House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

GENERAL OUTLINE

This Bill will amend the Income Tax (International Agreements) Act 1953 to give the force of law in Australia to:

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protocols amending the existing comprehensive double taxation agreements between Australia and Singapore and Australia and France, signed respectively in Canberra on 16 October 1989 and in Paris on 19 June 1989.

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comprehensive double taxation agreements between Australia and Papua New Guinea and Australia and Thailand covering all forms of income flowing between Australia and those countries. The agreement with Papua New Guinea was signed in Canberra on 24 May 1989 and the agreement with Thailand in Canberra on 31 August 1989;

FINANCIAL IMPACT

The protocols to amend the agreements with Singapore and France and the agreements with Papua New Guinea and Thailand are not expected to have a significant effect on revenue.

MAIN FEATURES

Protocol with Singapore

The protocol to the comprehensive taxation agreement with Singapore makes a number of amendments to the existing agreement signed in 1969.

The protocol terminates, with effect in respect of relevant dividends paid after 11 March 1988, a provision of the existing comprehensive agreement under which Australia is required to provide a rebate of tax for dividends paid to an Australian company by a Singapore company in which the Australian company has a 10 per cent or greater interest. Foreign tax credit relief will apply in Australia in relation to such dividends derived after 11 March 1988 in accordance with the general foreign tax credit provisions of the Australian law.

This result is achieved under the protocol by replacement of the article of the existing agreement which provides for the country of residence of the recipient of income to relieve the incidence of double taxation with respect to income which, under the agreement, may be taxed by both countries. Under the replacement article, where the recipient of such income is an Australian resident, tax credit relief is to be provided by Australia in accordance with Australia's general foreign tax credit system.

That replacement article also provides for Australia to give " tax sparing" credit relief for Singapore tax forgone under certain development incentives currently provided by Singapore. Australia will provide such relief by treating as paid for foreign tax credit purposes the Singapore tax forgone. An exchange of Notes which took place at the time the protocol was signed will extend to 30 June 1987 the operation of tax sparing provisions of the existing comprehensive agreement (which generally ceased to apply from 30 June 1984). From 1 July 1987, the tax sparing provisions of the replacement "credit relief"' article contained in the protocol will apply.

Other amendments to the existing comprehensive agreement with Singapore made by the protocol update it in line with Australia's current domestic law and tax treaty practice. Apart from some changes of a technical nature, those other amendments are effected by new or substitute articles relating to:

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the meaning of a "permanent establishment" - a substitute article (which is related to the practical application of the "'business profits" article) broadly parallels the comparable article in Australia's more recently concluded comprehensive tax treaties;

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taxing rights over business profits - a substitute and modified article preserves the basic rule that the profits of an enterprise of one country shall be taxable only in that country, except for profits attributable to a business carried on in the other country through a permanent establishment therein;

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international dealings between associated enterprises - a substitute article is designed to facilitate the application of current anti-avoidance provisions of each country's law in appropriate cases;

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the taxation of income from real property, including income arising in respect of the exploitation of natural resources - a substitute article preserves and clarifies source country taxing rights in respect of such income;

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the taxation of royalties - the definition of "royalties" is amended to broadly update it in line with the definition contained in Australia's current tax law and modern tax treaties;

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the treatment of "shipping and airline profits" \-a substitute article allocates taxing rights with respect to profits from the operation of ships or aircraft in international traffic solely to the country of residence of the shipping or airline operator, whereas the article it replaces allowed some "source country" taxing rights in the case of international shipping profits. (The substitute article also clarifies that interest earned on funds held in connection with the international operation of ships or aircraft is to be treated as profits derived from such operations.);

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income or gains from the alienation of property \-a new article contains specific taxing rules in relation to income or gains arising from the alienation of real property, certain business assets and some shares; it also provides for capital gains arising from the alienation of other property to be taxed in accordance with the domestic law of each country;

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the source of income - a substitute article contains a general source rule for profits, income or gains that are derived by a resident of one country and are taxable by the other country; and

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income not expressly covered - a new "sweep-up" article for such income provides for it to be taxable according to the taxation laws of the respective countries.;

The protocol will enter into force when the Australian and Singapore Governments exchange Notes through the diplomatic channel notifying each other that the processes necessary to give the protocol the force of law in the respective countries have been finalised. That notification can be given, in the case of Australia, following the passage of this Bill. On entry into force of the protocol, it will thereafter have effect:

(a)

with respect to interest declared by the substitute "shipping and airline profits"' article to be treated as profits from international shipping or airline operations - for the 1983/84 income year and subsequent income years in the case of Australia, and for any year of assessment beginning on or after 1 January 1984 in the case of Singapore; and

(b)

in any other case, with respect to income derived in the 1987/88 and subsequent income year in the case of Australia, and for any year of assessment beginning on or after 1 January 1988 in the case of Singapore.

