Principles and Practice of Double Taxation Agreements: A Question and Answer Approach

215 Pages·2008·100.4 MB·English

by  Robert L. Deutsch

Contents
List of abbreviations
XIV
About the authors xv
Preface
XVlI
1 General 1
1.1 Introduction 1
1.1.1 What kind of tax agreements (also known as
treaties or conventions) are there? 1
1.1.2 What are double tax agreements (DTAs)? 1
1.1.3 How are DTAs designed and structured? 2
1.1.4 Wha t are the key functions of DTA s? 3
1.1.5 What is international double taxation? 3
1.1.6 What is the history and relevance of the OECD
Model DTA? 4
1.1.7 What DTAs have Australia, China, France,
Germany, the UK and the US entered into? 5
1.1.8 What are most favoured nation clauses and what
happens if they are triggered? 5
1.1.9 What rules apply to the interpretation of DTAs? 6
1.1.10 How do DTAs deal with undefined terms? 6
1.1.11 Can DTAs be used by taxing authorities to avoid an
outcome of double taxation? 8
1.1.12 Can a DTA create a tax liability in circumstances
where no such liability exists under domestic
non-DTA law? 9
1.1.13 Can DTAs override the application of international
attribution measures such as the CFC and FIF rules? 10
1.1.14 How, if at all, are DTAs incorporated into domestic
tax law? 13
1.1.15 How do DTAs work? 14
Contents vii
VI Contents
1.1.16 In broad terms what types of Allocation Articles are 3.1.8 How have the OECD and UN Models influenced PE
articles in DTAs? 44
to be found in DTAs? 15
1.1.17 How is priority between the Allocation Articles 3.1.9 If there is a PE in the form of a branch, how are the
determined? 16 profits attributable to the PE calculated? 45
1.1.18 Is there a practical approach to the application of 3.1.10 If there is a PE in the form of an agency, how are the
DTAs that creates a coherent conceptual profits attributable to the PE calculated? 48
framework? 16 3.1.11 What about joint venture operations? 50
1.2 The Broad Principles applied under the Allocation 3.2 Active income: associated enterprises profits 51
3.2.1 What is the allocation rule? 51
Articles 16
3.2.2 Are compensating adjustments provided for? 52
1.2.1 Division of taxing rights 16
1.2.2 Income taxed by the residence jurisdiction only 17 3.2.3 What if there is inadequate information available to
1.2.3 Income may be taxed by both the residence and determine profits? 53
3.3 Active income: dependent personal services 53
source jurisdictions 18
3.3.1 Background 53
21
2 The three qualifying questions 3.3.2 What is the allocation rule - DTAs? 54
2.1 Taxpayers covered 21 3.3.3 How do the sample DTAs deal with these issues? 55
2.1.1 What taxpayers are covered by the DTA? 21 3.4 Active income: independent personal services 56
2.1.2 How do DTAs generally and the sample DTAs in 3.4.1 Background 56
particular resolve cases involving dual residency? 21 3.4.2 How do the sample DTAs deal with these issues? 56
2.1.3 What about other "entities" such as partnerships 3.5 Active income: fringe benefits 58
and trusts? 24 3.6 Passive income articles 60
2.2 Taxes covered 24 3.6.1 What types of income are dealt with by the passive
2.2.1 What are the "taxes covered" by the DTA? 24 income articles? 60
2.2.2 How do the sample DTAs in particular define 3.6.2 Under what general circumstances are these articles
"taxes covered"? 25 relevant? 60
2.3 Timing matters 27 3.6.3 Why do countries operate a system of withholding
2.3.1 What are the start dates and termination taxes on passive income? 61
arrangements in relation to the DTA? 27 3.6.4 Does the payment necessarily need to have a source
2.3.2 When does a DTA start to operate? 27 in the country of source? 61
2.3.3 When is a DTA terminated? 29 3.6.5 Do passive income articles generally allocate the
2.3.4 The sample DTAs 30 taxing rights to one country? 62
31 3.6.6 Can the articles apply even where there is no
3 The allocation rules
taxation in the country of residence? 62
3.1 Active income: business profits 31
3.6.7 What if there is no DTA in place between the
3.1.1 What is the allocation rule? 31
country of source and the country of residence? 63
3.1.2 What are business profits? 33 3.6.8
!'low is tax relief given for amounts still subject to
3.1.3 What is an enterprise? 34
mternational double taxation? 63
3.1.4 What is a "permanent establishment"? 35
