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House of Representatives

Income Tax (International Agreements) Amendment Bill 1992

Income Tax (International Agreements) Amendment Act 1992

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Dawkins, M.P.)

A. General Outline and Financial Impact

What will the Bill do?

The Bill will amend the Income Tax (International Agreements) Act 1953 (IT(IA)A) to give the force of law in Australia to three comprehensive agreements for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The respective agreements cover the various forms of income flows between Australia and Indonesia, Australia and Vietnam and Australia and Spain.

Who will be affected by the agreements in the Bill?

Any taxpayers who, for the purposes of the agreements, are residents of one of the two countries party to that agreement and who derive income, profits or gains from the other country that is a party to that agreement.

In what way does the Bill change the Act?

The Bill will make the following changes to the IT(IA)A:

•: it will insert in subsection 3(1) definitions of "the Indonesian agreement", "the Vietnamese agreement"and "the Spanish agreement" and insert new sections 11ZB, 11ZC and 11ZD which will give the force of law in Australia to those agreements.
•: it will add the text of each agreement as Schedules 37, 38 and 39 respectively.
•: it will repeal the airline profits agreement with India (section 11J and Schedule 19) but with a savings clause to provide that if a particular assessment of Australian tax would be affected by the repeal (eg a prior year assessment) the repeal is to be disregarded in making that assessment.

When will these changes take place?

The double taxation agreements (DTAs) will enter into force on the date of exchange of diplomatic notes between Australia and the respective treaty partner countries. Such diplomatic notes will formally advise that all the requirements necessary to give the DTAs the force of law in each country have been finalised.

When the agreements enter into force from what date will they have effect?

The DTA with Indonesia will have effect:

•: in Australia , for withholding tax purposes, in respect of income derived on or after 1 July in the calendar year next following that in which the agreement enters into force; and for other Australian taxes covered by the agreement, in respect of income, profits or gains of any year of income beginning on or after 1 July in the calendar year following that in which it enters into force.
•: in Indonesia , for withholding tax purposes, in respect of income derived on or after 1 July in the calendar year next following that in which the agreement enters into force; and for other Indonesian taxes covered by the agreement, for taxable years beginning on or after 1 July in the calendar year following that in which it enters into force.

The DTA with Vietnam will have effect:

•: in Australia , for withholding tax purposes, in respect of income derived on or after 1 July in the calendar year next following that in which the agreement enters into force; and for other Australian taxes covered by the agreement, in respect of income, profits or gains derived on or after 1 July in the calendar year following that in which it enters into force.
•: in Vietnam , for taxes withheld at source, in relation to taxable amounts paid on or after 1 January following the calendar year in which the agreement enters into force; and for other Vietnamese taxes covered by the agreement, in relation to income, profits or gains arising in the calendar year following the calendar year in which the agreement enters into force and in subsequent calendar years.

The DTA with Spain will have effect:

•: in Australia , for withholding tax purposes, in relation to income derived on or after 1 January in the calendar year following that in which the agreement enters into force; and for other Australian taxes covered by the agreement, in respect of income of any year of income beginning on or after 1 July in the calendar year following that in which it enters into force.
•: in Spain , for withholding tax purposes, in respect of income derived on or after 1 January in the calendar year next following that in which the agreement enters into force; and in respect of other Spanish taxes on income, in respect of taxes chargeable for the Spanish taxable year beginning on or after 1 January in the calendar year following that in which it enters into force.

The Financial Impact of the Bill

The operation of the agreements contained in this Bill is not expected to have a significant effect on revenue.

B. Introduction

What do we mean by double taxation?

Australia's DTAs are primarily concerned with relieving juridical double taxation, which can be described broadly as subjecting the same income derived by a taxpayer during the same period of time to comparable taxes under the taxation laws of two different countries.

Why are DTAs necessary?

Relief from double taxation is desirable because of the harmful effects double taxation can have on the expansion of trade and the movement of capital and people between countries. A DTA supplements the unilateral double tax relief provisions in the respective treaty partner countries' domestic laws and clarifies the taxation position of income flows between them.

What is the purpose of Australia's DTAs?

Australia's DTAs are designed to:

(a) Prevent double taxation and provide a level of security about the tax rules that will apply to particular international transactions by:-

•: allocating taxing rights between the contracting countries over different categories of income;
•: specifying rules to resolve dual claims in relation to the residential status of a taxpayer and the source of income; and
•: providing, where a taxpayer considers that taxation treatment has not been in accordance with the terms of a DTA, an avenue for the taxpayer to present a case for determination to the relevant taxation authorities.

(b) Prevent avoidance and evasion of taxes on various forms of income flows between the treaty partners by:-

•: providing for the allocation of profits between related parties on an "arm's length" basis;
•: generally preserving the application of domestic law rules that are designed to address transfer pricing and other international avoidance practices; and
•: providing for exchanges of information between the respective tax authorities.

How is the legislation structured?

DTAs to which Australia is a partner appear as Schedules to the IT(IA)A. The IT(IA)A gives the force of law in Australia to those DTAs. The provisions of the Income Tax Assessment Act 1936 (ITAA) are incorporated into and read as one with the IT(IA)A. In any cases of inconsistency, the IT(IA)A provisions (including the terms of the DTAs) generally override the ITAA provisions.

C. Main Features of the New DTAs

Under the terms of the DTAs with Indonesia, Vietnam and Spain:

Income from real property may be taxed in full by the country in which the property is situated. Income from real property includes natural resource royalties.

Business profits are to be generally taxed only in the country of residence of the recipient unless they are derived by a resident of one country through a branch or other prescribed "permanent establishment" in the other country, in which case that other country may tax the profits.

Profits from international operations of ships and aircraft may be taxed only in the country of residence of the operator.

Dividends, interest and royalties may generally be taxed in both countries, but there are limits on the tax that the source country may charge on dividends, interest and royalties flowing to residents of the other country. These limits are, in the case of the DTA with Indonesia, 15 per cent for dividends and 10 per cent or 15 per cent for royalties and 10 per cent for interest. In the case of the DTA with Vietnam, the limits are, in Australia, 15 per cent and in Vietnam, 10 per cent for dividends and in both countries, 10 per cent for interest and royalties. In the case of the DTA with Spain, the limits are 15 per cent for dividends and 10 per cent for interest and royalties.

Income, profits or gains from the alienation of property may be taxed in full by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and some shares, capital gains are to be taxed in accordance with the domestic law of each country.

Income from professional services and other similar activities will generally be taxed only in the country of residence of the recipient. However, remuneration derived by a resident of one country in respect of professional services rendered in the other country may, where derived through a fixed base of the person concerned in that country, be taxed in the latter country.

Income from dependent personal services that is, employee's remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited.

Government service remuneration paid by one country will generally be taxed only in that country. However, the remuneration may be taxed in the other country in certain circumstances where the government services are rendered in that other country.

Directors' fees and similar payments may be taxed in the country of residence of the paying company.

Income derived by entertainers (other than income derived from activities which are substantially supported by public funding in the case of the Indonesian and Spanish DTAs) may generally be taxed by the country in which the activities are performed.

Pensions and annuities (including government service pensions in the case of the Indonesian and Vietnamese DTAs) may generally be taxed only in the country of residence of the recipient. The Indonesian DTA provides that the source country may tax pensions but at a rate not greater than 15 per cent. The Spanish DTA, however, provides for government service pensions to be generally taxed only by the country for which the services were rendered.

Income of visiting students will be exempt from tax in the country visited so far as concerns payments made from abroad for the purposes of their maintenance or education.

Income of visiting professors and teachers under the DTA with Indonesia, derived during a visit to the other country of up to two years duration for the sole purpose of teaching or carrying out advance study or research at an educational institution will normally be taxed only in the country of residence of the recipient.

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

Exchange of information and consultation between the relevant taxation authorities is authorised by the respective DTAs.

Dual residents (i.e., persons (including companies) who are residents of both Australia and the other country according to the domestic law of each country) are, in accordance with specified criteria, to be treated for the purposes of the agreement, as being residents of only one country.

Source rules are prescribed in each agreement to the effect that income, profits or gains derived by a resident of one country which, under provisions of the agreement may be taxed in the other country, shall be treated as being sourced in the latter country.

Double taxation relief for income taxable by both countries is to be provided by the country of residence under each agreement as follows:-

•: in Australia , by allowing a credit for the Indonesian or Vietnamese or Spanish tax against Australian tax payable on income derived by a resident of Australia from sources in the other country. In the case of certain dividend payments from a company resident in the other country to a related Australian resident company, the Indonesian, Vietnamese or Spanish tax to be credited by Australia includes the "underlying" tax paid in respect of the profits out of which the dividend is paid.
•: tax sparing is to be provided by Australia in relation to income derived by a resident of Australia from Vietnam which has benefited from specified development incentives provided by Vietnam. Australia will provide a credit against the Australian tax payable in respect of that income for the Vietnamese tax forgone under those development incentives as if that tax had been paid.
•: in Indonesia , under the terms of that particular DTA, Indonesia will generally allow a credit against Indonesian tax for the Australian tax (including Fringe Benefits Tax) paid on income, profits or gains derived by residents of Indonesia from sources in Australia.
•: in Vietnam , under the terms of that particular DTA, Vietnam will generally allow a credit against Vietnamese tax for Australian tax paid on income, profits or gains derived by residents of Vietnam from sources in Australia.
•: in Spain , under the terms of that particular DTA, Spain will allow a deduction against Spanish tax for Australian tax paid on income or gains derived by residents of Spain from sources in Australia. In the case of certain dividend payments from an Australian resident company to a Spanish resident company, the deduction allowed by Spain will include that part of the tax effectively paid by the Australian company in respect of the profits out of which the dividend is paid.

Agreement with Indonesia

The comprehensive double taxation agreement with Indonesia generally accords in substantial practical effect with other comprehensive double taxation agreements to which Australia is a party. Like them, the agreement allocates to the country of source, sometimes at limited rates, a taxing right over some income, profits or gains. The country of residence is given the sole right to tax other types of income, profits or gains. The agreement also provides that where income, profits or gains may be taxed in both countries, the country of residence (if it taxes) is to allow double tax relief against its own tax for the tax imposed by the country of source. In the case of Australia, effect is given to the relief obligations arising under the double taxation agreement by application of the general foreign tax credit system provisions of Australia's domestic law, or relevant exemption provisions of the law where applicable.

A notable feature of the agreement is the royalty provisions of Article 12, which differ from standard Australian tax treaty practice in that they prescribe different source country tax rate limits for various categories of royalty payments.

Another notable feature is that the pension provisions of Article 18 allow the source country to tax pensions paid to a resident of the other country at a rate not greater than 15 per cent.

Article 1 - Personal Scope

Scope

This article establishes the scope of application of the agreement, by providing for it to apply to persons (which term includes companies) who are residents of one or both countries.

The application of the agreement to persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.

Article 2 - Taxes Covered

This article specifies the existing taxes of each country to which the agreement applies. These are, in the case of Australia:

•: the Australian income tax; and
•: the resource rent tax in respect of offshore petroleum projects.

For Indonesia the agreement applies to its:

•: income tax under the Undang-undang Pajak Penghasilan 1984.

Substantially similar taxes

The application of the 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. A duty is imposed on Australia and Indonesia to notify each other within a reasonable time of any substantial changes to their respective laws to which the agreement applies.