The entry into force provisions of the protocol are subject, however, to a "saving" provision which preserves the application of the articles of the existing comprehensive agreement for stipulated periods where those articles would afford greater relief to a taxpayer than the existing agreement as amended by the protocol. This saving provision preserves the application in Australia of the inter-corporate dividend rebate provisions of the existing agreement in respect of dividends paid before 12 March 1988 by a Singapore company to a related Australian company. It will also preserve the application of other relevant provisions of the existing agreement in respect of income of any year of income beginning before the date on which the protocol enters into force.

Protocol with France

The protocol to the comprehensive double taxation agreement with France amends the existing agreement (signed in 1976) in a number of respects relating to the prevention of double taxation and the removal of possible avenues of tax avoidance.

One of the amendments is designed to ensure that remuneration derived by professors or teachers temporarily visiting one of the countries for teaching or conducting research will be exempt from tax in the country visited but remain subject to tax in the country of residence.

Another amendment ensures that each country may apply its domestic law provisions directed against international profit shifting arrangements in appropriate cases.

Another measure adjusts the definition of "royalties" for the purposes of the agreement to bring it into line with the relevant definitions in Australia's income tax law and modern comprehensive taxation agreements.

Under a further measure, the source (paying) country is given the sole right to tax government service pensions paid to a resident of the other country. However, a government service pension will be taxed only in the country of residence of the pension recipient where that person is a citizen or national of that country. Other pensions will remain taxable only in the country of residence of the recipient.

As a related measure, the "Pensions and Annuities" article is being amended to ensure that contributions to a recognised foreign superannuation or pension fund qualify as an "undeducted purchase price" offset against pension income.

The protocol also amends the existing agreement to:

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update the "Income from Real Property" article, (including the definition of "real property") in line with current tax treaty policy and practice, in order to ensure, amongst other things, full source country taxing rights in respect of royalties and other income arising from the exploitation of natural resources;

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allow for the imposition of a branch profits tax in certain circumstances; and

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make other technical amendments, including an update of the definition of the term "France".;

The protocol also incorporates a "most favoured nation" article to the effect that if Australia subsequently agrees with another OECD member country to a lesser rate of tax on dividends, interest or royalties than is specified in the existing agreement with France, or to the inclusion of a "Non-Discrimination" article, Australia will negotiate with France with a view to providing the same treatment for France as provided to that other OECD member country.

The protocol will enter into force when Australia and France have notified each other of completion of the procedures necessary under their respective laws for its entry into force.

As announced at the time of signature of the protocol, the provisions concerning the taxation of pension income will have effect, following entry into force of the protocol, in relation to pensions derived on or after 1 July 1987. The adjustment by the protocol of the definition of "royalties" will have effect in relation to relevant income derived after the date the protocol was signed (19 June 1989). The other changes made by the protocol to the existing comprehensive taxation agreement with France will have effect in respect of income of any year of income (in Australia) and any assessment year (in France) beginning on or after the date the protocol was signed.

Comprehensive taxation agreements with Papua New Guinea and Thailand

The comprehensive agreements between Australia and Papua New Guinea (PNG) and Australia and Thailand are designed to avoid double taxation of income flowing between Australia and the respective treaty partners and to prevent fiscal evasion of taxes covered by the agreements. Double taxation is avoided under the comprehensive agreements by allocating taxing rights between the contracting countries in relation to certain categories of income and by setting out how relief from double taxation is to be provided where other income may be taxed by both countries. The basis provided by each agreement for allocating taxing rights and providing double taxation relief is substantially similar to that adopted in Australia's other modern comprehensive double taxation agreements.

