all other capital gains will be taxable only in the country of residence [Article 13] .

•        Profits 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 fixed base or the individual is present in the other country for a specified period [Article 14] .

•        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 15] .

•        Fringe benefits that would otherwise be subject to tax in both countries will be taxable only in the country which would have the primary taxing right in respect of salary or wages to which the benefit relates [Article 15] .

•        Directors’ remuneration may be taxed in the country in which the company of which the person is a director is a resident for tax purposes [Article 16] .

•        Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed [Article 17] .

•        Pensions (including government pensions) and retirement annuities may be taxed only in the country of residence of the recipient.  Certain specified lump sums are only subject to tax in the country in which they arise [Article 18] .

•        Income from government service will generally be taxed only in the country that pays the remuneration.  However, the remuneration will be taxed only 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 19] .

•        Payments made from abroad to visiting students or business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited [Article 20] .

•        Other income (that is, income not dealt with by other Articles) may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief [Article 21] .

•        Source rules in the Chilean convention prescribe, for domestic law and treaty purposes, that income, profits or gains derived by a resident of one country, which under certain provisions of the treaty may be taxed in the other country, will be treated as having a source in that other country [Article 22] .

•        Double taxation relief for income which, under the Chilean convention, 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 the Chilean convention as follows:

-       in Australia, by allowing a credit for the Chilean tax against Australian tax payable on income derived by a resident of Australia [Article 23, subparagraph 1a)] .  However, where the relevant income derived by the Australian resident is a dividend paid by a Chilean company, Australia’s credit obligation is limited [Article 23, subparagraph 1b)] ; and

-       in Chile, by allowing a credit for the Australian tax against Chilean tax payable on income derived by a resident of Chile [Article 23, paragraph 2] .

•        In the case of Australia, effect will be given to the double tax relief obligations arising under the Chilean convention by application of the general foreign income tax offset provisions of Australia’s domestic law, or the relevant exemption provisions of that law where applicable.

•        Rules in the Chilean convention will protect nationals and companies from tax discrimination in the other country and gives them private rights of appeal.  However, Article 24 does not restrict either country from applying provisions designed to prevent avoidance or evasion of taxes (for Australia, such measures include thin capitalisation rules or measures designed to ensure taxes can be collected efficiently and controlled foreign companies measures) and research and development concessions [Article 24] .

•        The Chilean convention provides for consultation between the two taxation authorities [Article 25] .

•        The Chilean convention provides for exchange of information, including bank information, between the two taxation authorities.  It authorises and requires Australia to exchange information where the information relates to federal taxes administered by the Commissioner of Taxation (Commissioner) [Article 26] .

•        The integrity of the Chilean convention is provided for through the inclusion of provisions to deny treaty benefits in certain circumstances and to establish a mechanism for consultation where benefits apply which were not contemplated or intended [Article 27] .

Comparison of key features of new law and current law

New law

Current law

This Schedule implements the 2010 Convention between Australia and Chile.

There is no existing treaty between Australia and Chile.

This Schedule provides rules to treat dual resident individuals (for example, individuals who are residents of both Australia and Chile according to the domestic taxation laws of each country) as residents of only one country for the purposes of the Chilean convention.

This Schedule limits the application of the Chilean convention to other dual resident persons who are not individuals.

No equivalent.

This Schedule defines the term ‘permanent establishment’ in Article 5 ( Permanent Establishment ) for the purposes of the Chilean convention.  In particular, under the Chilean convention a building site or installation project constitutes a permanent establishment only where it lasts more than 6 months.  An enterprise is deemed to have a permanent establishment in a country if:

•        it provides services in that country 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 (including 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.

The definition of ‘permanent establishment’ is set out in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

This Schedule treats certain business profits, such as profits from agriculture and forestry, as income from real property, and ensures that arms’ length profits are taxed on a net basis.

The definition of ‘real property’ covers land, and rights relating to exploration for, or exploitation of, natural resources.

Source taxation of business profits is limited to those profits derived through a branch or other prescribed permanent establishment (Article 5) situated in the source country.

In general, foreign residents are taxable on all Australian sourced income.

Transfer pricing adjustments are generally limited to seven years.

No equivalent.

Source taxation of profits from shipping and airline transport operations is limited to income from domestic transport. Profits from non-transport operations taxed as business profits.

Source taxation of profits from shipping and airline activities (including non-transport activities) is not limited.

Dividend withholding tax is limited to:

•        five per cent for intercorporate dividends on certain non-portfolio holdings; and

•        fifteen per cent in all other cases.

The rate of non-resident dividend withholding tax in Australia is 30 per cent.

This Schedule reduces the rate of Australian interest withholding tax from 10 per cent to 5 per cent where interest is paid to an unrelated financial institution. 

The rate of non-resident interest withholding tax in Australia is  10 per cent.

This Schedule reduces the rate of Australian royalty withholding tax from 30 per cent to:

•        five per cent of the gross royalty payments for use of industrial, scientific and commercial equipment; and

•        ten per cent for all other royalties.

The rate of non-resident royalty withholding tax in Australia is 30 per cent of the gross payment.

This Schedule includes a comprehensive Alienation of Property Article which allocates taxing rights over gains and prevents double non-taxation of certain capital gains.

The allocation of taxing rights in the Chilean convention is broadly consistent with Australia’s capital gains tax arrangements for non-residents.

Non-residents are taxable on their capital gains from the alienation of real property, business assets of a permanent establishment and on indirect holdings of real property.  In relation to indirect holdings of real property the non-resident has to have a non-portfolio interest in the entity holding the real property.

Source taxation of independent personal services is limited to those amounts attributable to a fixed base or where a person is present in that country for a period or periods exceeding in the aggregate 183 days in any 12-month period.

In general, foreign residents are taxable on all Australian sourced income.

Employment income paid in respect of certain short term visits is taxable only in the country of residence of the employee where the remuneration is borne by a permanent establishment or fixed base of the employer in the employee’s country of residence.

No equivalent.

Pensions and retirement annuities are taxable only in the country of residence of the recipient.

Lump sums are taxable only in the country of source.

Pensions may be taxable in both countries.



Lump sums may be taxed in both countries.

This Schedule includes a comprehensive article preventing tax discrimination under tax laws.

No equivalent.

This Schedule includes a framework to allow for mutual agreement procedures between the relevant tax authorities to resolve disputes.

No equivalent.

This Schedule includes a framework to allow the tax authorities to exchange taxpayer information.

No equivalent.

This Schedule includes a Limitation of Benefits Article that:

•        limits the treaty benefits that a country is obliged to provide under Articles 10 to 12;

•        provides a framework for Australia and Chile to consult if the treaty is being used to provide benefits not contemplated or not intended; and

•        limits the treaty benefits that Chile is obliged to provide to Australian temporary residents.

No equivalent.

The Chilean convention

3.4                   A full transcript of the Chilean convention and detailed explanation follows:

‘CONVENTION BETWEEN AUSTRALIA AND THE REPUBLIC OF CHILE FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME AND FRINGE BENEFITS AND THE PREVENTION OF FISCAL EVASION

Australia and the Republic of Chile, desiring to conclude a convention for the avoidance of double taxation with respect to taxes on income and fringe benefits and the prevention of fiscal evasion;

Have agreed as follows:

CHAPTER I

SCOPE OF THE CONVENTION

Article 1

PERSONS COVERED

This Convention shall apply to persons who are residents of one or both of the Contracting States.

Article 2

TAXES COVERED

1.  The existing taxes to which the Convention shall apply are:

a)  in Australia:

(i)  the income tax, including the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources; and

(ii) the fringe benefits tax, imposed under the federal law of Australia (hereinafter referred to as "Australian tax"); and

b)  in Chile, the taxes imposed under the Income Tax Act, "Ley sobre Impuesto a la Renta", including the specific tax on mining activity (Impuesto Específico a la Actividad Minera), (hereinafter referred to as "Chilean tax").

2.  The Convention shall apply also to any identical or substantially similar taxes that are imposed under the federal law of Australia or the law of Chile after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in the law of their respective States relating to the taxes to which the Convention applies within a reasonable period of time after those changes.

CHAPTER II

DEFINITIONS

Article 3

GENERAL DEFINITIONS

1.  For the purposes of this Convention, unless the context otherwise requires:

a)  the term "Australia" means the Commonwealth of Australia and, when used in a geographical sense, excludes all external territories other than:

(i)  the Territory of Norfolk Island;

(ii) the Territory of Christmas Island;

(iii) the Territory of Cocos (Keeling) Islands;

(iv) the Territory of Ashmore and Cartier Islands;

(v) the Territory of Heard Island and McDonald Islands; and

(vi) the Coral Sea Islands Territory,

and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the exclusive economic zone or the seabed and subsoil of the continental shelf;

b)  the term "Chile" means the Republic of Chile and, when used in a geographical sense, includes any area outside the territorial sea designated under the laws of the Republic of Chile and in accordance with international law as an area within which the Republic of Chile may exercise sovereign rights with regard to the seabed and subsoil and their natural resources;

c)  the terms "a Contracting State" and "the other Contracting State" mean, as the context requires, Australia or Chile respectively;

d)  the term "person" includes an individual, a company and any other body of persons;

e)  the term "company" means any body corporate or any entity that is treated as a company or body corporate for tax purposes;

f)  the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

g)  the term "international traffic" means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when such transport is solely between places in the other Contracting State;

h)  the term "competent authority" means:

(i)  in Australia, the Commissioner of Taxation or an authorised representative of the Commissioner ; and

(ii) in Chile, the Minister of Finance or an authorised representative of the Minister;

i)   the term "national" in relation to a Contracting State, means:

(i)  any individual possessing the nationality or citizenship of that Contracting State; and

(ii) any company deriving its status as such from the laws in force in that Contracting State;

j)   the term "tax" means Australian tax or Chilean tax as the context requires, but does not include any penalty or interest imposed under the law of either Contracting State relating to its tax.

2.  As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State concerning the taxes to which the Convention applies, any meaning under the applicable tax law of that State prevailing over a meaning given to the term under other law of that State.

Article 4

RESIDENT

1.  For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein as a resident of that State or by reason of domicile in that State, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.

2.  Where by reason of the provisions of paragraph 1 a person, being an individual is a resident of both Contracting States, then the person’s status shall be determined as follows:

a)  the individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; but if a permanent home is available in both States or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual’s personal and economic relations are closer (centre of vital interests);

b)  if the State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national.

3.  Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the person shall not be entitled to any benefits provided by the Convention except that the provisions of Article 24 shall apply.

Article 5

PERMANENT ESTABLISHMENT

1.  For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2.  The term "permanent establishment" includes especially:

a)  a place of management;

b)  a branch;

c)  an office;

d)  a factory;

e)  a workshop;

f)  a mine, an oil or gas well, a quarry or any other place relating to the exploration for or the exploitation of natural resources; and

g)  an agricultural, pastoral or forestry property.

3.  A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months.

4.  Notwithstanding the provisions of paragraphs 1, 2 and 3, where an enterprise of a Contracting State:

a)  performs services (other than activities to which subparagraphs b) or c) apply) in the other Contracting State, for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed through one or more individuals who are present and performing such services in that other State;

b)  carries on activities (including the operation of substantial equipment) in the other State in the exploration for or exploitation of natural resources situated in that other State for a period or periods exceeding in the aggregate 90 days in any twelve month period; or

c)  operates substantial equipment in the other State (including as provided in subparagraph b)) for a period or periods exceeding in the aggregate 183 days in any twelve month period,

such activities shall be deemed to be performed through a permanent establishment that the enterprise has in that other State, unless the activities are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

5.  a)The duration of activities under paragraphs 3 and 4 will be determined by aggregating the periods during which activities are carried on in a Contracting State by associated enterprises provided that the activities of the enterprise in that State are substantially the same as the activities carried on in that State by its associate.

b)  The period during which two or more associated enterprises are carrying on concurrent activities will be counted only once for the purpose of determining the duration of activities.

c)  Under this Article, an enterprise shall be deemed to be associated with another enterprise if:

(i)  one is controlled directly or indirectly by the other; or

(ii) both are controlled directly or indirectly by the same person or persons.

6.  Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:

a)  the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

b)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

c)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

d)  the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

e)  the maintenance of a fixed place of business solely for the purpose of advertising, supplying information or carrying out scientific research for the enterprise, or any other similar activity, if such activity is of a preparatory or auxiliary character.

7.  Notwithstanding the provisions of paragraphs 1 and 2 where a person - other than an agent of an independent status to whom paragraph 8 applies - is acting on behalf of an enterprise and has and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise or manufactures or processes in a Contracting State for the enterprise goods or merchandise belonging to the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 6 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

8.  An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a person who is a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

9.  The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself make either company a permanent establishment of the other.

CHAPTER III

TAXATION OF INCOME

Article 6

INCOME FROM IMMOVABLE (REAL) PROPERTY

1.  Income derived by a resident of a Contracting State from immovable (real) property (including income from agriculture or forestry) may be taxed in the Contracting State in which the immovable (real) property is situated.

2.  For the purposes of this Convention, the term "immovable (real) property":

a)  in the case of Australia, means real property according to the law of Australia, and shall also include:

(i)  a lease of land and any other interest in or over land, whether improved or not, including a right to explore for mineral, oil or gas deposits or other natural resources, and a right to mine those deposits or resources; and

(ii) a right to receive variable or fixed payments either as consideration for or in respect of the exploitation of, or the right to explore for or exploit, mineral, oil or gas deposits, quarries or other places of extraction or exploitation of natural resources; and

b)  in the case of Chile, means such property which, according to the law of Chile, is immovable property and shall in any case include:

(i)  property accessory to immovable property;

(ii) livestock and equipment used in agriculture and forestry;

(iii) rights to which the provisions of the general law respecting land apply, including a lease of land and any other interest in or over land, whether improved or not, including a right to explore for mineral, oil or gas deposits or other natural resources, and a right to mine those deposits or resources; and

(iv) usufruct of immovable property and rights to variable or fixed payments either as consideration for or in respect of the exploitation of or the right to exploit mineral deposits, mineral sources and other natural resources.

Ships and aircraft shall not be regarded as immovable (real) property.

3.  Any interest or right referred to in paragraph 2 shall be regarded as situated where the land, mineral, oil or gas deposits or sources, quarries or natural resources, as the case may be, are situated or where the exploration may take place.

4.  The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable (real) property.

5.  The provisions of paragraphs 1 and 4 shall also apply to profits from immovable (real) property of an enterprise or immovable (real) property used for the performance of independent personal services. Where such profits are attributable to a permanent establishment or a fixed base in the Contracting State in which the immovable (real) property is situated, the profits shall be determined in accordance with principles of paragraphs 2 and 3 of Article 7.

Article 7

BUSINESS PROFITS

1.  The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2.  Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises with which it deals.

3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses of the enterprise, being expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred whether incurred in the State in which the permanent establishment is situated or elsewhere

4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

5. Where profits include items of income or gains which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

6.  Notwithstanding the preceding provisions of this Article, premiums in respect of insurance policies issued by an enterprise of a Contracting State may be taxed in the other State in accordance with its domestic law. However, except where the premium is attributable to a permanent establishment of the enterprise situated in that other State, the tax so charged shall not exceed:

a)  5 per cent of the gross amount of the premiums in the case of policies of reinsurance; and

b)  10 per cent of the gross amount of the premiums in the case of all other policies of insurance.

7.  Where:

a)  a resident of a Contracting State is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated as a company for tax purposes; and

b)  in relation to that enterprise, that trustee would, in accordance with the principles of Article 5, have a permanent establishment in that other State,

the enterprise carried on by the trustee shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated therein and that share of business profits shall be attributed to that permanent establishment.

8.  No adjustments to the profits attributable to a permanent establishment of an enterprise for a year of income shall be made by a Contracting State after the expiration of seven years from the date on which the enterprise has completed the tax filing requirements of that State for that year of income. The provisions of this paragraph shall not apply in the case of fraud, gross negligence or wilful default or where, within that period of seven years, an audit into the profits of the enterprise has been initiated by either State.

9.  Nothing in this Convention shall affect the taxation in Chile of a resident of Australia in respect of profits attributable to a permanent establishment, or a fixed base, situated in Chile, under both the First Category Tax and the Additional Tax provided that the First Category Tax is fully creditable in computing the amount of the Additional Tax.

Article 8

SHIPS AND AIRCRAFT

1.  Profits of an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that State.

2. Notwithstanding the provisions of paragraph 1, profits of an enterprise of a Contracting State derived from the operation of ships or aircraft may be taxed in the other Contracting State to the extent that they are profits derived directly or indirectly from ship or aircraft operations confined solely to places in that other State.

3. The profits to which the provisions of paragraphs 1 and 2 apply include profits from the operation of ships or aircraft derived through participation in a pool service or other profit sharing arrangement.

4.  For the purposes of this Article, profits derived from the carriage by ships or aircraft of passengers or cargo (including mail) which are taken on board in a Contracting State for discharge at a place in that State shall be treated as profits from ship or aircraft operations confined solely to places in that State.

Article 9

ASSOCIATED ENTERPRISES

1. Where

a)  an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

b)  the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions operate, or are made or imposed, between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate or be made between independent enterprises, dealing wholly independently with one another then any profits which, but for those conditions, might have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

2. Where a Contracting State includes in the profits of an enterprise of that State - and taxes accordingly - profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which might have been expected to have accrued to the enterprise of the first-mentioned State if the conditions operative between the enterprises had been those which might have been expected to have operated between independent enterprises dealing wholly independently with one another, then that other State, if it agrees that the adjustment made by the first-mentioned State is justified both in principle and as regard the amount, shall make an appropriate adjustment to the amount of the taxes charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.

3. No adjustments to the profits of an enterprise for a year of income shall be made by a Contracting State after the expiration of seven years from the date on which the enterprise has completed the tax filing requirements of that State for that year of income. The provisions of this paragraph shall not apply in the case of fraud, gross negligence or wilful default or where, within that period of seven years, an audit into the profits of the enterprise has been initiated by either State.

Article 10

DIVIDENDS

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

a)  5 per cent of the gross amount of the dividends if the beneficial owner of those dividends is a company which holds directly at least 10 per cent of the voting power in the company paying the dividends; and

b)  15 per cent of the gross amount of the dividends in all other cases.

The provisions of this paragraph shall not limit the application of the Additional Tax payable in Chile provided that the First Category Tax is fully creditable in computing the amount of Additional Tax.

3. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as other amounts which are subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company’s undistributed profits even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

Article 11

INTEREST

1.  Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed:

a)  5 per cent of the gross amount of interest derived by a financial institution which is unrelated to and dealing wholly independently with the payer. The term "financial institution" means a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance; and

b)  10 per cent of the gross amount of interest in all other cases.

3. Notwithstanding paragraph 2, interest referred to in subparagraph a) of that paragraph may be taxed in the State in which it arises at a rate not exceeding 10 per cent of the gross amount of the interest if the interest is paid as part of an arrangement involving back-to-back loans or other arrangement that is economically equivalent and intended to have a similar effect to back-to-back loans.

4. Notwithstanding the rate limits specified in subparagraph 2 b) and paragraph 3, Chile may impose tax on interest arising in Chile to which those provisions apply at a rate not exceeding 15 per cent of the gross amount of the interest. However, if Chile agrees to limit the tax charged in Chile on interest arising in Chile to a rate less than 15 per cent in a tax treaty with any other State, the tax imposed in Chile on interest arising in Chile to which subparagraph 2 b) or paragraph 3 applies shall not exceed the rate provided in that treaty or 10 per cent, whichever is the greater, after the date of entry into force of that treaty.

5. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and in particular, interest from government securities and interest from bonds or debentures. The term "interest" also includes 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. The term "interest" shall not include any item which is treated as a dividend under the provisions of Article 10 of this Convention.

6. The provisions of paragraphs 1, 2, 3 and 4 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the indebtedness in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

7. Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether a resident of a Contracting State or not, has in a Contracting State or outside both Contracting States a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

8. Where, by reason of a special relationship between the payer and the beneficial owner of the interest or between both of them and some other person, the amount of the interest exceeds, for whatever reason, the amount which might have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

Article 12

ROYALTIES

1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed:

a)  5 per cent of the gross amount of the royalties for the use of, or the right to use, any industrial, commercial or scientific equipment; and

b)  10 per cent of the gross amount of the royalties in all other cases

3.  The term "royalties" in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for:

a)  (i) the use of, or the right to use, any copyright, including motion picture films; and

(ii) the use of, or the right to use, in connection with television, radio or other broadcasting, films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission;

b)  the use of, or the right to use any patent, trade mark, design or model, plan, secret formula or process or other like property or right;

c)  the use of, or the right to use, industrial, commercial or scientific equipment;

d)  the supply of information concerning technical, industrial, commercial or scientific experience;

e)  the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in subparagraph a), b) or c) or any such information as is mentioned in subparagraph d);

f)  the use of, or the right to use, some or all of the part of the spectrum specified in a spectrum licence, being spectrum of a Contracting State where the payment or credit arises; or

g)  total or partial forbearance in respect of the use or supply of any property or right referred to in this paragraph.

4.  The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid or credited is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5.  Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties, whether a resident of a Contracting State or not, has in a Contracting State or outside both Contracting States a permanent establishment or a fixed base in connection with which the obligation to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6.  Where, by reason of a special relationship between the payer and the beneficial owner of the royalties or between both of them and some other person, the amount of the royalties paid or credited having regard to what they are paid or credited for, exceeds the amount which might have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments or credits shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

Article 13

ALIENATION OF PROPERTY

1.  Income, profits or gains derived by a resident of a Contracting State from the alienation of immovable (real) property situated in the other Contracting State may be taxed in that other State.

2.  Income, profits or gains from the alienation of property, other than immovable (real) property, forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of property, other than immovable (real) property, pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such income, profits or gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such a fixed base, may be taxed in that other State.

3.  Income, profits or gains of an enterprise of a Contracting State from the alienation of ships or aircraft operated by that enterprise in international traffic, or of property (other than immovable (real) property) pertaining to the operation of such ships or aircraft, shall be taxable only in that State.

4.  Income, profits or gains derived by a resident of a Contracting State from the alienation of any shares, comparable interests or other rights deriving more than 50 per cent of their value directly or indirectly from immovable (real) property situated in the other Contracting State may be taxed in that other State.

5.  Gains of a capital nature, other than gains to which paragraph 2 or 4 apply, derived by a resident of a Contracting State (other than a pension fund) from the alienation of shares or other rights, not being debts claims, participating in profits, representing the capital of a company that is a resident of the other Contracting State, may be taxed in that other State but the tax so charged shall not exceed 16 per cent of the amount of the gain. However, nothing in this Article shall affect the right of that other State to tax such gains, in accordance with its laws, if the alienator has at any time during the twelve month period preceding such alienation owned shares or other rights representing, directly or indirectly, 20 per cent or more of the capital of that company.

6.  Gains of a capital nature from the alienation of any property, other than that referred to in the preceding paragraphs shall be taxable only in the Contracting State of which the alienator is a resident.

7.  Where an individual who upon ceasing to be a resident of a Contracting State, is treated under the taxation law of that State as having alienated any property and is taxed in that State by reason thereof, the individual may elect to be treated for the purposes of taxation in the other Contracting State as if the individual had, immediately before ceasing to be a resident of the first-mentioned State, alienated and reacquired the property for an amount equal to its fair market value at that time. However, the individual may not make the election in respect of property situated in either Contracting State.

Article 14

INDEPENDENT PERSONAL SERVICES

1.  Profits derived by an individual who is a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that Contracting State. However, such profits may also be taxed in the other Contracting State:

a)  if the individual has a fixed base regularly available in the other Contracting State for purpose of performing the activities; in that case, only so much of the profits as are attributable to that fixed base may be taxed in that other State; or

b)  if the individual is present in the other Contracting State for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve month period commencing or ending in the income year of that other State, the individual shall be deemed to have a fixed base regularly available in that State; in that case, only so much of the profits as are derived from the activities performed in that other State may be taxed in that State.

2.  The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

Article 15

INCOME FROM EMPLOYMENT

1.  Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2.  Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

a)  the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the income year of that other State, and

b)  the remuneration is paid by, or on behalf of, a person being an employer who is not a resident of the other State, and

c)  the remuneration is not borne by a permanent establishment or a fixed base which that employer has in the other State.

3.  Notwithstanding the preceding provisions of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised aboard a ship or aircraft operated in international traffic shall be taxable only in that State.

4.  Where, except for the application of this paragraph, a fringe benefit is taxable in both Contracting States the benefit will be taxable only in the Contracting State that has the sole or primary taxing right in accordance with paragraphs 1, 2 or 3 of this Article in respect of salary or wages from the employment to which the benefit relates.