Article 3 - General Definitions

Definition of "Australia"

As with Australia's other modern taxation agreements, "Australia" is defined as including certain external territories and areas of the continental shelf. By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by nonresidents on the seabed and subsoil of the continental shelf areas (under section 6AA of the ITAA, certain sea installations and offshore areas are to be treated as part of Australia). The definition is also relevant to the taxation by Australia and Indonesia of shipping profits in accordance with Article 8 of the agreement. [Subparagraph 1(a)]

Definition of "tax"

For the purposes of the agreement, the terms "Australian tax" and "Indonesian tax" do not include any amount of penalty or interest imposed under the respective domestic laws of Australia and Indonesia [Subparagraph 1(g)] . This is important in determining a taxpayer's entitlement to a credit under the double tax relief provisions of Article 24 of the agreement.

In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation laws of Indonesia with respect to income that Indonesia is entitled to tax under the agreement, would not be a creditable "Indonesian tax" for the purposes of Article 24(1) of the agreement. This is in keeping with the meaning of "foreign tax" in the ITAA (subsection 6AB(2) -Foreign Income and Foreign Tax).

Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 24(1) (pursuant to Division 18 of Part III of the ITAA - Credits in Respect of Foreign Tax).

References to a permanent establishment

The references to a permanent establishment or fixed base in the Dividends, Interest, Royalties and Income Not Expressly Mentioned Articles, include a reference to an enterprise's sales and other business activities in subparagraphs 1(b) and (c) of the Business Profits Article and to an individual's activities in subparagraph 1(b) of the Independent Personal Services Article. [Paragraph 2]

Terms not specifically defined

Where a term is not specifically defined within this agreement, that term (unless used in a context that requires otherwise) is to be taken to have the same interpretative meaning as it has under the domestic law of the country applying the agreement.

The expression "in force at the time of application" is included in order to clarify that a term not defined in the agreement is to be given the meaning it has under that country's domestic law at the time of application of the agreement. This is designed to obviate the need for research into the meaning such a term had when the agreement was negotiated. [Paragraph 3]

Article 4 - Residence

Residential status

This article sets out the basis by 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 each country's taxing rights and is a necessary condition for the provision of relief under the agreement. The concept of resident according to each country's taxation law provides the basic test.

The article also includes a set of "tie-breaker" rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement if a taxpayer - whether an individual, a company or other entity - qualifies as a dual resident, i.e., as a resident under the domestic laws of both countries.

Example

A dual resident who is deemed by Article 4 to be a resident solely of Indonesia for the purposes of the agreement would be entitled to any exemption from, or reduction in, Australian tax provided by an article of the agreement in respect of income derived from sources in Australia by a resident of Indonesia.

For the categories of income which under the agreement remain taxable in both countries, the obligation placed by Article 24 (Methods of Elimination of Double Taxation) on the country of residence of the recipient of the income to provide double tax relief would in that example rest with Indonesia.

Dual residents remain, however, in relation to each country a resident of that country for the purposes of its domestic law and subject to its tax as such so far as the agreement allows.

Note

Article 22 (Income Not Expressly Mentioned) would operate in relation to the dual resident referred to in the example above as if that person were a resident of Indonesia. This would preclude Australia from taxing items of income not expressly dealt with by another article of the agreement, where the income is derived from sources in Indonesia or from sources in a third country unless that income was effectively connected with a permanent establishment or fixed base in Australia of the dual resident.

Paragraph 5 of Article 13 (Alienation of Property) would, however, preserve the application of Australia's rules for taxing capital gains in relation to gains to which that paragraph applied on the basis that the dual resident remains a resident of Australia for those purposes.

Article 5 - Permanent Establishment

Role and definition

Application of various provisions of the agreement (principally Article 7 relating to business profits) is dependent upon whether a person who is a resident of one country has a "permanent establishment" in the other, and if so, whether income derived by the person in the other country is attributable or effectively connected with that "permanent establishment". The definition of the term "permanent establishment" which this article embodies, corresponds generally with definitions of the term in Australia's other double taxation agreements.

Meaning of "permanent establishment"

The primary meaning of the term "permanent establishment" is expressed as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. [Paragraph 1]

Other paragraphs of the article are concerned with elaborating on the meaning of the term by giving examples (by no means intended to be exhaustive) of what may constitute a "permanent establishment" - for example:

•: an office;
•: a mine; or
•: an agricultural, pastoral or forestry property.

Other articles

The principles set down in this article are also to be applied in determining whether a permanent establishment exists in a third country or whether a third country has a permanent establishment in Australia (or in Indonesia) for the purposes of:

•: paragraph 5 of Article 11 (Interest); and
•: paragraph 5 of Article 12 (Royalties). [Paragraph 7]

Article 6 - Income from Real Property

Where income from property is taxable

This article makes it clear that income from real property which is situated in one of the countries is taxable in the country where the property is situated [Paragraph 1] . Thus income from real property in Australia will be subject to Australian tax laws.

Income from real property

Income from real property is effectively defined as extending to:

•: the direct use, letting or use in any other form of any land or interest therein; and
•: royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.

Consistent with the usual rule that whatever is affixed to or attached to land forms part of, or becomes part of, the land, the reference to land is to be read as meaning either improved or unimproved land. For example, the definition of real property will encompass a lease of a building or any other interest in a building.

Independent personal services

The operation of this article extends to income derived from the use or exploitation of real property of an enterprise, and income derived from real property that is used for the performance of independent personal services. [Paragraph 5]

Accordingly, application of this article (when read with Articles 7 and 14) to such income ensures that the treaty country in which the real property is situated may impose tax on the income derived from that property by:

•: an enterprise of the other country; or
•: an independent professional person resident in that other country,

irrespective of whether or not that income is attributable to a "permanent establishment" of such an enterprise, or fixed base of such a person, situated in the first mentioned country.

Ships and aircraft

Ships, boats and aircraft are specifically excluded from the scope of this article because the treatment of profits arising from their operation is to be determined in accordance with Article 8.

Article 7 - Business Profits

This article is concerned with the taxation of business profits derived by an enterprise carried on 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" in that other country. If a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax the profits of the enterprise that are attributable to that permanent establishment. That country may also generally tax income attributable to sales of goods or merchandise, or business activities carried on, in that other State of the same or similar kind as those sold, or carried on through that permanent establishment. [Paragraph 1]

If a taxpayer who is a resident of one country carries on business through an enterprise that does not have a "permanent establishment" in the other country, the taxpayer will not be liable to tax in the other country on the business profits of that enterprise. [Paragraph 1]

Determination of business profits

Profits of a "permanent establishment" are to be determined on the basis of arm's length dealing. The provisions correspond to comparable provisions in Australia's other double taxation agreements. [Paragraphs 2 and 3]

No profits are to be attributed to a permanent establishment merely because it purchases goods or merchandise for the enterprise. [Paragraph 4]

Profits of a permanent establishment derived from business activities carried on in its own right will not be increased by adding to them any profits attributable to the purchasing activities undertaken for the head office. It follows, of course, that any expenses incurred by the permanent establishment in respect of those purchasing activities will not be deductible in determining the taxable profits of the permanent establishment.

Inadequate information

The article allows for the application of the source country's domestic law (e.g. Australia's Division 13) where, due to inadequate information, the correct amount of profits attributable to a "permanent establishment" cannot be determined or can only be ascertained with extreme difficulty. [Paragraph 5]

Income dealt with under other articles

Where income is otherwise specifically dealt with under other articles of the agreement the effect of those particular articles is not overridden by this article. [Paragraph 6]

This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other articles of the agreement (eg. dividends, interest and royalties) are to be treated in accordance with the terms of those articles and as outside the scope of this article (except where otherwise provided, e.g. by paragraph 4 of Article 10).

Insurance with non-residents

Each country has the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non-residents. However, if the relevant law in force in either Contracting State at the date of signature of this agreement is varied (otherwise than in minor respects so as not to affect its general character), the Contracting States must consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate. An effect of this paragraph is to preserve, in the case of Australia, the application of Division 15 of Part III of the ITAA (Insurance with Non-residents). [Paragraph 7]

Trust beneficiaries

The principles of the article will apply in relation to business profits derived by a resident of one of the countries (directly or through one or more interposed trust estates) as a beneficiary of a trust estate. [Paragraph 8]

Example

In accordance with this article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of Indonesia is beneficially entitled under the trust estate. Paragraph 8 ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business.

Article 8 - Ships and Aircraft

International traffic

Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from:

•: participation in a pool service;
•: a joint transport operating organisation; or
•: an international operating agency,

is generally reserved to the country of residence of the operator.

Internal traffic

Any profits derived by a resident of one country from internal traffic in the other country (i.e. from operations confined solely to places in the other country) may be taxed in that other country.

By reason of the definition of "Australia" contained in Article 3 and the terms of paragraph 4 of this article, any shipments by sea or air from a place in Australia (including the continental shelf areas and external territories covered by the definition of "Australia") to another place in Australia, are treated as forming part of internal traffic. [Paragraph 4]

Example

Profits derived from a shipment of goods taken on board (during the course of an international voyage between a place in Indonesia and Sydney) at Cairns for delivery to Brisbane, would be profits from internal traffic and would fall within the scope of section 129 of the ITAA. As such, 5 per cent of the amount paid in respect of internal traffic would be deemed to be taxable income of the operator for Australian tax purposes.

Article 9 - Associated Enterprises

Re-allocation of profits

This article authorises the re-allocation of profits between related enterprises in Australia and Indonesia 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 wholly at arm's length with one another.

The article would not generally authorise the re-writing of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms.

Each country retains the right to apply its domestic law relating to the determination of the tax liability of a person (e.g. Australia's Division 13) to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, in accordance with the principles of this article. [Paragraph 2]

Correlative adjustments

Where a re-allocation of profits is made (either under this article or, by virtue of paragraph 2, under domestic law) 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. To avoid this result, the other country is required to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation. [Paragraph 3]

This adjustment has to be made only if the re-allocation was made on the basis of arrangements that might be expected to operate between independent enterprises dealing wholly at arm's length with one another.

It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the re-allocation of profits for an appropriate compensatory adjustment to reflect the re-allocation of profits made by the competent authority of the other treaty partner country. If necessary, the competent authorities of Australia and Indonesia will consult with each other to determine the appropriate adjustment.

Article 10 - Dividends

This article broadly allows both countries to tax dividends flowing between them but in general limits the tax that the country of source may impose on dividends payable by companies that are residents of that country under its domestic law to beneficial owners resident in the other country.

Rate of tax

Under this article, Australia will reduce its rate of withholding tax on unfranked dividends paid by Australian resident companies to residents of Indonesia from 30 per cent to 15 per cent of the gross amount of the dividends. Franked dividend payments will, of course, remain free of withholding tax under Australia's domestic law. The rate of withholding tax to be imposed by Indonesia on outgoing dividends is also limited to 15 per cent. [Paragraph 2]

Exception to limitation

The limitation on the source country's tax does not apply to dividends derived by a resident of the other country who has a "permanent establishment" or "fixed base" in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that "permanent establishment" or "fixed base".