The agreements provide that certain categories of income are to be taxed as follows:

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Income from real property (which includes natural resources royalties) is taxable in full by the country in which the property is situated.

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Business profits are to be 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 "permanent establishment" in the other country, in which case that other country may tax the profits.

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Profits from international operations of ships and aircraft will be taxed only in the country of residence of the operator except that, in the case of the Thailand agreement, shipping profits may be taxed by both countries with the source country reducing its tax on those profits by one half.

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Dividends, interest and royalties may be taxed in the country of source, but there are general limits on the tax that country may charge on such income flowing to residents of the other country.

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Income or gains from the alienation of real 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.

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Income from professional services and other similar activities will generally be taxed only in the country of residence of the recipient.

However, the other country may also tax the income where it is attributable to activities performed from a fixed base of the recipient in the other country, or in certain other circumstances.

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Income from dependent personal services, that is, employees' remuneration, may generally be taxable in the country where the services are performed.

However, the income will be exempt in the country visited where the services are performed by a resident of one country during a short visit to the other country, the employer is not a resident of the country visited and the remuneration is not deductible in determining taxable profits of a permanent establishment or fixed base which the employer has in the country visited.

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Government officials will generally be taxed only in their home country.

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

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Income derived by public entertainers from their activities as such (other than, in the case of the Thailand agreement, where the activity is substantially funded by public funds of the country of residence of the entertainer) is to be taxed by the country in which the activities are performed.

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Pensions will generally be taxed only in the country of residence of the recipient (except, in the case of the Thailand agreement, for certain government service pensions, which are to be taxed only in the country which pays the pensions).

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Professors and teachers who are resident in Australia or Thailand and are visiting the other country for a period not exceeding two years solely for the purpose of teaching or research at an educational institution will generally be taxable only by their country of residence on remuneration derived for such teaching or research.

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Students resident in one country who are temporarily present in the other country solely for the purpose of their education will be exempt from tax in the country visited in respect of payments made from abroad for the purposes of their maintenance or education.

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Dual residents (i.e., residents of both countries according to the domestic taxation laws of the respective contracting countries) are, in accordance with specified criteria, to be treated for the purpose of each agreement as being residents of only one Country.

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

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Double taxation relief is to be allowed by the country of residence of the recipient of income (including gains) which, under the agreement, may also be taxed in the other country, as follows:

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in Australia, by allowance of a credit against Australian tax on such income for the tax paid in the other country. In the case of a dividend payment from a company resident in Papua New Guinea or Thailand to a related Australian resident company, the tax to be credited by Australia includes the "underlying" tax paid in respect of the profits out of which the dividend is paid.

The tax credit relief to be provided by Australia is to include "tax sparing" relief in relation to income derived from Papua New Guinea or Thailand by a resident of Australia which has benefited from certain development tax incentives of the other country. This "tax sparing" relief is to be provided by granting a credit against the Australian tax payable in respect of that income for the foreign tax forgone under those development incentives as if that tax had been paid. This tax sparing relief is to be provided under both agreements by the "direct credit" method, which means that the amount of income received will not be "grossed-up", for Australian assessment purposes, by the amount of foreign tax forgone before allowance of the tax credit.

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in Papua New Guinea, generally by the allowance of a credit against PNG tax for the Australian tax paid on income (or gains) derived by residents of PNG from sources in Australia.

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in Thailand, generally by the allowance of a credit against Thai tax for the Australian tax paid on income (or gains) derived by residents of Thailand from sources in Australia.

The agreements also provide for the exchange of information and for consultation between the taxation authorities of the respective countries.

Each agreement will enter into force when diplomatic Notes are exchanged notifying that the last of the constitutional processes necessary to give the agreement the force of law in the respective countries has been completed.

Upon entering into force, the agreement with Papua New Guinea will have effect in Australia for withholding tax purposes in respect of income derived on or after 1 July in the calendar year following that in which the agreement enters into force. For all other Australian taxes covered by the agreement, it will first have effect in respect of income of the income year beginning on 1 July in the calendar year after that in which the agreement enters into force.

The agreement with Papua New Guinea will have effect in that country for withholding tax purposes in respect of income derived on or after 1 January in the calendar year following that in which the agreement enters into force. For all other PNG taxes covered by the agreement, it will first have effect in respect of income of the income year beginning on 1 January in the calendar year after that in which the agreement enter into force.

