House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Phillip Lynch, M.P.)

Introductory Note

The main purpose of this Bill is to give the force of law in Australia to comprehensive double taxation agreements between Australia and the Netherlands and Australia and France which were signed in Canberra on 17 March 1976 and 13 April 1976 respectively.

The Bill also specifies that interest and royalties derived from the Netherlands or France by residents of Australia, and in respect of which, under the new agreements, the Netherlands or France limits its tax to 10 per cent, will not, by reason of the payment of that limited tax, be exempt from Australian tax. Australia will instead allow credit for the limited tax against the Australian tax on this income.

The agreements set out the basis on which, and the extent to which, income derived in each country by residents of the other, is to be taxed in each country and the basis on which relief from double taxation is to be effected where income may be taxed by both countries. The main features of the arrangements with the two countries are as follows:

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Industrial or commercial (business) profits, if they are derived by a resident of one country from a branch or other "permanent establishment" in the other country, may be taxed in the latter country; otherwise they are to be taxed only in the country of residence.

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Dividends, interest and royalties will be subject to tax in the country of source but there is a ceiling on the tax that that country may charge of 15 per cent for dividends and 10 per cent for interest and royalties. Australian shareholders in French companies will be allowed a special tax credit normally allowed only to French shareholders.

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Income from real property is taxable in full in the country in which the property is situated.

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Profits from international operations of ships and, in the case of the Netherlands agreement, aircraft will be taxed only in the country of residence of the operator. (An existing agreement with France provides to this effect in relation to airline profits.)

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Income from independent personal services will be taxed only in the country of residence of the recipient unless the income is attributable to a fixed base of the recipient in the other country.

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Income from dependent personal services, i.e., employees' remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during a short visit to one country by a resident of the other country, the income will be taxed only in the country of residence of the recipient.

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Government officials are to be taxed by their home country.

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Directors' fees will generally be taxed in the country of residence of the paying company.

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Income derived by public entertainers (including athletes) from their activities as such are to be taxed by the country in which the activities take place.

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Pensions and annuities will generally be taxed only in the country of residence of the recipient.

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Remuneration derived by teachers and professors from teaching or research during visits of up to two years' duration may be taxed only in the country of residence.

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A student resident in one country who is temporarily present in the other country solely for the purpose of receiving an education will be exempt from tax in the latter country in respect of payments made from abroad for the purposes of maintenance or education.

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Dual residents of both countries are, according to specified criteria, to be treated for the purposes of the agreements as being residents of only one country.

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Associated enterprises may be taxed on the basis of dealings at arm's length.

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Exchange of information and consultation between the taxation authorities of each country is authorised.

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Double taxation relief to be allowed by the country of residence in respect of income taxed in the other country will be:

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in Australia, (both agreements) by allowance of credit against Australian tax for the foreign tax on interest and royalties, where that tax is limited by the relevant agreement, and on dividends received by individuals - dividends received by companies and all other categories of income being freed from Australian tax by Australian tax law;

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in the Netherlands, by allowance of credit against Netherlands tax for the limited Australian tax on dividends, interest and royalties and for the Australian tax on entertainers and, while taking other income into account in determining the rate of Netherlands tax on taxable income, by exempting that other income from Netherlands tax;

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in France, by allowance of credit against French tax for the limited Australian tax on dividends, interest and royalties and for the Australian tax on directors and entertainers and, while taking other income into account in determining the rate of French tax on taxable income, by exempting that other income from French tax.

Notes on the clauses of the Bill are given below and these are followed by explanations of the articles of each agreement.

Notes on Clauses

INCOME TAX (INTERNATIONAL AGREEMENTS) AMENDMENT BILL 1976

Clause 1: Short title and citation.

This clause formally provides for the short title and citation of the Amending Act and of the Principal Act as amended.

Clause 2: Commencement.

Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that unless the contrary intention appears every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. By this clause the Amending Act will come into operation on the day on which it receives the Royal Assent, thus enabling early implementation of the agreements.

Clause 3: Interpretation.

Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act.

Paragraphs (a) and (b) of clause 3 will insert in section 3 definitions referring to the comprehensive agreements with the French Republic and the Kingdom of the Netherlands (which are being incorporated as schedules to the Principal Act by clause 8 of the Bill). Section 3 already contains a definition of the term "the French agreement", which refers to a limited double taxation agreement dealing only with the taxation of international airline profits. This definition will be amended by clause 3 to re-define the term as "the French airline profits agreement".

Paragraph (c) proposes an amendment to sub-section (7) of section 3 of the Principal Act. That is an interpretation provision under which, unless the contrary intention appears, the English text of the Japanese agreement is to be construed as if words in the singular include the plural and words in the plural include the singular. By paragraph (c) it is proposed to amend this provision to extend its application to the French agreement. This is not necessary in the case of the Netherlands agreement since provisions to this effect are included in article 3 of that agreement.

Clause 4: Airline profits agreement with France.

This clause will make a drafting amendment of section 9 of the Principal Act consequential on the amendment, effected by paragraph (a) of clause 3, of the defined term referring to the limited airline profits agreement.

Clause 5: Agreement with France.

Clause 6: Agreement with the Kingdom of the Netherlands.