5.  For the purposes of this Article:

a)  "fringe benefit" includes a benefit provided to an employee or to an associate of an employee by:

(i)  an employer;

(ii) an associate of an employer; or

(iii) a person under an arrangement between that person and the employer, associate of an employer or another person in respect of the employment of that employee,

and includes an accommodation allowance or housing benefit so provided but does not include a benefit arising from the acquisition of an option over shares under an employee share scheme;

b)  a Contracting State has a "primary taxing right" to the extent that a taxing right in respect of salary or wages from the relevant employment is allocated to that State in accordance with paragraphs 1, 2 or 3 of this Article and the other Contracting State is required to provide relief for the tax imposed in respect of such remuneration by the first-mentioned State.

Article 16

DIRECTORS' FEES

Directors' fees and other similar payments derived by a resident of a Contracting State in that person’s capacity as a member of the board of directors or a similar organ of a company which is a resident of the other Contracting State may be taxed in that other State.

Article 17

ARTISTES AND SPORTSPERSONS

1.  Notwithstanding the provisions of Articles 7, 14 and 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that person’s personal activities as such exercised in the other Contracting State, may be taxed in that other State.

2. Where income in respect of personal activities exercised by an entertainer or a sportsperson in that person's capacity as such accrues not to that person but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised.

Article 18

PENSIONS

1.  Pensions, including retirement annuities, paid to an individual who is a resident of a Contracting State shall be taxable only in that State.

2.  The term "retirement annuity" means a stated sum payable in respect of retirement and paid periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration from funds out of a retirement savings plan.

3.  Alimony and other maintenance payments paid to a resident of a Contracting State shall be taxable only in that State. However, any alimony or other maintenance payments paid by a resident of a Contracting State to a resident of the other Contracting State, shall, to the extent it is not allowable as a relief to the payer, be taxable only in the first-mentioned State.

Article 19

GOVERNMENT SERVICE

1.  a) Salaries, wages and other remuneration, other than a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.

b)  However, such salaries, wages and other remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:

(i)  is a national of that State; or

(ii) did not become a resident of that State solely for the purpose of rendering the services.

2.  The provisions of Articles 15, 16 and 17 shall apply to salaries, wages and other remuneration in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof.

Article 20

STUDENTS

Payments which a student or business apprentice who is or was immediately before visiting a Contracting State a resident of the other Contracting State and who is temporarily present in the first-mentioned State solely for the purpose of their education or training receives for the purpose of their maintenance, education or training shall not be taxed in that State, provided that such payments arise from sources outside that State.

Article 21

OTHER INCOME

1.  Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

2.  The provisions of paragraph 1 shall not apply to income, other than income from immovable (real) property, derived by a resident of a Contracting State who carries on business in the other Contracting State through a permanent establishment or performs in that other State independent personal services from a fixed based situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

3.  Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of the Convention from sources in the other Contracting State may also be taxed in the other Contracting State.

Article 22

SOURCE OF INCOME

1.  Income, profits or gains derived by a resident of a Contracting State which, under any one or more of Articles 6 to 8 and 10 to 19, may be taxed in the other Contracting State shall for the purposes of the law of that other Contracting State relating to its tax be deemed to arise from sources in that other Contracting State.

2.  For the purposes of determining where income arises under paragraph 7 of Article 11 or paragraph 5 of Article 12, an individual is a resident of a Contracting State, notwithstanding the provisions of paragraph 2 of Article 4, if that individual is a resident of that State in accordance with its domestic tax law.

CHAPTER IV

RELIEF FROM DOUBLE TAXATION

Article 23

RELIEF OF DOUBLE TAXATION

1.  In Australia, double taxation shall be relieved as follows:

a)  subject to the provisions of the law of Australia from time to time in force which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle of this Article), Chilean tax paid under the law of Chile and in accordance with this Convention, whether directly or by deduction, in respect of income derived by a person who is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of that income; and

b)  in the case of income referred to in Article 10, Chilean tax paid shall, for purposes of subparagraph a) of this paragraph, refer to the amount of the Additional Tax after the First Category Tax is deducted, or 15 per cent of the amount on which the Additional Tax is calculated, whichever is the lesser.

2.  In Chile, double taxation shall be relieved as follows:

Residents in Chile, obtaining income which has, in accordance with the provisions of this Convention, been subject to taxation in Australia, may credit the tax so paid against any Chilean tax payable in respect of the same income, subject to the applicable provisions of the law of Chile (which shall not affect the general principle of this Article). This paragraph shall apply to all income referred to in this Convention.

3. Where, in accordance with any provision of the Convention, income derived by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on other income, take into account the exempted income.

CHAPTER V

SPECIAL PROVISIONS

Article 24

NON-DISCRIMINATION

1.  Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to individuals who are not residents of one or both of the Contracting States.

2.  The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in similar circumstances.

3.  Nothing in this Article shall be construed as obliging a Contracting State to grant to individuals who are residents of the other Contracting State any of the personal allowances, reliefs and reductions for taxation purposes which it grants to its own residents.

4.  Except where the provisions of paragraph 1 of Article 9, paragraph 8 of Article 11, or paragraph 6 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.

5.  Companies which are residents of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar companies which are residents of the first-mentioned State, in similar circumstances, are or may be subjected.

6.  This Article shall not apply to any provision of the laws of a Contracting State which:

a)  is designed to prevent the avoidance or evasion of taxes, including measures designed to address thin capitalisation or to ensure that taxes can be effectively collected or recovered;

b)  provides tax incentives to eligible taxpayers for expenditure on research or development, provided that a company that is a resident of one Contracting State and is wholly or partly owned by residents of the other State can access such incentives on the same terms and conditions as any other company that is a resident of the first-mentioned State; or

c)  is otherwise agreed to be unaffected by this Article in an Exchange of Notes between the Contracting States.

The competent authorities of the Contracting States shall notify each other of any changes to such laws, where those changes might, in the absence of this paragraph, be affected by the provisions of this Article.

7.  The provisions of this Article shall apply to the taxes which are the subject of this Convention, as well as the Goods and Services Tax in the case of Australia and the Value Added Tax (Impuesto al Valor Agregado) in the case of Chile.

Article 25

MUTUAL AGREEMENT PROCEDURE

1.  Where a person considers that the actions of one or both of the Contracting States result or will result for the person in taxation not in accordance with the provisions of this Convention, the person may, irrespective of the remedies provided by the domestic law of those States, present a case to the competent authority of the Contracting State of which the person is a resident or, if the case comes under paragraph 1 of Article 24, to that of the Contracting State of which the person is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the Convention.

2.  The competent authority shall endeavour, if the complaint appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic laws of the Contracting States provided that, in the case of Chile, the case is presented under paragraph 1 within three years from the determination of the Chilean tax liability to which the case relates.

3.  The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention.

4.  The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.

5.  For the purposes of paragraph 3 of Article XXII (Consultation) of the General Agreement on Trade in Services, the Contracting States agree that, notwithstanding that paragraph, any dispute between them as to whether a measure falls within the scope of this Convention may be brought before the Council for Trade in Services, as provided by that paragraph, only with the consent of both Contracting States. Any doubt as to the interpretation of this paragraph shall be resolved under paragraph 3 of this Article or, failing agreement under that procedure, pursuant to any other procedure agreed to by both Contracting States.

Article 26

EXCHANGE OF INFORMATION

1.  The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic law concerning taxes of every kind and description imposed by or on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2.

2.  Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic law of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

3.  In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

a)  to carry out administrative measures at variance with the law and administrative practice of that or of the other Contracting State;

b)  to supply information which is not obtainable under the law or in the normal course of the administration of that or of the other Contracting State;

c)  to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy ("ordre public").

4.  If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5.  In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

Article 27

LIMITATIONS OF BENEFITS

1.  The provisions of Articles 10, 11 and 12 shall not apply if it was the main purpose or one of the main purposes of any person concerned with the assignment of dividends, interest or royalties or with the creation or assignment of a right or debt-claim in respect of which dividends, interest or royalties are paid to take advantage of those Articles by means of that creation or assignment.

2.  Considering that the main aim of the Convention is to avoid international double taxation, the Contracting States agree that, in the event the provisions of the Convention are used in such a manner as to provide benefits not contemplated or not intended, relevant authorities of the Contracting States shall consult in an expeditious manner with a view to recommending specific amendments to be made to the Convention.

3.  Where under this Convention any income, profits or gains are relieved from tax in Chile and, under the law in force in Australia, an individual in respect of that income or those profits or gains is exempt from tax by virtue of being a temporary resident of Australia within the meaning of the applicable tax laws of Australia, then the relief to be allowed under this Convention in Chile shall not apply to the extent that that income or those profits or gains are exempt from tax in Australia.

Article 28

MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS

Nothing in this Convention shall affect the fiscal privileges of members of diplomatic missions or consular posts under the general rules of international law or under the provisions of special international agreements.

CHAPTER VI

FINAL PROVISIONS

Article 29

ENTRY INTO FORCE

The Contracting States shall notify each other through the diplomatic channel of the completion of their domestic requirements for the entry into force of this Convention. The Convention shall enter into force on the date of the last notification, and thereupon the provisions of this Convention shall have effect:

a)  in Australia:

(i)  in respect of withholding tax on income that is derived by a non-resident, in relation to income derived on or after the first day of the second month next following the date on which the Convention enters into force;

(ii) in respect of fringe benefits tax, in relation to fringe benefits provided on or after 1 April next following the date on which the Convention enters into force;

(iii) in respect of other Australian tax, in relation to income, profits or gains of any year of income beginning on or after 1 July next following the date on which the Convention enters into force; and

b)  in Chile: in respect of taxes on income obtained and amounts paid, credited to an account, put at the disposal or accounted as an expense, on or after 1 January next following the date on which the Convention enters into force.

Article 30

TERMINATION

This Convention shall continue in effect indefinitely, but either Contracting State may terminate the Convention by giving written notice of termination, through the diplomatic channel, to the other State 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 and, in that event, the Convention shall cease to be effective:

a)  in Australia:

(i)  in respect of withholding tax on income that is derived by a non-resident, in relation to income derived on or after the first day of the second month next following that in which the notice of termination is given;

(ii) in respect of fringe benefits tax, in relation to fringe benefits provided on or after 1 April next following the date on which notice of termination is given;

(iii) in respect of other Australian tax, in relation to income, profits or gains of any year of income beginning on or after 1 July next following that in which the notice of termination is given; and

b)  in Chile: in respect of taxes on income obtained and amounts paid, credited to an account, put at the disposal or accounted as an expense, on or after 1 January next following that in which the notice of termination is given.

IN WITNESS WHEREOF the undersigned, being duly authorised, have signed this Convention.

DONE at Santiago, this tenth day of March 2010, in duplicate in the English and Spanish languages, both texts being equally authentic.

 

For Australia:                                For the Republic of Chile:

Virginia Grenville                         Andrés Velasco Brañes

Ambassador                                  Minister for Finance

PROTOCOL TO THE CONVENTION BETWEEN AUSTRALIA AND THE REPUBLIC OF CHILE FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME AND FRINGE BENEFITS AND THE PREVENTION OF FISCAL EVASION

On signing the Convention for the avoidance of double taxation with respect to taxes on income and fringe benefits and the prevention of fiscal evasion between Australia and the Republic of Chile, the signatories have agreed that the following provisions shall form an integral part of the Convention.

1.  In general,

a)  If, after the date on which the Convention enters into force, either Contracting State introduces a tax on capital under its domestic law, the Contracting States will enter into negotiations with a view to concluding a Protocol to amend the Convention by extending its scope to include any tax on capital so introduced. The terms of any such Protocol shall have regard to any arrangements between either Contracting State and a third State for the relief of double taxation on capital.

b)  With respect to pooled investment accounts or funds (as for instance the existing Foreign Capital Investment Fund, Law N°18.657), that are subject to a remittance tax and are required to be administered by a resident in Chile, the provisions of this Convention shall not be interpreted to restrict imposition by Chile of the tax on remittances from such accounts or funds in respect of investment in assets situated in Chile.

c)  Nothing in this Convention shall affect the application of the existing provisions of the Chilean legislation Decree Law No. 600 (Foreign Investment Statute) as they are in force at the time of signature of this Convention and as they may be amended from time to time without changing the general principle thereof.

d)  A regulated pension fund which is established in a Contracting State primarily for the benefit of residents of that State shall be treated as a resident of that State and the beneficial owner of the income it receives. For the purposes of this Convention the term "regulated pension fund" means, in the case of Australia, an Australian Superannuation Fund, Approved Deposit Fund or Pooled Superannuation Trust within the meaning of the tax laws of Australia and, in the case of Chile, a pension fund established under the pension system of Decree Law No. 3500, and such other similar funds as may be agreed by the competent authorities of the Contracting States.

2.  With reference to Article 5,

a)  A person who substantially negotiates the essential parts of a contract on behalf of an enterprise will be regarded as exercising an authority to conclude contracts on behalf of that enterprise within the meaning of paragraph 7, even if the contract is subject to final approval or formal signature by another person.

b)  A person will come within the scope of paragraph 8 of Article 5 only if that person is independent of the enterprise referred to in that paragraph, both legally and economically, and acts in the ordinary course of that person´s business as such a broker or agent when acting on behalf of the enterprise.

c)  The principles set forth in Article 5 also apply in determining, for the purposes of paragraph 7 of Article 11 and paragraph 5 of Article 12, whether there is a permanent establishment outside both Contracting States and whether an enterprise, not being an enterprise of a Contracting State, has a permanent establishment in a Contracting State.

3.  With reference to Article 7,

When computing the taxable income of a permanent establishment situated in a Contracting State, the deductibility of expenses which are attributable to that permanent establishment shall be determined under the domestic law of that State.

4.  With reference to Articles 7 and 9,

Nothing in Articles 7 and 9 shall affect the application of any law of a Contracting State relating to the determination of the tax liability of a person, including determinations in cases where the information available to the competent authority of that State is inadequate to determine the profits to be attributed to a permanent establishment or accruing to an enterprise as the case may be, provided that that law shall be applied, so far as it is practicable to do so, consistently with the principles applicable under Articles 7 and 9.

5.  With reference to paragraph 2 of Article 10,

If,

a)  Chile agrees in a tax treaty with any other State to limit the Additional Tax charged in Chile; or

b)  in either Contracting State the tax imposed on dividends and on profits out of which such dividends are paid exceeds in the aggregate 42 per cent, the Contracting States shall consult each other with a view to agreeing to any amendment of this paragraph that may be appropriate.

6.  With reference to paragraph 2 of Article 11,

If, in a tax treaty with any other State, Chile agrees to limit the tax charged in Chile on interest arising in Chile and derived by a financial institution to a rate lower than that specified in subparagraph 2a), or derived by a government to a rate lower than that specified in subparagraph 2b), Chile shall without delay enter into negotiations with Australia with a view to making a comparable adjustment.

7.  With reference to paragraph 2 of Article 12,

If, in a tax treaty with any other State, Chile agrees that payments for industrial, commercial or scientific equipment will not be treated as royalties for the purposes of that treaty, or limits the tax charged in Chile on royalties arising in Chile to a rate below that provided for in paragraph 2 of Article 12 of this Convention, Chile shall without delay enter into negotiations with Australia with a view to providing the same treatment for Australia.

8.  With reference to Article 17,

Income referred to in paragraph 1 of Article 17 shall include any income derived from any personal activity exercised in the other State related to performances or appearances in that State.

9.  With reference to Article 26,

Notwithstanding Article 29 of this Convention, in the case of Chile, information to which paragraph 5 of Article 26 applies, to the extent that such information is covered by Article 1 of Decree Law No. 707 and Article 154 of Decree Law No. 3, will be available with respect to bank account transactions that take place on or after 1 January 2010. Nothing in the Convention shall prevent the application of Article 26 to the exchange of other information that existed prior to the date of entry into force of the Convention.

IN WITNESS WHEREOF the signatories, duly authorised to that effect, have signed this Protocol.

DONE at Santiago, this 10th day of March 2010,

in duplicate in the English and Spanish languages, both texts being equally authentic.

 

For Australia:                                For the Republic of Chile:

H E Virginia Grenville                  Andrés Velasco Brañes

Ambassador                                  Minister for Finance’

Detailed explanation of the Chilean convention

Article 1 — Persons Covered

Scope

3.5                   This Article establishes the scope of the application of the Chilean convention 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 the Chilean convention.  [Article 1]

3.6                   The Chilean convention also applies to third country residents in relation to Article 24 ( Non-Discrimination ) in its application to nationals of one of the treaty countries, Article 25 ( 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 26 ( Exchange of Information ).

3.7                   The application of the Chilean convention to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 ( Resident ).

Capital taxes

3.8                   To ensure that the Chilean convention continues to achieve its purpose of avoiding double taxation, the Protocol provides for the commencement of negotiations to extend the scope of the Chilean convention to include any tax on capital if either country introduces such a tax in the future.  [Protocol, subitem 1a)]

Preservation of certain Chilean domestic taxation arrangements

3.9                   Subitem 1b) of the Protocol is included in the Chilean convention to preserve Chile’s ability to levy its remittance tax on distributions of Chilean sourced income to foreign investors in Chilean funds regulated under the Foreign Capital Investment Funds legislation.  These rules provide a flat 10 per cent rate of tax for relevant remittances provided that the foreign investor maintains their investment in the Chilean fund for at least five years.  The funds do not qualify as residents of Chile for the purposes of the Chilean convention.  As such they will not qualify for the benefits of the Chilean convention other than those provided under the Non-Discrimination Article.

3.10               Subitem 1c) of the Protocol is included in the Chilean convention to preserve the application of Chile’s Foreign Investment Statute (Decree Law 600). These rules are designed to encourage direct foreign investment into Chile by providing foreign investors with long-term certainty concerning their tax treatment in Chile.  In particular, the foreign investor can seek guarantees from the Chilean Government by entering into an agreement which may grant the following rights:

•        A legal regime which is non-discriminatory.

•        For a fixed period of time, the option to have tax imposed on their Chilean profits at a fixed rate of 42 per cent. This locks in the rate of tax and the tax base.

•        A freeze on the existing rate of value added tax and customs duties applicable to the import of machinery and equipment not manufactured in Chile.

Article 2 — Taxes Covered

3.11               This Article specifies the existing taxes of each country to which the Chilean convention applies.  These are, in the case of Australia, the Australian income tax, the petroleum resource rent tax and the fringe benefits tax. 

3.12               The term ‘income tax’ includes Australian income tax imposed on capital gains.

3.13               Although Australia considers the petroleum resource rent tax to be encompassed by the term ‘income tax’, a specific reference to this has been included in the Chilean convention to put beyond doubt that it is a tax covered. 

3.14               The Chilean convention generally does not cover Australia’s goods and services tax (GST), customs duties, state taxes and duties and estate tax and duties. 

3.15               For Chile, the Chilean convention applies to taxes imposed under the Chilean Income Tax Act , including the specific tax on mining activity.

Extended scope for non-discrimination and exchange of information

3.16               While the taxes specified in Article 2 are covered for all purposes of the Chilean convention, a wider range of taxes are covered for the purposes of Articles 24 ( Non-Discrimination ) and 26 ( Exchange of Information ).  Paragraph 7 of Article 24 provides that the Article applies to the taxes which are the subject of the Chilean convention (that is, in Australia, the income tax, the petroleum resource rent tax and the fringe benefits tax), as well as Australia’s GST and Chile’s Value Added Tax ( Impuesto al Valor Agregado ).  Article 26 applies, in Australia, to all federal taxes administered by the Commissioner of Taxation (Commissioner) and in Chile, to all taxes imposed by or on behalf of Chile.   [Article 24, paragraph 7 and Article 26, paragraph 1]

Identical or substantially similar taxes

3.17               The application of the Chilean convention 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 listed in paragraph 1 of this Article (that is, in the case of Australia, the income tax, the petroleum resource rent tax and the fringe benefits tax).  [Article 2, paragraph 2]

Notification of changes to the tax laws

3.18               The competent authorities (that is, the Commissioner in the case of Australia and the Minister of Finance in the case of Chile, 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]

Article 3 — General Definitions

3.19               This Article provides general definitions and rules of interpretation applicable throughout the Chilean convention.  In particular, paragraph 1 defines a number of basic terms used in the convention.  The introduction to paragraph 1 makes clear that these definitions apply for all purposes of the convention, unless the context requires otherwise.

3.20               Certain other terms are defined in other Articles of the Chilean convention.  For example, the terms ‘resident of a Contracting State’, ‘permanent establishment’ and ‘immovable (real) property’ are defined in Articles 4 ( Resident ), 5 ( Permanent Establishment ) and 6 ( Income from Immovable (Real) Property ) respectively.  These definitions are to be applied consistently throughout the Chilean convention.  In contrast, a number of terms, such as ‘dividends’, ‘interest’ and ‘royalties’ are defined in specific Articles for use only in those articles.

Definition of Australia

3.21               As in Australia’s other modern tax treaties, Australia is defined to include certain external territories and the continental shelf.  The Chilean convention also refers specifically to the ‘exclusive economic zone’.  Although the exclusive economic zone is considered to be covered by the definition used in Australia’s other tax treaties, it is specifically included in the convention for additional clarity.  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 ITAA 1936, certain sea installations and offshore areas are to be treated as part of Australia).  [Article 3, subparagraph 1a)]

Definition of Chile

3.22               The definition of Chile covers the Republic of Chile and includes any area outside its territorial sea designated under the laws of the Republic of Chile and within which it may exercise sovereign rights in accordance with international law.  This mirrors the definition of Australia.  [Article 3, subparagraph 1b)]

Definition of person

3.23               The definition of person in the Chilean convention accords with the OECD Model Tax Convention on Income and on Capital (OECD Model) and includes individuals, companies and any other body of persons.  This includes a partnership (as a body of persons).  [Article 3, subparagraph 1d)]

Definition of company

3.24               The definition of company in the Chilean convention accords with the OECD Model, and means any body corporate or any entity which is treated as a body corporate for tax purposes.  [Article 3, subparagraph 1e)]

3.25               The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships (limited liability partnerships) in the same way as companies for income tax purposes.  These trusts and partnerships are included as companies for the purposes of the Chilean convention.  [Article 3, subparagraph 1e)]

Definitions of enterprise of a Contracting State and enterprise of the other Contracting State

3.26               The terms enterprise of a Contracting State and enterprise of the other Contracting State are defined as an enterprise carried on by residents of the respective countries.  An enterprise of a Contracting State need not be carried on in that State.  It may be carried on in the other Contracting State or a third state (that is, an Australian company doing all its business in Chile would still be an Australian enterprise.   [Article 3, subparagraph 1f)]

Definition of international traffic

3.27               In the Chilean convention, this term is of relevance for taxation of profits from shipping and air transport operations (Article 8 ( Ships and Aircraft )), income, profits 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 15 ( Income from Employment )). 

3.28               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, that is where the journey of a ship or aircraft within that country forms part of a longer voyage of that ship or aircraft involving a place of arrival or departure outside 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 or airspace.  For example, a ‘voyage to nowhere’ which begins and ends in Sydney on a ship operated by a Chilean 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 1g)]

Definition of competent authority

3.29               The competent authority is the person specifically authorised to perform certain actions under the Chilean convention.  For instance, the competent authority is required to give certain notifications (for example, 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 (for example, gather and exchange tax information in accordance with Article 26 ( Exchange of Information )). 

3.30               In the case of Australia, the competent authority is the Commissioner or an authorised representative of the Commissioner.  In the case of Chile, the competent authority is the Minister of Finance or an authorised representative of the Minister.  [Article 3, subparagraph 1h)]

Definition of national

3.31               The Chilean convention defines national by reference to an individual’s nationality or citizenship.  A company will be a national if it is created or organised under the laws of Australia or Chile.  For example, a company’s nationality is determined by where it is incorporated.  [Article 3, subparagraph 1i)]

3.32               The concept of nationality is used in subparagraph b) of paragraph 2 of Article 4 ( Resident ), subparagraph b) of paragraph 1 of Article 19 ( Government Service ) and paragraph 1 of Article 24 ( Non-Discrimination ).

Definition of tax

3.33               For the purposes of the Chilean convention, the term tax does not include any amount of penalty or interest imposed under the respective domestic tax law of the two countries.  [Article 3, subparagraph 1j)]

3.34               In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of Chile with respect to income that Chile is entitled to tax under the Chilean convention would not be a creditable Chilean tax for the purposes of paragraph 1 of Article 23 ( Relief of Double Taxation ).  This is in keeping with the meaning of ‘foreign income tax’ in subsection 770-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997).  Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer’s foreign income tax offset entitlement under paragraph 1 of Article 23 (pursuant to Division 770 of the ITAA 1997 — Foreign income tax offsets). 