In practice, however, under changes made to Australia's domestic law with the introduction from 1 July 1987 of a full imputation system of company taxation, such dividends that are franked dividends will remain exempt from Australian tax while unfranked dividends will be subject to withholding tax at the rate of 15 per cent instead of being taxed by assessment. [Paragraph 4]

Extra-territorial application precluded

The extra-territorial application by either country of taxing rights over dividend income is precluded by providing, broadly, that one country (the first country) will not tax dividends paid by a company resident solely in the other country, unless:

•: the person deriving the dividends is a resident of the first country; or
•: the holding giving rise to the dividends is effectively connected with a "permanent establishment" or "fixed base" in the first country. [Paragraph 5]

However, the exemption does not apply where the dividend paying company is a dual resident, even though the company is deemed to be a resident of only one country for purposes of the agreement. This proviso ensures that Australia has the right to tax dividends paid to a third country resident by an Australian company which is deemed to be a resident of Indonesia for the purposes of the agreement.

Additional tax

Where a company which is a resident of one of the Contracting States has a permanent establishment in the other Contracting State, the profits of that permanent establishment may be subjected to an additional tax in the Contracting State in which that permanent establishment is situated. The rate of tax applicable is, however, limited to 15 per cent of the profits that remain after the tax imposed by the other Contracting State has been deducted. [Paragraph 6]

However the operation of paragraph 6 will not affect the rate of additional tax payable under any production sharing contracts and contracts of work relating to oil and gas or other mineral products negotiated by the Government of Indonesia, its instrumentality, its State oil company and any other entity thereof. [Paragraph 7]

Article 11 - Interest

Rate of tax

This article provides for interest income to be taxed in both countries but requires the country of source to generally limit its tax to 10 per cent of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. [Paragraphs 1 and 2]

The limitation of the source country tax rate to 10 per cent accords with the general rate of interest withholding tax applicable under Australia's domestic law.

Definition

The term "interest" is defined for the purposes of the article in a way that, in relation to Australia, encompasses items of income such as discounts on securities and payments under certain hire purchase agreements which are treated for Australian tax purposes as interest or amounts in the nature of interest. [Paragraph 3]

Business profits

Interest derived by a resident of one country which is effectively connected with a "permanent establishment" or "fixed base" of that person in the other country will form part of the business profits of that "permanent establishment" or "fixed base" and be subject to the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services). Accordingly, the 10 per cent source country tax rate limitation does not apply to such interest. [Paragraph 4]

Source rules

Interest "source" rules which are in accord with the scheme of the interest withholding tax provisions of Australia's domestic law are set out in the article. Those rules operate to allow Australia to tax interest to which a resident of Indonesia is beneficially entitled where the interest is paid by a resident of Australia and is not an expense of a business carried on by the Australian resident through a permanent establishment in a country outside Australia and borne by that permanent establishment. Australia may also tax interest paid by a resident of Indonesia to which another Indonesian resident is beneficially entitled if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment. [Paragraph 5]

Related persons

The article also contains a general safeguard 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 source country tax rate 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. [Paragraph 6]

Any excess part of the interest remains taxable according to the domestic law of each country but subject to the other articles of this agreement.

Certain interest income that would normally qualify for exemption from taxation in the country in which it is derived under the international doctrine of sovereign immunity shall be exempt from tax in that country. [Paragraph 7]

Article 12 - Royalties

Rate of tax

The article in general allows both countries to tax royalty flows but limits the tax of the country of source on royalties paid or credited to beneficial owners resident in the other country. [Paragraphs 1 and 2]

Two separate source country tax rate limits apply for different categories of royalty payments. Broadly, these rate limits are:

•: 10 per cent for rentals and other royalties, including fees for related ancillary services, concerning the use of industrial, commercial and scientific equipment or the supply of scientific, technical, industrial or commercial knowledge or information; and
•: 15 per cent for all other royalty payments.

The 10 or 15 per cent rate limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed.

In the absence of a double taxation agreement, Australia generally taxes royalties paid to nonresidents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax.

Definition

The definition of "royalties" reflects the definition in Australia's domestic income tax law and in Australia's other existing double tax agreements.

Permanent establishment

As in the case of interest income, it is specified that the 10 or 15 per cent source country tax rate limitation is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" in that country. [Paragraph 4]

Deemed source rule

The royalties "source" rule effectively corresponds in the case of Australia with the deemed source rule mentioned in section 6C (Source of royalty income derived by a non-resident) of the ITAA for royalties paid to nonresidents of Australia [Paragraph 5] . It broadly mirrors the "source" rule for interest income contained in paragraph 5 of Article 11 (Interest).

Related persons

If royalties flow between related persons, the 10 or 15 per cent source country tax rate limitation will apply only to the extent that the royalties are not excessive [Paragraph 6] . Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other articles of this agreement.

Payments include credits

This provision reflects Australia's domestic definition of "royalties" and is expressed to apply to amounts which are credited and not only to amounts actually paid. [Paragraph 7]

Article 13 - Alienation of Property

Taxing rights

This article allocates between the respective countries taxing rights in relation to income, profits or gains arising from the alienation of real property (as defined in Article 6) and other items of property.

Income, profits or gains from the alienation of real property may be taxed by the country in which the property is situated. [Paragraph 1]

The definition of real property and the situs rules for such property in Article 6 apply for the purposes of this paragraph. [Paragraph 6(b)]

"Permanent establishment"

Paragraph 2 deals with income, profits or gains arising from the alienation of property (other than real property covered by paragraph 1) forming part of the business assets of a permanent establishment of an enterprise or pertaining to a fixed base used for performing independent personal services. It also applies where the permanent establishment (alone or with the whole enterprise) or the fixed base is alienated. Such income or gains may be taxed in the country in which the permanent establishment or fixed base is situated. This corresponds to the rules for business profits and for income from independent personal services contained in Articles 7 and 14 respectively.

Disposal of ships or aircraft

Income, profits or gains from the disposal of ships or aircraft operated in international traffic, or associated property (other than real property covered by paragraph 1) are taxable only in the country of residence of the operator of the ships or aircraft. This rule corresponds to the taxing rule contained in Article 8 in relation to profits from the operation of ships or aircraft in international traffic. [Paragraph 3]

Shares

The treatment of income, profits or gains from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally of real property covered by paragraph 1, is assimilated to the treatment by paragraph 1 of the alienation of that real property. Such income or gains may thus be taxed by the country in which the real property is situated. [Paragraph 4]

Capital gains

The article contains a sweep-up provision in relation to capital gains which enables each country to tax, according to its domestic law, any gains of a capital nature derived by its own resident or by a resident of the other country from the alienation of any property not specified in the preceding paragraphs of the article. It thus ensures that Australia's domestic law relating to the taxation of capital gains may be applied to the alienation of such property. [Paragraph 5]

This paragraph operates independently of Article 22, which contains sweep-up provisions in relation to items of income not expressly dealt with in other articles of the agreement.

Definition of real property

The term "real property" is to be defined as it is under Article 6, as is the determination of where the property is situated in accordance with paragraph 3 of Article 6. [Paragraph 6]

Business profits

As indicated earlier, income, profits or gains from the alienation of property that fall within the scope of this article are not affected by the "business profits" provisions of Article 7. In the event that the operation of this article should result in an item of income or gain being subjected to tax in both countries, the country in which the person deriving the income or gain is a resident (as determined in accordance with Article 4) would be obliged by Article 24 to provide double tax relief for the tax imposed by the other country.

Article 14 - Independent Personal Services

Taxing rights

At present, an individual resident in Australia or in Indonesia may be taxed in the other country on income derived from the performance in that other country of professional services or other similar independent activities.

By this article, such income will continue to be subject to tax in the country in which the services are performed if:

•: the recipient has a "fixed base" regularly available in that country for the purposes of performing his or her activities and the income is attributable to activities exercised from that base; or
•: the recipient stays in that country for a period or periods exceeding 120 days in any 12 month period, and income is derived from the recipient's activities in that country.

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

Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and are not covered by this article.

Article 15 - Dependent Personal Services

Basis of taxation

This article generally provides the basis upon which the remuneration of visiting employees is to be taxed. The provisions of this article do not apply, however, in respect of income that is dealt with separately in:

•: Article 16 (Directors' Fees);
•: Article 18 (Pensions and Annuities);
•: Article 19 (Government Service); and
•: Article 20 (Professors and Teachers)

of the agreement.

Generally, salaries, wages and similar remuneration derived by a resident of one country from an employment exercised in the other country will be liable to tax in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where visits of only a short-term nature are involved.

Exemption

The conditions for this exemption are that:

•: the visit or visits not exceed, in the aggregate, 120 days in any 12 month period;
•: the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited;
•: the remuneration is not borne by (in the sense it is not deductible in determining taxable profits of) a "permanent establishment" or a "fixed base" which the employer has in the country being visited; and
•: the remuneration is subject to tax in the country of residence of the recipient.

Where all of these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient.

Employment on a ship or aircraft

Income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of residence of the operator. [Paragraph 3]

Short-term visit

Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from an employment exercised in Indonesia may be subject to tax in Indonesia. However, the article does not allocate sole taxing rights to Indonesia in that situation.

Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the ITAA that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the agreement allows both countries to tax a category of income, Australia would be required in this situation (pursuant to Article 24(1)), as the country of residence of the income recipient, to relieve the double taxation that would otherwise occur.

Although that paragraph provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Indonesian tax paid, the "exemption with progression" method of providing double tax relief in relation to the employment income derived in the situation described would normally be applicable in practice. This method takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.

Article 16 - Directors' Fees

Under this article, remuneration derived by a resident of one country in the capacity of a director of a company which is a resident of the other country may be taxed in the latter country.

Article 17 - Entertainers

Personal activities

By this article, income derived by visiting entertainers (including athletes) from their personal activities as such may generally be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The words "income derived by entertainers.... from their personal activities as such...." extend the application of this article to income generated from promotional and associated kinds of activities engaged in by the entertainer while present in the visited country.

Safeguard

There is a safeguarding provision designed to ensure that income in respect of personal activities exercised by an entertainer, whether received:

•: by the entertainer; or
•: by another person, e.g., a separate enterprise which formally provides the entertainer's services,

is taxed in the country in which the entertainer performs, whether or not that other person has a "permanent establishment" or "fixed base" in that country. [Paragraph 2]

Cultural agreement

Income derived by entertainers from activities performed under a cultural agreement or arrangement between the Contracting States is free from tax in the country visited, when the visit to the source country is wholly or substantially supported by public funds of the country of residence of the entertainers. [Paragraph 3]

Article 18 - Pensions and Annuities

Limitation

Pensions (including government pensions) and annuities are to be taxed only by the country of residence of the recipient. [Paragraph 1]

However, where a pension (including a government pension) or an annuity is paid to a resident of one country from sources in the other country, the country of source may tax such income but at a rate of tax not greater than 15 per cent of the gross amount of the pension or annuity. [Paragraph 2]

Departure from Australia's normal policy of taxing all pensions solely on a residence basis was considered necessary because Indonesia does not tax the portion of salary that is contributed to a pension fund. However, when the pension is drawn, Indonesia taxes it, which means that tax is, in effect, deferred until then.

Scope of article

It is intended that the operation of this article extends to pension and annuity payments made to dependants, for example a widow or children, of the person in respect of whom the pension or annuity entitlement accrued where upon that person's death, such entitlement has passed to that person's dependants.