These clauses propose the insertion in the Principal Act of two sections - sections 9A and 11A - which will respectively give the force of law in Australia to the agreements with France and the Netherlands, when these agreements enter into force. Each agreement will be given the force of law with effect from the times indicated in each agreement itself (see explanations of article 28 of the French agreement and article 29 of the Netherlands agreement).

By sub-section (1) of the proposed new section 9A the French agreement will, when the agreement enters into force, have effect as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 January 1973;

(b)

in respect of other income, for any year of income beginning on or after 1 July 1972.

By sub-section (1) of the proposed new section 11A the Netherlands agreement will, when the agreement enters into force, have effect, as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 July 1975;

(b)

in respect of other income, for any year of income beginning on or after 1 July 1975.

Sub-section (2) of each of the new sections provides for the notification in the Gazette of the dates on which the agreements are to enter into force. The purpose of these provisions is to provide a readily available and authoritative source from which persons generally may ascertain the fact and date of entry into force of these agreements. Because of the manner in which, under the terms of the French and the Netherlands agreements, those agreements will enter into force, it is not possible to indicate the dates of entry into force in this Bill. (The agreements will enter into force when the respective governments exchange diplomatic notes signifying that everything has been done to give them the force of law in each country.)

Turning to sub-sections (3) and (4) of section 9A and sub-section (3) of section 11A, article 5 of the French agreement and article 6 of the Netherlands agreement provide, in part, that income from real property may be taxed in the Contracting State in which the real property is situated. They also specify that income from a lease of land and income from any other direct interest in or over land is to be regarded as income from real property, but neither article specifies where these elements of property are to be deemed to be situated. A similar position exists with article 12 of the French agreement concerning income from the alienation of a lease of land or other direct interest in or over land or of shares in a company the principal assets of which consist of such property. The purpose of the sub-sections is to ensure that the relevant income will be treated as having a source in the Contracting State in which is situated the land to which the abovementioned elements of property relate.

Sub-section (5) of section 9A arises out of paragraphs (6) and (7) of article 9 of the agreement with France and is to the effect that where a payment is made under those paragraphs by the French Government to an Australian individual shareholder in a French company equal to the French tax credit ("avoir fiscal"), or to an Australian company shareholder in a French company equal to the French "precompte" in respect of dividends received from a French company, the payments shall be deemed to be dividends and included in the assessable income of the Australian recipient in the year in which they are received. An explanation of the circumstances in which Australian residents are entitled to these payments is contained later in this memorandum in the notes relating to paragraphs (6) and (7) of article 9.

Sub-clause (2) of clause 5 of the Bill will empower the Commissioner to amend assessments for the purpose of giving effect to the agreement with France. It is necessary to give the Commissioner this power because, although the agreement will not enter into force until the Governments of Australia and France exchange notes through the diplomatic channel in accordance with article 28 of the agreement, its provisions will have effect - pursuant to sub-section (1) of the new section 9A - in relation to income in respect of which assessments have already been made. Sub-clause (2) of clause 6 has a similar purpose in relation to the Netherlands agreement.

Clause 7: Provisions relating to certain income derived from sources in the United Kingdom, Singapore, Japan, New Zealand, Germany, the Netherlands and France.

The primary purpose of this clause is to apply the credit system of relief of double taxation to interest and royalties that are derived by residents of Australia from the Netherlands and France in respect of which, under the respective agreements, the Netherlands or French tax is limited. Section 12 of the Principal Act, which is to be amended by this clause, already achieves a corresponding result for interest and royalties derived by residents of Australia from the United Kingdom, Singapore, Japan, New Zealand and the Federal Republic of Germany, where the double taxation agreements with those countries limit the foreign tax on the income.

Section 23(q) of the Income Tax Assessment Act provides an exemption from Australian tax for foreign-source income (other than dividends) of Australian residents that is taxed in the country of source. Section 12 of the Principal Act gives effect to a policy that this exemption is not to apply to interest or royalties derived (either directly or through a trustee) from another country where the double taxation agreement with that country limits the tax it may charge. Once the exempting provision is made inapplicable, the interest or royalties become assessable income for the general purposes of the Income Tax Assessment Act, but the agreement in each case requires Australia to credit against its tax the limited tax of the other country. Sections 14 and 15 of the Principal Act govern the allowance of the credit.

Clause 7 will apply this policy to interest and royalties derived by Australian residents from France or the Netherlands after the commencement of the year of income to which the relevant agreement is first to apply.

Paragraph (a) of sub-clause 7(1) will effect a formal drafting amendment consequent on the addition to sub-section 12(1) of the Principal Act of two new paragraphs (ae) and (af).

Paragraph (b) will insert the two new paragraphs in section 12(1) of the Principal Act. This section sets out classes of income to which the exemption under section 23(q) of the Income Tax Assessment Act does not apply.

The new paragraph (ae) will ensure that interest or royalties derived from the Netherlands by a resident of Australia, the Netherlands tax on which is limited by the agreement to 10 per cent, will not be exempt from Australian tax. Paragraph (ae) will apply to income derived during income years commencing on or after 1 July 1975. With an exception mentioned in the next paragraph of these notes, paragraph (ae) will have no immediate practical effect, however, because the Netherlands ordinarily does not at present impose tax on outgoing interest and royalty payments. However, should Netherlands tax be imposed on such income in the future, the agreement would apply to limit the Netherlands' tax thereon to 10 per cent and Australia would allow a credit against the Australian tax thereon in respect of this amount.