3.6.9 What if the DTA and domestic provisions of the
3.1.5 How are permanent establishments dealt with in the
count.ry of residence do not provide for any method
context of electronic commerce? 38
of unilateral double tax relief? 63
3.1.6 What sort of presence can a taxpayer have without
3.6.10
How does a credit method of unilateral double tax
creating aPE? 40
relief generally operate? 63
3.1. 7 May the definition of a PE differ between 3.6.11
Can .relief for underlying tax be available for royalty
developing and developed countries? 41
and mterest payments? 64
x Contents Contents xi
3.8.3 How does the "other income" article allocate the 7.1.4 Collection procedures 107
taxing rights? 79
3.8.4 What if there is no "other income" article? 80 8 The reconstructed alternative AustraliaJUK DTA 109
Article 1 Is the person covered? 109
4 Restrictions on the availability of DTA benefits 81
Article 2 Is the tax covered? 110
4.1 What is treaty shopping? 81 Article 2.1 Existing taxes 110
4.2 How can treaty shopping be prevented? 82 Article 2.2 Identical and substantially similar taxes 110
4.3 How effectively has the concept of beneficial Article 3 Is the convention in force? 110
ownership been used to prevent the practice of Article 3.1 Entry into force 110
treaty shopping? 82 Article 3.2 Termination 111
4.4 How do the comprehensive Limitation on Benefits Article 3.3 Special termination arrangements for
(LOB) provisions work to prevent treaty shopping? 88 entertainers and sports persons 112
4.4.1 What is a qualified person? 89 Article 4 Is the item of income or gain covered and, if
4.4.2 What is a regional headquarters company ("RHC") 90 so, how is the item dealt with? 112
4.4.3 What is the active business test? 92 Article 4.1 Business profits 112
4.4.4 What is the anti-avoidance test? 92 Article 4.2 Shipping and air transport profits 114
4.4.5 What is the Equivalent Beneficiary test? 92 Article 4.3 Associated entities profits 115
4.4.6 What are deductible payments? 93 Article 4.4 Income from employment 116
4.4.7 Who are Equivalent Beneficiaries? 93 Article 4.5 Income from independent personal services 117
4.5 How do limited LOB provisions work? 94 Article 4.6 Fringe benefits 118
4.6 How do the anti-conduit provisions work? 94 Article 4.7 Government Service 118
4.7 Is there room for the application of GAAR to treaty Article 4.8 Dividends 119
shopping arrangements? 96 Article 4.9 Interest 122
4.8 What is the difference between treaty shopping and Article 4.10 Royalties 124
basket shopping? 96 Article 4.11 Pensions and Annuities 126
Article 4.12 Income from real property 127
5 Avoiding double tax 97
Article 4.13 Income or gains from the alienation of
5.1 What methods are there in place to avoid double
property 128
taxation? 97
Article 4.14 Income or gains from the alienation of ships or
5.2 What is tax sparing and how does it work? 99
aircraft, etc. 129
5.2.1 Illustration 99
Article 4.15 Deferred property income or gains 129
5.2.2 Solutions 99
Article 4.16 Entertainers and sports persons - income
5.2.3 Example 1: Tax sparing vs. no tax sparing 100
earned 130
5.2.4 Example 2: Interposing intermediary company 100
Article 4.17 Entertainers and sportspersons - income
6 Non-discrimination 103 accrued in a third person 130
6.1 What is the purpose and effect of Article 4.18 Students 131
non-discrimination clauses in DTAs? 103 Article 4.19 Professors and teachers 131
Article 4.20 Other income 131
7 Procedures 105
Article 5 How is the operation of the Convention
7.1 What procedures are in place to assist in the
excluded or limited? 133
effective administration of cross-border taxation? 105 Article 5.1 Remittance based taxing states 133
7.1.1 Mutual agreement procedure ("MAP") 105 Article 5.2 Temporary residents based taxing states 133
7.1.2 Binding arbitration procedure ("BAP") 105 Article 5.3 Partnerships 134
7.1.3 Exchange of information 106
Article 5.4 Members of diplomatic missions or permanent 9.2.4 Podd et at. v. Commissioner 160
missions and consular posts 134 9.2.5 Terry Haggerty Tire Co. Inc. u. United States 161
Article 6 How is double taxation eliminated? 135 9.3 Other cases 163
Article 6.1 Credit for United Kingdom tax against 9.3.1 The QlIeen Crown Forest Industries Limited 163
(I.