Terms not specifically defined

3.35               Where a term is not specifically defined within the Chilean convention, 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 the Chilean convention at the time of its application.  In that case, the meaning of the term under the taxation law of the country will have precedence over the meaning it may have under other domestic laws.  [Article 3, paragraph 2]

3.36               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 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. 

3.37               If a term is not defined in the Chilean convention, 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 — Resident

Residential status

3.38               This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of the Chilean convention.  Residential status in one or other country is a necessary condition for the provision of relief under the convention.  For both Australia and Chile, ‘resident’ status is determined by reference to the person’s liability to tax as a resident, or by reason of domicile, under the laws of the respective country.  [Article 4, paragraph 1]

3.39               The term ‘liable to tax therein as a resident or by reason of domicile in that State’ is intended to capture those persons who are subject to comprehensive taxation under a country’s domestic taxation laws.  A person may be regarded as liable to tax as a resident even where the country does not in fact impose tax.  For example, under Australian law charitable institutions are exempt from income tax but only if they meet the requirements for exemption.  Such institutions are liable to tax for the purposes of the Article and, therefore, are ‘residents’ under the Chilean convention.  [Article 4, paragraph 1]

3.40               The second sentence of paragraph 1 of the Article deals with a person who may be considered to be a resident of a country according to its domestic laws but is only liable to taxation on income from sources in that country, such as foreign diplomatic and consular staff.  In the Australian context, this also 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 the Chilean convention.  Accordingly, Chile will not have to forgo tax in accordance with the convention on income derived by residents of Norfolk Island from sources in Chile (which will not be subject to Australian tax).  [Article 4, paragraph 1]

Residency of governments

3.41               Article 4 follows the OECD Model in specifically providing that the State, or a political subdivision, or local authority of the State, are residents for the purposes of the Chilean convention.  This means that the Australian Government, the state governments and local councils of Australia will be residents for the purpose of the convention.  This does not necessarily mean that income, profits or gains derived by these bodies from sources in Chile will be subject to tax in Chile as sovereign immunity principles may apply.  [Article 4, paragraph 1]

Dual residents

Individuals

3.42               A set of tie-breaker rules is included for determining how residency for an individual is to be allocated to one or other of the countries for the purposes of the Chilean convention if an individual taxpayer qualifies as a dual resident; that is, as a resident of both countries in accordance with paragraph 1 of the Article.

3.43               The tie-breaker rules for individuals apply certain tests, in a descending hierarchy.  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 the Chilean convention;

•        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 Chile, and the person is deemed for the purposes of the Chilean convention to be a resident only of the country with which the person has the closer personal and economic relations (centre of vital interests); or

•        if the individual’s centre of vital interests cannot be determined, the individual shall be deemed to be a resident of the country of which that individual is a national.

[Article 4, paragraph 2]

3.44               Notwithstanding that the Chilean convention deems a dual resident individual to be a resident only of one country for treaty purposes, that person remains a resident for the purposes of Australian domestic tax law.  Accordingly, that individual remains liable to tax in Australia as a resident, insofar as the Chilean convention allows.

Other persons

3.45               Where a person that is not an individual (such as a company) is a resident of both countries in accordance with paragraph 1, the person will not be entitled to any benefits provided by the Chilean convention with the exception of the protection from discrimination afforded under Article 24 ( Non-Discrimination ).  [Article 4, paragraph 3]

Regulated pension funds

3.46               The Chilean convention also specifically provides that a ‘regulated pension fund’ will be treated as being a resident of the country if the fund is established in that country primarily for the benefit of residents of that country.  Furthermore, in applying the convention to qualifying funds, the funds are to be treated for the purposes of applying the convention as the beneficial owner of the income it receives.  These rules are included in the convention to ensure that appropriate treaty benefits apply to qualifying funds.

3.47               The definition of the term regulated pension fund is aligned to the domestic laws of the respective countries.  In the case of Australia, the term means ‘an Australian superannuation fund, approved deposit fund or pooled superannuation trust’ within the meaning of the tax laws in Australia.  In the case of Chile, the term means a pension fund established under the pension system of Decree Law no. 3500.  Other similar pension funds may also qualify with the agreement of the competent authorities. [Protocol, subitem 1d)]

Article 5 — Permanent Establishment

Role and definition

3.48               The application of various provisions of the Chilean convention (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. 

3.49               The definition of the term ‘permanent establishment’ in this Article corresponds generally with definitions of the term in Australia’s more recent tax treaties.  However, the definition in the Chilean convention also includes a provision dealing specifically with services. 

Meaning of permanent establishment

3.50               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]

3.51               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;

•        a place relating to the exploration for, or the exploitation of, natural resources; or

•        an agricultural, pastoral or forestry property.

3.52               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]

Agricultural, pastoral or forestry property

3.53               Most of Australia’s tax treaties include as a permanent establishment an agricultural, pastoral or forestry property.  This reflects Australia’s usual practice of providing for taxation of profits from the exploitation of Australian land for the purposes of primary production under Article 7 ( Business Profits ).

3.54               However, under the Chilean convention, income from agriculture or forestry is dealt with under Article 6 ( Income from Immovable (Real) Property ).  This is reflected in the phrase ‘including income from agriculture or forestry’ in paragraph 1 of that Article.

3.55               Nevertheless, a fixed place of business that is used for primary production purposes, such as a farm or forestry property, will constitute a permanent establishment.  This has significance for Articles where the concept of permanent establishment is relevant, for example, in determining the right of a country to tax income (that is, under Article 15 ( Income from Employment )) or the country in which income arises (for example, interest). 

Building site or construction or installation project

3.56               A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. 

3.57               The phrase ‘building site or construction or installation project’ includes not only places used for the construction of buildings but also for 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

Performance of services

3.58               Where an enterprise performs services (other than activities to which subparagraphs 4b) or 4c) apply) in a country for a period exceeding 183 days in any 12-month period, and those services are performed through one or more individuals who are present and performing such services in that country, the enterprise will be deemed to have in that country a permanent establishment through which those activities are performed (unless the activities are of a type described in paragraph 6 of this Article and are of a preparatory or auxiliary nature).  [Article 5, subparagraph 4a)]

3.59               For these purposes, an enterprise performs services mainly through the activities of the entrepreneur or persons who are in a paid employment relationship with the enterprise (personnel).  These personnel include employees and other persons receiving instructions from the enterprise (for example, dependent agents).

3.60               In the course of negotiations, the two delegations noted that:

‘For [the] purposes of [Article 5], paragraph 4a), the scope of the term ‘services’ will have regard to the Commentary on the OECD Model on taxation of services.’

Natural resource activities

3.61               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 exceeding 90 days in any 12-month period, it will be deemed to have in that country a permanent establishment through which those activities are performed (unless the activities are of a type described in paragraph 6 of this Article and are of a preparatory or auxiliary nature).  Any time during which the substantial equipment was used for such purposes in that country is also counted for the purpose of computing the number of days in this paragraph.  [Article 5, subparagraph 4b)]

Substantial equipment

3.62               If an enterprise operates substantial equipment in a country for one or more periods which exceed, in the aggregate, 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 of this Article and are of a preparatory or auxiliary nature).  In the course of negotiations, the two delegations noted that:

‘The words “(including as provided in subparagraph b))” in subparagraph c) of paragraph 4 are intended to address the situation where substantial equipment is used both in natural resource activities in accordance with subparagraph b) and in other activities in accordance with subparagraph c).  Any use of substantial equipment for natural resources activities in accordance with subparagraph b) will therefore also be counted towards the 183 day threshold in subparagraph c).  However the profits will only be taxed once under Article 7.’

[Article 5, subparagraph 4c)]

3.63               Subparagraphs 4b) and c) together reflect Australia’s reservation to the OECD Model concerning activities relating to natural resources and 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; in particular those involving the use of such equipment.

3.64               The words ‘operation’ and ‘operates’ have been included to clarify that only active use of substantial equipment assets will be captured by subparagraphs 4b) 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. 

3.65               For example, if a Chilean enterprise itself operates a mobile crane at an Australian port for more than 183 days in a 12-month period, the Chilean enterprise would be deemed to have a permanent establishment in Australia under subparagraph 4c).  If, however, that Chilean 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 Chilean enterprise would not be deemed to have a permanent establishment in Australia under subparagraph 4c).  However, if that other person operates the substantial equipment for or on behalf of the Chilean enterprise in Australia, the Chilean enterprise would be considered to operate the equipment in Australia. 

3.66               The meaning of the term ‘substantial’ depends on the relevant facts and circumstances of each individual case.  Factors such as the size, quantity or value of the equipment, or the role of the equipment in income producing activities, are relevant in determining whether the equipment is substantial.  However, some examples of substantial equipment would include:

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

•        manufacturing or processing equipment used in a factory; or

•        oil or drilling rigs, platforms and other structures used in the petroleum, gas or mining industry.

Anti-avoidance provision

3.67               Given that Article 5 of the Chilean convention 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.  Activities will be regarded as substantially the same where, for example, different stages of a project are carried out by different subsidiaries within a group of companies or where the nature of the work carried on by the associated enterprises in respect of such project is the same.  [Article 5, paragraph 5]

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

3.69               The OECD Model Commentary recognises that time thresholds in Article 5 may give rise to abuses and notes that countries concerned with this issue may adopt solutions in bilateral negotiations to prevent such abuse.

3.70               The Chilean convention provides that an enterprise shall be deemed to be associated with another enterprise if one enterprise participates directly or indirectly in the management, control or capital of the other enterprise or the same persons participate directly or indirectly in the management, control or capital of the enterprises.  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]

Diagram 3.1  

In the above diagram, each of the subsidiaries may conduct substantially the same activities, for example, supervisory activities at a single building site.  In determining whether the six-month time threshold has been met, the time spent undertaking those activities by each of the enterprises would be aggregated.  However, any period during which more than one of the subsidiaries is carrying on activities concurrently would be counted only once.  For example, if C Sub A was present in Australia from 1 July 2011 to 30 November 2011 conducting supervisory activities at a building site and C Sub B was present in Australia from 1 November 2011 to 31 March 2012 also conducting supervisory activities at the same building site, the time spent by both subsidiaries would be aggregated to produce a nine month period (that is, as both subsidiaries were in Australia in November 2011 that month is counted only once in determining whether the six month threshold is met).

Where the time threshold is met, each of the subsidiaries would be deemed to have a permanent establishment through which its activities with respect to the project are conducted.  Only the profits derived by each subsidiary from its own activities would be attributed to each company's permanent establishment.

Preparatory and auxiliary activities

3.71               Certain activities do not generally give rise to a permanent establishment (for example, the use of facilities solely for storage, display or delivery).  Consistent with Chile’s treaty practice the list of activities also includes an express reference to the use of facilities solely for advertising, supplying information, scientific research or any other similar activity.

3.72               These activities are ordinarily of a preparatory or auxiliary character and are unlikely to give rise to substantial profits.  The economic link between the activities of the enterprise and the country in which the activities are carried on is generally insufficient to warrant the allocation of taxing rights to that country in these circumstances.

3.73               Another feature consistent with Australia’s tax treaty practice is that subparagraph 4f) of Article 5 ( Permanent Establishment ) of the OECD Model — dealing with combinations of activities of the kind referred to in subparagraphs 6a) to e) of this convention — is not included.  Australia does not consider that an enterprise undertaking multiple functions of the kind indicated in subparagraphs 6a) to e) would generally be regarded as only engaged in preparatory or auxiliary activities.  [Article 5, paragraph 6]

Dependent agents

3.74               An enterprise of one country is deemed to have a permanent establishment in the other country if a person acts on its behalf in that other country where that person has and habitually exercises, an authority to conclude contracts on behalf of the enterprise.  Such people are referred to as dependent agents.  Subitem 2a) of the Protocol clarifies that a person who substantially negotiates the essential parts of a contract on behalf of an enterprise will be regarded as ‘exercising an authority to conclude contracts on behalf of that enterprise’, even if the contract is subject to final approval or formal signature by another person.  [Article 5, paragraph 7, Protocol, subitem 2a)]

3.75               However, 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.  Agents of independent status (such as brokers or commission agents) to whom paragraph 8 of Article 5 applies are also excluded.  [Article 5, paragraph 7]

Manufacturing or processing on behalf of others

3.76               Consistent with Australia’s reservation 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.  An example is the situation where a mineral plant refines minerals for a foreign enterprise at cost, so that the plant operations produce no Australian profits.  Title to the refined product remains with the foreign enterprise and profits on sale are realised mainly outside of Australia.

3.77               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 much of their 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.  Paragraph 7 prevents an enterprise which carries on substantial manufacturing or processing activities in a country through an intermediary from escaping tax in that country.

3.78               The inclusion of this paragraph 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, paragraph 7]

Independent agents

3.79               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.  Subitem 2b) of the Protocol provides that a person will come within the scope of paragraph 8 only if that person is independent of the enterprise, both legally and economically, and acts in the ordinary course of that person’s business as such a broker or agent when acting on behalf of the enterprise.  [Article 5, paragraph 8, Protocol, subitem 2b)]

Subsidiary companies

3.80               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

3.81               The principles set out 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 Chile) when applying the source rule contained in:

•        paragraph 7 of Article 11 ( Interest ); and

•        paragraph 5 of Article 12 ( Royalties ).

[Protocol, subitem 2c)]

Article 6 — Income from Immovable (Real) Property

3.82               This convention uses the term ‘immovable (real) property’ in place of Australia’s preferred treaty practice wording ‘real property’.  No difference is intended.

Where income from immovable (real) property is taxable

3.83               This Article provides that the income of a resident of one country, from immovable (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. 

3.84               Generally, Australia’s tax treaties exclude profits of an enterprise from agriculture or forestry from the operation of this Article.  Such profits are generally dealt with under Article 7 ( Business Profits ) of Australian treaties.  However, under the Chilean convention, the allocation of taxing rights over such income is determined by Article 6 ( Income from Immovable (Real) Property ).  Accordingly, income from the relevant activities may be taxed in Australia where the real property is situated in Australia, irrespective of whether the enterprise has a permanent establishment in Australia.  Nonetheless, an enterprise would generally have a permanent establishment in the country in which the agriculture or forestry property is situated.  [Article 6, paragraph 1]

Definition

3.85               Immovable (real) property is primarily defined as having the meaning which it has under the domestic law of the country where the property is situated.  In the case of Australia, real property also extends to:

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

•        royalties and other payments relating to the exploration for, or exploitation of, natural resources.

3.86               In the case of Chile, immovable (real) property also extends to:

•        property accessory to immovable property;

•        livestock and equipment used in agriculture and forestry;

•        rights to which the provisions of the general law of Chile respecting land apply, including a lease of land and any other interest in or over land (including exploration and mining rights over natural resources); and

•        usufruct of immovable property, and royalties and other payments relating to the exploitation of natural resources.

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

Deemed situs

3.87               Under Australian law the place where an interest in land or natural resources, such as a lease, is situated (situs) is not necessarily where the underlying property is situated.  Paragraph 3 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]

Form of exploitation of immovable (real) property

3.88               Paragraph 4 makes it clear that the general rule in paragraph 1 applies irrespective of the form of exploitation of the immovable (real) property.  The Article applies to income derived from the direct use, letting or use in any other form of immovable (real) property.  [Article 6, paragraph 4]

Immovable (real) property of an enterprise

3.89               Paragraphs 1 and 4 of Article 6 are extended to profits derived from the use or exploitation of real property of an enterprise or real property used for the performance of independent personal services.  The reference to ‘profits’ in paragraph 5 is intended to ensure that taxation is on a net basis.

3.90               This Article provides that the country in which the real property is situated may impose tax on the income derived from that property by a resident of the other country, irrespective of whether or not that income is attributable to a permanent establishment or fixed base situated in the first-mentioned country.

3.91               However, in relation to real property of an enterprise of one country, or real property used for the performance of independent personal services by a resident of that country, paragraph 5 of this Article specifically provides that the profits from such real property, if attributable to a permanent establishment or a fixed base situated in the other country, are to be determined in accordance with the rules in paragraphs 2 and 3 of Article 7 ( Business Profits ).  This clarifies that, notwithstanding that the profits are dealt with under Article 6, and not Article 7 as is usually the case under Australian treaties, such profits will be taxed on a net basis.  [Article 6, paragraph 5]

Article 7 — Business Profits

3.92               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. 

3.93               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.  Furthermore, the inclusion of the words ‘or has carried on business’ in the second sentence of paragraph 1 clarifies that the other country may tax any profits that are attributable to activities carried on through the permanent establishment, even if they are derived after the relevant permanent establishment has ceased to exist.  While Australia would apply the treaty in this way even without these words, the specific inclusion is consistent with Chile’s preferred treaty practice.  [Article 7, paragraph 1]

3.94               If an enterprise which is a resident of one country derives business profits in the other country that are not 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 such profits (except where paragraph 7 of this Article applies — see the explanation in paragraphs 3.108 and 3.109). 

Determination of business profits

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

3.96               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.  Item 3 of the Protocol specifically clarifies that for the purposes of the source country’s computation of the taxable income of a permanent establishment situated in that country, the deductibility of expenses which are attributable to that permanent establishment are to be determined under the domestic law of that country. [Article 7, paragraph 3, Protocol, item 3]

3.97               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 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]

Application of domestic law

3.98               The domestic law of the country in which the permanent establishment is situated (for example, 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 stated in 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 important 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. 

3.99               Item 4 of the Protocol 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.  [Protocol, item 4]

3.100           In addition, paragraph 9 preserves the application of Chile’s unique two-tiered system of taxing profits attributable to a permanent establishment, or a fixed base, situated in Chile, under both the Chilean First Category Tax and the Additional Tax provided that the First Category Tax is fully creditable in computing the amount of the Additional Tax [Article 7, paragraph 9]

3.101           The First Category Tax is a business profits tax levied on income derived on an accrual basis from commercial, industrial, mining and other activities involving the use of capital.  It is currently imposed at a rate of 17 per cent.

3.102           The Additional Tax applies to remittances or payments of income abroad or, in general, when money is made available from Chile to a non-resident or non-domiciled person.  The current rate of tax under the Additional Tax is 35 per cent.

3.103           To calculate Additional Tax, an amount equivalent to the First Category Tax paid corresponding to the profits distributed or remitted should be included in the tax base and the income is thus grossed-up.  The amount of the First Category Tax is creditable against the Additional Tax due on the grossed up distribution. 

Profits or gains dealt with under other Articles

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

3.105           This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other Articles of the Chilean convention (for example, 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.  However, under certain Articles, for example paragraph 4 of Article 10 ( Dividends ), where the holding or asset in respect of which the income is paid is effectively connected with a permanent establishment that income will be dealt with under Article 7 ( Business Profits ).  [Article 7, paragraph 5]

Insurance with non-residents

3.106           Each country has the right to continue to apply any provisions in its domestic law relating to the taxation of income from insurance with non-resident insurers.  However, except where the premium is attributable to a permanent establishment, the tax charged shall not exceed:

•        five per cent of the gross amount of the premiums in the case of policies of reinsurance; and

•        ten per cent of the gross amount of the premiums in the case of all other policies of insurance.

Where the premium is attributable to a permanent establishment situated in a country, the tax that may be imposed in that country is not subject to these limits.  In such cases, that country may tax the premium in accordance with its domestic law.  [Article 7, paragraph 6]

3.107           An effect of this paragraph is generally 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 broadly consistent with Australia's reservation to Article 7 ( Business Profits ) of the OECD Model.

Trust beneficiaries

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

3.109           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 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 Chile is beneficially entitled under the trust.  Paragraph 7 of this Article ensures that such business profits will be subject to tax in Australia where the trustee of the relevant trust has, or would have if it were a resident of Chile, a permanent establishment in Australia in relation to that business.  This paragraph will also apply where relevant to other Articles of the Chilean convention, 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.  That is, the beneficiary of the trust will also have a permanent establishment for the purposes of paragraph 2 of Article 13.

Time limitation

3.110           The Chilean convention specifies a time limit for the adjustment of profits attributable to a permanent establishment of the enterprise.  A country may not make an adjustment to the profits for a year of income where a period of seven years has expired from the date on which the enterprise completed the filing requirements for that year of income in that country.  However, the time limit does not apply in the case of fraud, gross negligence, wilful default, or where an audit into the profits of an enterprise was initiated by that country within the seven-year period.  [Article 7, paragraph 8]

3.111           The Article does not impose a time limit on conclusion of the audit into the profits of the enterprise.

Article 8 — Ships and Aircraft

Profits from international traffic

3.112           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]

3.113           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 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.  An example of such ancillary profits would be profits derived by a ship operator in the business of transport who undertakes a one-off bareboat lease of one of their ships.

Profits from internal traffic

3.114           Profits derived directly or indirectly by an enterprise of one country from the operation of ships or aircraft may, to the extent that they relate to operations that are confined solely to places in the other country, be taxed in the other country.  [Article 8, paragraph 2]

3.115           Australia’s (Chile’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 (Chile).  [Article 8, paragraph 4]

3.116           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, for Australian tax purposes, Division 12 of Part III of the ITAA 1936, deems 5 per cent of the amount paid in respect of the transport of passengers, livestock, mail or goods shipped in Australia to be the taxable income of a ship owner or charterer who has their principal place of business outside of Australia. 

Example 3.1  

A ship operated by a Chilean enterprise, in the course of an international voyage from Valparaiso to Melbourne, makes a stop in Hobart to pick up cargo.  Profits derived from the transport of the goods loaded in Hobart and discharged in Melbourne would be profits from the carriage of goods shipped in and discharged at a place in Australia under paragraph 2 of Article 8.  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 3.2  

A Chilean enterprise operates sightseeing flights over the Southern Ocean.  Passengers board the aircraft in Hobart and disembark at the same airport later on the same day.  The profits from the carriage of the passengers shipped in and discharged at a place in Australia would be covered by paragraph 2 of Article 8, 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.

Article 9 — Associated Enterprises

Reallocation of profits

3.117           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 Chile on an arm’s length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate or be made between unrelated enterprises dealing wholly independently with one another.  In the course of negotiations, the two delegations noted that:

‘The expression “dealing wholly independently with one another” is included in paragraph 1 [of Article 9 ( Associated Enterprises )] to conform to Australia’s consistent treaty practice and to address Australia’s concerns that the appropriate benchmark for determining the conditions operating between the associated enterprises should have regard to whether those dealings between the enterprises occurred on a truly independent basis.’

[Article 9, paragraph 1]

3.118           This Article would 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.  The term ‘might be expected to operate or be made’ in paragraph 1 is included to conform broadly to Australia’s treaty practice and allows adjustments where it is not possible to determine the conditions that ‘would have been made or occurred’ between the associated enterprises.

3.119           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.

3.120           Each country has the right to apply its domestic law relating to the determination of the tax liability of a person (for example, Australia’s Division 13 of Part III of the ITAA 1936) to 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.  [Protocol, item 4]

Correlative adjustments

3.121           Where a reallocation of profits is made (either under this Article or, by virtue of item 4 of the Protocol, under domestic law) so that the profits of an enterprise of one country are adjusted upwards, economic double taxation (that is, taxation of the same income in the hands of different persons) 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 is required, if it agrees with the primary adjustment, to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation.

3.122           It is therefore 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 Chile will consult with each other to determine the appropriate adjustment.  [Article 9, paragraph 2]

Time limitation

3.123           The Chilean convention specifies a time limit for an adjustment to the profits of an enterprise under this Article.  A country may not make an adjustment to the profits for a year of income where a period of seven years has expired from the date on which the enterprise completed the filing requirements for that year of income in that country.  However, the time limit does not apply in the case of fraud, gross negligence, wilful default, or where an audit into the profits of an enterprise was initiated by that country within the seven-year period.  [Article 9, paragraph 3]

3.124           The Article does not impose a time limit on conclusion of the audit into the profits of the enterprise.

Article 10 — Dividends

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

•        certain cross-border intercorporate dividends will be subject to a maximum 5 per cent rate of source taxation;

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

•        the application of Chile’s unique two-tiered system of taxing profits is not limited by this Article (subject to certain conditions);

•        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 );

•        dividends paid in respect of a holding which is effectively connected with a fixed base are to be dealt with under Article 14 ( Independent Personal Services ); and

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

3.126           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

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

3.127           This Article allows both Australia and Chile to tax dividends flowing between them but limits the rate of tax that the country of source may impose on dividends paid by companies that are resident 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]

3.128           A rate limit of 5 per cent will apply for dividends paid in respect of company shareholdings that constitute a direct voting interest of at least 10 per cent.  [Article 10, subparagraph 2a)]

Fifteen per cent rate limit for all other dividends

3.129           In all other cases, the Chilean convention provides that the source country may tax dividends that are beneficially owned by residents of the other country, but will limit its tax to 15 per cent of the gross amount of the dividend.  [Article 10, subparagraph 2b)]

3.130           Although the provisions in Article 10 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.

Interaction of paragraph 2 with the Chilean Additional Tax

3.131           Chile does not impose a dividend withholding tax on foreign investors.  Rather it has a unique two-tiered system of taxing profits, comprising the First Category Tax and the Additional Tax.  Thus a key feature of Chile’s tax treaties is to include a provision whereby the permissible rates of source country taxation in paragraph 2 do not limit the application of the Additional Tax payable in Chile provided that the First Category Tax is fully creditable in computing the amount of Additional Tax.  See paragraphs 8.100 to 8.103 for an explanation of Chile’s two-tiered system.   [Article 10, paragraph 2]

Requirement for consultation

3.132           To ensure that the rate of withholding tax provided for under this Chilean convention remain competitive into the future Australia and Chile are required to consult each other with a view to agreeing to any amendment of paragraph 2 of this Article if:

•        Chile agrees in a tax treaty with any other country to limit the Additional Tax charged in Chile; or

•        in either Australia or Chile the tax imposed on dividends and on profits out of which such dividends are paid exceeds, in the aggregate, 42 per cent.