Alimony and maintenance payments

The taxing right in respect of alimony and other maintenance payments is allocated solely to the country of residence of the payer. [Paragraph 3]

The purpose of this is to remove any possibility of double taxation of such payments arising by reason of the treatment accorded such payments under the respective domestic laws. In the case of Australia, those payments will generally remain exempt from Australian tax under the ITAA in the hands of the recipient and non-deductible to the payer.

Article 19 -Government Service

Salary and wage income

Salary and wage type income, other than a pension or annuity, paid to an individual for services rendered to a government (including a State or local authority) of one of the countries, is to be taxed only in that country. However, such remuneration is to be taxable only in the other country if:

•: the services are rendered in that other country;
•: the recipient is a resident of that other country as determined in accordance with Article 4; and
•: the recipient is a citizen or national of that other country, or did not become a resident of that other country solely for the purpose of performing those services. [Paragraph 1]

Trade or business income

Remuneration for services rendered in connection with a trade or business carried on by a government is excluded from the scope of this article. This remuneration will remain subject to the provisions of Article 15 (Dependent Personal Services) or Article 16 (Directors' Fees) as the case may be. [Paragraph 2]

Article 20 - Professors and Teachers

Scope of article

This article applies in respect of professors and teachers who are resident in one country and visit, for example during sabbatical leave, the other country for a period of not more than two years for the purpose of teaching or advanced study or research at an educational institution. In these circumstances, the remuneration received by the professor or teacher for that teaching, study or research work is exempt from tax in the country visited provided it is, or upon the application of this article will be, subject to tax in the country of residence. [Paragraph 1]

In the latter respect, the application of this article to exempt from Indonesian tax remuneration derived by an Australian resident teacher visiting Indonesia will generally operate to cause the remuneration to be excluded from the scope of section 23AG of the ITAA, so that it will remain subject to Australian tax. Section 23AG generally exempts foreign earnings of individuals from Australian income tax provided the period of continuous foreign service is not less than 91 days.

Exception

The exemption provided by the article does not however apply to remuneration received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons. [Paragraph 2]

Example

Where a professor or teacher who is a resident of one country receives a grant or is otherwise paid by an enterprise to undertake, in the other country, work associated with the refinement and further development of a particular product that is to be commercially marketed by that organisation, the income so received by the professor or teacher will not fall within the operational scope of this article but will fall within the ambit of either Article 14 (Independent Personal Services) or Article 15 (Dependent Personal Services).

Article 21 - Students

Exemption from tax

This article applies to students temporarily present in one of the countries solely for the purpose of their education if the students are, or immediately before the visit were, resident in the other country. In these circumstances, the students will be exempt from tax in the country visited for payments received from abroad for their maintenance or education (even though they may qualify as a resident of the country visited during the period of their visit).

The exemption from tax provided by the visited country is treated as extending to maintenance payments received by the student that are made for maintenance of dependent family members who have accompanied the student to the visited country.

Employment income

Where however, a student from Indonesia who is visiting Australia solely for educational purposes undertakes:

•: some part time work with a local employer; or
•: during a semester break undertakes work with a local employer,

the income earned by that student as a consequence of that employment may, as provided in Article 15, be subject to tax in Australia. In this situation the payments received from abroad for the student's maintenance or education will not however be taken into account in determining the tax payable on the employment income that is subject to tax in Australia.

Article 22 - Income not Expressly Mentioned

Allocation of taxing rights

This article provides rules for the allocation between the two countries of taxing rights to items of income not expressly mentioned in the preceding articles of the agreement. The scope of the article is not confined to such items of income arising in one of the Contracting States; it extends also to income from sources in a third State.

Where this occurs, the country of residence of the recipient of the income would be obliged by Article 24 (Methods of Elimination of Double Taxation) to provide double taxation relief.

Note

This article effectively contains "sweep-up" provisions in relation to items of income not expressly dealt with in other articles of the agreement and paragraph 5 of Article 13 effectively "sweeps-up" capital gains not dealt with in other articles of the agreement.

Article 23 - Source of Income

Deemed source

This article effectively deems income, profits or gains derived by a resident of one country which, under the agreement, may be taxed in the other country to have a source in the latter country - for the purposes of Article 24 (Methods of Elimination of Double Taxation) and the domestic income tax laws of the respective countries. It therefore ensures the jurisdiction of each country to exercise the taxing rights allocated to it by the agreement over residents of the other country.

Double taxation relief

The article is also designed to ensure that where an item of income, profits or gains is taxable in both countries, double taxation relief will be given by the income recipient's country of residence (pursuant to Article 24) for tax levied by the other country as prescribed under the agreement. In this way, income derived by a resident of Australia, which is taxable by Indonesia under the agreement, will be treated as being foreign income for the purposes of the ITAA, including the foreign tax credit provisions of the ITAA.

Article 24 - 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 either:

•: 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.

Tax credit

It is necessary, however, to prescribe a method for relieving double taxation for other classes of income which, under the agreement, remain 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 the tax of the country of source. This article also reflects that approach.

Australia relieves double taxation by allowing a credit against its own tax for Indonesian tax paid under the law of Indonesia and in accordance with the agreement on income derived by a resident of Australia from sources in Indonesia. [Paragraph 1]

Dividends

Where a dividend is paid by an Indonesian resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Indonesian company, paragraph 2 provides for the credit allowed by Australia to also take into account, in addition to the Indonesian tax paid in respect of the dividends, the underlying Indonesian tax paid by the company in respect of the profits out of which the dividend is paid. [Paragraph 2]

Australian method of relief

Australia's general foreign tax credit system, together with the terms of this article and of the agreement generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in Indonesia. As in the case of Australia's other double taxation agreements, the source of income rules specified by Article 23 for purposes of the agreement will also apply for those purposes.

Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraphs 1 and 2 of this article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA. This will include the allowance of "underlying" tax credit relief in respect of dividends paid by Indonesian resident companies that are related to Australian resident companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA.

Notwithstanding the credit form of relief provided for by paragraph 1 of the article, the "exemption with progression" method of relief will be applicable, as appropriate, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of "foreign service" (as defined in subsection 23AG(7) of the ITAA) in Indonesia.

Accruals system

It is also relevant that Indonesia is a listed "comparable tax" country for purposes of the measures recently introduced into the ITAA to give effect to the foreign income accruals system.

Accordingly, dividends and branch profits derived from Indonesia which are exempted from Australian tax where derived by an Australian resident company under those measures (e.g., sections 23AH or 23AJ of the ITAA) will continue to qualify for exemption from Australian tax under those provisions. In these cases, the credit form of relief would not be relevant.

Indonesian method of relief

There is a requirement that Indonesia shall allow a credit of tax paid in Australia to Indonesian residents where they have derived income, profits or gains which is taxed in Australia. [Paragraph 3]

Fringe benefits tax

Australian fringe benefits tax paid by Indonesian residents on income derived from, and taxable in, Australia is to be added to the amount of the Australian tax payable, for purposes of calculating the credit allowable against Indonesian tax.

Article 25 - Mutual Agreement Procedure

Consultation

One of the purposes of this article is to provide for consultation between the competent authorities of the two countries with a view to reaching a satisfactory solution where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the agreement.

Time limits

If, on consideration, a solution is reached, it may be implemented irrespective of any time limits imposed by domestic tax laws of the relevant country. [Paragraph 2]

Resolution of difficulties

The article also authorises consultation between the competent authorities of the two countries for the purpose of resolving any difficulties regarding the interpretation or application of the agreement and to give effect to it. [Paragraph 4]

Article 26 - Exchange of Information

Limitations on exchange

This article authorises and limits the exchange of information by the two competent authorities to information which is necessary for the carrying out of the agreement or for the administration of domestic laws concerning the taxes to which the agreement applies. [Paragraph 1]

The limitation placed on the kind of information authorised to be exchanged effectively means that information access requests relating to taxes not within the coverage provided by Article 2, for example sales tax, are not within the scope of the article.

Purpose

The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted along the lines of Australia's other double taxation agreements. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State. [Paragraph 1]

An 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 is not permitted by the article. [Paragraph 2]

Article 27 - Diplomatic and Consular Officials

The purpose of this article is to ensure that the provisions of the agreement do not result in members of diplomatic and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international laws. In Australia, such persons are entitled, for example, to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act 1967 and the Consular (Privileges and Immunities) Act 1972.

Article 28 - Miscellaneous

The purpose of this article is to ensure that the provisions of this agreement do not override the operational effect of the provisions of the Treaty between Australia and the Republic of Indonesia on the Zone of Co-operation in an Area between the Indonesian Province of East Timor and Northern Australia done over the Zone of Cooperation on 11 December 1989.

Article 29 - Entry into Force

Date of entry into force

This article provides for the entry into force of the agreement. This will be on the date on which diplomatic notes are exchanged through the diplomatic channel notifying that the last of the necessary processes to give the agreement the force of law in their respective countries has been completed. In the case of Australia, the enactment of the legislation which gives the force of law in Australia to the agreement is the necessary prerequisite to the exchange of diplomatic notes taking place.

Withholding tax

Once it enters into force, the agreement will have effect in Australia for purposes of withholding taxes in respect of income derived on or after 1 July in the calendar year next following that in which the agreement enters into force.

Other taxes

In respect of tax other than withholding tax, the agreement will first have effect in Australia in relation to profits, income or gains of the Australian year of income beginning on or after 1 July in the calendar year following that in which it enters into force.

Note

Where a taxpayer has adopted an accounting period ending on a date other than 30 June, profits, income or gains derived on or after the beginning of the accounting period that has been substituted for the year beginning on 1 July in the calendar year following the calendar year in which the agreement enters into force will be subject to the agreement for purposes of Australian tax other than withholding tax.

Date of effect in Indonesia

In Indonesia, the agreement will first have effect, in relation to Indonesian tax withheld at source, on or after 1 July in the calendar year next following that in which the agreement enters into force. For other Indonesian tax, the agreement will first have effect in Indonesia for the taxable year of income beginning on or after 1 July in the calendar year next following that in which it enters into force.

Article 30 - Termination

By this article the agreement is to continue in effect indefinitely. However, either country may give through the diplomatic channel written notice of termination of the agreement on or before 30 June in any calendar year beginning after the expiration of five years from the date of its entry into force.

Cessation in Australia

In that event, the agreement would cease to be effective in Australia for purposes of withholding tax in respect of income derived on or after 1 July in the calendar year next following that in which the notice of termination is given. For other Australian taxes, it would cease to be effective in relation to profits, income or gains of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.

Cessation in Indonesia

It would correspondingly cease to be effective in Indonesia in respect of withholding tax on income derived on or after 1 July in the calendar year subsequent to that in which the notice of termination is given, and in relation to other Indonesian tax, termination would apply for taxable years beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.

Agreement with Vietnam

The comprehensive double taxation agreement with Vietnam accords substantially with other comprehensive double taxation agreements to which Australia is a party. Like them, the agreement allocates to the country of source, sometimes at limited rates, a taxing right over some income, profits or gains. The country of residence is given the sole right to tax other types of income, profits or gains. The agreement also provides that where income, profits or gains may be taxed in both countries, the country of residence (if it taxes) is to allow double tax relief against its own tax for the tax imposed by the country of source. In the case of Australia, effect is given to the relief obligations arising under the double taxation agreement by application of the general foreign tax credit system provisions of Australia's domestic law, or relevant exemption provisions of the law where applicable.