Australian tax 135 9.3.2 Association of Mouth and Foot Painting Artists Pty
Article 6.2 Credit for United Kingdom tax on profits out Ltd v. Commissioner of Taxation 164
of which a dividend is paid against Australian 9.3.3 The Queen u. Dudney 165
tax 135 9.3.4 Gulf Offshore N.S. Limited u. The Queen 167
Article 6.3 Credit for Australian tax against United 9.3.5 Specialty Manufactllring Ltd v. The Queen 168
Kingdom tax 135 9.3.6 Sumner u. The Queen 169
Article 6.4 Credit for Australian tax on profits out of 9.3.7 M and Mme Robert Gilly 1'. Directeur des Seruices
which a dividend is paid against United Fiscallx dl{ Bas-Rhin 171
Kingdom tax 136 9.3.8 "Pipeline" decision 174
Article 6.5 Source 136 9.3.9 Re Sti Schneider Electric 175
Article 7 I low is non-discrimination dealt with? 136 9.4 Additional cases involving DTAs 178
Article 8 What procedures are there in the Convention
10 Double taxation agreements table 181
to allow for mutual agreement and exchange
of information? 138
Article 8.1 Mutual agreement procedures 138 Appendix: Sample DTAs 191
Article 8.2 Exchange of information procedures 139 AustralialUK Convention 193
Article 9 What are the Convention definitions and AustralialUK Exchange of Notes 221
deernings? 140 ChinalUK DTA 231
Article 9.1 General 140 ChinalUK protocol 253
Article 9.2 Residence 142 France/China DTA 257
Article 9.3 Permanent establishment 143 France/China protocol 276
Article 9.4 Deemed source for Australian domestic tax Germany/China DTA 277
purposes 145 Germany/China protocol 298
UKIUSA DTA 301
9 Some leading DTA cases 147
UKlUSA Exchange of Notes 344
9.1 Australian cases 147
US/Australia DTA 365
9.1.1 Federal Commissioner of Taxation v. Lamesa
Holdings BV 147
9.1.2 Max Factor & Co. v. Federal Commissioner of Bibliography 399
Taxation 149 Index
401
9.1.3 McDermott Industries (Aust) Pty Ltd v.
Commissioner of Taxation 150
9.1.4 Thiel v. Federal Commissioner of Taxation 152
9.1.5 Unisys Corporation v. Federal Commissioner of
Taxation 154
9.2 US cases 156
9.2.1 Cudd Pressure Control Inc. v. The Queen [1998] 156
9.2.2 The North West Life Assurance Company of
Canada v. Commissioner of Internal Revenue 157
9.2.3 Qantas Airways Limited v. United States 159
Abbreviations About the authors
ATO Australian Tax Office Robert L. Deutsch BEe LLB (Hons) Syd LLM (Hons) Cantab, FTIA
BAP binding arbitration procedure Bob Deutsch is one of Australia's leading tax lawyers, with extensive experience
BFH Bundesfinanzhof as a tax practitioner both with professional bodies and tax authorities and some
CFC controlled foreign corporation 14 years in academe. His research fields include international taxation, super
CGT capital gains tax annuation, GST and CGT.
DTA double taxation agreement Bob is currently a Director with KPMG in an advisory capacity and was
EB equivalent beneficiary appointed inaugural KPMG Professor of Taxation at ATAX (the Australian
FBT fringe benefits tax Taxation Studies programme in the Faculty of Law at the University of New
FIF foreign investment fund South Wales) in May 2007. Previously he was a tax partner with Mallesons Ste
GAAR general anti-avoidance rules phen Jaques. Before that, he was a Senior Lecturer in Law at the University of
GST goods and services tax Sydney.