[Protocol, item 5]

Dividends effectively treated as either business profits or profits from independent personal services

3.133           Limitations on the tax of the country in which the dividend is sourced do not apply to dividends derived by a resident of the other country who has a permanent establishment or fixed base in the source country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with such permanent establishment or fixed base.

3.134           Where the holding is effectively connected with such permanent establishment or fixed base, the dividends are to be treated as business profits and profits from independent personal services respectively, 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 Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ).

3.135           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 or fixed base 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 4]

Extra-territorial application precluded

3.136           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 or fixed base situated in the first country.

[Article 10, paragraph 5]

Diagram 3.2  

In the diagram above, paragraph 5 would, but for the exception, preclude Chile from taxing the dividend paid by Australian resident company 2 to Australian resident company 1 out of profits derived from Chilean sources.  However, as the dividends relate to the Australian shareholder’s permanent establishment in Chile with which the holding is effectively connected, Chile may tax the dividends.

Definition of dividends

3.137           The term dividends in this Article means income from:

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

•        income or other distributions which are subject to the same taxation treatment as income from shares in the country of which the distributing company is a resident. 

[Article 10, paragraph 3]

3.138           In the course of negotiations, the two delegations noted that:

‘The definition of dividends in paragraph 3 does not limit either country’s ability to determine the meaning of “income from shares” in accordance with its domestic law.  In the case of Australia, subsection 3(2A) of the International Tax Agreements Act 1953 shall apply.’

Limitation of benefits

3.139           The source country rate limits and exemptions available under this Article will not apply where an assignment of dividends, or 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 27, paragraph 1]

Article 11 — Interest

3.140           This Article allocates taxing rights in respect of interest flows between Australia and Chile.  Article 11 provides that:

•        a maximum 5 per cent rate of source country tax may be applied on interest derived by financial institutions in certain circumstances;

•        a maximum 10 per cent rate of source country tax may be applied on all other interest income.  However, Chile may impose a maximum rate of 15 per cent provided Chile has not agreed in a treaty with another country to a rate less than 15 per cent;

•        interest paid on a debt-claim which is effectively connected with a permanent establishment or fixed base shall be subject to Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively;

•        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 Chilean resident other than where the indebtedness in respect of which the interest is paid is effectively connected with a permanent establishment or fixed base situated in Chile; or

-       the interest is paid by a non-resident to a Chilean resident and it is an expense of the payer in connection with a permanent establishment or fixed base situated in Australia;

•        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; and

•        a ‘most favoured nation’ obligation will be triggered if Chile agrees in a tax treaty with another country to lower source country taxation rates in relation to interest derived by financial institutions or governments.

3.141           No relief is available under this Article in cases that have been designed with the main purpose of taking advantage of the Article.

Permissible rate of source country taxation

3.142           This Article provides for interest income to be taxed by both countries but requires the country in which the interest arises (that is, the source country) to limit its tax where a resident of the other country is the beneficial owner of the interest.  [Article 11, paragraphs 1 and 2]

Five per cent rate limit for financial institutions

3.143           Source country taxation is not to exceed five per cent of the gross amount of interest derived by a financial institution which is unrelated to and deals wholly independently with the payer.  This applies to interest derived by a financial institution that is a resident of the other country and the beneficial owner of the interest. 

3.144           The term financial institution means a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance.  This does not include a corporate treasury or a member of a group that performs the financing services of the group.  [Article 11, subparagraph 2a)]

3.145           The 5 per cent rate limit is not available for interest paid as part of an arrangement involving back-to-back loans or other arrangement that is economically equivalent and intended to have a similar effect.  The denial of the 5 per cent rate limit 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 lower withholding tax rate.  The 5 per cent rate limit will only be denied for interest paid on the component of a loan that is considered to be back-to-back.  In such cases, the 10 per cent rate limit will apply, subject to paragraph 4.  [Article 11, paragraph 3]

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

•        a Chilean 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. 

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

Ten per cent rate limit

3.148           Subject to the higher rate limits that may apply in accordance with paragraph 4, source country taxation is not to exceed 10 per cent of the gross amount of interest in all other cases where a resident of the other country is the beneficial owner of the interest.  [Article 11, subparagraph 2b)]

Unilateral source country taxation rate limits for Chile

3.149           In the case of interest arising in Chile to which subparagraph 2b ) and paragraph 3 applies, the rate of tax will be 15 per cent rather than the specified 10 per cent rate.  However, in the event Chile agrees in a subsequent tax treaty with any other country to limit Chilean tax to a rate less than 15 per cent, Chile’s source country taxation to which subparagraph 2b ) or paragraph 3 applies will automatically be reduced to the greater of the rate provided under that treaty or 10 per cent.  The timing of the reduction in the permissible rate that Chile may impose on interest beneficially owned by an Australian resident will coincide with the ‘date of effect’ in Chile’s treaty with the other country which has triggered the event.  [Article 11, paragraph 4]

‘Most favoured nation’ clause

3.150           The Chilean convention contains a ‘most favoured nation’ clause in respect of interest derived by financial institutions or governments.  In the event that Chile agrees under a tax treaty with any other country to limit the tax charged on interest derived by a financial institution to a rate lower than that specified in subparagraph 2a ) (that is, 5 per cent), or interest derived by a government to a rate lower than that specified in subparagraph 2b ) (that is, 10 per cent), Chile is required to enter into negotiations with Australia with a view to providing the same treatment.  [Protocol, item 6]

Definition of interest

3.151           The term interest is defined for the purposes of this Article to include:

•        income from debt-claims of every kind;

•        interest from government securities;

•        interest from bonds and debentures; and

•        income which is subjected to the same taxation treatment as income from money lent by the law of the country in which the income arises. 

3.152           However, it does not include any income which is treated as a dividend under Article 10 ( Dividends ).  For purposes of determining whether income should be treated as a dividend, the two delegations noted in the course of negotiations that Australia’s domestic law characterisation of ‘income from shares’ is preserved (as discussed in paragraph 8.138).  [Article 11, paragraph 5]

Interest effectively treated as business profits or profits derived from independent personal services

3.153           Interest derived by a resident of one country which is paid in respect of a debt-claim which is effectively connected with a permanent establishment or fixed base of that person in the other country, will form part of the profits of that permanent establishment or fixed base and be subject to the provisions of Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively.  Accordingly, the rate limitations on source taxation provided in paragraphs 2 to 4 of this Article do not apply to such interest in the country in which the interest is sourced.  [Article 11, paragraph 6]

Deemed source rules

3.154           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 Chile 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 Chilean resident, if it is an expense incurred by the payer of the interest in connection with a permanent establishment or fixed base situated in Australia.

3.155           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 in Chile, or outside both Australia and Chile.  Similarly, interest connected with a fixed base situated in a third State is deemed to be sourced in the country in which the fixed base is situated.  [Article 11, paragraph 7]

3.156           In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply.  [Protocol, subitem 2c)]

Related persons

3.157           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 source country tax rate limits apply 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 the Chilean convention.  [Article 11, paragraph 8]

3.158           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. 

A special relationship also covers relationships of blood or marriage and, in general, any community of interests.

Limitation of benefits

3.159           The source country rate limits and exemptions available under this Article will not apply where an assignment of the interest, or a creation or assignment of the debt-claim or other rights in respect of which the interest is paid, has been made with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article.  [Article 27, paragraph 1]

Article 12 — Royalties

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

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

•        a maximum 10 per cent rate of source country tax may be levied on the gross amount of royalties in all other cases;

•        royalties paid in respect of a right or property which is effectively connected with a permanent establishment or fixed base are subject to Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively;

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

-       the royalties are paid to a Chilean resident by a person who is a resident of Australia for purposes of Australian tax, other than a payment made in respect of a right or property which is effectively connected with a permanent establishment or a fixed base situated in Chile; or

-       the royalties are paid by a non-resident to a Chilean resident and are an expense of the payer in connection with a permanent establishment or fixed base situated in Australia;

•        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; and

•        a ‘most favoured nation’ obligation will be triggered if Chile agrees in a tax treaty with another country to exclude ‘equipment’ rentals from the scope of this Article, or limits source country taxation of royalties to a rate below those provided for in this Article.

3.161           No relief is available under this Article in cases that have been designed with a main purpose of taking advantage of the Article.

Permissible rate of source country taxation

3.162           This Article in general allows both countries to tax royalty flows but limits the tax of the country of source, in respect of royalties beneficially owned by residents of the other country, to:

•        five per cent of the gross amount of royalties which are for the use of, or the right to use, any industrial, commercial or scientific equipment; and

•        ten per cent of the gross amount of royalties in all other cases.

[Article 12, paragraphs 1 and 2]

3.163           The specific source country taxation rate limitations above do not apply to natural resource royalties, which, in accordance with Article 6 ( Income from Immovable (Real) Property ), remain taxable in the country of source without limitation of the tax that may be imposed.

‘Most favoured nation’ clause

3.164           The Chilean convention contains a ‘most favoured nation’ clause in respect of the definition of the term ‘royalties’ and the rate limitations.  In particular, if Chile agrees in a tax treaty with another country to exclude equipment rentals from being treated as royalties or to provide lower rates of tax than those provided under paragraph 2, Chile is required to enter into negotiations with Australia with a view to providing the same treatment for Australia.  [Protocol, item 7]

Definition of royalties

3.165           The definition of royalties in this Article reflects most elements of the definition in Australia’s domestic income tax law.  The definition encompasses payments (or credits) for the use of, or the right to use, any copyright, or for the use of, or right to use, industrial, commercial or scientific equipment.  It also includes payments (or credits) for the supply of information concerning technical, industrial, commercial or scientific experience but not payments for services rendered, except as provided for in subparagraph 3e).  In the Chilean convention, the definition adopts the OECD Model approach in referring to ‘information concerning technical, industrial, commercial or scientific experience’, rather than the more usual reference in Australian treaties to ‘knowledge or experience’.  However, both expressions refer to what is commonly known as ‘know-how’, and no difference in meaning is intended.  [Article 12, paragraph 3]

Image or sound reproduction or transmission

3.166           The ‘royalties’ definition includes payments (or credits) made for the use of, or the right to use, motion picture films.  It also covers payments (or credits) for the use of, or the right to use, images or sounds, however reproduced or transmitted, for use in connection with television, radio or other 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 (or credits) will constitute a royalty.  [Article 12, subparagraph 3a)]

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

3.167           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.

3.168           Payments (or credits) 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.

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

3.170           Depending on the circumstances, payments for services rendered are to be treated under either Articles 7 ( Business Profits ) or 14 ( Independent Personal Services ).

Payments (or credits) for the supply of ancillary assistance

3.171           Consistent with Australia’s treaty practice and paragraph 11.6 of the OECD Model Commentary on Article 12, payments made (or amounts credited) for the supply of any assistance as a means of enabling the application or enjoyment of the property, right or information referred to in subparagraphs 3a) to 3d) fall within the meaning of the term ‘royalties’ where the assistance is both ancillary and subsidiary to the use or supply of the relevant property, right or information.   [Article 12, subparagraph 3e)]

Spectrum licences

3.172           Under the Chilean convention, payments (or credits) 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 (or credits) that arise in Australia for the use in Australia of any part of the radiofrequency spectrum specified in an Australian spectrum licence.  [Article 12, subparagraph 3f)]

Forbearance

3.173           Consistent with Australian tax treaty practice and international standards (see paragraph 8.5 of the OECD Model Commentary on Article 12), subparagraph 3g ) 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 this Article.  [Article 12, subparagraph 3g)]

Other royalties effectively treated as business profits or profits derived from independent personal services

3.174           As in the case of dividend or 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 or fixed base in the country in which the income is sourced.  Such income is subject to the full rate of tax applicable in the country in which the royalty is sourced in accordance with the provisions of Articles 7 ( Business Profits ) and 14 ( Independent Personal Services ) respectively.  [Article 12, paragraph 4]

Deemed source rules

3.175           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 ) and operate to allow Australia to tax royalties paid by a resident of Australia to a resident of Chile who is the beneficial owner of those royalties.  Australia may also tax royalties paid by a non-resident, being royalties which are beneficially owned by a Chilean resident, if the royalties are an expense incurred by the payer in connection with a permanent establishment or fixed base situated in Australia.

3.176           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 in Chile, or outside both Australia and Chile, 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.  Similarly, royalties connected with a fixed base situated in a third State are deemed to be sourced in the country in which the fixed base is situated. [Article 12, paragraph 5]

3.177           In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply.  [Protocol, subitem 2c)]

Related persons

3.178           Where a special relationship exists between the payer and the beneficial owner of the royalties, the source country tax rate limits 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 the Chilean convention.

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

Limitation of benefits

3.180           The source country rate limit available under this Article will not apply where the assignment of the royalties, or the creation or assignment of the property or right in respect of which the royalty is paid, has been made or performed with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article.  [Article 27, paragraph 1]

Article 13 — Alienation of Property

Taxing rights

3.181           This Article allocates between the respective countries taxing rights in relation to income, profits or gains arising from the alienation of immovable (real) property and other items of property.

3.182           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 may be 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.

Immovable (real) property

3.183           Income, profits or gains from the alienation of immovable (real) property may be taxed by the country in which the property is situated.  [Article 13, paragraph 1]

3.184           For the purpose of this Article, the term ‘immovable (real) property’ has the same meaning as it has under paragraph 2 of Article 6.  Where the property is situated is clarified under paragraph 3 of Article 6 ( Income from Immovable (Real) Property ).

Permanent establishment or fixed base

3.185           Paragraph 2 deals with income, profits or gains arising from the alienation of property (other than immovable (real) property covered by paragraph 1) forming part of the business assets of a permanent establishment of an enterprise or pertaining to a fixed base for the performance of independent personal services.  It also applies where the permanent establishment or fixed base are themselves (alone or with the whole enterprise) alienated.  Such income, profits or gains may be taxed in the country in which the permanent establishment or fixed base 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

3.186           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 immovable (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]

3.187           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 (for example, so-called ‘voyages to nowhere’ by cruise ships).  [Article 3, subparagraph 1g)]

Shares and other interests in land-rich entities

3.188           Paragraph 4 applies to situations involving the alienation of shares, comparable interests or other rights that derive more than 50 per cent of their value directly or indirectly from real property situated in the other country.  Income, profits or gains from the alienation of such shares, comparable interests or other rights may be taxed in the country in which the immovable (real) property is situated.  Paragraph 4 complements paragraph 1 of this Article and is designed to cover arrangements involving the effective alienation of incorporated immovable (real) property, or like arrangements.

3.189           This provision ensures that capital or revenue gains on disposal of a foreign resident’s indirect, as well as direct, interests in certain targeted assets are taxable by Australia.  Such treatment applies whether the immovable (real) property is held directly or indirectly through a chain of interposed entities.  [Article 13, paragraph 4]

Capital gains from shares and other rights in companies

Small shareholders — limited rate of tax at source

3.190           The first sentence of paragraph 5 applies to capital gains (other than gains to which paragraph 2 or 4 applies) derived by residents of a country (with the exception of pension funds) from the alienation of ‘shares or certain other rights representing the capital of a company’, where that company is a resident of the other country.  This provision permits the other country to tax the capital gain, but the rate so imposed is limited to 16 per cent of the amount of the gain.    

3.191           In the course of negotiations, the two delegations noted that:

‘The reference to shares and other rights “representing the capital of a company” in the first sentence of paragraph 5 reflects Chile’s consistent treaty practice and refers to shares in a company and other rights or participation in companies such as social rights in the case of Chilean Sociedates de Responsabilidad Limitada .’

3.192           Capital gains derived by pension funds on the alienation of shares will be taxable only in the fund’s country of residence (that is, under paragraph 6 of this Article), unless paragraph 2 or 4 or the second sentence of paragraph 5 applies.

3.193           The second sentence of paragraph 5 removes the limitation on the rate of tax the source country is permitted to impose in respect of capital gains from the alienation of ‘substantial shareholdings’.  In this context ‘substantial holdings’ are those holdings where the alienator has owned shares or other rights representing, directly or indirectly, 20 per cent or more of the capital of that company during the 12-month period preceding such alienation.  [Article 13, paragraph 5]

3.194           Paragraph 5 of this Article is consistent with Chile’s treaty practice.  While the paragraph allocates a taxing right over certain gains derived by residents of Chile (that is, gains from the sale of shares in Australian companies that are not ‘land-rich’) it will have no practical application in Australia as these gains are not taxable under Australia’s domestic tax laws.

Resident country sweep-up provision

3.195           Paragraph 6 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 of which the person deriving the gains is a resident.  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 Chile.  The liability of the Australian resident to taxation on such capital gains will be determined in accordance with Australia’s domestic law.  [Article 13, paragraph 6]

Departing residents

3.196           The purpose of paragraph 7 is to prevent double taxation of capital gains of departing residents.  Under section 104-160 of the ITAA 1997, a person who ceases to be a resident of Australia will generally trigger a tax liability on unrealised gains from assets held, other than taxable Australian property (as defined in section 855-15 of the ITAA 1997).  Under subsections 104-165(2) and (3) of the ITAA 1997, a departing Australian resident individual may elect to either pay the Australian tax at the time of departure or to defer tax on the unrealised gain until the actual disposal of the asset.  A former Australian resident individual who has been taxed on the unrealised gains upon departure from Australia, and who becomes a Chilean resident, may elect to be treated for Chilean taxation purposes as having, immediately before ceasing to be a resident of Australia, alienated and reacquired the property for an amount equal to its fair market value at that time.  However, a departing resident may not make the election in respect of property situated in either Australia or Chile.  [Article 13, paragraph 7]

Example 3.3  

An Australian resident, Kylie, owns a house in Bali which was purchased in the year 2002 for $200,000 (this is the cost base of the asset as Kylie has not incurred any further expenditure which should be taken into account in determining the cost base of the asset).  At the time Kylie ceases to be an Australian resident, the market value of the house is $300,000.  Kylie will therefore have an Australian capital gain of $100,000.  Kylie pays the tax on this unrealised gain rather than electing to defer payment of the tax.  

Kylie later sells the house for $400,000 while a resident of Chile.  Paragraph 7 will allow Kylie to elect to be treated for Chilean tax purposes as if she had acquired the property for $300,000 at the time that she ceased to be an Australian resident.  This will mean that Chile is precluded from taxing Kylie on the gain that accrued on the house during the period of Kylie’s residence in Australia.

Example 3.4  

An Australian resident, Michael, owns a house in Chile which was purchased in the year 2004 for $300,000 (this is the cost base of the asset as Michael has not incurred any further expenditure which should be taken into account in determining the cost base of the asset).  At the time Michael ceases to be an Australian resident, the market value of the house is $400,000.  Michael will therefore have an Australian capital gain of $100,000.  Michael pays the tax on this unrealised gain rather than electing to defer payment of the tax.

Michael later sells the house for $450,000 while a resident of Chile.  Paragraph 7 will not allow Michael to elect to be treated for Chilean tax purposes as if he had acquired the property for $400,000 at the time that he ceased to be an Australian resident.  This will mean that Chile is permitted to tax Michael on the gain that accrued on the house.

Double tax relief

3.197           In the event that the operation of this Article should result in an item of income or gain being subjected to tax in both States, the country of which the person deriving the income or gain is a resident (as determined in accordance with Article 4 ( Resident )) would be obliged by Article 23 ( Relief of Double Taxation ) to provide double tax relief for the tax imposed by the other country.

Article 14 — Independent Personal Services

3.198           Under this Article, profits derived by an individual in respect of professional services or other activities of an independent character will be subject to tax in the country in which the services or activities are performed if either:

•        the individual has a fixed base regularly available in the other country for the purpose of performing those activities; or

•        the individual is present in the other country for a period or periods exceeding, in the aggregate, 183 days in any 12-month period commencing or ending in the fiscal year concerned.

3.199           If either of these conditions are met, the country in which the services or activities are performed will be able to tax so much of the profits as are attributable to the activities performed during such period or periods or through that fixed base.  The reference to ‘profits’ (rather than ‘income’ which is commonly found in articles similar to this Article) is intended to put beyond doubt that deductions will be allowed for expenses incurred in gaining the income from the services performed.  [Article 14, paragraph 1]

3.200           If the above tests are not met, the income will be taxed only in the country of residence of the individual.

3.201           The term professional services includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.  [Article 14, paragraph 2]

3.202           Remuneration derived as an employee and income derived by entertainers and sportspersons are the subject of other Articles of the tax treaty and are not covered by this Article.

Article 15 — Income from Employment

Basis of taxation

3.203           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 16 ( Directors’ Fees );

•        Article 17 ( Artistes and Sportspersons );

•        Article 18 ( Pensions ); and

•        Article 19 ( Government Service ). 

3.204           Generally, salaries, wages and other 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 15, paragraphs 1 and 2]

Short-term visit exemption

3.205           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 not a resident of the visited country; and

•        the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the country being visited. 

3.206           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 15, paragraph 2]

Where the short-term visit exemption does not apply

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

3.208           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 23 ( Relief of Double Taxation ) Australia would be required in this situation to relieve any resulting double taxation. 

Employment on a ship or aircraft

3.209           Income derived by crew members from employment exercised aboard a ship or aircraft operated in international traffic will be taxable only in the country of which the crew member is a resident.  Thus, for example, an Australian resident pilot employed by a Chilean airline would be taxable only in Australia on his or her remuneration in respect of services rendered on international flights.  [Article 15, paragraph 3]

Fringe benefits

3.210           Paragraphs 4 and 5 of this Article deal with fringe benefits which, in the absence thereof, would be taxable in both Australia and Chile.  Under paragraph 4, the country that would have the primary taxing right if the benefit were ordinary employment income will have the sole taxing right in relation to the fringe benefit.  This would be determined in accordance with paragraph 1, 2 or 3 of this Article.  [Article 15, paragraph 4]

Definition of primary taxing right

3.211           This Article provides that the primary taxing right lies with the country that may, in accordance with paragraph 1, 2 or 3 of this Article, impose tax on the employment remuneration, being tax in respect of which the other country is required to provide relief under Article 23 ( Relief of Double Taxation ).  [Article 15, subparagraph 5b)]

Example 3.5  

Pedro, a Chilean resident employee of a Chilean company is sent to work in Australia.  He is present in Australia for more than 183 days, and receives both employment income and fringe benefits.  Under paragraph 1 of this Article, Australia has the right to tax the employment income.  Chile may also tax but, under Article 23 ( Relief of Double Taxation ), would be obliged to give credit for the Australian tax paid on the fringe benefit if it was ordinary employment income.  Therefore, Australia has the primary right to tax in these circumstances. 

Definition of fringe benefit

3.212           The term fringe benefit is defined as including a benefit provided to an employee or to an associate of an employee by:

•        an employer;

•        an associate of an employer; or

•        a person under an arrangement between that person and the employer, associate of an employer or another person in respect of the employment of that employee.