In some circumstances the Netherlands, which, as mentioned, does not ordinarily levy tax on interest derived by residents of other countries, treats interest as a dividend and taxes it accordingly. The interest is, when derived by an Australian resident, to be subject under article 10 (the dividend article) to Netherlands tax of no more than 15 per cent and the reference in new paragraph (ae) of sub-section (1) to article 10 of the Netherlands agreement will mean that double taxation relief in respect of such interest will be given in Australia by the credit method.

The new paragraph (af) will serve a similar purpose as regards income from France. It will have effect for interest or royalties derived on or after 1 July 1972 where, under the agreement, French tax is limited to 10 per cent of the gross amount of the interest or royalties. The interest and royalties will thus be assessable income for the general purposes of the Income Tax Assessment Act and the agreement (article 23) will require a credit for the limited tax to be allowed against the Australian tax on the income.

Sub-clause (2) of clause 7 is designed to avoid any retrospective increase in overall tax liability that might result from the application of the credit method of relief to relevant interest and royalty income derived from France by Australian residents after the commencement of the 1972-73 income year but on or before the date of announcement of signature of the French agreement on 13 April 1976. When signature of the French agreement was announced it was indicated that the credit method of relief was to be applied to this income. The sub-clause provides, in effect, that any increase in the Australian tax payable in respect of the interest or royalties, resulting from the change from the exemption system to the credit system, is not to exceed the amount by which the French tax on the income is reduced by reason of the agreement.

Sub-clause (3) of clause 7 has a similar purpose to that of sub-clauses 5(2) and 6(2) of the Bill. It will empower the Commissioner to amend assessments that have already issued, to apply the credit method of double taxation relief in accordance with sub-clauses (1) and (2) as regards interest and royalties from France.

Clause 8: Schedules 10 and 11.

This clause adds the two new agreements as Schedules to the Principal Act.

Clause 9: Formal amendments.

This clause amends the Principal Act by making formal changes in the descriptions of the various Schedules to the Act.

Notes on Articles

AGREEMENT WITH THE NETHERLANDS

By and large, the agreement - which consists of a main agreement and a supplementary protocol - corresponds with other comprehensive double taxation agreements to which Australia is a party. Like those, 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 or is to allow other comparable relief from double taxation.

Article 1 - Personal scope.

This article provides, in effect, that the agreement will apply to persons (which term includes companies) who are residents of either Australia or the Netherlands.

The term "resident of one of the States" and the situation of persons who are residents of both countries (i.e., dual residents) are dealt with in article 4.

Article 2 - Taxes covered.

This article specifies the existing income taxes of each country to which the agreement is to apply. It also provides that the agreement will apply to any identical or substantially similar taxes which may subsequently be imposed by either Australia or the Netherlands 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.

It will be noted that, as in Australia's other modern double taxation agreements, "Australia" is defined as including external territories and areas of the continental shelf. One purpose of the definition is to enable Australia to retain taxing rights in relation to these areas, particularly as regards mineral exploration and mining activities. The definition also has relevance to Australia's right to tax shipping and airline profits under article 8 of the agreement.

The corresponding definition of "the Netherlands" excludes from the scope of the agreement that part of the Kingdom of the Netherlands that is situated outside Europe, i.e., the Netherlands Antilles. The agreement therefore has no application in respect of that territory.

Article 4 - Residence.

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".

Article 6 - Income from real property.

This article provides that income from real property, including royalties and similar payments in respect of the exploitation of mines, quarries or other natural resources may be taxed in the country in which the property is situated. The scope of the term "income from real property" is extended by paragraph (2) of the article to include income from a lease of land and income from any other direct interest in or over land and income from debt-claims, excluding bonds or debentures, secured by mortgage of real property or of any other direct interest in or over land.

Income to which this article applies is specifically excluded from the scope of article 7 (by paragraph (5) 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.

Article 7 - Business profits.

This article sets out the general basis of taxation of business profits derived by a resident of one country from sources in the other. Broadly, for a country to be able to tax the profits of an enterprise resident in the other country, that enterprise must carry on business in the first country through a "permanent establishment" situated therein.

Article 7 has practical effect comparable with corresponding articles in Australia's other double taxation agreements. As under those agreements, the article provides an "arm's length" basis for ascertaining the amount of profits fairly attributable to a "permanent establishment".

Paragraphs 2 and 3 of the protocol to the agreement also relate to this article and contain provisions that are normally found in the article itself. Paragraph 2 provides for 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. Paragraph 3 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 organisation or in an international operating agency, is reserved to the country of residence of the operator. However, any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. In such cases, the tax shall not exceed 5 per cent of the net amount paid or payable in respect of carriage in internal operations. 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 is a conventional provision which authorises the re-allocation, on an arm's length basis, of profits between associated enterprises where the commercial or financial arrangements between them differ from those that might be expected to exist between independent enterprises.

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. Paragraph (2) of article 9 requires the other country concerned to make an appropriate adjustment in these circumstances with a view to relieving any such double taxation.

Article 10 - Dividends.

The broad scheme of this article is to limit to 15 per cent of the gross amount of dividends the tax imposed by the country of source on dividends payable by companies resident in that country to shareholders resident in the other country. This is in line with Australia's other comprehensive agreements. Under this article, Australian withholding tax on dividends paid to residents of the Netherlands will be at the rate of 15 per cent, rather than at the general rate of 30 per cent. Correspondingly, withholding tax of the Netherlands on dividends paid to Australian residents will be reduced from the general rate of 25 per cent to 15 per cent.

