House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Australia - Marshall Islands agreement

Outline of chapter

2.1 Schedule 1 to this Bill amends the International Tax Agreements Act 1953 (Agreement Act 1953) to define and give the force of law to the 2010 Agreement between the Government of Australia and the Government of the Republic of the Marshall Islands for the Allocation of Taxing Rights with Respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments (the Marshall Islands agreement). Subsection 3AAA (1) of the Agreements Act 1953 will define the Marshall Islands agreement and subsection 5(1) will give it the force of law in Australia. This chapter explains the rules that apply in the Marshall Islands agreement.

Context of amendments

2.2 The Marshall Islands agreement was signed in Majuro on 12 May 2010. There is no pre-existing agreement of this type between Australia and the Republic of the Marshall Islands (the Marshall Islands).

Summary of new law

Main features of the Marshall Islands agreement

2.3 The main features of the Marshall Islands agreement are as follows:

•

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

•

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

•

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

2.4 A non-binding administrative mechanism will be established to assist taxpayers to seek resolution of transfer pricing disputes.

Comparison of key features of new law and current law

The Marshall Islands agreement

2.5 A full transcript of the Marshall Islands agreement and detailed explanation follows:

AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE REPUBLIC OF THE MARSHALL ISLANDS FOR THE ALLOCATION OF TAXING RIGHTS WITH RESPECT TO CERTAIN INCOME OF INDIVIDUALS AND TO ESTABLISH A MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

(Majuro, 12 May 2010)

Agreement between the Government of Australia and the Government of the Republic of the Marshall Islands for the allocation of taxing rights with respect to certain income of individuals and to establish a mutual agreement procedure in respect of transfer pricing adjustments.

The Government of Australia and the Government of the Republic of the Marshall Islands ("the Contracting States"),

Recognising that the Contracting States have concluded an Agreement for the Exchange of Information with Respect to Taxes, and

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

Have agreed as follows:

ARTICLE 1

PERSONS COVERED

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

ARTICLE 2

TAXES COVERED

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

(a)

in Australia, the income tax imposed under the federal law of Australia; (hereinafter referred to as "Australian tax").

(b)

in the Republic of the Marshall Islands, income tax imposed under the national laws of the Republic of the Marshall Islands; (hereinafter referred to as "Marshall Islands tax").

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

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

ARTICLE 3

DEFINITIONS

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

(a)

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

(i)

the Territory of Norfolk Island;

(ii)

the Territory of Christmas Island;

(iii)

the Territory of Cocos (Keeling) Islands;

(iv)

the Territory of Ashmore and Cartier Islands;

(v)

the Territory of Heard Island and McDonald Islands; and

(vi)

the Coral Sea Islands Territory,

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

(b)

the term "the Republic of Marshall Islands" means; any land territory within the territorial limits of the Republic of the Marshall Islands, and includes the internal waters and territorial sea of the Republic of the Marshall Islands;

(c)

the term "competent authority" means in the case of Australia, the Commissioner of Taxation or an authorised representative of the Commissioner and, in the case of the Republic of the Marshall Islands; the Secretary of Finance or an authorised representative of the Secretary of Finance,

(d)

the term "Contracting State" means Australia or the Republic of the Marshall Islands, as the context requires;

(e)

the term "national", in relation to a Contracting State, means any individual possessing the nationality or citizenship of that Contracting State;

(f)

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

(g)

the term "tax" means Australian tax or Marshall Islands tax as the context requires; and

(h)

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

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

ARTICLE 4

RESIDENT

1 For the purposes of this Agreement, the term "resident of a Contracting State" means:

(a)

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

(b)

in the case of the Republic of the Marshall Islands, a person who is a resident of Marshall Islands for the purposes of Marshall Islands Tax; and

2 A person is not a resident of a Contracting State for the purposes of this Agreement if the person is liable to tax in that State in respect only of income from sources in that State or, in the case of the Republic of the Marshall Islands, is not subject to the most comprehensive taxation provided under the national tax laws of the Republic of the Marshall Islands.

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

(a)

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

(b)

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

(c)

if the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.

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

ARTICLE 5

PENSIONS AND RETIREMENT ANNUITIES

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

2 The term "retirement annuity" means:

(a)

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

(b)

in the case of the Republic of the Marshall Islands, a superannuation annuity payment within the meaning of the taxation laws of the Republic of the Marshall Islands.