GTC General Taxation Code (France) He was a private sector representative on the Tax Law Improvement Project
ITAA Income Tax Assessment Act (Australia) and a member of the Australian Tax Office's Part IVA and Public Rulings Panels.
]V joint venture Bob is a past Chairman of the Australian branch of the International Fiscal
LOB limitation on benefits Association and a former Governor on the Board of the Australian Tax
MFN most favoured nation Research Foundation. He has acted as a consultant to the Thin Capitalisation
PE permanent establishment Project Team and an external referee for the Dividend Taxation and Globalis
QP qualified person ation in Australia Project (Bureau of Industry Economics).
RHC regional headquarters company Bob has published widely, with articles and books in the area of international
tax and derivatives. He is co-author of the standard reference Guidebook to
Australian International Tax (Legal Books, 2002), Australian Tax Handbook
(2008) and Fundamental Tax Legislation (2008) and The Income Tax and GST
Strategies Manual. He has presented extensively at seminars and conferences
over a number of years and is on the Editorial Board of eJournal of Tax
Research.
R~is~n M. Arkwright BA (Hons), MSc, CTA, MCIPD, FTIA
ROlSm has 16 years' experience in UK and Australian taxation with approxi
mately ten years spent in a tax technical training environment. She is a qualified
Chartered Tax Adviser (CTA) from the UK, but has spent the last eight years in
the ongomg tax reform environment in Australia.
Raisin is a member of the Taxation Module Advisory Committee for the
Preface
Chartered Accountants Programme of the Institute of Chartered Accountants
in Australia (ICAA) and a member of the Education, Examinations and Quality
Assurance Board of the Taxation Institute of Australia (TIA).
Raisin is also a Fellow of the TIA and a full member of the UK Chartered
Institute of Personnel and Development (MCIPD).
Raisin is currently the National Director of KPMG's Tax Business School® in
Australia responsible for the development and delivery of tax technical training
programmes to KPMG staff across Australia. Before joining KPMG in Austra
lia, Raisin developed and delivered tax training for the Association of Taxation
Technicians (ATT) and the Chartered Tax Adviser (CTA) exams for staff of
KPMG in the UK.
Daniela Chiew BComm UNSW MTax Syd This book is the culmination of many years of work in analysing, researching
Daniela Chiew is a Partner in the Corporate Taxation Services group at KPMG. and teaching in relation to double taxation agreements (DTAs).
Daniela has 17 years' experience providing corporate and international tax While there have been numerous books written on this topic (see in particular
advice to a range of Australian based and multinational organisations particu the bibliography) we have taken a different perspective in this book, looking
larly in the information technology, media and services industries. Daniela has more at the conceptual underpinnings of DTAs and the way in which we believe
experience with the co-ordination of tax services in the Asia Pacific region for they operate in practice.
global clients and is regularly involved in advising on tax structuring issues and We have also sought to bring into the analysis actual DTAs rather than refer
conducting tax due diligence for acquisitions. ring continuously to the OECD or UN Model Conventions. In addition, we
Daniela is a member of the Taxation Institute of Australia and is an adjunct have included a number of critical DTA cases decided throughout the world,
lecturer in the University of NSW ATAX programme. particularly where those cases have an important principle which can be applied
more generally to DTAs.
We have dealt with a wide geographic spread of countries but inevitably in an
initial edition of such a book, our focus has been restricted to a number of spe
cific countries at this early stage. In this book, while our focus is worldwide, at
times our key initial observations are in respect of Australia, China, France,
Germany, the United Kingdom and the United States. In future editions our
analysis and discussion will include a number of other countries and we are par
ticularly mindful of the need to include further developing countries such as
India and Brazil and key financial centres such as the Netherlands and Singa
pore. These countries, in particular, will be in sharper focus in the next edition
of this book.
