Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)Notes on Articles
AGREEMENT WITH MALAYSIA
Subject to some differences that reflect the position of Malaysia as a developing country, the agreement with that country proceeds much along the lines of other comprehensive double taxation agreements to which Australia is a party. Like them, it limits the tax that the country of source may charge on some types of income, and reserves to the country of residence the sole right to tax other types. It also contains provisions to the effect that where both countries may levy tax on income the country of residence, if it taxes, is to give credit against its tax for the tax of the country of source.
The agreement will apply to persons (which term includes companies) who are residents of Australia or Malaysia.
This article specifies the existing income taxes of each country to which the agreement is to apply. These are the Australian income tax and the Malaysian income tax, excess profits tax, supplementary income taxes and petroleum income tax. By it, the agreement will also apply to any identical or substantially similar taxes which may subsequently be imposed by either Australia or Malaysia in addition to, or in place of the existing taxes.
Article 3 - General Definitions
This article defines a number of the terms used in the agreement. Definitions of some other terms are contained in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law of the country applying the agreement.
As with Australia's other modern double taxation agreements, "Australia" is defined as including external territories and areas of the continental shelf. By virtue of this definition, Australia retains taxing rights in relation to mineral exploration and mining activities on its continental shelf.
This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residence according to each country's taxation law provides the basic test. The article provides rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under both countries' domestic laws. (Residential status is one of the criteria for determining taxing rights, and the provision of relief, under the agreement.)
Article 5 - Permanent Establishment
The application of various provisions of the agreement (principally Article 7) is dependent upon whether a person resident in one country has a "permanent establishment" in the other, or whether income that such a person derives in the other country is effectively connected with a "permanent establishment" belonging to the person that is located there. The article defines the term "permanent establishment" for the purposes of the agreement. Its primary meaning in paragraph 1 is that of a fixed place of business in which the business of an enterprise is wholly or partly carried on. The other paragraphs elaborate on and refine the general definition by giving examples - a branch, an office, a mine, etc. - of what constitutes a "permanent establishment" and detailing tests to be used in determining the existence of a "permanent establishment".
Under this article income from the direct use, letting or use in any other form of land, including any estate or direct interest in land, and payments in respect of the exploitation of mines, quarries or other natural resources may be taxed in the country in which the land, mine, quarry or natural resource is situated.
Income to which this article applies is excluded from the scope of Article 7 (by paragraph 6 of that article) and is therefore taxable in the country of source regardless of whether or not the recipient has a "permanent establishment" in that country.
This article is concerned with the taxation of business profits derived by a resident of one country from sources in the other country.
The taxing of these profits depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer. If, however, a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment.
The article has practical effect comparable with corresponding articles in Australia's other double taxation agreements. As under those agreements, it provides for profits of the "permanent establishment" to be determined on the basis of arm's length dealing.
Paragraph 5 of this article allows the application of provisions of the source country's domestic law where there is insufficient information available to determine the profits of a "permanent establishment" on the basis of arm's length dealing (section 136 of the Income Tax Assessment Act is such a provision), while paragraph 7 preserves the application of the special provisions in each country's law relating to income from general insurance.
Article 8 - Shipping and Air Transport
Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits received through participation in a pool service, in a joint transport operating organization or in an international operating agency, is reserved to the country of residence of the operator.
Any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. By reason of the definition of "Australia" in Article 3 and the terms of paragraph 4 of Article 8, any shipments by air or sea from a place in Australia to another place in Australia, its continental shelf or external territories are to be treated as forming part of internal traffic.
Paragraph 5 of Article 8 makes it clear that nothing in the article affects the application of provisions of the source country's domestic law in determining the tax liability of a resident of the other country in respect of airline and shipping operations confined solely to places in the source country. This provision will in relation to such operations preserve Australia's right to apply the provisions of Division 12 - Overseas Ships - of the Income Tax Assessment Act, and Malaysia's right to apply equivalent provisions in its law.
Article 9 - Associated Enterprises
This article authorises the re-allocation of profits between inter-connected enterprises in Australia and Malaysia on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another. Again, (by reason of paragraph 1) there may be resort to section 136 of the Assessment Act.
If a re-allocation of profits were effected in one of the countries and the profits of an enterprise of that country were adjusted upwards, a form of double taxation would arise if the profits so re-allocated remained subject to tax in the hands of an associated enterprise in the other country. In order to relieve this double taxation, Article 23(4) provides for the other country to allow credit against the tax paid by the associated enterprise for the increased tax paid by the first mentioned enterprise as a result of the re-allocation.
The broad scheme of this article is to impose a limit on the tax imposed by the country of source on dividends payable by companies resident in that country and to which persons resident in the other country are beneficially entitled.