(c)

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

ARTICLE 6

GOVERNMENT SERVICE

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

(b)

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

(i)

is a national of that State; or

(ii)

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

2 Notwithstanding the provisions of paragraph 1, salaries, wages and other similar remuneration in respect of services rendered in connection with any trade or business carried on by a Contracting State or a political subdivision or a local authority thereof may be taxed in accordance with the laws of a Contracting State.

ARTICLE 7

STUDENTS

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

ARTICLE 8

MUTUAL AGREEMENT PROCEDURE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS

1 Where a resident of a Contracting State considers the actions of the other Contracting State results or will result in a transfer pricing adjustment not in accordance with the arm's length principle, the resident may, irrespective of the remedies provided by the domestic law of those States, present a case to the competent authority of the first-mentioned State. The case must be presented within 3 years of the first notification of the adjustment.

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

ARTICLE 9

EXCHANGE OF INFORMATION

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

ARTICLE 10

ENTRY INTO FORCE

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

(a)

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

(b)

in respect of the Republic of the Marshall Islands, for any year of income beginning on or after 1 October in the calendar year next following the date on which this Agreement enters into force;

ARTICLE 11

TERMINATION

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

2 Such termination shall become effective:

(a)

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

(b)

in respect of Marshall Islands tax, in the year of income beginning on or after 1 October in the calendar year next following that in which the notice of termination is given.

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

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

DONE at Majuro in duplicate, on this 12th day of May 2010.

Detailed explanation of new law

2.6 This Bill gives effect to the Marshall Islands Agreement, which deals with the allocation of taxing rights with respect to certain income of individuals.

Article 1 - Persons Covered

2.7 This Article establishes the scope of the application of the Marshall Islands agreement by providing for it to apply to persons who are residents of one or both of the countries. [Article 1]

2.8 The application of the Marshall Islands agreement to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 ( Resident ).

Article 2 - Taxes Covered

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

2.10 For the Marshall Islands, the Marshall Islands agreement applies to the national income tax. [Article 2, subparagraph 1(b)]

2.11 The application of the Marshall Islands agreement will be automatically extended to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, the existing taxes. The competent authorities of Australia and the Marshall Islands are required to notify each other in the event of a substantial change to the taxation laws of the respective countries, within a reasonable period of time after any such changes. [Article 2, paragraph 2]

2.12 The Marshall Islands agreement shall not apply to taxes imposed by states, municipalities, local authorities or other political subdivisions or possessions of either country. [Article 2, paragraph 3]

Article 3 - Definitions

Definition of Australia

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

Definition of the Marshall Islands

2.14 The Marshall Islands is defined to mean any land territory within the territorial limits of the Republic of the Marshall Islands, and includes the internal waters and territorial sea of the Republic of the Marshall Islands. [Article 3, subparagraph 1(b)]

Definition of competent authority

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

2.16 In the case of Australia, the competent authority is the Commissioner of Taxation or an authorised representative of the Commissioner [Article 3, subparagraph 1(b)] . In the case of Marshall Islands, it is the Secretary of Finance or an authorised representative of the Secretary of Finance. [Article 3, subparagraph 1(c)]

Definition of Contracting State

2.17 Contracting State means Australia or the Marshall Islands, as the context requires. [Article 3, subparagraph 1(d)]

Definition of national

2.18 National means any individual possessing the nationality or citizenship of Australia or the Marshall Islands. [Article 3, subparagraph 1(e)]

Definition of person

2.19 Person includes an individual, a company and any other body of persons. [Article 3, subparagraph 1(f)]

Definition of tax

2.20 The term tax means either Australian tax or Marshall Islands tax, depending on the context. [Article 3, subparagraph 1(g)]

Definition of transfer pricing adjustment

2.21 A transfer pricing adjustment is an adjustment made by the tax authorities of Australia or Marshall Islands to the profits of an enterprise, based on the application of domestic transfer pricing laws [Article 3, subparagraph 1(h)] . For Australia, such laws are contained in Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and Subdivision 815A of the Income Tax Assessment Act 1997 (ITAA 1997).

Terms not specifically defined

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

Article 4 - Resident

2.23 This Article sets out the basis upon which the residence of a person is to be determined for the purposes of the Marshall Islands agreement. Residence is a criterion for determining each country's taxing rights and is a necessary condition for the provision of relief under the Marshall Islands agreement. In the case of Australia, a person's residence is determined according to Australia's taxation law [Article 4, subparagraph 1(a)] . In the case of the Marshall Islands, residence is determined according to Marshall Islands' taxation law [Article 4, subparagraph 1(b)] .