A creative aspect of this book is the inclusion in Chapter 8 of a reconstructed
version of the AustralialUK DTA, which is designed to bring into sharper relief
the conceptual underpinnings of DTAs as we see it. In particular, we have
re-arranged the terms of that DTA so as to more directly reveal the critical ele
ments of the DTA as being:
Art~cles 1,2 and 3 - an analysis of the three key preliminary questions;
ArtIcle 4 - a detailed series of various allocation rules each dealt with in a
separate sub-article. Each sub-article deals with a different type of income
basket such as business profits, dividends, interest, royalties, income from
---
--.
......
services, etc. These various allocation sub-articles are schematically struc
General
tured in an identical fashion so as to more immediately reveal the likely
benefits and flaws in each of them; .
Article 5 - exclusions and limits that operate in the application of this par
ticular DTA ; and
a Article 6 - the method for eliminating double taxation.
In our view this more properly reflects the way in which the DTAs should be
approached - both in teaching and in practice.
Naturally a production of this breadth requires a collaboration of minds and
we would particularly like to thank all those who have assisted in enabling us to
reach this stage. While there are many people who have been involved in this
process we would specifically like to mention Dave Corbin, Michael Moldrich
and Elizabeth Scott of KPMG and Cindy Chan from ATAX at the University of
1.1 Introduction
New South Wales. All these individuals provided input to various aspects of the
book. Invaluable administrative assistance was also provided by Narelle Robin 1.1.1 What types of tax agreement (also known as treaties or
son (KPMG), in the preparation and finalisation of the manuscript. conventions) are there?
In addition we would also like to thank the key personnel at BNA Interna
There are over twenty different types of tax agreements, including agreements
tional in the production of this book, in particular Deborah Hicks, for all her
on income and capital, agreements on estates and gifts, agreements on adminis
efforts in bringing this into existence in a timely fashion and for her faith in the
trative assistance on tax matters, agreements on shipping and airline profits.
project.
Many countries have also entered into multilateral agreements to coordinate
We trust that readers will find both the content of the book and the concep
their tax policies and promote regional economic development.
tual approach adopted of interest and we look forward to receiving feedback so
The focus in this book is on the comprehensive double tax agreements
that we can improve future editions.
(DTAs) that have been entered into in respect of income and capitaL All of these
agreements, which exist throughout the world, follow an internationally accep
Professor Robert Deutsch, ATAX UNSW, Director KPMG
ted format which is prescribed by the Organisation for Economic Co-operation
R6isfn Arkwright, Director KPMG
and Development (OECD model) or the version as modified by the United
Daniela Chiew, Partner KPMG
Nations (UN model). There is also a US Model Income Tax Convention, which
was finalised in 1996 and which forms the basis of all US bilateral DTAs. This
Model is quite different from the other models, as it more cogently reflects the
position of the United States as a capital-exporting country. Taxation rights in
respect of residents are more strongly defended in this Model, sometimes at the
expense of the source country.
It is the thesis of this book that the format currently adopted globally is in
need of.refinement, and the structure put forward in Chapter 8 in respect of the
AustraltalUK DTA is a possible way forward.
1.1.2 What are double tax agreements (OTAs)?
A double taxation agreement - a term often used interchangeably with "double
tda x . treaty" 0 r " conventi.On" -.IS an agreement entere d m. to b y two countn.e s,
eSlgned primarily to control the way in which income is taxed by the two coun
tne~ where both countries claim the right to tax the same income. This is usually
achieved by a series of articles (also known as "provisions") which clarify the
way in which the domestic tax rules of the two treaty partners apply in relation This book is largely structured a.ro~nd the framework given above, with
to a specific item of income or specific type of taxpayer (see Article 4 in the C h apter 2 dealing with the three prellIrunary matters. and Chapters 3, 4, 5 and 6
reconstructed AustraliafUK DTA in Chapter 8). · wI·th each of the remaining matters sequenttally.
d esa·1m g . . . h 8fl
In this book the term used will be "double tax agreements" or the abbrevia ·1 ly the reconstructed verSIOn of the AustraliafUK DTA m C apter 0 -
tion DTA unless quoting from a specific source where a different term is used. lo:rh:rsame framework, with Articles 1,2 and 3 dealing with the t~ee p~e-
~ost DTAs are "comprehensive" in the sense that they deal with all types of h..m mmaarttyers, Article 4 dealmg wi.t h a.l.lo catIOn rules, A.rtIcle 5. dealm.g with
mcome. However, some are limited in their application, e.g. there is an agree exclusions and limitations on t~e availab~Ity of DTA benefits, ArtIcle 6 dealmg
ment between Australia and Greece that deals only with airline profits. Some . h double tax relief, and ArtIcle 7 dealmg with procedural matters.