Paragraph (4) of article 10 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.

Paragraph (5) of article 10 is a provision which ensures, broadly, that one country will not tax dividends paid by a company resident 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" in that country.

Article 11 - Interest.

This article requires the country of source generally to limit its tax on interest income derived by residents of the other country to 10 per cent of the gross amount of the interest. The 10 per cent limitation accords with the Australian interest withholding tax rate of 10 per cent. Except for interest on debts secured by mortgage of real property situated in the Netherlands (to which article 6 applies) or interest on profit-sharing debentures which is taxed as dividends (article 10), the Netherlands does not impose tax on interest paid to non-residents unless it is derived through a "permanent establishment" in the Netherlands. The 10 per cent limitation, therefore, does not have any practical application as regards Netherlands tax on interest paid to non-residents.

By paragraph (4), the 10 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. The article contains a general safeguard (paragraph (6)) 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 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.

Article 12 - Royalties.

In Australia, gross royalties paid to non-residents, as reduced by allowable expenses, are, in the absence of an agreement, taxed by assessment at ordinary rates of tax. In the Netherlands, royalties (other than natural resource royalties) paid to non-residents are not at present subject to tax unless derived through a permanent establishment in the Netherlands. This article requires the country of source generally to limit its tax on royalties derived by residents of the other country to 10 per cent of the gross royalties. 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.

There are other cases in which the limitation on the tax of the country of source is not to apply in respect of royalties. One is where the asset giving rise to the royalties is effectively connected with a "permanent establishment" which the recipient has in the country of source. The other is where the royalties are paid by a person not independent of the payee. In the latter case the limitation will not apply to any amount of royalty that is in excess of what might be expected to have been agreed upon by independent persons acting at arm's length.

Article 13 - Alienation of property.

This article provides, in effect, that income from the alienation of real property may be taxed in the country in which that property is situated. In Australia it will only apply to amounts that are treated as income for taxation purposes, e.g., profits from the sale of Australian real estate purchased for purposes of re-sale at a profit. 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 deemed to be real property. Paragraph (3) of the article preserves the application of an anti-tax avoidance provision of the Netherlands law.

Article 14 - Independent personal services.

At present, an individual resident in Australia or in the Netherlands may be taxed in the other country on remuneration derived from the performance in that other country of professional services or other similar independent activities. This article provides that such remuneration 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 remuneration is attributable to that base. If the tests mentioned are not met the remuneration 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 article also provides that income from an employment exercised on ships or aircraft operated in international traffic shall be taxed only in the country of residence of the employee.

Article 16 - Directors' remuneration.

This article relates to remuneration - received by a resident of one country from a company resident in the other country - as a director, or in the Netherlands, the equivalent of a director. To avoid difficulties in such cases in ascertaining in which country the person's services are performed, and the remuneration is to be taxed, the article provides that the remuneration may be taxed in the country of residence of the company. However, where the remuneration is derived by a person as a result of regular and substantial activities in a "permanent establishment" in one country of a company which is a resident of the other country, and the remuneration is deductible in determining the taxable profits of the "permanent establishment", the remuneration, to the extent to which it is so deductible, is to be taxed only in the country in which the "permanent establishment" is situated.

Article 17 - Entertainers.

This article provides that income derived by visiting entertainers (including athletes) from their personal activities as such may be taxed by the country in which the activities are exercised, no matter how short their visit to that country.

The article also contains a safeguard against attempts by entertainers to circumvent its general purpose by, e.g., having fees paid to a separate enterprise which the performer or a specified relative controls, and which arranges the provision of his 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.

Article 18 - Pensions and annuities.

This article provides that pensions, other than pensions paid to an individual in respect of government service, and annuities are to be taxed only by the country of residence of the recipient.

Article 19 - Government service.

This article provides that remuneration, including pensions, paid in respect of services rendered to a government (including State and local government) of one of the countries may be taxed by that country. However, such remuneration, other than pensions, 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. The article does not apply, however, where the services are rendered in connection with a trade or business carried on by a government.

Article 20 - Professors and teachers.

This article applies in respect of professors or teachers resident in one country who visit the other country for a period of not more than two years for the purpose of advanced study or research or of teaching at an educational institution. In these circumstances, the remuneration of the professor or teacher for his teaching, study or research work is to be exempt from tax in the country visited and will remain taxable in the home 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.

Article 21 - Students.

This article applies to students resident in one of the countries who are temporarily present in the other country solely for the purposes of their education. A student meeting these tests will be exempt from the tax of the country visited in respect of payments made to him from abroad for the purposes of his maintenance or education.

Article 22 - Income of a dual resident.

This article relates to individuals and companies that are residents both of Australia and the Netherlands under the general income tax laws of the two countries.

For the purposes of the agreement, the residential status of such a person is established by application of the rules set out in article 4, and article 22 reserves to the country to which the person's residence is allotted the sole right to tax income from sources in that country or from a third 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. Where the other country (as the country of residence) is not bound by the agreement to give relief by the credit method, it is required to give other relief, such as by freeing the income from its tax. A similar approach has been adopted in this agreement.