Under paragraph 2 of this article, Australia will reduce its rate of withholding tax on dividends paid to residents of Malaysia from 30 per cent to 15 per cent.
Paragraphs 3 and 4 deal with the taxation by Malaysia of dividends paid to residents of Australia. Under the existing Malaysian taxation system, the company tax on the profits out of which dividends are paid by a Malaysian company has the effect of meeting the Malaysian tax on the dividends, so that an Australian resident is not called on to pay any Malaysian tax on the dividends he receives from a Malaysian company. This is also the position as regards dividends paid by a Singapore company which, under arrangements between Malaysia and Singapore, has declared itself to be a resident of Malaysia for the purpose of those dividends - paragraph 7.
Paragraph 3 provides that while Malaysia retains its present taxing system, Australian residents are to be exempt from Malaysian tax on Malaysian dividends. Malaysia may collect an appropriate amount of tax on dividends paid to Australian residents, however, where, due to changes in Malaysian tax rates, the rate of Malaysian tax on those dividends fails to coincide with the rate of Malaysian company tax on the profits out of which the dividends were paid.
Paragraph 4 deals with the possible future introduction by Malaysia of a tax on dividends that is distinct from the company tax on the profits out of which the dividends are paid. In this event the Malaysian tax on dividends derived by an Australian resident is to be limited to 15 per cent of the dividends.
Paragraph 5 of Article 10 ensures, broadly, that one 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.
Paragraph 6 ensures that the country of source will remain free to impose its normal rate of tax where the holding giving rise to the dividends is effectively connected with a "permanent establishment" that the recipient has in that country. In such a case the dividends will be treated as business profits subject to the provisions of Article 7.
Paragraph 9 preserves the right of each country to impose any "branch profits" taxes provided for under its domestic law.
This article requires the country of source generally to limit its tax on interest derived by residents of the other country to 15 per cent of the gross amount of the interest. This rate limitation will not affect the Australian withholding tax rate of 10 per cent which will continue to be imposed in respect of interest derived by Malaysian residents.
Paragraph 3 of the Article requires that interest derived by residents of Australia on loans to Malaysia, being "approved loans" or "long-term loans", as defined for the purpose of Malaysian incentive measures, will be exempt from Malaysian tax. Under Article 23, Australia will give a tax sparing credit for the Malaysian tax forgone.
By paragraph 4, the 15 per cent limitation does not apply where the person deriving the interest has in the country of source a "permanent establishment" with which the indebtedness giving rise to the interest is effectively connected. In such a case Article 7 applies.
The article contains a general safeguard (paragraph 6) against payment of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 15 per cent tax limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.
Because the interest "source" rules set out in paragraph 5 differ from those under Australian law and under Australia's double taxation agreements generally, in that interest paid by an Australian resident that is an expense of a permanent establishment (branch) in a third country is treated by paragraph 5 as having a source in Australia, it has been necessary to propose an ameliatory amendment of the Income Tax (International Agreements) Act. This is to be found in clause 7 of the Bill (proposed sub-section 11F(4))
The purpose of this article is to place a limit of 15 per cent (of the amount of the gross royalties) on the tax Australia and Malaysia may charge on royalties derived by a resident of the other country. In the absence of a double taxation agreement, Australia generally taxes royalties paid to non-residents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax.
The 15 per cent limitation under this article is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed, nor will it affect the Australian tax on film and video tape royalties paid to residents of Malaysia which will continue to be imposed at the rate of 10 per cent of the gross royalties. Film rentals derived by residents of Australia from Malaysia, in the absence of an agreement, are subject to the Malaysian cinematograph film-hire duty and to Malaysian income tax. By paragraph 9, the rentals are freed from Malaysian tax, and by Article 24(9), credit will be allowed for the Malaysian cinematograph film-hire duty (of 15 per cent) against the Australian tax that will be payable on such film rentals derived by Australian residents.
Paragraph 3 together with paragraph 8 means that "approved industrial royalties" (royalties connected with the promotion of Malaysian industrial development) derived by residents of Australia will be exempt from Malaysian tax. By Article 23 Australia is to give "tax sparing" relief for the Malaysian tax forgone.
As in the case of dividends and interest, it is specified in paragraph 4 that the 15 per cent limitation of tax in the country of origin is not to apply to royalties effectively connected with a "permanent establishment" in that country. The point noted above in relation to the interest source rule is also applicable in relation to the royalty "source" rules contained in paragraph 5 of this article.
By paragraph 6, if royalties flow between related persons, the 15 per cent limitation will apply only to the extent that the royalties are not excessive.