DTAs also extend beyond "income", e.g. the UKJUS DTA extends to cover cer WI~n the view of the authors it would be sounder if DTAs were designed and
tain excise taxes and the AustralialNZ DTA covers fringe benefits (being bene structured around these six broad steps to enable readers to more Immediately
fits received as an employee otherwise than in cash) as well as cash. comprehend the operation of DTA~. . .
The structure of DTAs is, broadly speaking, the same but the content is often In the drafting of DTAs, harmoOlsatton of the deSIgn and structure would be
different. Even though two DTAs may look identical, the wording of specific of enormous benefit. It would be most helpful if the same ordering of articles
articles will often differ in a material way. Thus, caution should be exercised in was adopted and, where a particular DTA does not cover a particular aspect,
assuming that the same conclusions can be derived about the application of dif this should be highlighted by retaining the sub-article but without any content.
ferent DTAs. Thus, for example, in the AustraliafUK DTA there is no allocation article deal
ing with professors and teachers. Nonetheless, Art~cle 4.19 has been retained
1.1.3 How are DTAs designed and structured? albeit with no content, so that thIS becomes an explicit exclUSIOn m the context
of that treaty.
The comprehensive DTAs that currently exist throughout the world are designed
It would be helpful if this style were adopted across treaties generally, so that
and structured in broadly similar ways.
one could be compared with the other with much greater ease than is currently
Sequentially, the DTAs are simply ordered from Article 1 through to the final
the case.
article, usually somewhere around 28.
Whilst this numerical sequencing covers the field in a logical sequential order,
the ordering (in the authors' respectful opinion) fails to reflect adequately the 1.1.4 What are the key functions of DTAs?
true conceptual nature of DTAs.
The key functions of a DTA are to
In particular, DTAs are constructed around a series of conceptual steps pri
marily consisting of the following: • alleviate international double taxation;
• eliminate international tax avoidance by prescribing rules for the alloca
1. Rules dealing with the time covered by the DTA - i.e. commencement
tion of income and deductions between related parties, for the exchange of
and termination dates. (Chapter 2)
information and for assistance in collection; and
2. Rules dealing with the taxes covered by the DTA. (Chapter 2)
• provide procedural rules for the resolution of tax objections and inconsis
3. Rules dealing with the taxpayers covered by the DTA. (Chapter 2)
tencies (the "mutual agreement procedure"), which are considered later.
4. Rules applicable to different types of income, etc., allocating tax capacity
to one or other of the two jurisdictions which are parties to the DTA or
sharing tax capacity between them. (Chapter 3) 1. 1.5 What is international double taxation?
5. Rules excluding the operation of the beneficial aspects of the DTA in
International double taxation in a legal sense occurs where comparable taxes
certain circumstances. (Chapter 4)
(typically taxes on income or gains) are levied by more than one country on the
6. Rules providing for double tax relief. (Chapter 5)
same taxpayer in respect of the same subject matter for identical periods. This
7. Rules providing for procedural measures to assist in the resolution of
can happen where a taxpayer who is treated as a resident of Country A under
disputes and in the collection of taxes. (Chapter 6)
Country A tax law derives income which is treated by Country B as having a
The first three matters are preliminary issues to the application of a DTA and SOurce in Country B, and any of the following applies:
should be grouped together for that reason. The other four aspects are stand
(a) Country A imposes tax on its residents on their worldwide income and
alone matters that should be dealt with separately.
Country B imposes tax on non-residents on income sourced in Country B;
Wh DTAs have been entered into by Australia, China,
(b) both countries impose tax by reference 10 source, but each country con 1.1.7 at G nnanv the United Kingdom and the United States?
siders the income derived as having a "source" within its jurisdiction; France, e "
(c) both countries impose tax by reference to residence, but A and B both . 42) China (85), France (115), Germany (85), the United Kingdom
consider the taxpayer to be "resident" within its jurisdiction for the same Australia ( U' . d St tes (66) have entered into a broad range of DTAs, as set
(116) and the rute a
period.