When the Income Tax Assessment Act and the 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 the Netherlands by Australian residents are as follows. Australia will allow credit for the Netherlands tax on dividends derived by individuals from the Netherlands and, to the extent that the Netherlands does tax the income, on interest and royalties derived by individuals and companies in respect of which the tax of the Netherlands is limited to 10 per cent by articles 11 and 12 or, exceptionally, is, in the case of certain interest, limited to 15 per cent by article 10. (See the notes above concerning clause 7 of the Bill.) Section 46 of the Income Tax Assessment Act will continue to free from Australian tax dividends that are derived from the Netherlands by Australian resident companies, while other income of Australian residents that is taxed in the Netherlands will continue to qualify for exemption from Australian tax under section 23(q) of that Act. In these latter cases, as there will be no Australian tax payable, there will be no question of allowance of credits.

For its part, the Netherlands, while including in assessable income, for purposes of its tax, income that under the agreement may be taxed in Australia, will, depending on the class of income concerned and on other circumstances, either effectively allow its residents a credit for Australian tax on Australian-source income or rebate the proportion of Netherlands tax attributable to the Australian income. Broadly speaking, a credit for Australian tax will, in effect, be allowed in respect of dividends, interest and royalties on which Australian tax is limited under the agreement, and income from public entertainment, while the proportionate rebate method - commonly referred to as exemption with progression - will be allowed in respect of other categories of income.

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 within a three year time limit, and any adjustments agreed may be made notwithstanding any time limits imposed by domestic tax laws of the relevant country.

The other 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 interpretation and 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 of domestic taxation laws. 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 - Regulations.

This article is necessary to enable the making of regulations in the Netherlands to carry out the provisions of the agreement.

Article 28 - Territorial extension.

The purpose of this article is to provide for the possibility of extension of the agreement, either as it stands or with modifications, to the Netherlands Antilles. The two governments would need to agree on the need for and aims of any extension before it could take place. The article neither prescribes nor implies any commitment on either side.

Article 29 - Entry into force.

This article provides for the entry into force of the agreement on the date on which the governments of each country exchange notes through the diplomatic channel notifying each other that the last of such things has been done as is necessary to give the agreement the force of law in both countries. As mentioned earlier in this memorandum it is proposed that there will be a notification inserted in the Gazette of the day on which the agreement will enter into force.

Once it enters into force, the agreement will in general have effect for purposes of Australian tax as from 1 July 1975, although 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 ending on 30 June 1976 will be the date from which the agreement takes effect. In the Netherlands, the agreement will have effect in respect of income (other than dividends subject to the Netherlands' dividend tax) derived on or after 1 January 1975. For Netherlands' dividend tax purposes the agreement will have effect in respect of dividends derived on or after 1 July 1975.

Article 30 - Termination.

This article declares that the agreement is to continue in effect indefinitely but either country may give written notice of termination on or before 30 June in any calendar year after 1979. In that event, the agreement would cease to apply to the fiscal year commencing in the calendar year following the year in which the notice is given.

PROTOCOL TO THE AGREEMENT WITH THE NETHERLANDS

The protocol contains a number of provisions varying or extending parts of the main body of the agreement. The protocol itself provides that its provisions are to form an integral part of the agreement.

Paragraph 1 of the protocol provides that, for the purposes of Australian domestic law under which non-residents may be taxed only on income from sources in Australia, income derived by a resident of the Netherlands which, under Articles 6 to 8 and 10 to 17, may be taxed in Australia shall be deemed to be income from sources in Australia.

Paragraph 2 of the protocol covers the situation where there is insufficient information available to enable proper application of the arm's length basis of determining profits for purposes of articles 7 and 9 of the agreement.

In effect, the paragraph will authorise the Commissioner of Taxation, in an appropriate case, to apply the provisions of section 136 of the Income Tax Assessment Act. That section provides, under defined conditions, for assessment on the basis of such portion of the total receipts of a business as the Commissioner determines.

Paragraph 3 of the protocol provides, in effect, that article 7 shall not apply to the profits of an enterprise from carrying on a business of general insurance, each country being left to apply the provisions of its domestic taxation law to such a business. It also provides, in effect, that for the purposes of the elimination of double taxation by the country of residence of the insurer, the profits so taxed by the other country are to be treated as having a source in that other country.

Paragraph 4 of the protocol places a time limit of three years after the end of the year during which the tax is levied for applications to the Netherlands authorities for a refund of tax levied by the Netherlands in excess of the amount contemplated by the agreement. This relates generally to the Netherlands dividend withholding tax procedures, under which the standard rate of 25 per cent is automatically applied, with reduction to the rate of 15 per cent and refund of the excess being effected on application by the taxpayer. In Australia, application of the reduced rate is normally effected at the time a payment of income is made.

Paragraph 5 of the protocol contains two provisions which bear on article 23 of the agreement - the article which deals with the relief of double taxation.

Sub-paragraph (a) in effect specifies the source of various items of income for the purposes of the application by Australia of the credit provisions of article 23 and of the exemption provisions of section 23(q) of the Income Tax Assessment Act. The broad principle of sub-paragraph (a) is that if the agreement gives the Netherlands the right to tax income of a resident of Australia, Australia is to treat the income as having a source in the Netherlands. This obviates any difficulties which might arise should each country, by the application of the source rules under its own domestic law, claim to be the source of the income.