Article 13 - Alienation of Land
This article is to the effect that income from the alienation of land (as defined in Article 6) may be taxed in the country where the land is situated. In Australia it will only apply to amounts that are income for taxation purposes, e.g., profits from the sale of Australian real estate purchased for the purpose of re-sale at a profit.
Article 14 - Personal Services
This article sets out the basis for taxing remuneration derived by an individual resident in one country (including an employee) from the performance of personal services (including professional services) in the other country. A resident of one country will generally be taxed in the other country on remuneration from the performance of services where the services are rendered during a visit to the other country but subject to specified conditions, there is an exemption from this rule for short-term visitors which, where it applies, provides an exemption from the tax of the country being visited. The conditions for exemption are, broadly, that the visit not exceed 183 days in the year of income and the remuneration not be an expense of a resident of or permanent establishment in the country visited.
The article also permits income from an employment exercised aboard a ship or aircraft operated in international traffic to be taxed in the country of residence of the operator.
This article relates to remuneration received by a resident of one country in the capacity of a director of a company which is a resident of the other country. The remuneration is to be taxed in the country of residence of the company.
By paragraph 1 of this article, income derived by visiting entertainers (including athletes) from their personal activities as such will continue to be taxed in the country in which the activities are exercised, no matter how short their visit to that country.
Paragraph 2 of the article contains a safeguard against attempts by entertainers to circumvent its general purpose by, e.g., having fees paid to a separate enterprise which formally provides the entertainer's services. In such a case, the profits of the enterprise from the provision of the services may be taxed in the country in which the activities of the performer are exercised, whether or not that enterprise has a "permanent establishment" in that country.
By paragraph 3, paragraphs 1 and 2 are not to apply to remuneration or profits derived from activities of entertainers exercised during a visit to a country that is arranged by and is substantially supported by the other country or a political sub-division, local authority or statutory body thereof.
Article 17 - Pensions and Annuities
Under this article pensions and annuities (other than government pensions referred to in Article 18) are to be taxed only by the country of residence of the recipient.
In order to avoid a form of double taxation arising from the different bases of taxing alimony and maintenance payments in the two countries, paragraph 3 of the article requires that such payments arising in one country and paid to a resident of the other be taxed only in the country in which they arise.
Article 18 - Government Service
By paragraph 1 of this article, remuneration in respect of services rendered to a government (including a State or local government) of one of the countries will be taxed only in that country. However, such remuneration is to be taxable only in the other country if the services are rendered in that country and the recipient is, in broad terms, a citizen of, or ordinarily resident in, that country.
Under paragraph 2, any pension paid in respect of services rendered to a government (including a State or local government) of one of the countries are to be taxed in that country.
Paragraph 3 provides, in effect, that the article does not apply where the services are rendered in connection with a trade or business carried on by a government. In such a case, the provisions of Articles 14, 15 and 17 will apply.
Article 19 - Professors and Teachers
This article applies in respect of professors or teachers who, at the invitation of a recognised educational institution in a country, visit that country for a period of not more than two years for the purpose of teaching or research at that educational institution and who are or immediately before the visit were resident in the other country. In these circumstances, the remuneration of the professor or teacher for the teaching or research work is to be exempt from tax in the country visited providing it is taxed in the other country. The exemption provided by the article does not apply to remuneration which is received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons.
This article applies to students temporarily present in a country solely for the purposes of their education or training who are, or immediately before visiting that country were, residents of the other country. A student meeting these tests will be exempt from the tax of the country visited in respect of payments made to him or her from abroad for the purpose of his or her maintenance, education or training.
Article 21 - Income of Dual Resident
This article relates to individuals and companies resident in both Australia and Malaysia under the domestic income tax laws of the two countries.
For the purposes of the agreement such a person is to be treated by application of the rules set out in Article 4 as a resident of one only of the countries and Article 21 reserves to the country to which the person's residence is so allotted the sole right to tax income from sources in that country or from a third country.
Article 22 - Sources of Income
This article specifies the source of various classes of income for the purposes of ensuring that each country is empowered to exercise the taxing rights assigned to it by the agreement over residents of the other country and that the country of residence will, as the agreement intends, give double taxation relief in respect of tax levied pursuant to those rights. This provision obviates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.
Article 23 - Methods of Elimination of Double Taxation
Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax. It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes subject to tax in both countries. Australia's other double taxation agreements provide for a credit basis for the relief of double taxation to be applied by Australia and, usually, the other country. In these cases the country of residence is required to give credit against its tax for tax of the country of source. This approach has generally been adopted in this agreement.