Special residency rules

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

Dual residents

2.25 Tie-breaker rules are included for determining residency of a person, for the purposes of the Marshall Islands agreement, if a person qualifies as a dual resident, that is, a resident of both countries in accordance with paragraph 1 of Article 4. These rules, in order of application are:

•

if the individual has a permanent home available in only one of the countries, the person is deemed to be a resident solely of that country for the purposes of the Marshall Islands agreement [Article 4, subparagraph 3(a)] ;

•

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

•

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

•

if the individual is a 'national' of both countries, or of neither, the competent authorities will endeavour to resolve the question by mutual agreement [Article 4, subparagraph 3(c)] .

2.26 A person other than an individual, such as a company or other body of persons, that is a dual resident will be deemed to be a resident of the country in which its effective place of management is situated. [Article 4, paragraph 4]

2.27 In relation to Australia, a dual resident remains a resident for the purposes of Australian domestic law. Accordingly, that person remains liable to tax in Australian as a resident, insofar as the Marshall Islands agreement allows.

Article 5 - Pensions and Retirement Annuities

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

Meaning of retirement annuity

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

2.30 In the case of Marshall Islands, a 'retirement annuity' means superannuation annuity payment within the meaning of the taxation laws of the Marshall Islands. [Article 5, subparagraph 2 (b)]

Article 6 - Government Service

2.31 Salary and wage type income, other than government service pensions or annuities, paid to an individual for services rendered to a government of one of the countries (including a political subdivision or local authority), is to be taxed only in that country [Article 6, subparagraph 1(a)] . However, such remuneration will be taxable only in the other country if the services are rendered in that other country and:

•

the recipient is a resident of, and a national of, that other country; or

•

the recipient is a resident of that other country and did not become a resident of that country solely for the purpose of rendering the services (for example, if the recipient is a permanent resident of that other country).

[Article 6, subparagraph 1(b)]

Business income

2.32 However, salaries, wages and other similar remuneration in respect of services rendered in connection with a trade or business carried on by any governmental authority is excluded from the scope of the Article. Such remuneration will remain subject to the domestic taxation laws of the two countries. [Article 6, paragraph 2]

Article 7 - Students

Exemption from tax

2.33 Article 7 applies to students or business apprentices who are temporarily present in one of the countries solely for the purpose of their education or training if they are, or immediately before the visit, were, resident in the other country. In these circumstances, payments from abroad received by the students or business apprentices solely for their maintenance, education or training will be exempt from tax in the country visited. This will apply even though the student or apprentice may qualify as a resident of the country visited during the period of their visit.

Employment income

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

2.35 For business apprentices, this Article only applies where the apprentice's remuneration consists solely of subsistence payments to cover training or maintenance. Remuneration for service, that is, salary equivalents, falls for consideration under domestic taxation law.

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

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

2.38 In these situations, the payments received from abroad for the student or apprentice's maintenance, education or training will not, however, be taken into account in determining the tax payable on the employment income that is subject to tax in Australia. No Australian tax would be payable on the employment income if the student or apprentice qualifies as a resident of Australia during the visit and the taxable income of the student or apprentice does not exceed the tax-free threshold applicable to Australian residents for tax purposes.

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

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

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

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

Article 9 - Exchange of Information

2.42 Article 9 authorises and limits the exchange of information by the competent authorities to information that is foreseeably relevant to the administration of the Marshall Islands agreement.

2.43 The exchange of information is subject to the provisions of the Agreement on the Exchange of Information with Respect to Taxes , which was signed by the two countries on 12 May 2010. That agreement provides for exchange of information that is foreseeably relevant to the administration of the taxation laws of the two countries. It also contains safeguards to protect taxpayers' rights. For example:

•

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

•

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

Article 10 - Entry into Force

Date of entry into force

2.44 The Marshall Island agreement will enter into force on the date of the last exchange of diplomatic notes notifying that the domestic procedures to give it the force of law have been completed. In Australia, enactment of the legislation giving the Marshall Islands agreement the force of law along with tabling the Marshall Islands agreement in Parliament are prerequisites to the exchange of diplomatic notes. Entry into force is also conditional upon the related Agreement on the Exchange of Information with Respect to Taxes between the two countries being in force at that time. That Agreement entered into force on 25 November 2011.

Date of application in Australia

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

Date of application in Marshall Islands

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

Article 11 - Termination

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

Cessation in Australia

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

Cessation for Marshall Islands

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

Cessation in other circumstances

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