A corresponding result is achieved, for residents of the Netherlands deriving income from Australia, by the language of article 23(2) itself.

Sub-paragraph (b) is a technical interprative provision applicable in the Netherlands. Broadly speaking, it provides a technical link with that country's equivalents for the Australian term "taxable income".

Sub-paragraph (a) of paragraph 6 of the protocol provides that where one of the countries is entitled, under the agreement, to tax the business profits of an enterprise, that country may also tax profits arising from the disposal of capital assets (other than real property) of the enterprise. This does not, of course, make any profits taxable in either country that are not taxable within the terms of its own taxation laws.

Sub-paragraph (b) provides that if, at some future time, Australia enters into an agreement with a country which, at the date of signature of the protocol, is a member of the O.E.C.D., in which Australia agrees to limit its tax on dividends, interest and royalties to rates which are less than those prescribed for that income in the Netherlands agreement, Australia shall enter into negotiations with the Netherlands for the purpose of reviewing those rates in the Netherlands agreement.

AGREEMENT WITH FRANCE

Introductory Note

In common with the Netherlands agreement, the agreement with France is broadly along the lines of other modern comprehensive double taxation agreements to which Australia is a party. The country of source is generally allocated the right to tax income arising there (sometimes at limited rates) while in particular situations the country of residence of the recipient of income is given the sole right to tax. The relief of 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.

Article 1 - Taxes to which Agreement applies.

This article specifies the existing income taxes to which the agreement applies. These are the Australian income tax and the French income and corporation taxes. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may be imposed by either country in addition to, or in place of, the existing taxes.

Article 2 - 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 Australia's right to tax shipping profits under article 7 of the agreement.

Article 3 - Residence.

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 "domiciled in France" under French tax law, are taken as the basis. The article then 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 resident or domiciled in each.

Article 4 - Permanent establishment.

Application of various provisions of the agreement (principally article 6) 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 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 in 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 5 - Income from real property.

This article provides that 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 real property is defined in paragraph (2) of the article to include income from a lease of land and income from any other direct interest in or over land, and sub-section (3) of new section 9A, to be inserted in the Principal Act by clause 5 of the Bill, makes it clear that such income will be treated as having a source 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 6 (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.

Article 6 - Industrial or commercial profits.

This article is concerned with the taxation of industrial or commercial (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 trade or business through a "permanent establishment" (as defined in article 4) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment.

Paragraph (4) of the article provides for circumstances in which there is insufficient information available to determine the profits of the "permanent establishment" on the basis of arm's length dealing. In such circumstances the provisions of the general income tax law which permit the taxation authority to estimate taxable profits, such as section 136 of the Australian Income Tax Assessment Act, may be applied.

Paragraph (7) empowers each country to continue to apply special provisions in its domestic law relating to the taxation of income from the carrying on of a business of general insurance. Sections 142, 143 and 148 of the Income Tax Assessment Act are the relevant Australian provisions.

Article 7 - Shipping.

This article specifies that profits from the operation of ships in international traffic will be subject to tax only in the country of residence of the operator. The right of the country of origin to tax shipping profits derived by a resident of the other country is, however, preserved in respect of profits from the operation of ships confined solely to places in the first-mentioned country. Where such internal operations consist of the carriage of passengers, cargoes and mails, the tax in the country of origin is not to exceed 5 per cent of the net amount paid or payable in respect of such carriage. By reason of the definition of "Australia" in article 2 and the terms of paragraph (3) of article 7, any shipments 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 operations.

International airline profits are not, as is usually the case, dealt with in this article. This is because those profits are covered by an existing agreement, the operation of which is not being disturbed (see article 28(2)).

Article 8 - Associated enterprises.

This article authorises the re-allocation of profits between inter-connected enterprises in Australia and France 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.

Where a re-allocation of profits is effected under paragraph (1) of article 8, 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) of article 8 requires the other country to consider a claim by the associated enterprise for relief in such cases.

Article 9 - Dividends.

Paragraphs (1) and (2) of this article limit to 15 per cent of the gross amount of dividends the tax that the country of source may impose on dividends payable to shareholders resident in the other country. This is in line with Australia's other comprehensive agreements. Under this article, Australia will reduce its rate of withholding tax on dividends paid to residents of France from 30 per cent to 15 per cent, while France will reduce its withholding tax on dividends paid to Australian residents from 25 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" in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that "permanent establishment". Dividends of that nature fall to be taxed in accordance with article 6.

Paragraph (5) relates to provisions of French income tax law under which an additional tax is imposed on French branches of foreign companies to make up, broadly, for the tax that is imposed on dividends paid by French companies, but not dividends paid by foreign companies. The paragraph provides that where an Australian company has a "permanent establishment" in France it may be subjected to such additional French tax. However, paragraph (5) also provides that this tax shall not exceed 15 per cent of two-thirds of the profits derived by the "permanent establishment", after payment of French corporation tax on those profits. (By paragraph (1) of the article Australia may impose tax of 15 per cent on dividends paid by a French company, out of Australian profits, to a resident of France.)