For its part Malaysia will, broadly, allow a credit to Malaysian residents, in respect of taxes payable in Australia on their Australian source income, against the Malaysian tax payable on that income. The amount of credit to be allowed in Malaysia is restricted to the lesser of the Australian tax payable and the Malaysian tax applicable to the income.
When the Income Tax Assessment Act and Income Tax (International Agreements) Act (as amended by the present Bill) are read together, the measures that will operate to relieve double taxation of income derived from Malaysia by Australian residents are as follows.
Australia will allow credit for the Malaysian tax on interest and royalties derived by individuals and companies in respect of which the tax of Malaysia is expressly limited by Articles 11 and 12 respectively (see the notes above concerning clause 8 of the Bill) and, if Malaysia should change its system of taxation so as to impose a tax on dividends in addition to the tax paid by Malaysian companies on profits out of which the dividends are paid, it will allow credit for that tax on dividends derived by Australian resident individuals.
Section 46 of the Income Tax Assessment Act continues to free from Australian tax dividends that are derived from Malaysia by Australian resident companies. However, should Australia cease to allow Australian resident companies the rebate under section 46 in respect of dividends they derive from Malaysia, Article 23 would require Australia to allow credit, not only for any Malaysian tax on the dividends themselves, but also for the Malaysian tax on the company profits out of which the dividends are paid. Credit for the latter tax would be allowable only if the Australian company owns at least 10 per cent of the paid-up share capital of the Malaysian company.
Other Malaysian income of Australian residents that is taxed in Malaysia continues to qualify for exemption from Australian tax under section 23(q) of the Assessment Act. In these latter cases, as there will be no Australian tax payable, there will be no question of allowance of credits.
Paragraph 4 relates to Article 9 of the agreement, which allows reconstruction, for income tax purposes, of accounts of associated enterprises, and ensures that double taxation relief is available in those cases.
The agreement contains "tax sparing" provisions which are similar to those included in Australia's agreements with Singapore and the Philippines. Under these provisions, which are contained in paragraphs 5, 6 and 7 of Article 23, Australia will tax an Australian recipient of income on which Malaysia - as an incentive measure - has forgone its tax as if Malaysian tax forgone had been paid.
Paragraph 5 defines the term "Malaysian tax forgone" for the purposes of the tax sparing credit, and paragraphs (b) and (c) in effect limit the tax sparing credit for Malaysian tax, in relation to interest and royalties, to 10 per cent of the gross amount of such income. Against the background of other features of the agreement and of the domestic laws of the two countries, paragraph (a) does not have present practical effect.
Paragraph 6 means that for the purposes of the tax sparing credit, Malaysian tax forgone as defined in paragraph 5 is to be treated as Malaysian tax paid. Sub-paragraph (c) of paragraph 6 has the effect that where a tax sparing credit is allowed, the Malaysian income concerned is to be grossed-up, for purposes of calculating the Australian tax thereon, by the amount of the tax-sparing credit. For example, in the case of interest and royalties received from Malaysia, in respect of which Malaysian tax has been forgone, the amount included in assessable income in Australia will be the amount received, plus ten per cent of that amount.
By reason of paragraph 7, the "tax sparing" provisions outlined above will not apply after 30 June 1984 unless Australia and Malaysia agree to extend them beyond that date. Proposed sub-section 11F(4) (see clause 7 of the Bill) will provide for advice of any such extension to be notified in the Gazette.
Paragraph 8 contains provision to the effect that if Australia should subsequently conclude an agreement with a third country granting more favourable treatment in relation to tax sparing credits, or the allowance of credit for the tax paid by a company on profits out of which dividends are paid to Australian companies, than that extended to Malaysia the two governments will enter into negotiations with a view to extending similar treatment to Malaysia.
By paragraph 9, Australia will allow credit for the Malaysian cinematograph film-hire duty against the Australian tax payable on film rentals derived by residents of Australia from Malaysia.
Article 24 - Mutual Agreement Procedure
One of the purposes of this article is to provide for the taxation authorities of the two countries to consult with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case, in writing, within a two years of the action leading to the taxation contrary to the agreement and if, on consideration, a solution is reached, it may be implemented, irrespective of any domestic statutory limitations provided the claim is made within six years of the end of the year of assessment or year of tax.
The other main object of the article is to authorise consultation between the taxation authorities of the two countries for the purpose of implementing the agreement and assuring its consistent application.
Article 25 - Exchange of Information
This article authorises the exchange between the two taxation authorities of information necessary for the carrying out of the agreement or for the prevention of fraud or for the administration of domestic anti-avoidance laws concerning the taxes to which the agreement applies. The restrictions which it contains in relation to the purposes for which this information may be used and the persons to whom it may be disclosed are along the lines of Australia's other double taxation agreements.
This article does not permit the exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process, or which would be contrary to public policy.