The agreement includes tax sparing provisions, under which Australia will allow a tax credit to Australian residents for tax forgone by Vietnam under certain of its development incentive measures.

Article 1 - Personal Scope

Scope

This article establishes the scope of application of the agreement, by providing for it to apply to persons (which term includes companies) who are residents of one or both countries.

The application of the agreement to persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.

Article 2 - Taxes Covered

This article specifies the existing taxes of each country to which the agreement applies. These are, in the case of Australia:

•: the Australian income tax; and
•: the resource rent tax in respect of offshore petroleum projects.

For Vietnam the agreement applies to:

•: the income tax;
•: the profit tax; and
•: the withholding tax.

Substantially similar taxes

The application of the 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. A duty is imposed on Australia and Vietnam to notify each other within a reasonable time of any substantial changes to their respective laws to which the agreement applies.

Article 3 - General Definitions

Definition of "Australia"

As with Australia's other modern taxation agreements, "Australia" is defined as including certain external territories and areas of the continental shelf.

By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by non-residents on the seabed and subsoil of the continental shelf areas (under section 6AA of the ITAA, certain sea installations and offshore areas are to be treated as part of Australia).

The definition is also relevant to the taxation by Australia and Vietnam of shipping profits in accordance with Article 8 of the agreement. [Subparagraph 1(a)]

Definition of "tax"

For the purposes of the agreement, the terms "Australian tax" and "Vietnamese tax" do not include any amount of penalty or interest imposed under the respective domestic laws of Australia and Vietnam. This is important in determining a taxpayer's entitlement to a credit under the double tax relief provisions of Article 23 of the agreement.

In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation laws of Vietnam with respect to income that Vietnam is entitled to tax under the agreement, would not be a creditable "Vietnamese tax" for the purposes of Article 23(1) of the agreement. This is in keeping with the meaning of "foreign tax" in the ITAA (subsection 6AB(2) -Foreign Income and Foreign Tax). Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 23 (1) (pursuant to Division 18 of Part III of the ITAA - Credits in Respect of Foreign Tax).

Terms not specifically defined

The expression "from time to time in force" is included in order to clarify that a term not defined in the agreement is to be given the meaning it has under that country's domestic law at the time of application of the agreement. This is designed to obviate the need for research into the meaning such a term had when the agreement was negotiated. [Paragraph 2]

Article 4 - Residence

Residential status

Example

A dual resident who is deemed by Article 4 to be a resident solely of Vietnam for purposes of the agreement would be entitled to any exemption from, or reduction in, Australian tax provided by an article of the agreement in respect of income derived from sources in Australia by a resident of Vietnam.

For the categories of income which under the agreement remain taxable in both countries, the obligation placed by Article 23 (Methods of Elimination of Double Taxation) on the country of residence of the recipient of the income to provide double tax relief would in that example rest with Vietnam.

Dual residents remain, however, in relation to each country, a resident of that country for the purposes of its domestic law and subject to its tax as such so far as the agreement allows.

Note

Article 21 (Income Not Expressly Mentioned) would operate in relation to the dual resident referred to in the example above as if that person were a resident of Vietnam. This would preclude Australia from taxing items of income not expressly dealt with by another article of the agreement, where the income is derived from sources in Vietnam or from sources in a third country unless that income was effectively connected with a permanent establishment or fixed base in Australia of the dual resident.

Article 5 - Permanent Establishment

Role and definition

Meaning of "permanent establishment"

•: an office;
•: a mine; or
•: an agricultural, pastoral or forestry property.

Other articles

•: paragraph 5 of Article 11 (Interest); and
•: paragraph 5 of Article 12 (Royalties) [Paragraph 8]

Article 6 - Income from Real Property

Where income from property is taxable

This article makes it clear that income from real property which is situated in one of the countries is taxable in the country where the property is situated. [Paragraph 1]. Thus, income from real property in Australia will be subject to Australian tax laws.

Income from real property

In the case of Australia, income from real property is effectively defined as extending to:

•: the direct use, letting or use in any other form of any land or interest therein; and
•: royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.

In the case of Vietnam, real property is generally defined as immovable property and includes:

•: property accessory to immovable property;
•: rights to which the general law in respect of landed property applies; and
•: usufruct of immovable property and rights to variable and fixed payments for the working of mineral deposits, sources and other natural resources.

Independent personal services

The operation of this article extends to income derived from the use or exploitation of real property of an enterprise and income derived from real property that is used for the performance of independent personal services. [Paragraph 5]

•: an enterprise of the other country; or
•: an independent professional person resident in that other country,

irrespective of whether or not that income is attributable to a "permanent establishment" of such an enterprise, or fixed base of such a person, situated in the firstmentioned country.

Ships and aircraft

Ships and aircraft are specifically excluded from the scope of this article because the treatment of profits arising from their operation is to be determined in accordance with Article 8. [Subparagraph 2(c)]

Article 7 - Business Profits

This article is concerned with the taxation of business profits derived by an enterprise carried on by a resident of one country from sources in the other country.

If a taxpayer who is a resident of one country carries on a business through an enterprise that does not have a "permanent establishment" in the other country, the taxpayer will not be liable to tax in the other country on the business profits of that enterprise. [Paragraph 1]

Determination of business profits

No profits are to be attributed to a permanent establishment merely because it purchases goods or merchandise for the enterprise. [Paragraph 4]

Inadequate information

This article allows for the application of the source country's domestic law (e.g. Australia's Division 13) where, due to inadequate information, the correct amount of profits attributable to a "permanent establishment" cannot be determined or can only be ascertained with extreme difficulty. [Paragraph 5]

Income dealt with under other articles

Where income is otherwise specifically dealt with under other articles of the agreement the effect of those particular articles is not overridden by this article. [Paragraph 6]

Insurance with non-residents

Trust beneficiaries

The principles of the article will apply to business profits derived by a resident of one of the countries (directly or through one or more interposed trust estates) as a beneficiary of a trust estate. [Paragraph 8]

Example

In accordance with this article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of Vietnam is beneficially entitled under the trust estate. Paragraph 8 ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business.

Article 8 - Ships and Aircraft

International traffic

Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from:

•: participation in a pool service;
•: a joint transport operating organisation; or
•: an international operating agency,

is generally reserved to the country of residence of the operator.

Internal traffic

Any profits derived by a resident of one country from internal traffic in the other country (i.e. from operations confined solely to places in the other country) may be taxed in that other country.

Example

Profits derived from a shipment of goods taken on board (during the course of an international voyage between a place in Vietnam and Sydney) at Cairns for delivery to Brisbane, would be profits from internal traffic and would fall within the scope of section 129 of the ITAA. As such, 5 per cent of the amount paid in respect of internal traffic would be deemed to be taxable income of the operator for Australian tax purposes.

Article 9 - Associated Enterprises

Re-allocation of profits

This article authorises the re-allocation of profits between related enterprises in Australia and Vietnam 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 wholly at arm's length with one another. The article would not generally authorise the re-writing of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms. [Paragraph 1]

Correlative adjustments

It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the re-allocation of profits for an appropriate compensatory adjustment to reflect the re-allocation of profits made by the competent authority of the other treaty partner country. If necessary, the competent authorities of Australia and Vietnam will consult with each other to determine the appropriate adjustment.

Article 10 - Dividends

Rate of tax

Under this article, Australia will reduce its rate of withholding tax on unfranked dividends paid by Australian resident companies to residents of Vietnam from 30 per cent to 15 per cent of the gross amount of the dividends. Franked dividend payments will, of course, remain free of withholding tax under Australia's domestic law. The rate of withholding tax to be imposed by Vietnam on outgoing dividends is limited to 10 per cent. [Paragraph 2]

Exception to limitation

Where the dividends are so effectively connected, they are to be treated as "business profits" or "income from independent personal services" and therefore subject to the source country's tax ( in accordance with the provisions of Article 7 or Article 14, as the case may be). In practice, however, under changes made to Australia's domestic law with the introduction from 1 July 1987 of a full imputation system of company taxation, such dividends that are franked dividends will remain exempt from Australian tax while unfranked dividends will be subject to withholding tax at the rate of 15 per cent instead of being taxed by assessment. [Paragraph 4]

Extra-territorial application precluded

•: the person deriving the dividends is a resident of the first country; or
•: the holding giving rise to the dividends is effectively connected with a "permanent establishment" or "fixed base" in the first country. [Paragraph 5]

Article 11 - Interest

Rate of tax

This article provides for interest income to be taxed by both countries but requires the country of source to generally limit its tax to 10 per cent of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. [Paragraphs 1 and 2]

The limitation of the source country tax rate to 10 per cent accords with the general rate of interest withholding tax applicable under Australia's domestic law.

Definition

Business profits

Source rules

Interest "source" rules which are in accord with the scheme of the interest withholding tax provisions of Australia's domestic law are set out in the article. Those rules operate to allow Australia to tax interest to which a resident of Vietnam is beneficially entitled where the interest is paid by a resident of Australia and is not an expense of a business carried on by the Australian resident through a permanent establishment in a country outside Australia and borne by that permanent establishment. Australia may also tax interest paid by a resident of Vietnam to which another Vietnamese resident is beneficially entitled if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment. [Paragraph 5]

Related persons

Article 12 - Royalties

Rate of tax

The article in general allows both countries to tax royalty flows but limits the tax of the country of source to 10 per cent of the gross amount of royalties paid or credited to beneficial owners resident in the other country. [Paragraphs 1 and 2]

The 10 per cent rate 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.

Definition

The definition of "royalties" reflects the definition in Australia's domestic income tax law and in Australia's other existing double tax agreements.

Permanent establishment

As in the case of interest income, it is specified that the 10 per cent source country tax rate limitation is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" in that country. [Paragraph 4]

Deemed source rule

Related persons

If royalties flow between related persons, the 10 per cent source country tax rate limitation will apply only to the extent that the royalties are not excessive [Paragraph 6] . Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other articles of this agreement.

Article 13 - Alienation of Property

Taxing rights

Income, profits or gains from the alienation of real property may be taxed by the country in which the property is situated. [Paragraph 1]

The definition of real property and the situs rules for such property in Article 6 apply for the purposes of this paragraph. [Paragraphs 6 and 7]

Permanent establishment

Disposal of ships or aircraft

Shares

Capital gains

This paragraph operates independently of Article 21, which contains sweep-up provisions in relation to items of income not expressly dealt with in other articles of the agreement.

Definition of real property

The term "real property" is to be defined as it is under Article 6, as is the determination of where the property is situated in accordance with paragraph 3 of Article 6. [Paragraphs 6 and 7]

Business profits

As indicated earlier, income, profits or gains from the alienation of property that fall within the scope of this article are not affected by the "business profits" provisions of Article 7. In the event that the operation of this article should result in an item of income or gain being subjected to tax in both countries, the country in which the person deriving the income or gain is a resident (as determined in accordance with Article 4) would be obliged by Article 23 to provide double tax relief for the tax imposed by the other country.