3.213           They include accommodation allowances or housing benefits but do not include a benefit arising from the acquisition of an option over shares under an employee share scheme.  For example, a fringe benefit is provided when an employer allows an employee to use a work motor vehicle for private purposes, gives an employee a subsidised loan, or pays an employee’s private health insurance costs.  Benefits arising from employee share option schemes are excluded from the treaty definition of fringe benefit.  Such option benefits are treated as remuneration from employment for the purposes of paragraph 1 of this Article.  [Article 15, subparagraph 5a)]

Article 16 — Directors’ Fees

3.214           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 similar organ, of a company which is a resident of the other country.  The inclusion of the words ‘similar organ’ is to accommodate unlisted Chilean companies which are not governed by a ‘board of directors’.  To avoid difficulties in such cases of ascertaining which country a director’s services are performed, and consequently where the remuneration is to be taxed, the Article provides that directors’ fees may be taxed in the country of residence of the company.  [Article 16]

Article 17 — Artistes and Sportspersons

Personal activities

3.215           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.  Item 8 of the Protocol specifies that income referred to in paragraph 1 of this Article includes any income derived from any personal activity exercised in the other country related to performances or appearances in that country.  This accords with the generally accepted view that the application of this Article extends to income generated from promotional and associated kinds of activities engaged in by the entertainer or sportsperson in connection with a performance while present in the visited country.   [Article 17, paragraph 1, Protocol, item 8]

Safeguard

3.216           Income in respect of personal activities exercised by an entertainer or sportsperson, where derived by another person (for example, 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 17, paragraph 2]

Article 18 — Pensions

General scope

3.217           Pensions (including retirement annuities) are to be taxed only by the country of which the recipient is a resident. 

3.218           In the course of negotiations, the two delegations noted that:

‘The term “pensions” is understood to include periodical social security payments and government service pensions.’

3.219           The term retirement annuity means a stated sum payable in respect of retirement and paid periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration from funds out of a retirement savings plan.  In the course of negotiations, the two delegations noted that:

‘It is understood that the term “retirement annuity” covers, in the case of Australia, a superannuation annuity payment within the meaning of the tax laws of Australia, and in the case of Chile, amounts paid under the pension system of DL 3.500.’

3.220           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]

Alimony payments

3.221           As a general rule alimony and other maintenance payments are taxable only in the country of which the recipient is a resident.  However, such payments will be taxable only in the country of which the payer is a resident to the extent that the payments do not attract allowable relief for the payer in that country. 

3.222           In the case of Australia, maintenance payments received by an Australian resident are exempt from tax.  Where maintenance payments are made to a resident of Chile by an Australian resident, no deduction or rebate is generally allowable in Australia.  Accordingly, the payments will not be taxable in Chile in these circumstances.  [Article 18, paragraph 3]

Article 19 — Government Service

Salary and wage income

3.223           Salary and wage type income, other than government service pensions, paid to an individual for services rendered to a government (including a political subdivision or local 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 (for example, if the recipient was a permanent resident of that other country prior to rendering the services). 

[Article 19, paragraph 1]

Business income

3.224           Remuneration paid 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 15 ( Income from Employment ), Article 16 ( Directors’ Fees ) or Article 17 ( Artistes and Sportspersons ).  [Article 19, paragraph 2]

Article 20 — Students

Exemption from tax

3.225           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, a resident of 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 business apprentice may qualify as a resident of the country visited during the period of their visit. 

3.226           The exemption from tax provided by the visited country extends 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.  [Article 20]

Employment income

3.227           Where a Chilean 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 15 ( Income from Employment ), be subject to tax in Australia.

3.228           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 15 ( Income from Employment ), as will any income derived from employment with a local employer.

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

3.230           A payment for maintenance, education or training would not be expected to exceed the level of expenses likely to be incurred to ensure the student or business apprentice’s maintenance, education or training (that is, a subsistence payment).  On the other hand, if the remuneration is similar to the amounts paid to persons who provide similar services that are not business apprentices (that is, a salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under Article 15 ( Income from Employment ).  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 15.

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

Article 21 — Other Income

Allocation of taxing rights

3.232           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 the Chilean convention.  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. 

3.233           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 the positions expressed by both Australia and Chile on Article 21 ( Other Income ) of the OECD Model.  [Article 21, paragraphs 1 and 3]

3.234           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 23 ( Relief of Double Taxation ) to provide double taxation relief. 

3.235           This Article does not apply to income (other than income from immovable (real) property as defined in paragraph 2 of Article 6 ( Income from Immovable (Real) Property )) where the right or property in respect of which the income is paid is effectively connected with a permanent establishment or fixed base which a resident of one country has in the other country.  In such a case, Articles 7 ( Business Profits ) or 14 ( Independent Personal Services ) will apply.  [Article 21, paragraph 2]

3.236           This Article does not apply in the situation where business profits are not taxed in the country of source because of the absence of a permanent establishment.  That is, in the absence of a permanent establishment, paragraph 1 of Article 7 ( Business Profits ) provides that the profits of an enterprise of a country shall be taxable only in that country. 

Example 3.6  

Esk Co, an Australia resident company, derives business profits from the sale of merchandise through an independent agent located in Chile.  As Esk Co does not have a permanent establishment in Chile, the business profits will be taxable in Australia pursuant to Article 7 ( Business Profits ) and not under Article 21 ( Other Income ).

3.237           Similarly, this Article does not apply in the situation where profits derived by an individual in respect of professional services or other activities of an independent character are not taxed in the country where the activities are performed because of the absence of a fixed base or insufficient ‘presence in terms of time’.  That is, in the absence of a fixed base or sufficient presence, paragraph 1 of Article 14 ( Independent Personal Services ) provides that the profits derived by an individual who is a resident of a country shall be taxable only in that country.

Article 22 — Source of Income

Deemed source

3.238           Consistent with Australia’s treaty practice, this Article effectively deems income, profits or gains derived by a resident of a country which, in accordance with the Chilean convention, may be taxed in the other country, to have a source in that other country for the purposes of the law of 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 the convention over income derived by residents of Chile.  [Article 22, paragraph 1]

3.239           Paragraph 2 deals with the source of interest and royalties paid by dual resident individuals. For the purpose of determining where income arises under paragraph 7 of Article 11 ( Interest ) or paragraph 5 of Article 12 ( Royalties ), the interest or royalties will be treated as paid by a resident of a country if the income is paid by an individual who is a resident of that country in accordance with its domestic law.  Such interest or royalties will be regarded as arising in that country, notwithstanding that the individual may be treated as a resident only of the other country for treaty purposes under the tie-breaker rules in paragraph 2 of Article 4 ( Resident ).  This outcome is consistent with that normally provided under Australia’s treaties, where provisions equivalent to paragraph 7 of Article 11 (Interest) and paragraph 5 of Article 12 (Royalties) refer to ‘a person who is a resident of (a) State for the purposes of its tax’.  [Article 22, paragraph 2]

Article 23 — Relief of Double Taxation

3.240           Double taxation does not arise in respect of income flowing between Australia and Chile:

•        where the terms of the Chilean convention provide for the income to be taxed only in one country; or

•        where the domestic taxation law of one of the States exempts the income from its tax. 

3.241           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 the Chilean convention, 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 an exemption of the foreign income, or a credit or deduction against its tax for the tax of the country of source.  This Article also reflects that approach.

Australian method of relief

3.242           This Article requires Australia to provide Australian residents a credit against their Australian tax liability for Chilean tax paid under Chilean laws and in accordance with the Chilean convention, on income which is 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 23, subparagraph 1a)]

3.243           Australia’s obligation to provide relief is limited in the case of Chilean dividends included in the assessable income of Australian taxpayers.  This limitation is included in this convention to address Chile’s unique two-tiered system of taxing profits.  The amount of relief in such cases is the lesser of:

•         the amount of the Chilean Additional Tax after the First Category Tax is deducted; or

•         fifteen per cent of the amount on which the Additional Tax is calculated. 

[Article 23, subparagraph 1b)]

3.244           Australia’s general foreign income tax offset rules, together with the terms of this Article and of the Chilean convention generally, will form the basis of Australia’s arrangements for relieving a resident of Australia from double taxation on income, profits or gains that are also taxed in Chile. 

3.245           Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by subparagraph 1a) of this Article by application of the general foreign income tax offset provisions (Division 770 of the ITAA 1997). 

3.246           Dividends and branch profits derived from Chile by an Australian resident company that are exempt from Australian tax under the foreign source income measures (for example, 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.

Chilean relief

3.247           Under its domestic law, Chile does not generally provide relief for foreign taxes paid by Chilean residents.  However, under the terms of this Convention, Chile is required to provide relief by way of a credit for Australian tax paid to Chilean taxpayers who are taxable in Chile on income which is also taxable in Australia under this convention.   [Article 23, paragraph 2]

Consideration of exempt amounts

3.248           Paragraph 3 permits each country to take into account income which is exempt from tax in that country under the Chilean convention in calculating the amount of tax on other income.  [Article 23, paragraph 3]

Article 24 — Non-Discrimination

3.249           The Chilean convention includes rules to prevent tax discrimination.  

Discrimination based on nationality

3.250           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 24, paragraph 1]

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

3.252           The term national is defined in subparagraph i) of paragraph 1 of Article 3 ( General Definitions ) of the Chilean convention and covers both an individual who is a citizen or national of one country or the other, and a company ‘deriving 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 under a law of Chile would be a national of Chile for the purposes of this paragraph.  [Article 3, subparagraph 1i)]

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

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

3.254           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. 

3.255           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 Chilean resident compared to an Australian resident will not constitute discrimination for the 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 Chile.

The meaning of ‘other or more burdensome’ taxation

3.256           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).

3.257           The phrase ‘other or more burdensome’ taxation 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/Chile

3.258           Consistent 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 Chile.  Consequently, residents of third countries who are nationals of either Australia or Chile 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 subparagraph i) of paragraph 1 of Article 3 ( General Definitions )) of either country. 

Non-discrimination and permanent establishments

3.259           The tax on permanent establishments of enterprises of the other country will 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 24, paragraph 2]

3.260           For this paragraph to apply, the enterprises of both States 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. 

3.261           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.

3.262           In determining whether taxation has been less favourably levied, regard would be had only to the rules applicable to the taxation of the permanent establishment’s own activities, and how those rules compare with those applicable to the taxation of similar activities carried on by a local enterprise.  As noted in paragraph 41 of the OECD Model Commentary on Article 24, the equal treatment principle in this paragraph ‘does not extend to rules that take account of the relationship between an enterprise and other enterprises (for example, rules that allow consolidation, transfer of losses or tax-free transfers of property between companies under common ownership), since the latter rules do not focus on the taxation of an enterprise’s own business activities similar to those of the permanent establishment’.  Accordingly, this paragraph does not affect Australia’s roll-over rules for capital gains, consolidation rules or loss transfer rules. Nor does it affect rules concerning the allowance of rebates or credits in relation to dividends, since these do not relate to the business activities of the permanent establishment.  

Non-resident individuals

3.263           Non-resident individuals do not have to be granted the personal allowances, reliefs or reductions available to residents of the tax treaty countries.  [Article 24, paragraph 3]

3.264           This means that Australia will continue to be able to grant certain tax offsets only to resident individuals, such as the tax offset for dependents contained in Division 13 of the ITAA 1997.

3.265           Unlike paragraph 3 of Article 24 ( Non-Discrimination ) of the OECD Model, the 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 for payments to foreign residents

3.266           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 24, paragraph 4]

Companies owned or controlled abroad

3.267           A country must not give less favourable treatment to companies, 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 Chilean residents may not be given other or more burdensome treatment than locally owned or controlled Australian companies.  [Article 24, paragraph 5]

3.268           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 5 or any other provision of this Article to allow imputation credits to non-resident shareholders.

Exclusions

3.269           Certain provisions of the law of both countries are not restricted in their application by this Article.  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 Chile which are not restricted in the application by this Article are those that:

•        are ‘designed to prevent the avoidance or evasion of taxes’.  In the case of Australia these laws include thin capitalisation, dividend stripping, transfer pricing, controlled foreign companies and transferor trust provisions.  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 the Chilean convention by the exclusion of such rules from the operation of the Article;

•        ensure that taxes are effectively collected or recovered.  This preserves the rules relating to the enforcement and operation of the various aspects of the withholding tax provisions relating to non-residents.  For example, section 26-25 ( Interest or royalty ) of the ITAA 1997 provides that where interest and royalties are paid to a non-resident and the payer fails to deduct withholding tax, the interest or royalty expense cannot be claimed as a deduction. No similar measure exists in relation to payments from a resident to another resident;

•        provide tax incentives for research and development expenditure, provided that a company that is a resident of one country and is wholly or partly owned by residents of the other country can access such incentives on the same terms and conditions as any other company that is a resident of the first-mentioned country; or

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

3.270           Paragraph 6 also requires the competent authorities of both countries to notify each other of any changes to the excluded laws, where those changes might, in the absence of these exclusions, be affected by the provisions of this Article.  [Article 24, paragraph 6]

Taxes to which this Article applies

3.271           This Article applies to taxes which are the subject of the Chilean convention (see paragraphs 3.11 to 3.16 for a list of the taxes covered).  It is intended that the Article extend to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, these taxes, where those taxes are covered by the convention in accordance with paragraph 2 of Article 2.  In addition, the Article applies to the GST in the case of Australia and the Value Added Tax in the case of Chile.  [Article 24, paragraph 7]

More favourable treatment

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

Article 25 — Mutual Agreement Procedure

Consultation on specific cases

3.273           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 the Chilean convention.  [Article 25, paragraph 2]

3.274           In the case of Australia, the competent authority is the Commissioner or an authorised representative of the Commissioner.  [Article 3, sub-subparagraph 1h)(i)]

3.275           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 24 ( Non-Discrimination ) of the Chilean convention, the person may present a case to the competent authority of the country of which the person is a national.

3.276           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 the Chilean convention.  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 25, paragraph 1]

3.277           In the course of negotiations, the two delegations agreed that:

‘The competent authorities will notify each other at the time when a case is presented under paragraph 1.’

3.278           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 the Chilean convention.  [Article 25, paragraph 2]

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

Implementation of a solution

3.280           The solution reached by mutual agreement between the competent authorities of the relevant countries must be implemented notwithstanding any time limits in the domestic laws of the tax treaty countries, provided that, in the case of Chile, the matter is presented within three years from the determination of the Chilean tax liability to which the case relates.  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 25, paragraph 2]

Consultation on general problems

3.281           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 the Chilean convention.  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.  [Article 25, paragraph 3]

Methods of communication between competent authorities

3.282           The competent authorities are permitted to communicate directly with each other without having to go through diplomatic channels.  This may be done by electronic means (for example, facsimile transmission, e-mail or web conferencing), letter, telephone, direct meetings or any other convenient means.  [Article 25, paragraph 4]

General Agreement on Trade in Services dispute resolution process

3.283           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 General Agreement on Trade in Services (GATS).

3.284           Australia and Chile 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.

3.285           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.

3.286           This provision is based, in all essential respects, on an OECD Model Commentary recommendation, and is common in recent international treaty practice.  [Article 25, paragraph 5]

Article 26 — Exchange of Information

3.287           The Chilean convention allows for the competent authorities to exchange information on a wide range of taxes and irrespective of whether the country of whom the information is requested has a domestic tax interest in the information sought.  The information allowed to be exchanged does not have to concern a resident of either Australia or Chile.

Foreseeably relevant information

3.288           Article 26 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 ) or Article 2 ( Taxes Covered ) of the Chilean convention, and may therefore cover persons who are not residents of Australia or Chile.

3.289           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 26, paragraph 1]

Taxes to which this Article applies

3.290           Under the Chilean convention, the Australian competent authority can request and obtain information concerning all federal taxes from the competent authority in Chile.  This means, for example, that information concerning Australian indirect taxes (that is, the GST) may be requested and obtained from Chile.

3.291           Similarly, in the case of Chile, the Chilean competent authority can request and obtain information concerning taxes of every kind and description imposed under Chilean tax laws from Australia.

Use of exchanged information

3.292           The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted in a manner which is consistent with 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 26, paragraph 2]

No domestic tax interest required

3.293           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

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

•        it would be required to carry out administrative measures at variance with the law and administrative practice of either Australia or Chile; or

•        such information is not obtainable under the domestic law or in the normal course of administration of Australia or Chile. 

[Article 26, subparagraphs 3a) and 3b)]

3.295           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 26, subparagraph 3c)]

Information held by institutions such as banks, other financial institutions or nominees

3.296           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 institutions such as banks, other financial institutions or nominees.  This reflects the 2005 changes to Article 26 ( Exchange of Information ) of the OECD Model.  [Article 26, paragraph 5]

3.297           Notwithstanding Article 29 ( Entry into Force ) of the Chilean convention, in the case of Chile, information to which paragraph 5 applies (that is, information held by institutions such as banks, other financial institutions or nominees), to the extent that such information is covered by Article 1 of Decree Law No. 707 and Article 154 of Decree Law No. 3, will be available with respect to bank account transactions that take place on or after 1 January 2010.  [Protocol, item 9]

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

3.298           With the exception of the limitation on the exchange of information specified in the first sentence of item 9 of the Protocol, the competent authorities can exchange information that relates to transactions or events occurring prior to the date of entry into force of the Chilean convention. 

Article 27 — Limitations of Benefits

Dividends, interest and royalties

3.299           No treaty benefits are available under Articles 10 ( Dividends ), 11 ( Interest ) and 12 ( Royalties ) in cases where an assignment of the relevant income, or the creation or assignment of a right or debt-claim in respect of which the income has been paid, has been designed or undertaken with a main purpose of taking advantage of those Articles.  [Article 27, paragraph 1]

Maintaining the integrity of the Chilean convention

3.300           Paragraph 2 of this Article obliges the relevant authorities to consult with a view to recommending specific changes where it is perceived that benefits may not be within those contemplated or intended under the Chilean convention.  The inclusion of this provision will ensure that the treaty applies as it was intended to.  [Article 27, paragraph 2]

Australian temporary residents

3.301           The Chilean convention also provides that where an individual is a temporary resident of Australia and is, for that reason, exempt from tax in Australia on certain income, profits or gains in Australia, then Chile will not be required to provide any relief specified in the Convention in respect of such income, profits or gains.  [Article 27, paragraph 3]

Article 28 — Members of Diplomatic Missions and Consular Posts

3.302           The purpose of this Article is to ensure that the provisions of the Chilean convention 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 28]

Article 29 — Entry into Force

Date of entry into force

3.303           This Article provides for the entry into force of the Chilean convention.  The convention will enter into force on the last date on which diplomatic notes are exchanged notifying that the domestic processes to approve the convention in the respective countries have been completed.  In Australia, enactment of the legislation giving the force of law in Australia to the convention along with tabling the convention in Parliament are prerequisites to the exchange of diplomatic notes.  [Article 29]

Date of application for Australian taxes

Withholding taxes

3.304           Once it enters into force, the Chilean convention 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 the first day of the second month next following the date on which the convention enters into force.  [Article 29, sub-subparagraph a)(i)]

Fringe benefits tax

3.305           The Chilean convention will apply in Australia in respect of fringe benefits provided on or after 1 April next following the date on which this convention enters into force.  [Article 29, sub-subparagraph a)(ii)]

Other Australian taxes

3.306           The Chilean convention will first apply to other Australian taxes as regards any year of income beginning on or after 1 July next following the date on which the convention enters into force.

3.307           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 next following the date on which the Chilean convention enters into force will be the relevant year of income for the purposes of the application of such Australian tax.  [Article 29, sub-subparagraph a)(iii)]

Date of application for Chilean taxes

3.308           Once it enters into force, the Chilean convention will apply in Chile in respect of taxes on income obtained and amounts paid, credited to an account, put at the disposal or accounted as an expense, on or after 1 January next following the date on which the convention enters into force.  [Article 29, subparagraph b)]

Exchange of Information

3.309           Article 26 ( Exchange of Information ) is intended to have effect from the date of entry into force of the Chilean convention, irrespective of the year of income to which the information relates (subject to any domestic law time limits).  However it is subject to the limitations of item 9 of the Protocol (see paragraph 3.297).

Article 30 — Termination

3.310           The Chilean convention is to continue in effect until terminated.  Either country may terminate the convention after the expiration of five years from the date of its entry into force.  Termination is by notice in writing of termination through the diplomatic channel, at least six months before the end of any calendar year beginning after the expiration of that five-year period.

Cessation in Australia

3.311           In the event of either country terminating the Chilean convention, the convention 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 the first day of the second month next following that in which the notice of termination is given;

•        fringe benefits tax, in respect of fringe benefits provided on or after 1 April next following that in which the notice of termination is given; and

•        other Australian taxes, as regards any year of income, profits or gains in the Australian year of income commencing on or after 1 July next following that in which the notice of termination is given. 

[Article 30, subparagraph a)]

Cessation in Chile

3.312           In the event of either country terminating the Chilean convention, the convention would cease to be effective in Chile in respect of taxes on income obtained and amounts paid, credited to an account, put at the disposal or accounted as an expense, on or after 1 January next following the date on which the notice of termination is given.  [Article 30, subparagraph b)]



Chapter 4          

Australia-the Cook Islands agreement

Outline of chapter

4.1                   Schedule 2 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the 2009 Agreement between the Government of Australia and the Government of the Cook Islands on the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Cook Islands agreement).  Subsection 3AAA(1) of the Agreements Act 1953 will define the Cook Islands agreement and subsection 5(1) will give it the force of law in Australia.  This chapter explains the rules that apply in the Cook Islands agreement.

Context of amendments

4.2                   The Cook Islands agreement was signed in Rarotonga on 27 October 2009.  There is no pre-existing agreement of this type between Australia and the Cooks Islands.

Summary of new law

Main features of the Cook Islands agreement

4.3                   The main features of the Cook Islands agreement are as follows:

•        Income from pensions and retirement annuities will generally be taxed only in the country of residence of the recipient, provided the income is subject to tax in that country [Article 5] .

•        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 6] .

•        Payments made from abroad to visiting students and business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited [Article 7] .

•        A non-binding administrative mechanism will be established to assist taxpayers to seek resolution of transfer pricing disputes [Article 8] .  

Comparison of key features of new law and current law

New law

Current law

Australian source pensions and retirement annuities derived by residents of the Cook Islands will be exempt from Australian tax, provided they are taxed in the Cook Islands.

Australian source income of foreign residents is generally subject to Australian tax.

Certain income derived by residents of the Cook Islands from government service in Australia will be exempt from Australian tax.  

Australian source income of foreign residents is generally subject to Australian tax.

Certain payments received by visiting students and business apprentices from the Cook Islands will be exempt from Australian tax.

Some payments received by foreign students and business apprentices may be taxable in Australia, depending on the circumstances.

The competent authorities of Australia and the Cook Islands will endeavour to resolve taxpayers’ transfer pricing disputes arising from transfer pricing adjustments that contravene the arm’s length principle through mutual agreement.

No equivalent.

The Cook Islands agreement

4.4                   A full transcript of the Cook Islands agreement and detailed explanation follows:

‘AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE COOK ISLANDS ON THE ALLOCATION OF TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF INDIVIDUALS AND TO ESTABLISH A MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

The Government of Australia and the Government of the Cook Islands ( the Contracting Parties ) ,

Recognising that the Contracting Parties have concluded an Agreement on the Exchange of Information with Respect to Taxes, and

Desiring to conclude an Agreement for the allocation of taxing rights with respect to certain income of individuals and to establish a mutual agreement procedure in respect of transfer pricing adjustments ,

Have agreed as follows:

ARTICLE 1

PERSONS COVERED

This Agreement shall apply to persons who are residents of one or both of the Contracting Parties.

ARTICLE 2

TAXES COVERED

1          The existing taxes to which this Agreement shall apply are:

(a)        in Australia, the income tax imposed under the federal law of Australia ;

            (hereinafter referred to as " Australian tax " ).

(b)        in the Cook Islands, the income tax;

(hereinafter referred to as " Cook Islands tax " ).

2          This Agreement shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes.  The competent authorities of the Contracting Parties shall notify each other within a reasonable period of time of any substantial changes to the taxation laws covered by this Agreement.

3          This Agreement shall not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions, or possessions of a Contracting Party.

ARTICLE 3

DEFINITIONS

1          For the purposes of this Agreement, unless the context otherwise requires:

(a)        the term "Australia", when used in a geographical sense, excludes all external territories other than:

(i)              the Territory of Norfolk Island;

(ii)             the Territory of Christmas Island;

(iii)            the Territory of Cocos (Keeling) Islands;

(iv)            the Territory of Ashmore and Cartier Islands;

(v)             the Territory of Heard Island and McDonald Islands; and

(vi)            the Coral Sea Islands Territory,

and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the exclusive economic zone or the seabed and subsoil of the continental shelf ;

(b)        the term " the Cook Islands " means the territory of the Cook Islands;

(c)        the term " competent authority " means, in the case of Australia, the Commissioner of Taxation or an authorised representative of the Commissioner and in the case of the Cook Islands, the Collector of Inland Revenue or an authorised representative of the Collector;

(d)        the term " Contracting Party " means Australia or the Cook Islands, as the context requires;

(e)        the term " person " includes an individual, a company and any other body of persons;

(f)        the term " tax " means Australian tax or Cook Islands tax, as the context requires; and

(g)        the term " transfer pricing adjustment " means an adjustment made by the competent authority of a Contracting Party to the profits of an enterprise as a result of applying the domestic law concerning taxes referred to in Article 2 of that Contracting Party regarding transfer pricing.