Article 26 - Diplomatic and Consular Officials
The purpose of this article is to ensure that members of diplomatic and consular posts will, under the provisions of the agreement, receive no less favourable treatment than that to which they are entitled in accordance with international law. In Australia, fiscal privileges are conferred on such persons by the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.
Article 27 - Limitation of Relief
This article relates to provisions of Malaysian law which have no counterpart in Australian taxation law. A person resident in Malaysia is taxed there on foreign source income only if the income is remitted to or received in Malaysia. The article will ensure that Australia is not to exempt or reduce its tax on income that, because it is not remitted to or received in Malaysia by the Malaysian resident who derives it, is not subject to Malaysian tax.
The article also contains provisions which will, in effect, require Australia to grant relief on income which initially was not remitted to or received in Malaysia, and therefore was fully taxed in Australia, but which is, at some later stage, remitted to or received in Malaysia.
This article provides for the entry into force of the agreement. This will be on the date on which notes are exchanged through the diplomatic channel notifying that the last of all such things has been done in Australia and Malaysia as is necessary to give the agreement the force of law in both countries.
Once it enters into force, the agreement will have effect in Australia, for purposes of withholding tax in respect of income derived on or after 1 July 1979, and for tax other than withholding tax, for years of income beginning on or after 1 July 1979. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year commencing on 1 July 1979 will be the date from which the agreement takes effect. In Malaysia, the agreement will have effect in respect of Malaysian tax for the year of assessment beginning on 1 January 1980 and subsequent years of assessment.
This article declares that the agreement is to continue in effect indefinitely but either country may give notice of termination on or before 30 June in any calendar year after 1982. In that event, the agreement would cease to be effective in Australia, for withholding tax purposes, in respect of income derived on or after 1 July in the calendar year next following that in which the notice of termination is given and for tax other than withholding tax, for years of income commencing on or after 1 July in the calendar year next following the year in which notice of termination is given. In Malaysia, the agreement would cease to be effective in respect of Malaysian tax for years of assessment beginning on or after 1 January in the second calendar year next following that in which the notice of termination is given.
AGREEMENT WITH SWEDEN
The agreement with Sweden is broadly along the lines of other comprehensive double taxation agreements recently concluded by Australia. The country of source is generally allocated the right to tax income arising there, sometimes at limited rates, while the country of residence is given the sole right to tax some other types of income. The relief from double taxation of classes of income taxable in both countries is assured by provisions in the agreement which require the country of residence of the recipient to give a credit against its own tax for the tax imposed in the country of origin, or comparable relief.
The agreement will apply to persons (which term includes companies) who are residents of either Australia or Sweden.
The situation of persons who are residents of both countries (i.e., dual residents) is dealt with in Article 4.
This article specifies the existing taxes to which the agreement applies. These are, in broad terms, the Australian income tax and the Swedish State and Communal income taxes. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.
Article 3 - General Definitions
This article defines a number of the terms used in the agreement. Definitions of some other terms are contained in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law of the country applying the agreement.
As with Australia's other modern double taxation agreements, "Australia" is defined as including external territories and areas of the continental shelf. By virtue of this definition, Australia retains taxing rights in relation to mineral exploration and mining activities on its continental shelf. The definition also has relevance to Australian taxation of shipping and airline profits under Article 8 of the agreement.
This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residential status is one of the criteria for determining taxing rights, and the provision of relief, under the agreement. The concepts of when a person is a "resident" under Australian tax law, or "subject to unlimited tax liability" under Swedish tax law (i.e., taxable on world-wide income), are taken as the basis. The article also includes rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded by the respective laws as a resident under both countries' domestic laws.
Article 5 - Permanent Establishment
Application of various provisions of the agreement (principally Article 7) is dependent upon whether a resident of one country has a "permanent establishment" in the other, and if so, whether income the person derives in the other country is attributable to the "permanent establishment". The definition of the term "permanent establishment" which this article embodies corresponds closely with definitions of the term in Australia's other double taxation agreements.
The primary meaning of the defined term is stated in paragraph (1) as being a fixed place of business through which the business of the enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with giving examples of what constitutes a "permanent establishment" - such as an office, a factory or a mine - and defining the circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country.
Article 6 - Income from Real Property
By this article, income from real property, including royalties and other payments in respect of the operation of mines or quarries or the exploitation of other natural resources may be taxed in the country in which the property is situated. Income from a lease of land and income from any other direct interest in or over land are, in accordance with paragraph (2), to be regarded as income from real property situated where the land to which the lease or other interest relates is situated.