Paragraph (6) grants to Australian individual shareholders in French companies certain benefits of the French system of taxing company profits which normally accrue only to French resident shareholders. Within France, the broad position with respect to individual shareholders is that part of the tax paid by a French company is allowed as a credit ("avoir fiscal") against the tax that a French shareholder receiving dividends from the company is liable to pay. By paragraph (6), together with sub-section (5) of new section 9A to be inserted in the Principal Act by clause 5 of the Bill, Australian individual shareholders in French companies will be entitled, in circumstances defined in that paragraph, to a similar credit and the amount of that credit will be included, as a dividend, in the assessable income of the Australian shareholder of the year of income in which the credit is paid.

Paragraph (7) is also related to the French system of taxation of company profits and dividends. Where a dividend is paid by a French company out of profits exempt from French corporation tax, a pre-payment ("precompte") is levied equal to the credit ("avoir fiscal") which will be allowed to the French resident recipient of the dividend. Under this paragraph, Australian company shareholders receiving dividends from France on which a pre-payment ("precompte") has been levied will be entitled to a refund of the "precompte" less withholding tax at the rate of 15 per cent. Sub-paragraph (b) of paragraph (7), together with sub-section (5) of new section 9A, provides that the amount of the refund, before deduction of withholding tax, is for Australian tax purposes to be included as a dividend in the assessable income of the recipient company of the year of income in which it is paid. By reason of section 46 of the Income Tax Assessment Act, the amount so included will be freed from Australian tax.

Article 10 - Interest.

By paragraph (1) 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 is 10 per cent, the agreement will not change the amount of Australian tax on interest flowing to residents of France. However, as the standard rate of French tax on interest is 25 per cent it will effect a reduction in the amount of French tax on interest payable to Australian residents.

Interest derived by a resident of one country which is effectively connected with a "permanent establishment" of that person in the other country will form part of the business profits of that establishment and be subject to the provisions of article 6. Accordingly, paragraph (3) of article 10 provides that the 10 per cent limitation is not to apply to such interest.

The article contains a general safeguard (paragraph (5)) 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 dealing at arm's length.

Article 11 - Royalties.

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 France 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 5, 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 taxes royalties, as reduced by allowable expenses, at ordinary rates of tax, while royalties paid from France are taxed there at the rate of 24 per cent, although as the rate is not applied to the full amount of the royalties the effective rate is somewhat lower than that.

As in the case of dividends and interest, it is specified in paragraph (3) 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" in that country. Paragraph (5) provides that where royalties flow between persons not at arm's length, the 10 per cent limitation will apply only to the extent that the royalties are not excessive, judged by arm's length standards.

Article 12 - Alienation of real property.

This article applies to income from the alienation of real property, including income from the alienation of a lease of land or of any other direct interest in or over land, and income from the alienation of shares or comparable interests in a real property co-operative or in a company the assets of which consist wholly or principally of such property. This income may be taxed in the country in which the land is situated. In Australia, the article will only apply to amounts that are treated as income for taxation purposes, e.g., profits from the sale of Australian land purchased for purposes of re-sale at a profit.

Sub-sections (3) and (4) of new section 9A, to be inserted in the Principal Act by clause 5 of the Bill, establish the source of the relevant profits by reference to the place where the land concerned is situated.

Article 13 - Independent personal services.

At present, an individual resident in Australia or in France may be taxed in the other country on remuneration derived from the performance in that other country of professional services or other similar independent activities. This article provides that such remuneration 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 to him in that country for the purposes of performing his activities, and the remuneration is attributable to that base. If the tests mentioned are not met the remuneration 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 14 - Dependent personal services.

The basis for taxing remuneration derived by visiting employees is set out in this article.

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 article also provides that income from an employment exercised on ships or aircraft in international traffic may be taxed in the country of residence of the operator.

Article 15 - Directors' fees.

This article relates to remuneration received by a resident of one country in his capacity as a director of a company which is a resident of the other country. To avoid difficulties in such cases of ascertaining in which country a director's services are performed, and his remuneration is to be taxed, the article provides that directors' fees and similar payments may be taxed in the country of residence of the company.

Article 16 - Public entertainers.

This article ensures that income derived by public entertainers, including athletes, from their personal activities as such will continue to be taxed in the country in which these activities are exercised, no matter how short their visit to that country.

The article also contains a safeguard against attempts by entertainers to circumvent its general purpose by having fees paid to a separate enterprise which the performer controls, and which arranges the provision of his 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 17 - Pensions and annuities.

Paragraph (1) of this article provides that pensions and annuities shall be taxed only by the country of residence of the recipient.

Paragraph (3) of the article specifies, however, that the country of residence is to exempt from its tax certain specified pensions while they remain exempt from tax under the other country's domestic law. The pensions covered by this exemption are Australian repatriation war pensions and their French equivalent.

Paragraph (4) will apply while section 23(q) of the Income Tax Assessment Act continues to exempt from Australian tax retirement pensions that are derived by residents of Australia from sources outside Australia and are taxed in the country of source. It allows residents of either country in receipt of retirement pensions from sources in the other country to elect to be taxed on such pensions in the country from which the pensions are derived.

Article 18 - Remuneration paid by Governments.

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 19 - Visiting professors and teachers.

This article applies in respect of professors or teachers resident in one country who visit the other country for a period of up to two years for the purpose of teaching or conducting research at an educational institution in the other country. In these circumstances, the remuneration of the teacher or professor for his teaching or research work is to be exempt from the tax of the country visited. The article does not apply, however, to remuneration which is received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons.

Article 20 - Students.