. or ble 10.1 in Chapter 10.
For example, an Australian incorporated company with income arising from ouCt O10p l.1e as 0 f the comprehensl.v e DTAs b etween
activities carried out in Singapore would be subject to tax in Australia as it is tax the United Kingdom and the United States,
resident in Australia by virtue of its place of incorporation, and would be subject
the United States and Australia, .
to tax in Singapore by virtue of its Singapore-sourced income (point (a) above).
United Kingdom and Austraha,
Similarly, a company incorporated in Singapore might carryon limited activi t h e . d K· d
China (PRCl and the Urute mg om,
ties in Australia; Australia and Singapore might both argue that the income pro
China (PRC) and France, and
duced from such activities is sourced in Singapore and Australia under their
China (PRC) and Germany
respective source rules, thus giving rise to tax in both jurisdictions (point (b)
· the Appendix. These DTAs are referred to extensively in the dis-
above). can be f oun dm
Finally, a US-incorporated company which is centrally managed and con cussions that follow in this book. . .
In addition the reconstructed version of the AustrahaIUK DTA IS to be found
trolled in Australia would be tax-resident in the United States for US tax pur
poses by virtue of the US incorporation, and tax-resident in Australia for in Chapter 8.
Australian tax purposes by virtue of its central management and control in Aus
tralia (point (c) above). What are most favoured nation clauses and what
1. 1. 8
Australia's DTAs seek to resolve such conflicts by allocating rights to tax and happens if they are triggered?
providing relief from double taxation in accordance with the rules contained in
Some DTAs contain "most favoured nation" (MFN) clauses that require the
the agreement.
DTA partner to renegotiate the terms of a DTA if that country subsequently
enters into a DTA with another country on more favourable terms.
1. 1.6 What is the history and relevance of the OECD Model This article can take one of two forms, as follows:
DTA?
• The first is an article in which there is an agreement between the DTA part
To encourage a uniform approach, a draft model double taxation convention ners (Countries A and B) that if specified rates in respect of specif~ed types of
was presented to the Council of the OECD in 1963; revisions of the Model Con income are negotiated between one of the DTA partners and a third country
vention were released in 1977 and 1992. An official O ECD commentary on the that are lower than those applicable in the DTA between A and B, those lower
articles in the 1977 Model has been published, and tile OECD itself has pub rates in respect of those items of income shall apply in respect of A and B.
lished an official commentary on the 1992 Model Convention and revisions of II The second is a more common article, which provides that If elther Country
that convention. A or Country B enters into a DTA with a third country on terms that are
Members of the OECD are expected, when entering into new agreements or more favourable in some respects than the terms specified in the Country
revising existing ones, to conform to the Model Convention, subject to any for AlB DTA, Country A and Country B are required to enter into immedi~te
mal reservations made. Although it is necessary to carefully examine the precise negotiations to amend the relevant articles of the Country AlB DTA to brmg
wording of each DTA, the Model Conventions have been influential and, for it into line with the more favourable terms of that third country DTA.
example, Australia's recent DTAs adopt the general format of the Model
Thus, for example, the reduction in withholding tax rates in the revi~ed
Convention.
AustraliafUS DTA triggered MFN obligations for Australia with the followmg
Because of the increase in the volume of electronic commerce, the OECD
countries: France, Italy, Switzerland, Finland, Norway, The Netherlands and
has reviewed its Model Convention to ensure that: it can adequately deal
South Korea.
with changes in business transactions. It has concluded that no major reforms
In the November 2005 Protocol to the AustralialNZ DTA, New Zealand
are necessary at this stage, but it will continue t:o monitor e-commerce
agreed to an MFN clause in relation to Australia.
developments.
6 Double Taxation Agreements
,. 1.9 What rules apply to the interpretation of DTAs?