Income to which this article applies is specifically excluded from the scope of Article 7 (by paragraph (6) of that article) and is therefore taxable in the country of source regardless of whether or not the recipient has a "permanent establishment" in that country.
This article is concerned with the taxation of business profits derived by a resident of one country from sources in the other country.
The taxing of these profits depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer. If, however, a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment.
Paragraph (2) of the article provides for profits of the "permanent establishment" to be determined on the basis of arm's length dealing.
Paragraph (5) of the article allows the application of provisions of the source country's domestic law (e.g. the Australian section 136) where there is insufficient information available to determine the profits of the "permanent establishment" on the basis of arm's length dealing, while paragraph (7) empowers each country to continue to apply special provisions in its domestic law relating to the taxation of income from general insurance.
Article 8 - Shipping and Air Transport
Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits received through participation in a pool service, in a joint transport operating organization or in an international operating agency, is reserved to the country of residence of the operator.
Any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. By reason of the definition of "Australia" in Article 3 and the terms of paragraph (4) of Article 8, any shipments by air or sea from a place in Australia to another place in Australia, its continental shelf or external territories are to be treated as forming part of internal traffic.
Article 9 - Associated Enterprises
This article authorises the re-allocation (on an arm's length basis) of profits between inter-connected enterprises in Australia and Sweden where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.
Where a re-allocation of profits is effected under paragraph (1), so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. Paragraph (3) requires the other country concerned to make an appropriate adjustment in these circumstances with a view to relieving any such double taxation.
This article in general limits to 15 per cent of the gross amount of dividends, the tax that the country of source may impose on dividends payable to beneficial owners resident in the other country. Under this article, Australia will reduce its rate of withholding tax on dividends paid to residents of Sweden from 30 per cent to 15 per cent, while Sweden will reduce its withholding tax on dividends paid to Australian residents from 30 per cent to 15 per cent.
Paragraph (4) declares that the 15 per cent limitation on the source country's tax will not apply to dividends derived by a resident of the other country who has a "permanent establishment" or "fixed base" in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that "permanent establishment" or "fixed base". In those cases the dividends will be taxed in accordance with the relevant articles, Article 7 or Article 14.
Paragraph (5) is a provision which ensures, broadly, that one country will not tax dividends paid by a company resident solely in the other country unless the person deriving the dividend is a resident of the first country or the holding giving rise to the dividends is effectively connected with a "permanent establishment" or "fixed base" in that country.
Paragraph (6) preserves the right of Australia to impose the "branch profits" tax provided for in its domestic law.
By paragraph (2) of this article the tax which the country of source may impose on interest payable to a resident of the other country is generally limited to 10 per cent of the gross amount of the interest. As the rate of the Australian withholding tax on interest paid to non-residents is 10 per cent, the agreement will not change the amount of Australian tax on interest flowing to residents of Sweden. Sweden does not impose tax on interest paid to non-residents unless, broadly, it is derived through a "permanent establishment" in Sweden. The 10 per cent limitation, therefore, does not have any practical application as regards Swedish tax on interest paid to non-residents.
Paragraph (3) requires each country to exempt interest derived by the Government of, or any other body exercising governmental functions in, the other country or by the central bank (in the case of Sweden, the National Debt Office) of the other country.
Interest derived by a resident of one country which is effectively connected with a "permanent establishment" or "fixed base" of that person in the other country will form part of the business profits of that establishment or "fixed base" and be subject to the provisions of Article 7 or Article 14. Accordingly, paragraph (5) of Article 11 requires that the 10 per cent limitation is not to apply to such interest.
The article also contains a general safeguard (paragraph (7)) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 10 per cent limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons not so related.
The purpose of this article is to place a limit of 10 per cent of the amount of the gross royalties on the tax Australia and Sweden may charge on royalties derived by a resident of the other country. The 10 per cent limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed. In the absence of the 10 per cent limitation Australia generally taxes such royalties paid to non-residents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax. Royalties paid from Sweden are taxed on an assessment basis.
As in the case of dividends and interest, it is specified in paragraph (4) that the 10 per cent limitation of tax in the country of origin is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" in that country.
By paragraph (6), if royalties flow between related persons, the 10 per cent limitation will apply only to the extent that the royalties are not excessive.
Article 13 - Alienation of Property
Under this article, income from the alienation of real property may be taxed in the country in which that property is situated. Real property is defined for the purposes of the article as including a lease of land or other direct interest in or over land and rights to exploit, or to explore for, natural resources. Shares or comparable interests in a company the assets of which consist wholly or principally of direct interests in or over land in one of the countries, or of rights to exploit or explore for natural resources in one of the countries, are also for these purposes deemed to be real property.