This article applies to students resident in one of the countries who are temporarily present in the other country solely for the purposes of their education. In these circumstances, a student will be exempt from the tax of the country visited in respect of payments made to him from sources outside that country for the purposes of his maintenance or education.

Article 21 - Income of dual residents.

This article relates to individuals and companies that are residents both of Australia and France under the general income tax laws of the two countries and are, by application of the rules set out in article 3, treated as residents of one of the countries for the purposes of the agreement. Article 21 reserves to the country to which the person's residence is allotted the sole right to tax income from sources in that country or from a third country.

Article 22 - Source of income.

Article 22 specifies, by paragraph (1), 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 does, as the agreement intends, give double taxation relief in respect of tax levied pursuant to those rights. The paragraph 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.

Paragraph (2) has a broadly similar purpose in relation to the "associated enterprises" provisions of article 8 and paragraph (3) states the principle that the exemption (under article 23(2)(a)) from French tax of certain classes of income derived by French residents from sources in Australia, and which may be taxed by Australia, is not to apply where the income is derived from sources in Australian external territories and is in fact not taxed by Australia. Because Australia does tax income of a French resident from sources in those territories, paragraph (3) has no current practical operation.

Article 23 - Relief from double taxation.

This article provides for the 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.

As outlined earlier in this memorandum, some income flowing between the two countries may be taxed only in one country or the other, 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 French tax on income derived by a resident of Australia from sources in France. Australia will allow credit for the French tax on dividends derived by individuals from France and on interest and royalties derived by individuals and companies from France in respect of which the tax of that country is limited to 10 per cent by articles 10 and 11. Section 46 of the Income Tax Assessment Act will continue to free from Australian tax dividends derived from France by Australian resident companies, while other income of Australian residents that is taxed in France will continue to qualify for exemption from Australian tax under section 23(q) of that Act. In these latter cases, since there will be no Australian tax payable, there is no call for allowance of credits.

Paragraph (2) of the article provides that France will, depending on the class of income and on other circumstances, either allow its residents a credit for Australian tax on Australian-source income or exempt the income from tax. In brief, France will allow its residents a tax credit for Australian taxes paid on dividends, interest, royalties, directors' fees and entertainers' remuneration derived from sources in Australia, while other Australian source income derived by French residents will be exempt from tax in France.

Dividends paid by an Australian company to a French company which holds at least 10 per cent of the shares in the Australian company are under French domestic law effectively exempt from French tax. Since dividends subsequently paid by the French company out of this income would be subject to the pre-payment ("precompte") - see notes on Article 9 - sub-paragraph (a) of paragraph (2) requires France to allow credit for the Australian withholding tax on the dividends against the French "precompte" that is payable when they are re-distributed. Paragraph (d) follows this up by obliging France to give full "avoir fiscal" credit to the French resident shareholders concerned.

Paragraph (3) provides that the two countries will enter into negotiations to vary the provisions for relief of double taxation on dividends if either country terminates its domestic law provisions freeing inter-company dividends from tax.

Article 24 - Complaints by taxpayers.

This article provides for consultation between the respective taxing authorities with a view to reaching a satisfactory accord where a person is able to demonstrate that he has been, or will be, subjected to taxation contrary to the provisions of the agreement.

The article also authorises communication between the authorities for the purpose of giving effect to the agreement.

Article 25 - Exchange of information.

This article authorises exchange of information between the taxing authorities of each country where this is necessary for the carrying out of the agreement or of domestic taxation laws. The restrictions which it imposes on the purposes for which the information so exchanged may be used, and the persons to whom it may be disclosed, correspond with those included in comparable provisions in Australia's other double taxation agreements.

The 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 privileges.

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 law. In Australia, fiscal privileges are conferred on such persons by the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.

The article also includes a safeguard to ensure that the benefits of the agreement shall not apply to international organisations, to organs or officials thereof, or to diplomatic staff of a third country who, although present in one of the countries, are not treated as residents by either country.

Article 27 - Extension to Territories.

The purpose of this article is to provide for extension of the agreement, either as it stands or with modifications, to any territory for whose international relations either country is responsible and which imposes taxes substantially similar in character to those to which the agreement applies. The two governments would need to agree on the need for and the terms to apply to any such extension before it could take place.

Article 28 - Entry into force.

This article provides for the entry into force of the agreement. This will be 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 France as is necessary to bring the agreement into force in both countries. As mentioned earlier in this memorandum, it is proposed that there will be a notification inserted in the Gazette of the day on which the agreement will enter into force.

Once it enters into force, the agreement will have effect in both countries, for purposes of withholding tax, as from 1 January 1973. It will have effect in Australia, in respect of tax other than withholding tax, as from 1 July 1972, although 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 ending on 30 June 1973 will be the date from which the agreement takes effect. In France, the agreement will have effect in respect of tax other than withholding tax for the 1972 assessment year and subsequent years.

Under paragraph (2) of the article the agreement is not to affect the operation of the existing agreement between Australia and France for the avoidance of double taxation of income derived from international air transport.

Article 29 - Duration of agreement.

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 1977. In that event, the agreement would cease to be effective in both countries, for withholding tax purposes, on 1 July in the calendar year following the year in which notice is given. It would cease to be effective for tax other than withholding tax from the beginning of the income year commencing in that calendar year in Australia and from the beginning of the assessment year commencing in that calendar year in France.