2          As regards the application of this Agreement at any time by a Contracting Party, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that Contracting Party, for the purposes of the taxes to which this Agreement applies, with any meaning under the applicable tax laws of that Contracting Party prevailing over a meaning given to the term under other laws of that Contracting Party.

ARTICLE 4

RESIDENT

1          For the purposes of this Agreement, the term " resident of a Contracting Party " means:

(a)        in the case of Australia, a person who is a resident of Australia for the purposes of Australian tax ; and

(b)        in the case of the Cook Islands, a person who is a resident of the Cook Islands for the purposes of Cook Islands tax.

2          A person is not a resident of a Contracting Party for the purposes of this Agreement if the person is liable to tax in that Contracting Party in respect only of income from sources in that Contracting Party.

3          Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Parties, then the person's status shall be determined as follows:

(a)        the individual shall be deemed to be a resident only of the Contracting Party in which a permanent home is available to that individual; if a permanent home is available in both Parties, or in neither of them, that individual shall be deemed to be a resident only of the Contracting Party with which the individual's personal and economic relations are closer (centre of vital interests);

(b)        if the Contracting Party in which the individual has their centre of vital interests cannot be determined, the individual shall be deemed to be a resident only of the Contracting Party in which the individual has an habitual abode;

(c)        if the individual has an habitual abode in both Contracting Parties, or in neither of them, the competent authorities of the Contracting Parties shall settle the question by mutual agreement

4          Where by reason of paragraph 1 a person other than an individual is a resident of both Parties, then it shall be deemed to be a resident only of the Contracting Party in which its place of effective management is situated.

ARTICLE 5

Pensions and rETIREMENT Annuities

1          Pensions (including government pensions) and retirement annuities paid to an individual who is a resident of a Contracting Party shall be taxable only in that Party. However, pensions and retirement annuities arising in a Contracting Party may be taxed in that Party where such income is not subject to tax in the other Contracting Party.

2          The term "retirement annuity" means:

(a)     in the case of Australia, a superannuation annuity payment within the meaning of the taxation laws of Australia;

(b)     in the case of the Cook Islands, an annuity payment that is not an approved annuity within the meaning of the taxation laws of the Cook Islands ; and

(c)     any other similar periodic payment agreed upon by the competent authorities.

ARTICLE 6

GOVERNMENT SERVICE

1               (a)   Salaries, wages and other similar remuneration, other than a pension or retirement annuity, paid by a Contracting Party or a political subdivision or a local authority thereof to an individual in respect of services rendered to that Contracting Party or subdivision or authority shall be taxable only in that Contracting Party.

(b)   However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting Party if the services are rendered in that Party and the individual is a resident of that Party who:

(i)         is a national or citizen of that Contracting Party; or

(ii)        did not become a resident of that Party solely for the purpose of rendering the services.

2          Notwithstanding the provisions of paragraph 1, salaries, wages and other similar remuneration in respect of services rendered in connection with any trade or business carried on by a Contracting Party or a political subdivision or a local authority thereof may be taxed in accordance with the laws of a Party.

ARTICLE 7

STUDENTS

Payments which a student or business apprentice who is or was immediately before visiting a Contracting Party a resident of the other Contracting Party and who is temporarily present in the first-mentioned Party solely for the purpose of their education or training, receives for the purpose of their maintenance, education or training shall not be taxed by that Party, provided such payments arise from sources outside that Party.

ARTICLE 8

MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

1          Where a resident of a Contracting Party considers the actions of the other Contracting Party results or will result in a transfer pricing adjustment not in accordance with the arm’s length principle, the resident may, irrespective of the remedies provided by the domestic law of those Parties, present a case to the competent authority of the first-mentioned Party.  The case must be presented within 3 years of the first notification of the adjustment.

2          The competent authorities shall endeavour to resolve any difficulties or doubts arising as to the application of the arm’s length principle by a Contracting Party regarding transfer pricing adjustments.  They may also communicate with each other directly for the purposes of this Article.

ARTICLE 9

EXCHANGE OF INFORMATION

The competent authorities of the Contracting Parties shall exchange such information as is forseeably relevant for carrying out the provisions of this Agreement.  Information may be exchanged by the competent authorities for the purposes of this Article in accordance with the provisions of the Agreement on the Exchange of Information with Respect to Taxes concluded by the Contracting Parties (whether or not this Agreement, in whole or in part, forms part of the domestic law of either Contracting Party).

ARTICLE 10

ENTRY INTO FORCE

            The Contracting Parties shall notify each other, in writing, through the diplomatic channel of the completion of their constitutional and legal procedures for the entry into force of this Agreement.  This Agreement shall enter into force on the date of the last notification, and shall, provided an Agreement on the Exchange of Information with Respect to Taxes is in force between the Contracting Parties, thereupon have effect:

(a)        in respect of Australian tax, for 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; and

(b)        in respect of Cook Islands tax, for any year of income beginning on or after 1 January in the calendar year following the date on which this Agreement enters into force.

ARTICLE 11

TERMINATION

1          This Agreement shall continue in effect indefinitely, but either of the Contracting Parties may give to the other Contracting Party written notice of termination.

2          Such termination shall become effective:

(a)        in respect of Australian tax, in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given; and

(b)        in respect of Cook Islands tax, in the year of income beginning on or after 1 January in the calendar year following that in which the notice of termination is given.

3          Notwithstanding the provisions of paragraph 1 or 2, this Agreement shall, on receipt through the diplomatic channel of written notice of termination of the Agreement on the Exchange of Information with Respect to Taxes between the Contracting Parties, terminate and cease to be effective on the first day of the month following the expiration of a period of 6 months after the date of receipt of such notice.

 

IN WITNESS WHEREOF the undersigned, duly authorised thereto by their respective Governments, have signed this Agreement.

 

DONE at [                                   ], [                               ] this [                     ] day of [                                      ], 200[                      ], in duplicate.

 

FOR THE GOVERNMENT OF                                         FOR THE GOVERNMENT OF AUSTRALIA:       THE COOK ISLANDS:’

Detailed explanation of new law

Article 1 — Persons Covered

4.5                   This Article establishes the scope of the application of the Cook Islands agreement by providing for it to apply to persons who are residents of one or both of the countries [Article 1 ] .  For the purposes of the agreement ‘person’ includes an individual, company and other body of persons (see paragraph 1.16).

4.6                   The application of the Cook Islands agreement to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 ( Resident ) (see paragraph 1.22).

Article 2 — Taxes Covered

4.7                   This Article specifies the existing taxes of each country to which the Cook Islands agreement applies.  This is, in the case of Australia, the federal income tax.  [Article 2, subparagraph 1a)]  

4.8                   For the Cook Islands, this agreement applies to taxes on income. [Article 2, subparagraph 1b)]

4.9                   The application of the Cook Islands 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 of Australia and the Cook Islands are required to notify each other in the event of a substantial changes to the taxation laws covered by the Cook Islands agreement, within a reasonable period of time after those changes.  [Article 2, paragraph 2]

4.10               The Agreement does not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions or possessions.  [Article 2, paragraph 3]

Article 3 — Definitions

Definition of Australia

4.11               The definition of ‘Australia’ follows corresponding definitions in Australia’s modern tax treaties.  ‘Australia’ is defined to include certain external territories and areas of the continental shelf.  [Article 3, subparagraph 1a)]

Definition of the Cook Islands

4.12               The Cook Islands is defined to mean the territory of the Cook Islands.  [Article 3, subparagraph 1b)]

Definition of competent authority

4.13               The ‘competent authority’ is the person or institution specifically authorised to perform certain actions under the Cook Islands agreement.  For example, to notify each other of any significant changes to the tax law of their respective countries, Article 2 ( Taxes Covered ), to communicate for the purposes of Article 8 ( Mutual Agreement Procedure ) and to exchange information in accordance with Article 9 ( Exchange of Information ).

4.14               In the case of Australia, the competent authority is the Commissioner of Taxation (Commissioner) or an authorised representative of the Commissioner.  In the case of the Cook Islands, the competent authority is the Collector of Inland Revenue or an authorised representative of the Collector.  [Article 3, subparagraph 1c)]

Definition of contracting party

4.15               ‘Contracting Party’ means Australia or the Cook Islands, as the context requires.  [Article 3, subparagraph 1d)]

Definition of person

4.16               ‘Person’ includes an individual, a company and any other body of persons [Article 3, subparagraph 1e)] .  However, Article 8 ( Mutual Agreement Procedure ) is the only substantive article of the Cook Islands agreement that will affect persons that are non-individuals. 

Definition of tax

4.17               ‘Tax’ means Australian tax or Cook Islands tax, as the context requires.  [Article 3, subparagraph 1f)] .  See paragraphs 4.7 to 4.10 for taxes covered by the agreement.

Definition of transfer pricing adjustment

4.18               A transfer pricing adjustment is an adjustment made by the tax authorities of Australia or the Cook Islands to the profits of an enterprise, based on the application of domestic transfer pricing laws [Article 3, subparagraph 1g)] .  For Australia, such laws are contained in Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). 

Terms not specifically defined

4.19               A term that is not specifically defined in the Cook Islands agreement shall have (unless the context requires otherwise) the meaning that it has under the domestic law of the country applying the Cook Islands agreement at the time of its application.  In that case, the term’s domestic taxation law meaning will have precedence over any meaning it may have under that country’s other domestic laws.  [Article 3, paragraph 2]

Article 4 — Resident

4.20               This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of the Cook Islands agreement.  Residential status is a criterion for determining each country’s taxing rights and is a necessary condition for the provision of relief under the Cook Islands agreement.  In the case of Australia, a person’s residence is determined according to Australia’s taxation law [Article 4, subparagraph 1a)] .  In the case of the Cook Islands, residence is determined according to the Cook Islands taxation law [Article 4, subparagraph 1b)]

Special residency rules

4.21               A person is not a resident of a country, for the purposes of the Cook Islands agreement, if that person is liable to tax in that country in respect only of income from sources in that country [Article 4, paragraph 2] In the Australian context, this would mean, for example, that Norfolk Island residents, who are generally only subject to Australian tax on Australian source income, are not residents of Australia for the purposes of the Cook Islands agreement.  Accordingly, the Cook Islands will not have to forego tax in accordance with the Cook Islands agreement on income derived by Norfolk Island residents (which will not be subject to Australian tax).  

Dual residents

4.22               Tie-breaker rules are included for determining residency of a person, for the purposes of the Cook Islands agreement, if the person qualifies as a resident of both countries in accordance with paragraph 1 of Article 4.  In the case of an individual the rules, in order of application, are:  

•        if the individual has a permanent home available to himself or herself in only one of the countries, the person is deemed to be a resident solely of that country [Article 4, subparagraph 3a)] ;

•        if the individual has a permanent home available in both countries or in neither, then the person’s residential status takes into account their personal or economic relations with Australia and the Cook Islands, and the person is deemed for the purposes of the Cook Islands agreement to be a resident only of the country with which they have the closer personal and economic relations [Article 4, subparagraph 3a)] ;

•        if the individual has an habitual abode in either Australia or the Cook Islands the person is deemed to be a resident of that country [Article 4, subparagraph 3b)] ;

•        if the individual has a habitual abode in both countries, or of neither, the competent authorities will resolve the question of treaty residence by mutual agreement [Article 4, subparagraph 3c)] .  

4.23               In the case of a non-individual, that is a company, partnership or other body or person, which would under paragraph 1 of Article 4 be a resident of both Australia and the Cook Islands, then the entity will be deemed to be a resident of the country in which the place of effective management is situated.  [Article 4, paragraph 4]

4.24               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 Australian as a resident, insofar as the Cook Islands agreement allows.

Article 5 — Pensions and Retirement Annuities

4.25               Pensions and retirement annuities are taxable only by the country of which the recipient is a resident, provided such income is subject to tax in that country.  If such income is not subject to tax in that country, the income may be taxed by the country from which the relevant payments were made.  [Article 5, paragraph 1]

Meaning of retirement annuity

4.26               In the case of Australia, retirement annuity means a superannuation annuity payment within the meaning of the taxation laws of Australia [Article 5, subparagraph 2a)] .  A superannuation annuity as defined by Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 , which took effect from 1 July 2007, is a retirement annuity.  In the case of the Cook Islands, ‘retirement annuity’ means an annuity payment which is not an approved annuity under the Cook Islands tax laws [Article 5, subparagraph 2b)] .  This Article also allows for a retirement annuity to include other similar periodic payments agreed to by the competent authority [Article 5, subparagraph 2c)] .

Article 6 — Government Service

4.27               Salary and wage type income, other than government service pensions paid to an individual for services rendered to a government of one of the countries (including a political subdivision or local authority), 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 or citizen of, that other country; or

•        the recipient is a resident of that other country and did not become a resident of that country solely for the purpose of rendering the services (for example, if the recipient is a permanent resident of that other country).

[Article 6, paragraph 1]

Business income

4.28               Remuneration in respect of services rendered in connection with a trade or business carried on by a governmental authority is excluded from the scope of the Article.  Such remuneration will remain subject to the domestic taxation laws of the two countries.  [Article 6, paragraph 2]

Article 7 — Students

Exemption from tax

4.29               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 7]

Employment income

4.30               Where a Cook Islander student visiting Australia solely for educational purposes undertakes employment in Australia, for example, part-time work with a local employer, the income earned by that student as a consequence of that employment may be subject to tax in Australia.

4.31               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, falls for consideration under domestic taxation law.

4.32               In the case of a Cook Islander 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. 

4.33               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 (that is, a subsistence payment).  If the remuneration is similar to the amounts paid to persons who provide similar services who are not business apprentices (that is, salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under domestic taxation law.  Likewise, if that business apprentice undertakes any other employment in Australia, the income earned from that employment may be subject to tax in Australia.

4.34               Where a taxpayer received both exempt income and assessable income, the exempt income may in some cases be taken into account in determining the rate of tax payable on the assessable income.  However, payments received from abroad for a student’s or apprentice’s maintenance, education or training will not be taken into account in determining the tax payable on the employment income that is subject to tax in Australia.

Article 8 — Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments

4.35               This Article provides for consultation between the competent authorities of the two countries for the purpose of endeavouring to resolve disputes concerning transfer pricing adjustments purportedly made not in accordance with the arm’s length principle.   [Article 8, paragraph 2]

4.36               The term ‘arm’s length principle’ refers to the requirement that businesses price their related party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation.  In Australia the Commissioner would apply the arm’s length principle when reviewing business transactions in the context of Division 13 of Part III of the ITAA 1936. 

4.37               A person wishing to use this mutual agreement procedure must present their case to the competent authority of their country of residence within three years of the first notification of the transfer pricing adjustment.  This procedure operates independently of, and in addition to, domestic legal remedies available to taxpayers.  [Article 8, paragraph 1]

Article 9 — Exchange of Information

4.38               This Article authorises and limits the exchange of information by the competent authorities to information that is foreseeably relevant to the administration of the Cook Islands agreement. 

4.39               The exchange of information is subject to the provisions of the Agreement on the Exchange of Information with Respect to Taxes , which was signed by the two countries on 27 October 2009.  After it takes effect, that agreement will provide for exchange of information that is foreseeably relevant to the administration of the taxation laws of the two countries.  It also contains safeguards to protect taxpayers’ rights.  For example:

•        confidentiality rules to ensure that information exchanged is only disclosed to authorised recipients; and

•        limitations to ensure that the competent authorities do not exceed domestic laws and administrative procedures in the course of obtaining and supplying information.

Article 10 — Entry into Force

Date of entry into force

4.40               The Cook Islands agreement will enter into force on the date of the last exchange of diplomatic notes notifying that the domestic procedures to give it the force of law have been completed.  In Australia, enactment of the legislation giving the Cook Islands agreement the force of law along with tabling the Cook Islands agreement in Parliament are prerequisites to the exchange of diplomatic notes.  Entry into force is also conditional upon the related Agreement on the Exchange of Information with Respect to Taxes between the two countries being in force at that time.

Date of application in Australia

4.41               Following entry into force, the Cook Islands agreement will take effect in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force.  [Article 10, subparagraph 1a)]

Date of application in the Cook Islands

4.42               Following entry into force, the Cook Islands agreement will take effect in the Cook Islands in respect of any income year beginning on or after 1 January in the calendar year next following the date on which it enters into force.  [Article 10, subparagraph 1b)]

Article 11 — Termination

4.43               The Cook Islands agreement is to continue in effect indefinitely.  However, either country may give the other country written notice of termination of the agreement through diplomatic channels.  [Article 11, paragraph 1]

Cessation in Australia

4.44               In the event of either country terminating the Cook Islands agreement, it would cease to be effective in Australia in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.  [Article 11, subparagraph 2a)]

Cessation for the Cook Islands

4.45               The Cook Islands agreement would correspondingly cease to be effective in the Cook Islands for any year of income beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.  [Article 11, subparagraph 2b)]

Cessation in other circumstances

4.46               The Cook Islands agreement will also terminate and cease to be effective if the Agreement on the Exchange of Information with Respect to Taxes between Australia and the Cook Islands is terminated.  In that event, the Cook Islands Agreement would terminate on the first day of the month following the expiration of six months after receipt of notification of termination of the Agreement on the Exchange of Information with Respect to Taxes [Article 11, paragraph 3]

 



Chapter 5          

Australia-Guernsey agreement

Outline of chapter

5.1                   Schedule 2 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the 2009 Agreement between the Government of Australia and the States of Guernsey for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Guernsey agreement).  Subsection 3AAA(1) of the Agreements Act 1953 will define the Guernsey agreement and subsection 5(1) will give it the force of law in Australia.  This chapter explains the rules that apply in the Guernsey agreement.

Context of amendments

5.2                   The Guernsey agreement was signed in London on 7 October 2009.  There is no pre-existing agreement of this type between Australia and Guernsey.

Summary of new law

Main features of the agreement

5.3                   The main features of the Guernsey agreement are as follows:

•        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 5]

•        Payments made from abroad to visiting students and business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited.  [Article 6]

•        A non-binding administrative mechanism will be established to assist taxpayers to seek resolution of transfer pricing disputes.  [Article 7]

Comparison of key features of new law and current law

New law

Current law

Certain income derived by residents of Guernsey from government service in Australia will be exempt from Australian tax.  

Australian source income of foreign residents is generally subject to Australian tax.

Certain payments received by visiting students and business apprentices from Guernsey will be exempt from Australian tax.

Some payments received by foreign students and business apprentices may be taxable in Australia, depending on the circumstances.

The competent authorities of Australia and Guernsey will endeavor to resolve taxpayers’ transfer pricing disputes arising from transfer pricing adjustments that contravene the arm’s length principle through mutual agreement.

No equivalent.

The Guernsey agreement

5.4                   A full transcript of the Guernsey agreement and detailed explanation follows:

‘AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE STATES OF Guernsey FOR THE ALLOCATION OF TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF INDIVIDUALS AND to establish a MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

The Government of Australia and the States of Guernsey (“the Parties”),

Recognising that the Parties have concluded an Agreement for the Exchange of Information Relating to Tax Matters, and

Desiring to conclude an Agreement for the allocation of taxing rights with respect to certain income of individuals and to establish a mutual agreement procedure in respect of transfer pricing adjustments,

Have agreed as follows:

ARTICLE 1

persons covered

            This Agreement shall apply to persons who are residents of one or both of the Parties.

ARTICLE 2

Taxes covered

1          The existing taxes to which this Agreement shall apply are:

(a)          in the case of Australia, the income tax imposed under the federal law of Australia;

(hereinafter referred to as "Australian tax");

(b)          in the case of Guernsey:

     (i)         income tax;

     (ii)        dwellings profits tax;

( hereinafter referred to as "Guernsey tax").

2          This Agreement shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes .   The competent authorities of the Parties shall notify each other within a reasonable period of time of any substantial changes to the taxation laws covered by this Agreement.

3          This Agreement shall not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions, or possessions of a Party.

ARTICLE 3

Definitions

1          For the purposes of this Agreement, unless the context otherwise requires:

(a)     "Australia", when used in a geographical sense, excludes all external territories other than:

(i)              the Territory of Norfolk Island;

(ii)             the Territory of Christmas Island;

(iii)            the Territory of Cocos (Keeling) Islands;

(iv)            the Territory of Ashmore and Cartier Islands;

(v)             the Territory of Heard Island and McDonald Islands; and

(vi)            the Coral Sea Islands Territory,

and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the exclusive economic zone or the seabed and subsoil of the continental shelf;

(b)     "Guernsey" means Guernsey, Alderney and Herm, including the territorial sea adjacent to those islands, in accordance with international law ;

(c)     "competent authority" means in the case of Australia, the Commissioner of Taxation or an authorised representative of the Commissioner and, in the case of Guernsey, the Director of Income Tax or his delegate;

(d)     "person" includes an individual, a company and any other body of persons; 

(e)     "tax" means Australian tax or Guernsey tax as the context requires; and

(f)      “transfer pricing adjustment” means an adjustment made by the competent authority of a Party to the profits of an enterprise as a result of applying the domestic tax law concerning taxes referred to in Article 2 of that Party regarding transfer pricing.

2          As regards the application of this Agreement at any time by a Party, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that Party, for the purposes of the taxes to which this Agreement applies, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party.

ARTICLE 4

Resident

1          For the purposes of this Agreement, the term "resident of a Party" means:

(a)        in the case of Australia, a person who is a resident of Australia for the purposes of Australian tax; and

(b)        in the case of Guernsey, a person who is a resident of Guernsey for the purposes of Guernsey tax.

2          A person is not a resident of a Party for the purposes of this Agreement if the person is liable to tax in that Party in respect only of income from sources in that Party.

3          Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Parties, then the person's status shall be determined as follows:

(a)     the individual shall be deemed to be a resident only of the Party in which a permanent home is available to that individual; if a permanent home is available in both Parties, or in neither of them, that individual shall be deemed to be a resident only of the Party with which the individual's personal and economic relations are closer (centre of vital interests);

(b)     if the Party in which the individual’s centre of vital interests cannot be determined, the individual shall be deemed to be a resident only of the Party in which the individual has an habitual abode;

(c)     if the individual has an habitual abode in both Parties, or in neither of them, the competent authorities of the Parties shall settle the question by mutual agreement;

4          Where, by reason of paragraph 1, a person other than an individual is a resident of both Parties, then it shall be deemed to be a resident only of the Party in which its place of effective management is situated.

ARTICLE 5

Government Service

1        (a)     Salaries, wages and other similar remuneration paid by a Party or a political subdivision or a local authority thereof to an individual in respect of services rendered to that Party or subdivision or authority shall be taxable only in that Party.

(b)     However, such salaries, wages and other similar remuneration shall be taxable only in the other Party if the services are rendered in that Party and the individual is a resident of that Party who:

          (i)    is a national or citizen of that Party; or

          (ii)   did not become a resident of that Party solely for the purpose of rendering the services.

2          Notwithstanding the provisions of paragraph 1, salaries, wages and other similar remuneration paid in respect of services rendered in connection with a business carried on by a Party or political subdivision or a local authority thereof may be taxed in accordance with the laws of a Party.

ARTICLE 6

Students

            Payments which a student or business apprentice, who is or was immediately before visiting a Party a resident of the other Party and who is temporarily present in the first-mentioned Party solely for the purpose of their education or training, receives for the purpose of their maintenance, education or training shall not be taxed in that Party, provided such payments arise from sources outside that Party.

ARTICLE 7

MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

1          Where a resident of a Party considers the actions of the other Party result or will result in a transfer pricing adjustment not in accordance with the arm’s length principle, the resident may, irrespective of the remedies provided by the domestic law of those Parties, present a case to the competent authority of the first-mentioned Party.  The case must be presented within three years of the first notification of the adjustment.

2          The competent authorities shall endeavour to resolve any difficulties or doubts arising as to the application of the arm’s length principle by a Party regarding transfer pricing adjustments.  They may also communicate with each other directly for the purposes of this Article.

ARTICLE 8

EXCHANGE OF INFORMATION

The competent authorities of the Parties shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement. Information may be exchanged by the competent authorities for the purposes of this Article in accordance with the provisions of the Agreement for the Exchange of Information Relating to Tax Matters concluded by the Parties (whether or not this Agreement, in whole or in part, forms part of the domestic law of either Party).