By paragraph (3), income from the alienation of capital assets of an enterprise or resident of one country will be taxable only in that country. However, where those assets form part of the business assets of a "permanent establishment" or "fixed base" in the other country the income may be taxed in that other country.
Article 14 - Independent Personal Services
At present, an individual resident in Australia or in Sweden may be taxed in the other country on income derived from the performance in that other country of professional services or other similar independent activities. By this article, such income will continue to be subject to tax in the country in which the services are performed if the recipient has a "fixed base" regularly available in that country for the purposes of performing his or her activities, and the income is attributable to activities exercised from that base. If the tests mentioned are not met the income will be taxed only in the country of residence. Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and will not be covered by this article.
Article 15 - Dependent Personal Services
This article sets out the basis for taxing remuneration derived by visiting employees. A resident of one country will generally be taxed in the other country on salaries, wages, etc., from an employment where the services are rendered during a visit to the other country but, subject to specified conditions, there is a conventional exemption from this rule for short-term visitors which, where it applies, provides an exemption from the tax of the country being visited. The conditions for exemption are, in broad terms, that the visit not exceed 183 days in the year of income, that the remuneration not be an expense of a resident of or permanent establishment in the country visited, and that the remuneration will be taxed in the country of residence.
Paragraph (3) will mean that income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country in which the place of effective management of the enterprise operating the ship or aircraft is situated.
This article relates to remuneration received by a resident of one country in the capacity of a director of a company which is a resident of the other country. The remuneration is to be taxed in the country of residence of the company.
By this article, income derived by visiting entertainers (including athletes) from their personal activities as such will continue to be taxed in the country in which the activities are exercised, no matter how short their visit to that country.
The article also contains safeguards against attempts by entertainers to circumvent its general purpose by, e.g., having fees paid to a separate enterprise which the entertainer controls, and which formally provides his or her services. In such a case, the profits of the enterprise from the provision of the services of the entertainer may be taxed in the country in which the entertainer performs, whether or not that enterprise has a "permanent establishment" in that country.
Article 18 - Pensions and Annuities
Under this article pensions and annuities are, with one exception, to be taxed only by the country of residence of the recipient.
Paragraph (3) provides that any pension paid by the government (including State and local government) of one country in respect of services rendered to that government, or under the social security system of that country, may be taxed in that country. However, this provision is only to apply if the recipient of the pension is a citizen of that country.
In order to avoid a form of double taxation arising from the different bases of taxing alimony and maintenance payments in the two countries, paragraph (4) of the article provides that such payments arising in one country and paid to a resident of the other are to be taxed only in the country in which they arise.
Article 19 - Government Service
This article provides for a reciprocal exemption from tax by each country in respect of remuneration of government employees of the other country. The article is subject to the provisos that the exemption conferred by the article will not apply where the services are rendered in connection with a trade or business carried on by the government, or where, in broad terms, the employee is a citizen of, or ordinarily resides in, the country where he performs his governmental duties for the other country.
Article 20 - Professors and Teachers
This article applies in respect of professors or teachers who visit a country for a period of not more than two years for the purpose of teaching or advanced study or research at an educational institution and who, immediately before the visit, were resident in the other country. In these circumstances, the remuneration of the professor or teacher for his or her teaching, study or research work are to be exempt from tax in the country visited provided it is subject to tax in the other country. The exemption provided by the article does not apply to remuneration received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons.
This article applies to students temporarily present in a country solely for the purpose of their education who are, or immediately before the visit were, resident in the other country. In these circumstances, a student will be exempt from the tax of the country visited in respect of payments made from abroad for the purposes of his or her maintenance or education.
Article 22 - Income not Expressly Mentioned
This article provides rules for the allocation between the two countries of taxing rights in relation to items of income not expressly mentioned in the preceding articles of the agreement.
The first rule is that any such income derived from sources in one country by a resident of the other may be taxed in the country of source. The second is that any such income derived by a resident of one country from sources in that country or from sources in a third country are to be taxed only in the country of residence of the recipient.
However, the second rule does not apply where the income is effectively connected with a "permanent establishment" or "fixed base" which a resident of one country has in the other. In such cases the provisions of Article 7 or Article 14 apply.
Article 23 specifies the source of various classes of income for the purpose of ensuring that Australia is empowered to exercise the taxing rights assigned to it by the agreement over residents of Sweden and that, as the agreement intends, Australia will give double taxation relief in respect of tax levied by Sweden pursuant to equivalent rights assigned to it. The article eliminates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country. The article does not apply for purposes of Swedish tax, for the reason that Swedish domestic law has much the same effect in relation to Swedish tax as this article will have in relation to Australian tax.