Article 14 - Independent Personal Services

Taxing rights

At present, an individual resident in Australia or in Vietnam may be taxed in the other country on income derived from the performance in that other country of professional services or other similar independent activities. By this article, such income will continue to be subject to tax in the country in which the services are performed if the recipient has a fixed base regularly available in that country for the purposes of performing his or her activities and the income is attributable to activities exercised from that base.

If the above test is not met, the income will be taxed only in the country of residence of the recipient.

Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and are not covered by this article.

Article 15 - Dependent Personal Services

Basis of taxation

•: Article 16 (Directors' Fees);
•: Article 18 (Pensions and Annuities); and
•: Article 19 (Government Service)

of the agreement.

Exemption

The conditions for this exemption are that:

•: the visit or visits not exceed, in the aggregate, 183 days in the year of income of that other State;
•: the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited;
•: the remuneration is not borne by (in the sense it is not deductible in determining taxable profits of) a "permanent establishment" or a "fixed base" which the employer has in the country being visited; and
•: the remuneration is subject to tax in the country of residence of the recipient.

Where all of these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient.

Employment on a ship or aircraft

Income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of residence of the operator. [Paragraph 3]

Short-term visit

Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from an employment exercised in Vietnam may be subject to tax in Vietnam. However, the article does not allocate sole taxing rights to Vietnam in that situation.

Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the ITAA that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the agreement allows both countries to tax a category of income, Australia would be required in this situation (pursuant to Article 23(1)), as the country of residence of the income recipient, to relieve the double taxation that would otherwise occur.

Although that paragraph provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Vietnamese tax paid, the "exemption with progression" method of providing double tax relief in relation to the employment income derived in the situation described would normally be applicable in practice. This method takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.

Article 16 - Directors' Fees

Under this article, remuneration derived by a resident of one country in the capacity of a director of a company which is a resident of the other country may be taxed in the latter country.

Article 17 - Entertainers

Personal activities

Safeguard

There is a safeguarding provision designed to ensure that income in respect of personal activities exercised by an entertainer, whether received:

•: by the entertainer; or
•: by another person, e.g., a separate enterprise which formally provides the entertainer's services,

is taxed in the country in which the entertainer performs, whether or not that other person has a "permanent establishment" or "fixed base" in that country. [Paragraph 2]

Article 18 - Pensions and Annuities

Pensions (including government pensions) and annuities are to be taxed only by the country of residence of the recipient. [Paragraph 1]

Scope of article

Alimony and maintenance payments

The taxing right in respect of alimony and other maintenance payments is allocated solely to the country of residence of the payer. [Paragraph 3]

The purpose of this paragraph is to remove any possibility of double taxation of such payments arising by reason of the treatment accorded such payments under the respective domestic laws. In the case of Australia, those payments will generally remain exempt from Australian tax under the ITAA in the hands of the recipient and non-deductible to the payer.

Article 19 -Government Service

Salary and wage income

•: the services are rendered in that other country;
•: the recipient is a resident of that other country as determined in accordance with Article 4; and
•: the recipient is a citizen or national of that other country, or did not become a resident of that other country solely for the purpose of performing those services. [Paragraph 1]

Trade or business income

Article 20 - Students

Exemption from tax

Employment income

Where however, a student from Vietnam who is visiting Australia solely for educational purposes undertakes:

•: some part time work with a local employer; or
•: during a semester break undertakes work with a local employer,

Article 21 - Income not Expressly Mentioned

Allocation of taxing rights

Where this occurs, the country of residence of the recipient of the income would be obliged by Article 23 (Methods of Elimination of Double Taxation) to provide double taxation relief.

This article does not apply to income effectively connected with a "permanent establishment" or "fixed base" derived by a resident of a Contracting State in the other Contracting State. In such a case, Article 7 (Business Profits) or 14 (Independent Personal Services), as the case may be, shall apply. However, this article applies to income from real property as defined in paragraph 2 of Article 6 where the income is effectively connected with a "permanent establishment" or "fixed base" in the other Contracting State. [Paragraph 3]

Note

Article 22 - Source of Income

Deemed source

This article effectively deems income, profits or gains derived by a resident of one country which, under the agreement, may be taxed in the other country to have a source in the latter country for the purposes of Article 23 (Methods of Elimination of Double Taxation) and the domestic income tax laws of the respective countries. It therefore ensures the jurisdiction of each country to exercise the taxing rights allocated to it by the agreement over residents of the other country.

Double taxation relief

The article is also designed to ensure that where an item of income, profits or gains is taxable in both countries, double taxation relief will be given by the income recipient's country of residence (pursuant to Article 23) for tax levied by the other country as prescribed under the agreement. In this way, income derived by a resident of Australia, which is taxable by Vietnam under the agreement, will be treated as being foreign income for the purposes of the ITAA, including the foreign tax credit provisions of the ITAA.

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 either:

•: 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.

Tax credit

Australia can relieve double taxation by allowing a credit against its own tax for Vietnamese tax paid under the law of Vietnam and in accordance with the agreement on income derived by a resident of Australia from sources in Vietnam. [Paragraph 1]

Dividends

Where a dividend is paid by a Vietnamese resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Vietnamese company, paragraph 2 provides for the credit allowed by Australia to also take into account, in addition to the Vietnamese tax paid in respect of the dividends, the underlying Vietnamese tax paid by the company in respect of the profits out of which the dividend is paid. [Paragraph 2]

Australian method of relief

Australia's general foreign tax credit system, together with the terms of this article and of the agreement generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in Vietnam. As in the case of Australia's other double taxation agreements, the source of income rules specified by Article 22 for purposes of the agreement will also apply for those purposes.

Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraphs 1 and 2 of this article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA. This will include the allowance of "underlying" tax credit relief in respect of dividends paid by Vietnamese resident companies that are related to Australian resident companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA.

Tax sparing

This article also contains "tax sparing" provisions under which an Australian resident receiving income on which Vietnam - under specified incentive measures - has forgone tax, will obtain tax credit relief as if the Vietnamese tax forgone has been paid. [Paragraph 3]

The incentive measures for which tax sparing relief will be available, and the years for which the tax sparing provisions will apply, will be determined by the Treasurer of Australia and the Minister of Finance of Vietnam from time to time in letters exchanged for this purpose. [Paragraphs 4 and 5]

Vietnam's method of relief

Vietnam will allow a credit of tax paid in Australia to Vietnamese residents where they have derived income, profits or gains which is taxed in Australia. [Paragraph 6]

Article 24 - Mutual Agreement Procedure

Consultation

Time limits

A person wishing to use this procedure must present a case to the competent authority of the State of which the person is a resident within three years of the first notification of the action the taxpayer considers gives rise to taxation not in accordance with the agreement [Paragraph 1] . If, on consideration, a solution is reached, it may be implemented irrespective of any time limits imposed by domestic tax laws of the relevant country. [Paragraph 2]

Resolution of difficulties

Article 25 - Exchange of Information

Limitations on exchange

This article authorises and limits the exchange of information by the two competent authorities to information necessary for the carrying out of the agreement or for the administration of domestic laws concerning the taxes to which the agreement applies. [Paragraph 1]

The limitation placed on the kind of information authorised to be exchanged means that information access requests relating to taxes not within the coverage provided by Article 2, for example sales tax, are not within the scope of the article.

Purpose

The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted consistently with Australia's other double taxation agreements. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State. [Paragraph 1]

Article 26 - Diplomatic and Consular Officials

Article 27 - Entry into Force

Date of entry into force

This article provides for the entry into force of the agreement. This will be on the date on which diplomatic notes are exchanged through the diplomatic channel notifying that the last of the processes to give the agreement the force of law in their respective countries has been completed. In Australia, enactment of the legislation giving the force of law in Australia to the agreement, is the necessary prerequisite to the exchange of diplomatic notes taking place.

Withholding tax

Other taxes

Note

Date of effect in Vietnam

In Vietnam, the agreement will first have effect, in relation to Vietnamese tax withheld at source, on or after 1 January in the calendar year next following that in which the agreement enters into force. For other Vietnamese tax, the agreement will first have effect in Vietnam in respect of income, profits or gains arising in the calendar year following that in which it enters into force.

Article 28 - Termination

Cessation in Australia

Cessation in Vietnam

It would correspondingly cease to be effective in Vietnam in respect of withholding tax on income derived on or after 1 January in the calendar year subsequent to that in which the notice of termination is given, and in relation to other Vietnamese tax, termination would first apply in relation to income, profits or gains arising in the calendar year following the calendar year in which the notice of termination is given.

Agreement with Spain

Subject to some differences, the comprehensive double taxation agreement with Spain accords substantially with other comprehensive double taxation agreements to which Australia is a party. Like them, the agreement allocates to the country of source, sometimes at limited rates, a taxing right over some income, profits or gains. The country of residence is given the sole right to tax other types of income, profits or gains. The agreement also provides that where income, profits or gains may be taxed in both countries, the country of residence (if it taxes) is to allow double tax relief against its own tax for the tax imposed by the country of source. In the case of Australia, effect is given to the relief obligations arising under the double taxation agreement by application of the general foreign tax credit system provisions of Australia's domestic law, or relevant exemption provisions of the law where applicable.

Article 1 - Personal Scope

Scope

This article establishes the scope of application of the agreement, by providing for it to apply to persons (which term includes companies) who are residents of one or both countries.

The application of the agreement to persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.

Article 2 - Taxes Covered

This article specifies the existing taxes of each country to which the agreement applies. These are, in the case of Australia:

•: the Australian income tax; and
•: the resource rent tax in respect of offshore petroleum projects.

For Spain the agreement applies to:

•: the income tax on individuals; and
•: the corporation tax.

Substantially similar taxes

The application of the 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. A duty is imposed on Australia and Spain to notify each other within a reasonable time of any substantial changes to their respective laws to which the agreement applies.

Article 3 - General Definitions

Definition of "Australia"

As with Australia's other modern taxation agreements, "Australia" is defined to include certain external territories and areas of the continental shelf. By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by nonresidents on the seabed and subsoil of the continental shelf areas (under section 6AA of the ITAA, certain sea installations and offshore areas are treated as part of Australia). The definition is also relevant to the taxation by Australia and Spain of shipping profits in accordance with Article 8 of the agreement. [Subparagraph 1(a)]

Definition of "tax"

For the purposes of the agreement, the terms "Australian tax" and "Spanish tax" do not include any amount of penalty or interest imposed under the respective domestic laws of Australia and Spain [Paragraph 2] . This is important in determining a taxpayer's entitlement to a credit under the double tax relief provisions of Article 23 of the agreement.

In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation laws of Spain with respect to income that Spain is entitled to tax under the agreement, would not be a creditable "Spanish tax" for the purposes of Article 23(1) of the agreement. This is in keeping with the meaning of "foreign tax" in the ITAA (subsection 6AB(2) -Foreign Income and Foreign Tax).

Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 23(1) (pursuant to Division 18 of Part III of the ITAA - Credits in Respect of Foreign Tax).

Terms not specifically defined

A term not defined in the agreement is to be given the meaning it has under that country's domestic law at the time of application of the agreement. The expression "at the time of the application" is designed to obviate the need for research into the meaning such a term had when the agreement was negotiated. [Paragraph 3]

Article 4 - Residence

Residential status

The agreement specifically provides that an individual's citizenship or nationality will be a factor in determining the degree of the individual's personal and economic relations with each country. [Paragraph 3]

Example

A dual resident who is deemed by Article 4 to be a resident solely of Spain for the purposes of the agreement, would be entitled to any exemption from, or reduction in, Australian tax provided by any article of the agreement for income derived from sources in Australia by a resident of Spain.