. under the applicable tax laws of that State prevailing over a meaning given to the
meaning
Although DTAs are incorporated into the domestic law of the DTA partner
term under other laws of that State
countries, typically with broad overriding effect subject only to particular
exceptions, they retain their status as international treaties. As a result they are
The result of the application of ~he unde~ined terms subparagraph is that an
subject to the general international law on DTAs as codified in the Vienna Con
vention on the Law of Treaties. undefined term will normally take ItS meamng from the relevant tax l~ws of the
state applying the DTA subject only to the context requmng otherWise.
Some general rules of construction may be identified.
• DTAs for the avoidance of double taxation and the prevention of fiscal eva 1. 1. 10. 1 Issue 1 - Context otherwise requires
sion with respect to taxes on income and gains should be construed liber When the "context would so otherwise require" is an open question, but clearly
ally. In this context, Article 25 of the Vienna Convention provides that the whether or not the context is strong enough to dictate a different conclusion
treaties are binding and should be performed in good faith. The principle of from that which might be gained from a domestic law definition is a matter
good faith would seem to imply that the literalist or narrow interpretation which can only be decided on the facts of each individual case.
should not be adopted where it would overcome the intended effect of a Rather than focusing on the word "context", it might be appropriate to con
treaty. sider the word "requires". "Requires" is a word of some force. Non-English
Article 27 of the Vienna Convention provides that a treaty party may not language versions of DTAs may be instructive in understanding the true force of
invoke the provisions of its internal law as justification for failure to per the word "requires" in this context. Thus, in the French language the word used
form a treaty. How this sits with the legislative amendments to Australian is demander and in the German erfordern. These words are all words of consid
domestic law post the decision in Lamesa v. FCT (see section 1.1.11 below erable force, so it would seem that the context must be reasonably strong for the
and Chapter 9) is an open question. internal law meaning to be ousted by the context. Otherwise the phrase that
• Each bilateral agreement must be construed individually (although it might might have been adopted might have been "unless the context otherwise sug
adopt many of the common principles and terms laid down in the OECD gests" or possibly "unless the context otherwise implies". These are words of
Model Convention). less force and would easily accommodate other meanings merely suggested or
• The effectiveness of the DTAs is enhanced if the judicial decisions of a implied rather than required by the context.
country concerning its provisions are recognised as persuasive authority by The only place where this issue has been ventilated in Australia is in the High
the courts of the other country, or of other countries, when construing com Court.
parable provisions: Canadian Pacific v. The Queen (1976) CCT 221. Illustra In Thiel v. FCT (1990) 21 ATR 531 the High Court held that the terms and
tions of a failure to implement this policy may be found in ES & A Bank v. FCT expressions "enterprise", "enterprise of one of the Contracting States" and
(1969) 1 ATR 104 and Ostime v. AMP Society [1960] AC 459. "enterprise carried on by" in the Swiss DTA have no particubr or settled mean
• Uniformity is increased to the extent the DECD commentaries on the arti ings in Australian income tax law. The meanings of those terms and expressions
cles to the Model Conventions are accepted as aids to construction. must therefore be ascertained from the Swiss agreement itself.
The court held that the Swiss DTA is to be interpreted in accordance with the
r~es of interpretation recognised by international lawyers, now codified by the
1.1.10 How do DTAs deal with undefined terms?
Vienna Convention on the Law of Treaties. As that DTA reflects those custom
DTAs, almost without exception, include an article that specifically deals with ~ry rules, the court considered it proper to have regard to its terms in interpret
undefined terms. Thus, for example, in the UKlUS DTA, Article 3(2) provides as mg the Swiss Agreement, even though Switzerland is not a party to that
follows: convention. Since the expression "enterprise" in the Swiss agreement is ambigu
ous, the court believed it was proper to have regard to any supplementary
means of interpretation. In this case, the supplementary means of interpretation
As regards the application of this Convention at any time by a Contracting State, any term
were the OECD Model Convention and commentaries thereon.
not defined therein shall, unless the context otherwise requires, or the competent author
ities agree on a common meaning pursuant to the provisions of Article 26 (Mutual Agree 1.1.10.2 Issue 2 - Static v. ambulatory
ment Procedure) of this Convention, have the meaning which it has at that time under the
There is a further and subsidiary issue which needs to be considered in the con
law of that State for the purposes of the taxes to which this Convention applies, any
text of the undefined terms clause, and that is whether DTAs have a static or an