Article 24 - Methods of Elimination of Double Taxation
This article provides for the formal relief of double taxation where income that is derived by a resident of one country from sources in the other country would otherwise be taxed in both countries.
Some income flowing between the two countries may be taxed only in one country, in which case there is no need to give further relief. Other income may be taxed in the country of source and if the country of residence would, but for this article, also tax, the article requires the country of residence to relieve the ensuing double taxation.
Paragraph (1) of the article requires Australia to allow against its own tax a credit for Swedish tax on income derived by a resident of Australia from sources in Sweden. Australia will allow credit for the Swedish tax on dividends derived by individuals from Sweden and on interest (if Swedish tax is imposed) and royalties derived by individuals and companies from Sweden in respect of which the tax of that country is limited by the agreement to 10 per cent. Section 46 of the Income Tax Assessment Act continues to free from Australian tax dividends derived from Sweden by Australian resident companies. However, should Australia cease to allow Australian resident companies the rebate under section 46 in respect of dividends received from Sweden, paragraph (2) of Article 24 would require Australia to allow, in addition to credit for the Swedish tax on the dividends themselves, credit for the Swedish tax on the company profits out of which the dividends are paid, but only if the Australian company owns at least 10 per cent of the paid-up share capital of the Swedish company.
Other income of Australian residents that is taxed in Sweden will continue to qualify for exemption from Australian tax under section 23(q) of the Assessment Act. In these latter cases, since there will be no Australian tax payable, there is no call for allowance of credits.
For its part, Sweden will include in assessable income, certain types of income which may be taxed in Australia (broadly, dividends, interest or royalties), and allow its residents a credit for the Australian tax paid up to but not exceeding the Swedish tax on the income. In the case of a Swedish company which owns at least 25 per cent of the paid-up share capital in, broadly, an Australian trading company, dividends paid by the Australian company to the Swedish company will be exempt from Swedish tax to the same extent that the dividends would have been exempt if the two companies had been resident in Sweden. Income derived by a Swedish resident from Australia, which under the agreement is to be taxed only in Australia, will be exempt from Swedish tax but may be taken into account in determining the amount of tax on the remaining income of the Swedish resident. This is commonly known as the "exemption with progression" method of relief.
Article 25 - Mutual Agreement Procedure
One of the purposes of this article is to provide for the taxation authorities of the two countries to consult with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation, contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case within three years of the first notification of the action giving rise to the taxation not in accordance with the agreement. Any solution so reached may be made notwithstanding any time limits imposed by domestic tax laws of the relevant country.
The other main object of the article is to authorise consultation between the taxation authorities of the two countries for the purpose of resolving any difficulties regarding the application of the agreement and to give effect to it.
Article 26 - Exchange of Information
This article authorises the exchange of information between the taxing authorities of each country, where this is necessary for the carrying out of the agreement or of domestic laws concerning the taxes to which the agreement applies. The restrictions which it contains in relation to the purposes for which this information may be used and the persons to whom it may be disclosed are along the lines of Australia's other double taxation agreements.
The article does not permit the exchange of information that would disclose any trade, business, industrial or professional secret or trade process or which would be contrary to public policy.
Article 27 - Diplomatic and Consular Officials
This article ensures that members of diplomatic and consular posts will, under the provisions of the agreement, receive no less favourable treatment than that to which they are entitled in accordance with international laws. In Australia, fiscal privileges are conferred on such persons by the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.
This article provides for the entry into force of the agreement. This will be on the date on which notes are exchanged at Stockholm through the diplomatic channel notifying that the last of all such things has been done in Australia and Sweden as is necessary to give the agreement the force of law in both countries.
Once it enters into force the agreement will, in general, have effect in Australia, for purposes of withholding tax, in respect of income derived on or after 1 January in the calendar year immediately following that in which the agreement enters into force. It will have effect in Australia, in respect of tax other than withholding tax, in relation to income of any income year beginning on or after 1 July in the calendar year immediately following that in which the agreement enters into force. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year beginning on 1 July in the year in which the agreement first has effect, will be the date from which the agreement will take effect. In Sweden, the agreement will have effect in respect of income derived on or after 1 January in the calendar year immediately following that in which the agreement enters into force.
This article declares that the agreement is to continue in effect indefinitely but that either country may give written notice of termination on or before 30 June in any calendar year beginning after the expiration of five years from the date of its entry into force. In that event, the agreement would cease to be effective in Australia, for withholding tax purposes, in respect of income derived on or after 1 January in the calendar year immediately following that in which the notice of termination is given. It would cease to be effective, in Australia, for tax other than withholding tax, in relation to income of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given. It would cease to be effective in Sweden in respect of income derived on or after 1 January in the calendar year next following that in which the notice of termination is given.