ARTICLE 9

ENTRY INTO FORCE

            The Parties shall notify each other, in writing, through the appropriate channel of the completion of their constitutional and legal procedures for the entry into force of this Agreement.  This Agreement shall enter into force on the thirtieth day after the date of the last notification and shall, provided an Agreement for the Exchange of Information Relating to Tax Matters is in force between the Parties, thereupon have effect:

(a)     in respect of Australian tax, for any year of income beginning on or after the first day of July in the calendar year next following the date on which this Agreement enters into force; and

(b)     in respect of Guernsey tax, for any year of charge beginning on or after the first day of January in the calendar year next following the date on which this Agreement enters into force.

Article 10

Termination

1          This Agreement shall continue in effect indefinitely, but either of the Parties may, after the expiration of 3 years from the date of its entry into force, give to the other Party written notice of termination.

2          Such termination shall become effective:

(a)     in respect of Australian tax, in the year of income beginning on or after the first day of July in the calendar year next following the date on which the notice of termination is given;

(b)     in respect of Guernsey tax, for any year of charge beginning on or after the first day of January in the calendar year next following the date on which the notice of  termination is given.

3          Notwithstanding the provisions of paragraphs 1 and 2, this Agreement shall, upon receipt of written notice of termination of the Agreement for the Exchange of Information Relating to Tax Matters between the Parties, terminate and cease to be effective on the first day of the month following the expiration of a period of six months after the date of receipt of such notice.

            IN WITNESS WHEREOF the undersigned, being duly authorised in that behalf by their respective Parties, have signed this Agreement.

 

            DONE at [                                   ], [                               ] this [                     ] day of [           ], 200[                      ], in duplicate.

FOR THE GOVERNMENT OF                    FOR THE STATES OF

AUSTRALIA:                                                            GUERNSEY:’

Detailed explanation of new law

Article 1 — Persons Covered

5.5                   This Article establishes the scope of the application of the Guernsey agreement by providing for it to apply to persons who are residents of one or both of the countries [Article 1] .   For the purposes of the agreement persons includes an individual, company and other body of persons (see paragraph 5.15).

5.6                   The application of the Guernsey agreement to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 ( Resident ) (see paragraph 5.21).

Article 2 — Taxes Covered

5.7                   This Article specifies the existing taxes of each country to which the Guernsey agreement applies.  This is, in the case of Australia, the federal income tax.  [Article 2, subparagraph 1a)]  

5.8                   For Guernsey, this agreement applies to income tax and dwellings profits tax.  [Article 2, subparagraph 1b)]

5.9                   The application of the Guernsey 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 of Australia and Guernsey are required to notify each other in the event of a substantial changes to the taxation laws covered by the agreement, within a reasonable period of time after those changes.  [Article 2, paragraph 2]

5.10               The Guernsey agreement does not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions or possessions.  [Article 2, paragraph 3]

Article 3 — Definitions

Definition of Australia

5.11               The definition of ‘Australia’ follows corresponding definitions in Australia’s modern tax treaties.  ‘Australia’ is defined to include certain external territories and areas of the continental shelf.  [Article 3, subparagraph 1a)]

Definition of Guernsey

5.12               Guernsey is defined to mean Guernsey, Alderney and Herm including the territorial sea adjacent to those islands, in accordance with international law.  [Article 3, subparagraph 1b)]

Definition of competent authority

5.13               The ‘competent authority’ is the person or institution specifically authorised to perform certain actions under the Guernsey agreement.  For example, to notify each other of any significant changes to the tax law of their respective countries, Article 2 ( Taxes Covered ) to communicate for the purposes of Article 7 ( Mutual Agreement Procedure ) and to exchange information in accordance with Article 8 ( Exchange of Information ).

5.14               In the case of Australia, the competent authority is the Commissioner of Taxation (Commissioner) or an authorised representative of the Commissioner.  In the case of Guernsey, the competent authority is the Director of Income Tax or his delegate.  [Article 3, subparagraph 1c)]

Definition of person

5.15               ‘Person’ includes an individual, a company and any other body of persons [Article 3, subparagraph 1d)] .  However, Article 7 ( Mutual Agreement Procedure ) is the only substantive Article of the Guernsey agreement that will affect persons that are non-individuals. 

Definition of tax

5.16               ‘Tax’ means Australian tax or Guernsey tax, as the context requires.  [Article 3, subparagraph 1e)] .  See paragraph 5.7 to 5.10 for taxes covered by the Guernsey agreement.

Definition of transfer pricing adjustment

5.17               A transfer pricing adjustment is an adjustment made by the tax authorities of Australia or Guernsey to the profits of an enterprise, based on the application of domestic transfer pricing laws [Article 3, subparagraph 1f)] .  For Australia, such laws are contained in Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). 

Terms not specifically defined

5.18               A term that is not specifically defined in the Guernsey agreement shall have (unless the context requires otherwise) the meaning that it has under the domestic law of the country applying the Guernsey agreement at the time of its application.  In that case, the term’s domestic taxation law meaning will have precedence over any meaning it may have under that country’s other domestic laws.  [Article 3, paragraph 2]

Article 4 — Resident

5.19               This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of the Guernsey agreement.  Residential status is a criterion for determining each country’s taxing rights and is a necessary condition for the provision of relief under the Guernsey agreement.  In the case of Australia, a person’s residence is determined according to Australia’s taxation law [Article 4, subparagraph 1a)] .  In the case of Guernsey residence is determined according to Guernsey taxation law [Article 4, subparagraph 1b)]

Special residency rules

5.20               A ‘person’ is not a resident of a country, for the purposes of the Guernsey agreement, if that person is liable to tax in that country in respect only of income from sources in that country [Article 4, paragraph 2] .  In the Australian context, this would mean, for example, that Norfolk Island residents, who are generally only subject to Australian tax on Australian source income, are not residents of Australia for the purposes of the Guernsey agreement.  Accordingly, Guernsey will not have to forego tax in accordance with the Guernsey agreement on income derived by Norfolk Island residents (which will not be subject to Australian tax).  

Dual residents

5.21               Tie-breaker rules are included for determining residency of a person, for the purposes of the Guernsey agreement, if the person qualifies as a resident of both countries in accordance with paragraph 1 of Article 4.  In the case of an individual the rules, in order of application, are:  

•        if the individual has a permanent home available to himself or herself in only one of the countries, the person is deemed to be a resident solely of that country [Article 4, subparagraph 3a)] ;

•        if the individual has a permanent home available in both countries or in neither, then the person’s residential status takes into account their personal or economic relations with Australia and Guernsey, and the person is deemed for the purposes of the Guernsey agreement to be a resident only of the country with which they have the closer personal and economic relations [Article 4, subparagraph 3a)] ;

•        if the individual has an habitual abode in either Australia or Guernsey the person is deemed to be a resident of that country [Article 4, subparagraph 3b)] ;

•        if the individual has a habitual abode in both countries, or of neither, the competent authorities will resolve the question of treaty residence by mutual agreement [Article 4, subparagraph 3c)] .  

5.22               In the case of a non-individual, that is a company, partnership or other body or person, which would under paragraph 1 of Article 4 be a resident of both Australia and Guernsey, then the entity will be deemed to be a resident of the country in which the place of effective management is situated.  [Article 4, paragraph 4]

5.23               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 Australian as a resident, insofar as the Guernsey agreement allows.

Article 5 — Government Service

5.24               Salary and wage type income, paid to an individual for services rendered to a government of one of the countries (including a political subdivision or local authority), 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 or citizen of, that other country; or

•        the recipient is a resident of that other country and did not become a resident of that country solely for the purpose of rendering the services (for example, if the recipient is a permanent resident of that other country).

[Article 5, subparagraph 1b)]

Business income

5.25               Remuneration in respect of services rendered in connection with a trade or business carried on by a governmental authority is excluded from the scope of the Article.  Such remuneration will remain subject to the domestic taxation laws of the two countries.  [Article 5, paragraph 2]

Article 6 — Students

Exemption from tax

5.26               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 [Article 6] .  This will apply even though the student or apprentice may qualify as a resident of the country visited during the period of their visit.  

Employment income

5.27               Where a student, from Guernsey, visiting Australia solely for educational purposes undertakes employment in Australia, for example, part-time work with a local employer, the income earned by that student as a consequence of that employment may be subject to tax in Australia.

5.28               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, falls for consideration under domestic taxation law.

5.29               In the case of a business apprentice visiting Australia from Guernsey 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. 

5.30               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 (that is, a subsistence payment).  If the remuneration is similar to the amounts paid to persons who provide similar services who are not business apprentices (that is, salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under domestic taxation law.  Likewise, if that business apprentice undertakes any other employment in Australia, the income earned from that employment may be subject to tax in Australia.

5.31               Where a taxpayer received both exempt income and assessable income, the exempt income may in some cases be taken into account in determining the rate of tax payable on the assessable income.  However, payments received from abroad for a student’s or apprentice’s maintenance, education or training will not be taken into account in determining the tax payable on the employment income that is subject to tax in Australia.

Article 7 — Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments

5.32               This Article provides for consultation between the competent authorities of the two countries for the purpose of endeavouring to resolve disputes concerning transfer pricing adjustments purportedly made not in accordance with the arm’s length principle.  [Article 7, paragraph 2]

5.33               The term ‘arm’s length principle’ refers to the requirement that businesses price their related party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation.  In Australia the Commissioner would apply the arm’s length principle when reviewing business transactions in the context of Division 13 of Part III of the ITAA 1936. 

5.34               A person wishing to use this mutual agreement procedure must present their case to the competent authority of their country of residence within three years of the first notification of the transfer pricing adjustment.  This procedure operates independently of, and in addition to, domestic legal remedies available to taxpayers.  [Article 7, paragraph 1]

Article 8 — Exchange of Information

5.35               This Article authorises and limits the exchange of information by the competent authorities to information that is foreseeably relevant to the administration of the Guernsey agreement.  [Article 8]

5.36               The exchange of information is subject to the provisions of the Agreement for the Exchange of Information Relating to Tax Matters , which was signed by Australia and Guernsey 7 October 2009.  After it takes effect, that agreement will provide for exchange of information that is foreseeably relevant to the administration of the taxation laws of the two countries.  It also contains safeguards to protect taxpayers’ rights.  For example:

•        confidentiality rules to ensure that information exchanged is only disclosed to authorised recipients; and

•        limitations to ensure that the competent authorities do not exceed domestic laws and administrative procedures in the course of obtaining and supplying information.

Article 9 — Entry into Force

Date of entry into force

5.37               The Guernsey agreement will enter into force on the thirtieth day after the date of the last exchange of diplomatic notes notifying that the domestic procedures to give it the force of law have been completed.  In Australia, enactment of the legislation giving the Guernsey agreement the force of law along with tabling the Guernsey agreement in Parliament are prerequisites to the exchange of diplomatic notes.  Entry into force is also conditional upon the related Agreement for the Exchange of Information Relating to Tax Matters between the two countries being in force at that time.

Date of application in Australia

5.38               Following entry into force, the Guernsey agreement will take effect in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force.  [Article 9, subparagraph a)]

Date of application in Guernsey

5.39               Following entry into force, the Guernsey agreement will take effect in Guernsey in respect of any year of charge beginning on or after 1 January in the calendar year next following the date on which it enters into force.  [Article 9, subparagraph b)]

Article 10 — Termination

5.40               The Guernsey agreement is to continue in effect indefinitely.  However, after the expiration of three years from the date of entry into force either country may give the other country written notice of termination of the agreement through diplomatic channels.  [Article 10, paragraph 1]

Cessation in Australia

5.41               In the event of either country terminating the Guernsey agreement, it would cease to be effective in Australia in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.  [Article 10, subparagraph 2a)]

Cessation for Guernsey

5.42               The Guernsey agreement would correspondingly cease to be effective in Guernsey for any year of charge beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.  [Article 10, subparagraph 2b)]

Cessation in other circumstances

5.43               The Guernsey agreement will also terminate and cease to be effective if the Agreement for the Exchange of Information Relating to Tax Matters between Australia and Guernsey is terminated.  In that event, the Guernsey agreement would terminate on the first day of the month following the expiration of six months after receipt of notification of termination of the Agreement for the Exchange of Information Relating to Tax Matters [Article 10, paragraph 3]

 



Chapter 6          

Malaysian protocol (No. 3)

Outline of chapter

6.1                   This Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the Third Protocol amending the Agreement between the Government of Australia and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income as amended by the First Protocol of 2 August 1999 and the Second Protocol of 28 July 2002 (Malaysian protocol No. 3), which amends the existing tax treaty with Malaysia (as amended by the Malaysian protocol (No. 1) and the Malaysian protocol (No. 2) (the existing Malaysian agreement).  Subsection 3AAA(1) of the Agreements Act 1953 will define the Malaysian protocol (No. 3) and subsection 5(1) will give it the force of law in Australia.

Context of amendments

6.2                   The Malaysian protocol (No. 3) was signed in Canberra on 24 February 2010.

6.3                   The Malaysian protocol (No. 3) was negotiated in the context of recent international progress in improving tax transparency and exchange of taxpayer information between countries. 

6.4                   Once in force, the Malaysian protocol (No. 3) will replace the Exchange of Information (EOI) Article in the existing Malaysian agreement with a new Article that meets the international standard on tax information exchange developed by the Organisation for Economic Co-operation and Development (OECD).

Summary of new law

6.5                   The main changes to the EOI Article of the existing Malaysian agreement (as revised by the Malaysian protocol (No. 3)) are as follows:

•        neither tax administration can refuse to provide information solely because it does not have a domestic interest in such information, or because the information is held by a bank or similar institution [New Article 25, paragraphs 4 and 5] ;

•        the Article now expands the scope of the EOI Article, as it will now allow tax administrations to request taxpayer information with regard to all federal taxes and not just taxes to which the treaty applies [New Article 25, paragraph 1] ; and

•        the Article also provides that information received by a tax authority may be used for other purposes when the laws of both countries permit this and where the tax authority supplying the information authorises such use [New Article 25, paragraph 2] .

Comparison of key features of new law and current law

New law

Current law

The Malaysian protocol (No. 3) closely aligns Article 25 ( Exchange of Information ) to the current OECD standard.  The effect of the change is to expand the range of taxes to which the Article applies and to clarify that neither bank secrecy laws nor any requirement of a domestic tax law interest in the information limits the exchange of information.

The new rules also provide that information received may be used for non-tax purposes when the laws of both countries permit this and the supplying authority authorises such use.

The existing rules apply to a narrower range of taxes and do not require the exchange of information that is not obtainable by the tax administration under domestic law.

The information received can only be used for tax purposes

The Malaysian protocol (No. 3)

6.6                   A full transcript of the Malaysian protocol (No. 3) and detailed explanation follows:

‘THIRD PROTOCOL AMENDING THE AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF MALAYSIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AS AMENDED BY THE FIRST PROTOCOL OF 2 AUGUST 1999 AND THE SECOND PROTOCOL OF 28 JULY 2002

The Government of Australia

and

The Government of Malaysia

DESIRING to amend the Agreement between the Government of Australia and the Government of Malaysia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income done at Canberra on 20 August 1980 (as amended by the first Protocol to that Agreement, done at Sydney on 2 August 1999 and the second Protocol to that Agreement, done at Genting Highlands on 28 July 2002), in this Protocol (hereinafter referred to as “the Agreement, as amended”),

Have agreed as follows:

Article 1

Article 25 of the Agreement, as amended, is deleted and substituted with the following:

“Article 25

EXCHANGE OF INFORMATION

1.  The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to the Agreement.  The exchange of information is not restricted by Articles 1 and 2.

2.  Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above.  Such persons or authorities shall use the information only for such purposes.  They may disclose the information in public court proceedings or in judicial decisions.  Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorises such use.

3.  In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy ( ordre public ). 

4.  If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes.  The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5.  In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.”

Article 2

This Protocol, which shall form an integral part of the Agreement, as amended, shall enter into force on the last of the dates on which the Contracting States exchange notes through the diplomatic channel notifying each other that the last of such things has been done as is necessary to give this Protocol the force of law in Australia and in Malaysia respectively, and thereupon this Protocol shall have effect.

 

IN WITNESS whereof the undersigned, being duly authorised, have signed this Protocol.

 

Done in duplicate in the English and Malay languages at Canberra,

this twenty-fourth day of February two thousand and ten, both texts being equally authentic.

 

FOR THE GOVERNMENT          FOR THE GOVERNMENT OF

AUSTRALIA:                               MALAYSIA:

Hon Nicholas Sherry                    HE Dato’ Salman Ahmad

Assistant Treasurer                       High Commissioner of Malaysia’

Detailed explanation of the Malaysian protocol (No. 3)

Article 1

Substitutes new Article 25 (Exchange of Information) into the existing Malaysian agreement

6.7                   This protocol aligns the information exchange provisions to the current OECD standard by replacing Article 25 ( Exchange of Information ) of the existing Malaysian agreement.  The new Article 25 continues to provide for the exchange of tax information by the tax administrations of the two countries, but differs from the previous approach in the following ways:

•        the scope is expanded to a wider ranges of taxes;

•        the new provision clarifies that the Commissioner of Taxation (Commissioner) is obliged to obtain information for Malaysian tax authorities regardless of whether Australia has a domestic tax interest in the information sought or whether the information concerns a resident of either country;

•        bank secrecy laws do not limit the exchange of information; and

•        information received by a tax authority may be used for other purposes when the laws of both countries permit this and where the tax authority supplying the information authorises such use.

Foreseeably relevant information

6.8                   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 ( Personal Scope ) of the existing agreement, and may therefore cover persons who are not residents of Australia or Malaysia.

6.9                   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.  [New Article 25, paragraph 1]

6.10               The change in wording from ‘necessary’ used in the previous version of the Article to a ‘foreseeably relevant’ standard reflects the wording in Article 26 ( Exchange of Information ) of the OECD Model Tax Convention on Income and on Capital (OECD Model) and no difference in effect is intended.

Taxes to which this Article applies

6.11               Under the corresponding Article in the existing Malaysian 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).

6.12               Under the new Article 25, 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 from the Malaysian competent authority.  This means, for example, that information concerning Australian indirect taxes (that is, the goods and services tax (GST)) may be requested and obtained from Malaysia.  [New Article 25, paragraph 1]

6.13               Similarly, in the case of Malaysia, the Malaysian competent authority can now request and obtain information concerning all federal taxes from the Australian competent authority.

Use of exchanged information

6.14               The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted in a manner which is consistent with the approach taken in the OECD Model.  However, the final sentence of this paragraph permits the information to be used for other purposes when the laws of both countries permit this and the tax authority supplying the information authorises such use.  [New Article 25, paragraph 2]

6.15               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.  [New Article 25, paragraph 2]

No domestic tax interest required

6.16               When requested, a country is required to obtain information under the new Article 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.  [New Article 25, paragraph 4]

Limitations

6.17               The country requested to provide information under this new Article 25 is not obliged to do so where:

•        it would be required to carry out administrative measures at variance with the law and administrative practice of either Australia or Malaysia; or

•        such information is not obtainable under the domestic law or in the normal course of administration. 

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

6.18               Also, in no case is the country receiving the request obliged to supply information under new Article 25 that would:

•        disclose any trade, business, industrial, commercial or professional secret or trade process; or

•        be contrary to public policy.

[New Article 25, subparagraph 3c)]

Information held by banks, other financial institutions, trusts, foundations and nominees

6.19               Paragraph 5 ensures that paragraph 3 of new Article 25 cannot be used to prevent the supply of information solely because the information is held by banks, other financial institutions, trusts, foundations, nominees etc.  The addition of this paragraph will not have any practical application for Australia, since Australian domestic tax law already permits the Commissioner to obtain information from banks and financial institutions in order to meet obligations under EOI Articles in tax treaties or Tax Information Exchange Agreements.  [New Article 25, paragraph 5]

Information that exists prior to the entry into force of the Malaysian protocol (No. 3)

6.20               Once new Article 25 is effective, the competent authorities can exchange information that relates to transactions or events occurring prior to entry into force of the protocol.  This approach conforms to the international practice contained in paragraph 10.3 of the OECD Commentary on Article 26 ( Exchange of Information ). 

Article 2

Date of entry into force of the Malaysian protocol (No. 3)

6.21               Article 2 provides that the Malaysian protocol (No. 3) shall form an integral part of the existing Malaysian agreement and for the entry into force of this protocol.  The protocol will enter into force on the date of the last exchange of diplomatic notes notifying that the domestic processes to give the protocol the force of law in the respective countries has been completed.  Once the protocol enters into force new Article 25 will have effect.  In Australia, enactment of the legislation giving the force of law in Australia to the Malaysian protocol (No. 3), along with tabling of the protocol in Parliament, are prerequisites to the exchange of diplomatic notes.  [Article 2 of the Malaysian protocol (No. 3)]



Chapter 7          

Australia-Samoa agreement

Outline of chapter

7.1                   Schedule 2 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the 2009 Agreement between the Government of Australia and the Government of Samoa for the Allocation of Taxing Rights with respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in respect of Transfer Pricing Adjustments (Samoan agreement).  Subsection 3AAA(1) of the Agreements Act 1953 will define the Samoan agreement and subsection 5(1) will give it the force of law in Australia.  This chapter explains the rules that apply in the Samoan agreement.

Context of amendments

7.2                   The Samoan agreement was signed in Canberra on 16 December 2009.  There is no pre-existing agreement of this type between Australia and the Government of Samoa (Samoa).

Summary of new law

Main features of the Samoan agreement

7.3                   The main features of the Samoan agreement are as follows:

•        Income from pensions and retirement annuities will generally be taxed only in the country of residence of the recipient, provided the income is subject to tax in that country [Article 5] .

•        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 6] .

•        Payments made from abroad to visiting students and business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited [Article 7] .

•        A non-binding administrative mechanism will be established to assist taxpayers to seek resolution of transfer pricing disputes [Article 8] .  

Comparison of key features of new law and current law

New law

Current law

Australian source pensions and retirement annuities derived by residents of Samoa will be exempt from Australian tax, provided they are taxed in Samoa.

Australian source income of foreign residents is generally subject to Australian tax.

Certain income derived by residents of Samoa from government service in Australia will be exempt from Australian tax.  

Australian source income of foreign residents is generally subject to Australian tax.

Certain payments received by visiting students and business apprentices from Samoa will be exempt from Australian tax.

Some payments received by foreign students and business apprentices may be taxable in Australia, depending on the circumstances.

The competent authorities of Australia and Samoa will endeavour to resolve taxpayers’ transfer pricing disputes arising from transfer pricing adjustments that contravene the arm’s length principle through mutual agreement.

No equivalent.

The Samoan agreement

7.4                   A full transcript of the Samoan agreement and detailed explanation follows:

 ‘AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE Government of samoa, FOR THE ALLOCATION OF TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF INDIVIDUALS AND to establish a MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

(Canberra, 16 December 2009)

 

The Government of Australia and the Government of Samoa ( " the Parties " ),

Recognising that the Parties have concluded an Agreement on the Exchange of Information with Respect to Taxes, and

Desiring to conclude an Agreement for the allocation of taxing rights with respect to certain income of individuals and to establish a mutual agreement procedure in respect of transfer pricing adjustments,

Have agreed as follows:

ARTICLE 1

persons covered

            This Agreement shall apply to persons who are residents of one or both of the Contracting States.

ARTICLE 2

Taxes covered

1          The existing taxes to which this Agreement shall apply are:

(a)     in Australia, the income tax imposed under the federal law of Australia;

  (hereinafter referred to as "Australian tax").

(b)     in Samoa, income tax;

( hereinafter referred to as "Samoan tax").

2          This Agreement shall also apply to any identical or substantially similar taxes which are imposed after the date of signature of this Agreement in addition to, or in place of, the existing taxes .   The competent authorities of the Contracting States shall notify each other within a reasonable period of time of any substantial changes to the taxation laws covered by this Agreement.

3          This Agreement shall not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions, or possessions of a Contracting State.

ARTICLE 3

Definitions

1          For the purposes of this Agreement, unless the context otherwise requires:

(a)          the term "Australia", when used in a geographical sense, excludes all external territories other than:

(i)         the Territory of Norfolk Island;

(ii)        the Territory of Christmas Island;

(iii)       the Territory of Cocos (Keeling) Islands;

(iv)       the Territory of Ashmore and Cartier Islands;

(v)        the Territory of Heard Island and McDonald Islands; and

(vi)       the Coral Sea Islands Territory,

and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the exclusive economic zone or the seabed and subsoil of the continental shelf;

(b)          the term " Samoa" means the Independent State of Samoa and the territorial waters thereof;

(c)          the term "competent authority" means in the case of Australia, the Commissioner of Taxation or an authorised representative of the Commissioner and, in the case of Samoa, the Minister of Revenue or an authorised representative of the Minister of Revenue ;

(d)          the term " Contracting State" means Australia or Samoa , as the context requires;

(e)          the term "national", in relation to a Contracting State, means any individual possessing the nationality or citizenship of that Contracting State;

(f)           the term "person" includes an individual, a company and any other body of persons;

(g)          the term "tax" means Australian tax or Samoan tax as the context requires; and

(h)          the term "transfer pricing adjustment" means an adjustment made by the competent authority of a Contracting State to the profits of an enterprise as a result of applying the domestic law concerning taxes referred to in Article 2 of that State regarding transfer pricing.