In this example, Spain is required under Article 23 to provide double tax relief for any income which remains taxable in both countries under the articles of the agreement. Thus, if the person has paid Australian income tax on income, Spain is required to allow a deduction from the Spanish tax on that income equal to the Australian tax paid.

Dual residents remain, however, in relation to each country, a resident of that country for the purposes of its domestic law and subject to its tax as such so far as the agreement allows.

Note

Article 21 (Income Not Expressly Mentioned) would operate in relation to the dual resident referred to in the example above as if that person were a resident of Spain. This would preclude Australia from taxing items of income not expressly dealt with by another article of the agreement, where the income is derived from sources in Spain or from sources in a third country unless that income was effectively connected with a permanent establishment or fixed base in Australia of the dual resident.

Paragraph 6 of Article 13 (Alienation of Property) would, however, preserve the application of Australia's rules for taxing capital gains in relation to gains to which that paragraph applied on the basis that the dual resident remains a resident of Australia for those purposes.

Article 5 - Permanent Establishment

Role and definition

Meaning of "permanent establishment"

•: an office;
•: a mine; or
•: an agricultural, pastoral or forestry property.

Certain circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country are also specified. Those paragraphs generally correspond with the comparable paragraphs of Australia's existing double taxation agreements with the exception of subparagraph 4(b). Subparagraph 4(b) specifically deems an enterprise to have a permanent establishment in one of the countries if a structure, installation, drilling rig, ship or other like substantial equipment is used, either continuously or for a period exceeding twelve months, for the exploration for, or exploitation of, natural resources or connected activities. [Subparagraph 4(b)]

Other articles

•: paragraph 5 of Article 11 (Interest); and
•: paragraph 5 of Article 12 (Royalties). [Paragraph 8]

Article 6 - Income from Real Property

Where income from property is taxable

This article makes it clear that income from real property which is situated in one of the countries is taxable in the country where the property is situated [Paragraph 1] . Thus, income from real property in Australia will be subject to Australian tax laws.

Income from real property

In the case of Australia, income from real property is effectively defined as extending to:

•: the direct use, letting or use in any other form of any land or interest therein; and
•: royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.

In the case of Spain, real property is defined as immovable property and includes:

•: property accessory to immovable property;
•: rights to which the general law in respect of landed property applies;
•: usufruct of immovable property; and
•: rights to variable and fixed payments for the exploitation and exploration of mineral deposits, oil or gas wells, quarries and other natural resources.

Independent personal services

•: an enterprise of the other country; or
•: an independent professional person resident in that other country,

irrespective of whether or not that income is attributable to a "permanent establishment" of such an enterprise, or fixed base of such a person, situated in the firstmentioned country.

Shares or other rights

Where the ownership of shares or other rights in a company or other entity confers on the holder the right to let, use or otherwise enjoy real property the income from such letting, use, or enjoyment may be taxed where the property is situated. [Paragraph 6]

Article 7 - Business Profits

This article is concerned with the taxation of business profits derived by an enterprise carried on by a resident of one country from sources in the other country.

Determination of business profits

No profits are to be attributed to a permanent establishment merely because it purchases goods or merchandise for the enterprise. [Paragraph 4]

Inadequate information

Income dealt with under other articles

Where income is otherwise specifically dealt with under other articles of the agreement, the effect of those particular articles is not overridden by this article. [Paragraph 6]

This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other articles of the agreement (e.g. dividends, interest and royalties) are to be treated in accordance with the terms of those articles and as outside the scope of this article (except where otherwise provided, e.g. by paragraph 5 of Article 10).

Insurance with non-residents

Each country has the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non-residents. However, if the relevant law in force in either Contracting State at the date of signature of this agreement is varied (otherwise than in minor respects so as not to affect its general character), the Contracting States must consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate. An effect of this paragraph is to preserve, in the case of Australia the application of Division 15 of Part III of the ITAA (Insurance with Non-residents). [Paragraph 7]

Trusts Beneficiaries

The principles of the article will apply in relation to business profits derived by a resident of one of the countries (directly or through one of more interposed trust estates) as a beneficiary of a trust estate. [Paragraph 8]

Example

In accordance with this article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of Spain is beneficially entitled under the trust estate. Paragraph 8 ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business.

Article 8 - Ships and Aircraft

International traffic

Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from:

•: participation in a pool service;
•: a joint transport operating organization; or
•: an international operating agency,

is generally reserved to the country of residence of the operator.

Internal traffic

Any profits derived by a resident of one country from internal traffic in the other country (i.e. from operations confined solely to places in the other country) may be taxed in that other country.

Example

Profits derived from a shipment of goods taken on board (during the course of an international voyage between a place in Spain and Sydney) at Cairns for delivery to Brisbane, would be profits from internal traffic and would fall within the scope of section 129 of the ITAA. As such, 5 per cent of the amount paid in respect of internal traffic would be deemed to be taxable income of the operator for Australian tax purposes.

Article 9 - Associated Enterprises

Re-allocation of profits

This article authorises the re-allocation of profits between related enterprises in Australia and Spain 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 wholly at arm's length with one another. The article would not generally authorise the re-writing of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms.

Correlative adjustments

Where a re-allocation of profits is made (either under this article or, by virtue of paragraph 2, under domestic law) 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. To avoid this result, provision is made for the other country to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation. [Paragraph 3]

The adjustment made by the other country to the profits of the associated enterprise will be based on the arrangements that might be expected to have operated between independent enterprises dealing wholly at arm's length with one another.

It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the re-allocation of profits for an appropriate compensatory adjustment to reflect the re-allocation of profits made by the competent authority of the other treaty partner country. If necessary, the competent authorities of Australia and Spain will consult with each other to determine the appropriate adjustment.

Article 10 - Dividends

Rate of tax

Under this article, Australia will reduce its rate of withholding tax on unfranked dividends paid by Australian resident companies to residents of Spain from 30 per cent to 15 per cent of the gross amount of the dividends. Franked dividend payments will, of course, remain free of withholding tax under Australia's domestic law. The rate of withholding tax to be imposed by Spain on outgoing dividends is also limited to 15 per cent. [Paragraph 2]

The 15 per cent withholding tax will not apply to income which, under the Spanish taxation law relating to transparent companies, is attributable to shareholders of such companies. Spain retains the right to tax such income under its domestic law provided that the income has not been subject to Spanish corporation tax. This exception applies whether or not the income has been distributed to the shareholders. [Paragraph 4]

Exception to limitation

The limitation on the source country's tax does not apply to dividends derived by a resident of the other country who has a "permanent establishment" or "fixed base" in the country from which the dividends are derived if the holding giving rise to the dividends is effectively connected with that "permanent establishment" or "fixed base".

Income or profits derived from the other country

The article generally provides that where an Australian company derives profits or income from Spain, Spain may not tax the dividends paid by the Australian company unless:

•: the dividends are paid to a resident of Spain; or
•: the holding giving rise to the dividends is effectively connected with a "permanent establishment" or a "fixed base" situated in Spain,

even if the dividends consist wholly or partly of profits or income arising in Spain.

Spain also cannot subject to tax any undistributed profits of the Australian company, even if such profits consist wholly or partly of profits or income arising in Spain.

The reverse equally applies to Spanish companies deriving profits or income from Australia. [Paragraph 6]

Article 11 - Interest

Rate of tax

The limitation of the source country tax rate to 10 per cent accords with the general rate of interest withholding tax applicable under Australia's domestic law.

Definition

Business Profits

Source rules

Interest "source" rules which are in accord with the scheme of the interest withholding tax provisions of Australia's domestic law are set out in this article. Those rules operate to allow Australia to tax interest to which a resident of Spain is beneficially entitled where the interest is paid by a resident of Australia and is not an expense of a business carried on by the Australian resident through a permanent establishment in a country outside Australia and borne by that permanent establishment. Australia may also tax interest paid by a resident of Spain to which another Spanish resident is beneficially entitled if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment. [Paragraph 5]

For the purposes of paragraph 5, a person is a resident of one country if the person is a resident of that country under the country's taxation laws, irrespective of the way in which paragraph (3) or paragraph (4) of Article 4 operates in relation to that person. Thus, for the purposes of paragraph 5, a "resident" of Spain is a person who is a resident under Spain's taxation law even if under paragraph (3) of Article 4 the person is deemed to be a resident of Australia for the purposes of this agreement. [Paragraph 6]

It is also possible that a person may be a resident under each of the country's domestic taxation laws. In such a case, the person may be treated as a resident of both countries for the purposes of paragraph 6.

Related persons

Any excess part of the interest remains taxable according to the domestic law of each country, but subject to the other articles of this agreement.

Article 12 - Royalties

Rate of tax

The article in general allows both countries to tax royalty flows but limits the tax of the country on royalties paid or credited to beneficial owners resident in the other country. [Paragraphs 1 and 2]

Definition

The definition of "royalties" reflects the definition in Australia's domestic income tax law and in Australia's other existing double taxation agreements.

In negotiations for this agreement, Australia and Spain expressly agreed that computer software royalties would fall within the subparagraph 3(a) definition.

Permanent establishment

Deemed source rule

Residency

Related persons

If royalties flow between related persons, the 10 per cent source country tax rate limitation will apply only to the extent that the royalties are not excessive. [Paragraph 7]

Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other articles of the agreement.

Article 13 - Alienation of Property

Taxing rights

This article allocates between the respective countries taxing rights in relation to income or gains arising from the alienation of real property (as defined in Article 6) and other items of property.

Income or gains from the alienation of real property may be taxed by the country in which the property is situated. The definition of real property and the situs rules for such property in Article 6 apply for the purposes of this paragraph. [Paragraph 1]

Permanent establishment

Paragraph 2 deals with income or gains arising from the alienation of property (other than real property referred to in Article 6 (Income from Real Property)) forming part of the business assets of a permanent establishment of an enterprise or pertaining to a fixed base used for performing independent personal services. It also applies where the permanent establishment (alone or with the whole enterprise) or the fixed base is alienated. Such income or gains may be taxed in the country in which the permanent establishment or fixed base is situated. This corresponds to the rules for business profits and for income from independent personal services contained in Articles 7 and 14 respectively.

Disposal of ships or aircraft

Income or gains from the disposal of ships or aircraft operated in international traffic, or associated property (other than real property covered by paragraph 1) are taxable only in the country of residence of the operator of the ships or aircraft. This rule corresponds to the taxing rule contained in Article 8 in relation to profits from the operation of ships or aircraft in international traffic. [Paragraph 3]

Shares

The treatment of income, profits or gains from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally of real property covered by paragraph 1, is assimilated to the treatment by paragraph 1 of the alienation of that real property [Paragraph 4] . Such income or gains may thus be taxed by the country in which the real property is situated.

Income or gains from the alienation of shares (or comparable interests) in a company which is a resident of one country, which are not covered by paragraph 4, may be taxed in that country if the recipient of the income or gains, during the 12 month period preceding the alienation, had a participation (either directly or indirectly) of at least 10 per cent in the capital of that company. [Paragraph 5]

Thus, an Australian shareholder who, during the 12 month period preceding the alienation of his or her shares, had a participation of at least 10 per cent in the capital of a company which is resident of Spain, may be taxed in Spain on the income or gain from the alienation of those shares.