2          As regards the application of this Agreement at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State, for the purposes of the taxes to which this Agreement applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

ARTICLE 4

Resident

1          For the purposes of this Agreement, the term "resident of a Contracting State" means:

(a)          in the case of Australia, a person who is a resident of Australia for the purposes of Australian tax; and

(b)          in the case of Samoa, a person who is a resident of Samoa for the purposes of Samoan tax.

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

3          Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Contracting States, then the person's status shall be determined as follows:

(a)     the individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);

(b)     if the State in which the individual has their centre of vital interests cannot be determined, the individual shall be deemed to be a resident only of the State of which the individual is a national;

(c)     if the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement. 

4          Where, by reason of paragraph 1, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.

ARTICLE 5

Pensions and rETIREMENT Annuities

1          Pensions (including government pensions) and retirement annuities paid to an individual who is a resident of a Contracting State shall be taxable only in that State. However, pensions and retirement annuities arising in a Contracting State may be taxed in that State where such income is not subject to tax in the other Contracting State.

2          The term "retirement annuity" means:

(a)     in the case of Australia, a superannuation annuity payment within the meaning of the taxation laws of Australia;

(b)     in the case of Samoa, a superannuation annuity payment; and

(c)     any other similar periodic payment agreed upon by the competent authorities.

ARTICLE 6

Government Service

1   (a)     Salaries, wages and other similar remuneration, other than a pension or retirement annuity, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.

          (b)     However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:

          (i)         is a national of that State; or

          (ii)        did not become a resident of that State solely for the purpose of rendering the services.

2          Notwithstanding the provisions of paragraph 1, salaries, wages and other similar remuneration in respect of services rendered in connection with any trade or business carried on by a Contracting State or a political subdivision or a local authority thereof may be taxed in accordance with the laws of a Contracting State.

ARTICLE 7

Students

            Payments which a student or business apprentice, who is or was immediately before visiting a Contracting State a resident of the other Contracting State and who is temporarily present in the first-mentioned State solely for the purpose of their education or training, receives for the purpose of their maintenance, education or training shall not be taxed in that State, provided such payments arise from sources outside that State.

ARTICLE 8

Mutual agreement procedure IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

1          Where a resident of a Contracting State considers the actions of the other Contracting State results or will result in a transfer pricing adjustment not in accordance with the arm’s length principle, the resident may, irrespective of the remedies provided by the domestic law of those States, present a case to the competent authority of the first-mentioned State.  The case must be presented within 3 years of the first notification of the adjustment.

2          The competent authorities shall endeavour to resolve any difficulties or doubts arising as to the application of the arm’s length principle by a Contracting State regarding transfer pricing

adjustments.  They may also communicate with each other directly for the purposes of this Article.

ARTICLE 9

EXCHANGE OF INFORMATION

The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Agreement. Information may be exchanged by the competent authorities for the purposes of this Article in accordance with the provisions of the Agreement on the Exchange of Information with Respect to Taxes concluded by the Contracting States (whether or not this Agreement, in whole or in part, forms part of the domestic law of either Contracting State).

ARTICLE 10

ENTRY INTO FORCE

            The Government of Australia and the Government of Samoa shall notify each other, in writing, through the diplomatic channel of the completion of their constitutional and legal procedures for the entry into force of this Agreement.  This Agreement shall enter into force on the date of the last notification, and shall, provided an Agreement on the Exchange of Information with Respect to Taxes is in force between Australia and Samoa, thereupon have effect for 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.

Article 11



Termination

1          This Agreement shall continue in effect indefinitely, but either of the Contracting States may give to the other Contracting State through the diplomatic channel written notice of termination.

2          Such termination shall become effective in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.

3          Notwithstanding the provisions of paragraph 1 or 2, this Agreement shall, on receipt through the diplomatic channel of written notice of termination of the Agreement on the Exchange of Information with Respect to Taxes between the Contracting States, terminate and cease to be effective on the first day of the month following the expiration of a period of 6 months after the date of receipt of such notice.

            IN WITNESS WHEREOF the undersigned, being duly authorised by their respective Governments, have signed this Agreement.

            DONE at      Canberra    on this    sixteenth   day of    December   2009, in duplicate.

FOR THE GOVERNMENT OF

AUSTRALIA:

 

 

The Hon. Nick Sherry

Assistant Treasurer

 

FOR THE GOVERNMENT OF

SAMOA:

 

 

The Hon. Tuuu Anasii Leota

Minister of Revenue’

 

Detailed explanation of new law

Article 1 — Persons Covered

7.5                   This Article establishes the scope of the application of the Samoan agreement by providing for it to apply to persons who are residents of one or both of the countries [Article 1] .  For the purposes of the agreement person includes an individual, company and other body of persons (see paragraph 1.17).

7.6                   The application of the Samoan agreement to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 ( Resident ) (see paragraph 1.22).

Article 2 — Taxes Covered

7.7                   This Article specifies the existing taxes of each country to which the Samoan agreement applies.  This is, in the case of Australia, the federal income tax.  [Article 2, subparagraph 1a)]  

7.8                   For Samoa, this Agreement applies to income taxes.  [Article 2, subparagraph 1b)]

7.9                   The application of the Samoan 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 of Australia and Samoa are required to notify each other in the event of a substantial change to the taxation laws covered by the Samoan agreement of the respective countries, within a reasonable period of time after any such changes. [Article 2, paragraph 2]

7.10               The Samoan agreement does not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions or possessions.  [Article 2, paragraph 3]

Article 3 — Definitions

Definition of Australia

7.11               The definition of ‘Australia’ follows corresponding definitions in Australia’s modern tax treaties.  ‘Australia’ is defined to include certain external territories and areas of the continental shelf.  [Article 3, subparagraph 1a)]

Definition of Samoa

7.12               Samoa is defined to mean the Independent State of Samoa and the territorial waters thereof.  [Article 3, subparagraph 1b)]

Definition of competent authority

7.13                The ‘competent authority’ is the person or institution specifically authorised to perform certain actions under the Samoan agreement.  For example, to notify each other of any significant changes to the tax law of their respective countries, Article 2 ( Taxes Covered ) to communicate for the purposes of Article 8 ( Mutual Agreement Procedure ) and to exchange information in accordance with Article 9 ( Exchange of Information ).

7.14               In the case of Australia, the competent authority is the Commissioner of Taxation (Commissioner) or an authorised representative of the Commissioner.  In the case of Samoa, the competent authority is the Minister of Revenue or an authorised representative of the Minister.  [Article 3, subparagraph 1c)]

Definition of Contracting State

7.15               ‘Contracting State’ means Australia or Samoa, as the context requires.  [Article 3, subparagraph 1d)]

Definition of national

7.16               ‘National’ means any individual possessing the nationality or citizenship of Australia or Samoa, as the context requires.  [Article 3, subparagraph 1e)]

Definition of person

7.17               ‘Person’ includes an individual, a company and any other body of persons [Article 3, subparagraph 1f)] .  However, Article 8 ( Mutual Agreement Procedure ) is the only substantive Article of the Samoan agreement that will affect persons that are non-individuals. 

Definition of transfer pricing adjustment

7.18               A transfer pricing adjustment is an adjustment made by the competent authorities of Australia or Samoa to the profits of an enterprise, based on the application of domestic transfer pricing laws [Article 3, subparagraph 1h)] .  For Australia, such laws are contained in Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). 

Terms not specifically defined

7.19               A term that is not specifically defined in the Samoan agreement shall have (unless the context requires otherwise) the meaning that it has under the domestic law of the country applying the Samoan agreement at the time of its application.  In that case, the term’s domestic taxation law meaning will have precedence over any meaning it may have under that country’s other domestic laws.  [Article 3, paragraph 2]

Article 4 — Resident

7.20               This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of the Samoan agreement.  Residential status is a criterion for determining each country’s taxing rights and is a necessary condition for the provision of relief under the Samoan agreement.  In the case of Australia, a person’s residence is determined according to Australia’s taxation law [Article 4, subparagraph 1a)] .  In the case of Samoa, residence is determined according to Samoa’s taxation law [Article 4, subparagraph 1b)]

Special residency rules

7.21               A person is not a resident of a country, for the purposes of the Samoan agreement, if that person is liable to tax in that country in respect only of income from sources in that country [Article 4, paragraph 2] .  In the Australian context, this would mean, for example, that Norfolk Island residents, who are generally only subject to Australian tax on Australian source income, are not residents of Australia for the purposes of the Samoan agreement.  Accordingly, Samoa will not have to forego tax in accordance with the Samoan agreement on income derived by Norfolk Island residents (which will not be subject to Australian tax). 

Dual residents

7.22               Tie-breaker rules are included for determining residency of a person, for the purposes of the Samoan agreement, if the person qualifies as a resident of both countries in accordance with paragraph 1 of Article 4.  In the case of an individual the rules, in order of application, are:  

•        if the individual has a permanent home available to himself or herself in only one of the countries, the person is deemed to be a resident solely of that country [Article 4, subparagraph 3a)] ;

•        if the individual has a permanent home available in both countries or in neither, then the person’s residential status takes into account their personal or economic relations with Australia and Samoa, and the person is deemed for the purposes of the Samoan agreement to be a resident only of the country with which they have the closer personal and economic relations [Article 4, subparagraph 3a)] ;

•        residency will be determined on the basis of an individual’s nationality where the foregoing tests are not determinative [Article 4, subparagraph 3b)] ; or

•        if the individual is a national (as defined in subparagraph 1e of Article 3 of the Samoan agreement) of both countries, or of neither, the competent authorities will endeavour to resolve the question of residence by mutual agreement [Article 4, subparagraph 3c)] .

7.23               In the case of a non-individual, that is a company, partnership or other body or person, which would under paragraph 1 of Article 4 be a resident of both Australia and Samoa, then the entity will be deemed to be a resident of the country in which the place of effective management is situated.  [Article 4, paragraph 4]

7.24               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 Australian as a resident, insofar as the Samoan agreement allows.

Article 5 — Pensions and Retirement Annuities

7.25               Pensions and retirement annuities are taxable only by the country of which the recipient is a resident, provided such income is subject to tax in that country.  If such income is not subject to tax in that country, the income may be taxed by the country from which the relevant payments were made.  [Article 5, paragraph 1]

Meaning of retirement annuity

7.26               In the case of Australia, retirement annuity means a superannuation annuity payment within the meaning of the taxation laws of Australia [Article 5, subparagraph 2a)] .  A superannuation annuity as defined by Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 , which took effect from 1 July 2007 is a retirement annuity. 

7.27               In the case of Samoa, a retirement annuity means a superannuation annuity payment.  [Article 5, subparagraph 2b)]

7.28               A retirement annuity also includes any other similar periodic payment subject to the agreement of the competent authorities of Australia and Samoa.  [Article 5, subparagraph 2c)]

Article 6 — Government Service

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

[Article 6, paragraph 1]

Business income

7.30               Remuneration in respect of services rendered in connection with a trade or business carried on by a governmental authority is excluded from the scope of the Article.  Such remuneration will remain subject to the domestic taxation laws of the two countries.  [Article 6, paragraph 2]

Article 7 — Students

Exemption from tax

7.31               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 7]

Employment income

7.32               Where a Samoan student visiting Australia solely for educational purposes undertakes employment in Australia, for example, part-time work with a local employer, the income earned by that student as a consequence of that employment may be subject to tax in Australia.

7.33               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, falls for consideration under domestic taxation law.

7.34               In the case of a Samoan 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. 

7.35               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 (that is, a subsistence payment).  If the remuneration is similar to the amounts paid to persons who provide similar services who are not business apprentices (that is, salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under domestic taxation law.  Likewise, if that business apprentice undertakes any other employment in Australia, the income earned from that employment may be subject to tax in Australia.

7.36               Where a taxpayer receives exempt income and assessable income, the exempt income may in some cases be taken into account in determining the rate of tax payable on the assessable income.  However, the payments received from abroad for a student’s or apprentice’s maintenance, education or training will not, be taken into account in determining the tax payable on the employment income that is subject to tax in Australia.

Article 8 — Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments

7.37               This Article provides for consultation between the competent authorities of the two countries for the purpose of endeavouring to resolve disputes concerning transfer pricing adjustments purportedly made not in accordance with the arm’s length principle.  [Article 8, paragraph 2]

7.38               The term ‘arm’s length principle’ refers to the requirement that businesses price their related party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation.  In Australia the Commissioner would apply the arm’s length principle when reviewing business transactions in the context of Division 13 of Part III of the ITAA 1936. 

7.39               A person wishing to use this mutual agreement procedure must present their case to the competent authority of their country of residence within three years of the first notification of the transfer pricing adjustment.  This procedure operates independently of, and in addition to, domestic legal remedies available to taxpayers.  [Article 8, paragraph 1]

Article 9 — Exchange of Information

7.40               This Article authorises and limits the exchange of information by the competent authorities for the purposes of the Samoan agreement, to information that is foreseeably relevant to the administration of the agreement.

7.41               The exchange of information is subject to the provisions of the Agreement on the Exchange of Information with Respect to Taxes , which was signed by the two countries on 16 December 2009.  After it takes effect, that agreement will provide for exchange of information that is foreseeably relevant to the administration of the taxation laws of the two countries.  It also contains safeguards to protect taxpayers’ rights.  For example:

•        confidentiality rules to ensure that information exchanged is only disclosed to authorised recipients; and

•        limitations to ensure that the competent authorities do not exceed domestic laws and administrative procedures in the course of obtaining and supplying information.

Article 10 — Entry into Force

Date of entry into force

7.42               The Samoan agreement will enter into force on the date of the last exchange of diplomatic notes notifying that the domestic procedures to give it the force of law have been completed.  In Australia, enactment of the legislation giving the Samoan agreement the force of law along with tabling the Samoan agreement in Parliament are prerequisites to the exchange of diplomatic notes.  Entry into force is also conditional upon the related Agreement on the Exchange of Information with Respect to Taxes between the two countries being in force at that time.  [Article 10]

Date of application in Australia and Samoa

7.43               Following entry into force, the Samoan agreement will take effect in Australia and Samoa in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force.  [Article 10]

Article 11 — Termination

7.44               The Samoan agreement is to continue in effect indefinitely.  However, either country may give the other country written notice of termination of the agreement through the diplomatic channel.  [Article 11, paragraph 1]

Cessation in Australia and Samoa

7.45               In the event of either country terminating the Samoan agreement, it would cease to be effective in Australia and Samoa in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.  [Article 11, paragraph 2)]

Cessation in other circumstances

7.46               The Samoan agreement will also terminate and cease to be effective if the Agreement on the Exchange of Information with Respect to Taxes between Australia and Samoa is terminated.  In that event, the Samoan agreement would terminate on the first day of the month following the expiration of six months after receipt of notification of termination the Agreement on the Exchange of Information with Respect to Taxes [Article 11, paragraph 3]

 



Chapter 8          

The Australia-Turkey convention

Outline of chapter

8.1                   Schedule 2 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to define and give the force of law to the 2010 Convention between the Government of Australia and the Government of the Republic of Turkey for the Avoidance of Double Taxation with respect to Taxes on Income and the Prevention of Fiscal Evasion and its Protocol (Turkish convention).  Subsection 3AAA(1) of the Agreements Act 1953 will define the Turkish convention and subsection 5(1) will give it the force of law in Australia.

Context of amendments

8.2                   The Turkish convention was signed in Ankara on 28 April 2010 and is the first convention of this type between Australia and Turkey.  The Turkish convention will:

•        promote closer economic cooperation between Australia and Turkey by reducing taxation barriers; in particular avoiding double taxation on income arising from overlapping jurisdictions; and

•        improve the integrity of the tax system by providing the framework through which the tax administrations of Australia and Turkey can prevent international fiscal evasion.

Summary of new law

Main features of the Turkish convention

8.3                   The main features of the Turkish convention are as follows:

•        Dual resident individuals (for example, individuals who are residents of both Australia and Turkey for tax purposes according to the domestic taxation laws of each country) are, in accordance with specified criteria, to be treated for the purposes of the Turkish convention as being residents of only one country [Article 4] .

•        Where a company is a resident of both countries for their domestic tax purposes, the entity is not entitled to the benefits of the Turkish convention except for the benefits provided to nationals under the non-discrimination provisions [Articles 3 and 4].

•        Income from real property (including the profits of an enterprise from agricultural, pastoral or forestry activities carried out on that real property) may be taxed by the country in which the property is situated.  Income from real property includes natural resource royalties [Article 6] .

•        Business profits 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 are generally to be taxed only in the country of residence of the operator [Article 8] .

•        Profits of associated enterprises may be adjusted for tax purposes where transactions have been entered into on other than arm’s length terms [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:

-       a 5 per cent limitation applies on certain inter-corporate non-portfolio dividends where the recipient holds directly at least:

:    ten per cent of the voting power of the Australian company paying the dividend [Article 10, sub-subparagraph 2a)(i)] ; or

:    twenty-five per cent of the capital of the Turkish company paying the dividend.  In these instances, the profits from which the dividends are paid must have been subjected to the full rate of corporate tax in Turkey and the dividends must be exempt from Australian taxation in the hands of the recipient company.  [Article 10, sub-subparagraph 2a)(ii), Protocol, subitem 6a)] ; and

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

•        In the case of branch profits:

-       a 5 per cent tax rate limitation applies to the after tax profits of the company where the branch profits were subject to the full rate of company tax in the country where the branch is situated [ Article 10, subparagraph 4a)] ; and

-        a general limit of 15 per cent applies in all other cases [ Article 10, subparagraph 4b)] .

•        In the case of interest:

-       an exemption applies for interest derived from the investment of official reserve assets by a government, its central bank or a bank performing central banking functions [Article 11, paragraph 3] ; and

-       a general limit of 10 per cent applies to all other interest [Article 11, paragraph 2] .

•        The rate limit on source country taxation of royalties is 10 per cent [Article 12, paragraph 2] .

•        Income, profits or gains from the alienation of real property may be taxed 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 certain companies and other entities (including land rich entities), all other capital gains will be taxable only in the country of residence [Article 13] .

•        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 fixed base or the individual is present in the other country for a specified period [Article 14] .

•        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 provided that the remuneration for the services is not borne by a permanent establishment of the employer in the country visited [Article 15] .

•        Directors’ remuneration may be taxed in the country in which the company of which the person is a director is a resident for tax purposes [Article 16] .

•        Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed [Article 17] .

•        Pensions and annuities and similar periodic remuneration (other than those relating to government service) are taxable only in the country of residence of the recipient.  Lump sums paid after the age of 60 in lieu of a right to receive a pension are also generally taxable only in the country of residence of the recipient.  However, in respect of other lump sum payments (other than lump sum retirement benefits relating to government service), taxing rights are to be shared between the country of residence and the country of source [Article 18] .

•        Income from government service will generally be taxed only in the country that pays the remuneration.  However, the remuneration will be taxed only in the other country where the services are rendered in that other country by a resident of that other country who is also a national of that other country or did not become a resident of that other country for the purpose of rendering the services [Article 19, paragraph 1] .

•        Pensions or annuities paid by, or out of funds created by, a country, to an individual in respect of services rendered to that country are taxable only in that country.  However, these payments shall be taxable in the other country if the individual is a resident and a national of that country.  Lump sum retirement benefits paid by, or out of funds created by, a country, to an individual in respect of services rendered to a country are taxable only in that country [Article 19, paragraph 2] .

•        Payments made from abroad to visiting students for their maintenance or education will be exempt from tax in the country visited [Article 20, paragraph 1] .

•        Remuneration received by a professor or teacher for the purpose of teaching, study or research at an educational institution for a period not exceeding two years will, under certain conditions, be exempt from tax in the country visited to the extent to which it is subject to tax by the country of residence [Article 20, paragraphs 2 and 3] .

•        Other income (that is, income not dealt with by other Articles) may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief [Article 21] .

•        Source rules in the Turkish convention prescribe, for domestic law and treaty purposes, that income, profits or gains derived by a resident of one country, which under certain provisions of the treaty may be taxed in the other country, will be treated as having a source in that other country [Article 22] .

•        Double taxation relief for income which, under the Turkish convention, 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 the Turkish convention as follows:

-       in Australia, by allowing a credit for the Turkish tax against Australian tax payable on income derived by a resident of Australia from sources in Turkey [Article 23, paragraph 1] ; and

-       in Turkey, by allowing a deduction for the Australian tax against Turkish tax payable on income derived by a resident of Turkey from sources in Australia [Article 23, paragraph 2] .

•        In the case of Australia, effect will be given to the double tax relief obligations arising under the Turkish convention by application of the general foreign income tax offset provisions of Australia’s domestic law, or the relevant exemption provisions of that law where applicable.

•        Rules in the Turkish convention will protect nationals and businesses from tax discrimination in the other country and gives them private rights of appeal.  However, Article 24 does not restrict either country from applying provisions designed to prevent avoidance or evasion of taxes (for Australia such measures include thin capitalisation, controlled foreign company rules and measures designed to ensure that taxes can be effectively collected and recovered, including conservancy measures), provisions dealing with capital gains deferral, provisions for the consolidation  of resident entities and research and development concessions [Article 24] .

•        The Turkish convention provides for consultation between the two taxation authorities to prevent taxation not in accordance with the treaty [Article 25] .

•        The Turkish convention provides for exchange of information, including bank information, between the two taxation authorities.  It authorises and requires Australia to exchange information where the information relates to federal taxes administered by the Commissioner of Taxation (Commissioner) [Article 26] .

Comparison of key features of new law and current law

New law

Current law

Implements the 2010 Convention between Australia and Turkey.

There is no existing treaty between Australia and Turkey.

Provides rules to treat dual resident individuals (for example, individuals who are residents of both Australia and Turkey for tax purposes according to the domestic taxation laws of each country) as residents of only one country for the purposes of the Turkish convention.

No equivalent.

Defines the term ‘permanent establishment’ in Article 5 ( Permanent Establishment ) for the purposes of the Turkish convention.  In particular, under the Turkish convention a building site or installation project constitutes a permanent establishment where it lasts more than six months.  An enterprise is deemed to have a permanent establishment in a country if:

•        it carries on supervisory activities in that country for more than six months in connection with a building site, or a construction, installation or assembly project, which is being undertaken in that country;

•        substantial equipment is operated in that country by the enterprise for more than six months in any 12-month period;

•        it performs professional services through one or more individuals for a period or periods exceeding 183 days in any 12-month period; or

•        the enterprise habitually maintains a stock of goods or merchandise for the purpose of regular delivery.

The definition of ‘permanent establishment’ is set out in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The Turkish convention treats certain business profits, such as profits from agricultural, pastoral or forestry activities, as income from real property, and ensures that arms’ length profits are taxed on a net basis.

The definition of ‘real property’ covers land, and rights relating to exploration for or exploitation of natural resources.

Source taxation of business profits is limited to those profits derived through a branch or other prescribed permanent establishment (Article 5) situated in the source country. 

In general, foreign residents are taxable on all Australian sourced income.

Source taxation of profits from shipping and airline transport operations is limited to income from domestic transport. 

Australia’s domestic law provides for source country taxation of profits from shipping and airline activities (including non-transport activities).

Dividend withholding tax is limited to 5 per cent on certain inter-corporate non-portfolio dividends where the recipient holds directly at least:

•        ten per cent of the voting power of the Australian company paying the dividend ; or

•        twenty-five per cent of the capital of the Turkish company paying the dividend.  In these instances, the profits from which the dividends are paid must have been subjected to the full rate of corporate tax in Turkey and the dividends must be exempt from Australian taxation in the hands of the recipient company.

A general limit of 15 per cent applies to all other dividends. 

In the case of branch profits:

•        a 5 per cent tax rate limitation applies to the after tax profits of the company where the branch profits were subject to the full rate of company tax in the country where the branch is situated; and

•        a general limit of 15 per cent applies in all other cases.

The rate of non-resident dividend withholding tax in Australia is 30 per cent.  There is no tax on branch profits in Australia and the treaty will not change the taxation treatment of branch profits.

In the case of interest:

•        an exemption applies for interest derived from the investment of official reserve assets by a government, its central bank or a bank performing central banking functions; and

•        a general limit of 10 per cent applies to all other interest .

The rate of non-resident interest withholding tax in Australia is 10 per cent.

Reduces the rate of royalty withholding tax from 30 p