Capital gains

The article contains a sweep-up provision in relation to capital gains which enables each country to tax, according to its domestic law, any gains of a capital nature derived by its own residents or by a resident of the other country from the alienation of any property not specified in the preceding paragraphs of the article. It thus ensures that Australia's domestic law relating to the taxation of capital gains may be applied to the alienation of such property. [Paragraph 6]

This paragraph operates independently of Article 21, which contains sweep-up provisions in relation to items of income not expressly dealt with in other articles of the agreement.

Business profits

As indicated earlier, income or gains from the alienation of property that fall within the scope of this article are not affected by the "business profits" provisions of Article 7. In the event that the operation of this article should result in an item of income or gain being subjected to tax in both countries, the country in which the person deriving the income or gain is a resident (as determined in accordance with Article 4) would be obliged by Article 23 to provide double tax relief for the tax imposed by the other country.

Article 14 - Independent Personal Services

Taxing rights

At present, an individual resident in Australia or in Spain may be taxed in the other country on income derived from the performance in that other country of professional services or other similar independent activities. By this article, such income will continue to be subject to tax in the country in which the services are performed if the recipient has a fixed base regularly available in that country for the purposes of performing his or her activities and the income is attributable to activities exercised from that base.

If these conditions are not met, the income will be taxed only in the country of residence of the recipient.

Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and are not covered by this article.

Article 15 - Dependent Personal Services

Basis of taxation

•: Article 16 (Directors' Fees);
•: Article 18 (Pensions and Annuities); and
•: Article 19 (Government Service)

of the agreement.

Exemption

The conditions for this exemption are that:

•: the visit or visits not exceed, in the aggregate, 183 days in the year of income of that other State;
•: the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited; and
•: the remuneration is not borne by (in the sense it is not deductible in determining taxable profits of) a "permanent establishment" or a "fixed base" which the employer has in the country being visited.

Where all of these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient.

Employment on a ship or aircraft

Income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of residence of the operator. [Paragraph 3]

Short-term visit

Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from an employment exercised in Spain may be subject to tax in Spain. However, the article does not allocate sole taxing rights to Spain in that situation.

Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the ITAA that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the agreement allows both countries to tax a category of income, Australia would be required in this situation (pursuant to Article 23(1)), as the country of residence of the income recipient, to relieve the double taxation that would otherwise occur.

Although that paragraph provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Spanish tax paid, the "exemption with progression" method of providing double tax relief in relation to the employment income derived in the situation described would normally be applicable in practice. This method takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.

Article 16 - Directors' Fees

Under this article, remuneration derived by a resident of one country in the capacity of a director of a company which is a resident of the other country may be taxed in the latter country.

Article 17 - Entertainers

Personal activities

By this article, income derived by visiting entertainers (including athletes) from their personal activities as such may generally continue to be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The words "income derived by entertainers ... from their personal activities as such ..." extend the application of this article to income generated from promotional and associated kinds of activities engaged in by the entertainer while present in the visited country.

Safeguard

There is a safeguarding provision designed to ensure that income in respect of personal activities exercised by an entertainer, whether received:

•: by the entertainer; or
•: by another person, e.g., a separate enterprise which formally provides the entertainer's services,

is taxed in the country in which the entertainer performs, whether or not that other person has a "permanent establishment" or "fixed base" in that country. [Paragraph 2]

Visits supported by public funds

Income derived by an entertainer who is a resident of one country from entertainment activities exercised in the other country, will be exempt from tax in that other country if the visit is substantially supported by the public funds of the country of residence or a political subdivision or local authority thereof. Thus, if an Australian resident's entertainment activities in Spain are substantially supported by Australian government funds, the income derived by the Australian entertainer from entertaining in Spain will be exempt from tax in Spain [Paragraph 3] . This paragraph is included to facilitate cultural and sporting exchanges between Australia and Spain.

Article 18 - Pensions and Annuities

Basis of taxation

Pensions (excluding government pensions) and annuities are to be taxed only by the country of residence of the recipient. [Paragraph 1]

Government service pensions are specifically dealt with under Article 19(2).

Scope of article

Alimony and maintenance payments

The taxing right in respect of alimony and other maintenance payments is allocated solely to the country of residence of the payer [Paragraph 3] . The purpose of this is to remove any possibility of double taxation of such payments arising by reason of the treatment accorded such payments under the respective domestic laws. In the case of Australia, those payments will generally remain exempt from Australian tax under the ITAA in the hands of the recipient and non-deductible to the payer.

Article 19 - Government Service

Salary and wage income

•: the services are rendered in that other country;
•: the recipient is a resident of that other country as determined in accordance with Article 4; and
•: the recipient is a citizen or national of that other country or did not become a resident of that other country solely for the purpose of performing the services. [Paragraph 1]

Government service pensions

Pensions paid by, or out of funds created by, one of the countries (or a political subdivision or local authority of that country) for services rendered to that country will be taxable only in that country. [Subparagraph 2(a)]

However, if the recipient is a resident of and a citizen or national of the other country, the pension will be taxable in that other country. Thus, an Australian government service pension paid to a Spanish resident who is also a Spanish national will only be taxable in Spain. [Subparagraph 2(b)]

Government business

Remuneration and pensions for services rendered in connection with business carried on by a government are precluded from the scope of this article. This remuneration will remain subject to the provisions of Article 15 (Dependent Personal Services), Article 16 (Directors' Fees) or Article 18 (Pensions and Annuities) as the case may be. [Paragraph 3]

Article 20 - Students

Exemption from tax

Employment income

Where however, a student from Spain who is visiting Australia solely for educational purposes undertakes:

•: some part time work with a local employer; or
•: during a semester break undertakes work with a local employer,

Article 21 - Income not Expressly Mentioned

Allocation of taxing rights

Broadly, such income derived by a resident of one country is to be taxed only in his or her country of residence unless it is derived from sources in the other country, in which case the income may also be taxed in the other country. Where this occurs, the country of residence of the recipient of the income would be obliged by Article 23 (Methods of Elimination of Double Taxation) to provide double taxation relief.

Note

Article 22 - Source of Income

Deemed source

This article effectively deems income, profits or gains derived by a resident of one country which, under the agreement, may be taxed in the other country to have a source in the latter country - for the purposes of Article 23 (Methods of Elimination of Double Taxation) and the domestic income tax laws of the respective countries. It therefore ensures the jurisdiction of each country to exercise the taxing rights allocated to it by the agreement over residents of the other country.

Double taxation relief

The article is also designed to ensure that where an item of income, profits or gains is taxable in both countries, double taxation relief will be given by the income recipient's country of residence (pursuant to Article 23) for tax levied by the other country as prescribed under the agreement. In this way, income derived by a resident of Australia, which is taxable by Spain under the agreement, will be treated as being foreign income for the purposes of the ITAA, including the foreign tax credit provisions of the ITAA.

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 either:

•: 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 tax.

Tax credit

Australia relieves double taxation by allowing a credit (or other relief) against its own tax for Spanish tax paid under the law of Spain and in accordance with the agreement on income derived by a resident of Australia from sources in Spain. [Paragraph 1]

Dividends

Where a dividend is paid by a Spanish resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Spanish company, paragraph 2 provides for the credit allowed by Australia to also take into account, in addition to the Spanish tax paid in respect of the dividends, the underlying Spanish tax paid by the company in respect of the profits out of which the dividend is paid. [Paragraph 2]

Australian method of relief

Australia's general foreign tax credit system, together with the terms of this article and of the agreement generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in Spain. As in the case of Australia's other double taxation agreements, the source of income rules specified by Article 22 for purposes of the agreement will also apply for those purposes.

Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraphs 1 and 2 of this article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA. This will include the allowance of "underlying" tax credit relief in respect of dividends paid by Spanish resident companies that are related to Australian resident companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA.

Accruals system

It is also relevant that Spain is a listed "comparable tax" country for purposes of the measures recently introduced into the ITAA to give effect to the foreign income accruals system. Accordingly, dividends and branch profits derived from Spain which are exempted from Australian tax where derived by an Australian resident company under those measures (e.g., sections 23AH or 23AJ of the ITAA) will continue to qualify for exemption from Australian tax under those provisions. In these cases, the credit form of relief would not be relevant.

Spanish relief

Spain is required to allow to its residents a deduction for Australian tax paid where they have derived income, profits or gains which are taxed in Australia and which are also subject to tax in Spain. The deduction is of an amount equal to the Australian tax paid and is made against the Spanish tax payable on the income.

In the case of dividends paid by Australian companies to Spanish companies who hold at least 25 per cent of the capital of the Australian company, Spain is also required to allow as a deduction against Spanish tax payable on the profits out of which the dividend is paid, an amount equal to the underlying Australian tax paid on such profits. [Paragraph 3]

Article 24 - Mutual Agreement Procedure

Consultation

Time limits

Resolution of difficulties

Article 25 - Exchange of Information

Limitations on exchange

Purpose

Article 26 - Diplomatic and Consular Officials

Article 27 - Entry into Force

Date of entry into force

Withholding tax

Once it enters into force, the agreement will have effect in Australia for purposes of withholding taxes in respect of income derived on or after 1 January in the calendar year next following that in which the agreement enters into force.

Other taxes

In respect of tax other than withholding tax, the agreement will first have effect in Australia in relation to income of the Australian year of income beginning on or after 1 July in the calendar year following that in which it enters into force.

Note

Where a taxpayer has adopted an accounting period ending on a date other than 30 June, income derived on or after the beginning of the accounting period that has been substituted for the year beginning on 1 July in the calendar year following the calendar year in which the agreement enters into force will be subject to the agreement for purposes of Australian tax other than withholding tax.

Date of effect in Spain

In Spain, the agreement will first have effect in respect of Spanish withholding tax on or after 1 January in the calendar year next following that in which the agreement enters into force. For other Spanish tax on income, the agreement will first have effect in Spain in relation to taxes chargeable for the taxable year beginning on or after 1 January in the calendar year following that in which it enters into force.

Article 28 - Termination

Cessation in Australia

In that event, the agreement would cease to be effective in Australia for purposes of withholding tax in respect of income derived on or after 1 January in the calendar year next following that in which the notice of termination is given. For other Australian taxes, it would cease to be effective in relation to income of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.

Cessation in Spain

It would correspondingly cease to be effective in Spain in respect of withholding tax on income derived on or after 1 January in the calendar year subsequent to that in which the notice of termination is given, and in relation to other Spanish tax on income, termination would first apply in relation to taxes chargeable for any taxable year beginning in the calendar year following the calendar year in which the notice of termination is given.

Protocol to Agreement With Spain

The protocol deals with any non-discrimination articles which Australia may subsequently enter into with other countries.

Broadly, a non-discrimination article provides that, for the purposes of taxation, a Contracting State may not treat the nationals of the other Contracting State less favourably than the State would treat its own nationals under the same circumstances.

The Protocol, which forms part of the agreement, provides that if Australia enters into a non-discrimination article with another country, it will also enter into negotiations with Spain for the purpose of extending similar treatment to that provided in respect of the nationals of that other country to the nationals of Spain.

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