The agreement with Thailand will have effect in Australia for withholding tax purposes in respect of income derived on or after 1 January in the calendar year following that in which the agreement enters into force. For other Australian taxes covered by the agreement, it will first have effect in respect of income of the income year beginning on 1 July in the calendar year after that in which the agreement enters into force.

In Thailand, that agreement will have effect for all Thai taxes (including tax withheld at source) in respect of income derived on or after 1 January in the calendar year next following that in which the Notes are exchanged to bring the agreement into force.

Notes on Clauses

Notes on the clauses of the Bill are given below and these are followed by a more detailed explanation of the articles of the respective comprehensive double taxation agreements and amending protocols.

INCOME TAX (INTERNATIONAL AGREEMENTS) AMENDMENT BILL (No. 2) 1989

Clause 1: Short title etc.

This clause formally provides the citation for the Amending Act, and that references to the "Principal Act" in the Bill relate to the Income Tax (International Agreements) Act 1953.

Clause 2: Commencement

Under subsection 5(1A) of the Acts Interpretation Act 1901, unless the contrary intention appears, every Act is to come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. By this clause the amending Act will come into operation on the day on which it receives the Royal Assent, thus enabling early implementation of the comprehensive taxation agreements and protocols.

Clause 3: Interpretation

This clause will amend section 3 of the Principal Act, which contains a number of definitions for the more convenient interpretation of the Act.

Paragraph (a) of clause 3 will make a technical amendment to the definition of "the French agreement" to reflect that the provisions of the French protocol are to form an integral part of that agreement.

Similarly, paragraph (b) of clause 3 will make a technical amendment to the definition of "the Singapore agreement" to reflect that the provisions of the Singapore protocol are to form an integral part of that agreement.

Paragraph (c) of clause 3 will insert in subsection 3(1) of the Principal Act definitions referring to the comprehensive taxation agreements with Papua New Guinea and Thailand, and the protocols amending the comprehensive taxation agreements with France and Singapore (which are being incorporated by the Bill as Schedules to the Principal Act).

Clause 4: Treasurer to notify entry into force of agreements, exchanges of letters under agreements etc.

Clause 4 will insert into the Principal Act new section 4A.

Section 4A introduces a general requirement for the notification by the Treasurer in the Gazette of the entry into force of particulars and other relevant events relating to a taxation agreement that is the subject of the Principal Act. The particular Gazette notice is to be published as soon as practicable after any of the specified events occur in relation to such an agreement. This will provide a readily available and authoritative source from which persons may ascertain the fact of, and timing of, the particular occurrence.

Subsection 4A(1) lists the various matters in relation to an agreement to be the subject of a Gazette notice, and subsection 4A(2) sets out the requirement for notification by the Treasurer of relevant particulars in the Gazette.

Insertion of this section will remove the need to insert in the Principal Act a separate provision concerning Gazette notices for each particular agreement, as has been the custom in the past. Separate (per agreement) references already contained in the Principal Act (as detailed in Schedule 4 to the amending Bill) become redundant as a consequence and will be removed by clause 11 of this Bill.

Particular matters in relation to the agreements and protocols that are the subject of this Bill which will have to be notified in the Gazette pursuant to section 4A are as follows:

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the dates on which the respective protocols and agreements enter into force (because, under the terms of the respective agreements and protocols, they will each enter into force upon a future exchange of Notes, it is not possible to indicate in this Bill the date of entry into force);

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particulars of Papua New Guinea, Thai and Singapore development incentives for which tax sparing is to apply that are so agreed from time to time by the Treasurer of Australia and his respective counterparts in Papua New Guinea, Thailand and Singapore in letters exchanged for that purpose (see the explanations of substitute Article 18 (Singapore protocol), Article 23 (PNG agreement) and Article 24 (Thai agreement); and

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the period (or extended period) for application of the relevant tax sparing arrangements that may be agreed to by the Treasurer and his respective Papua New Guinea, Thai or Singapore counterpart in an exchange of letters for that purpose (see also the explanations of substitute Article 18 (Singapore protocol), Article 23 (PNG agreement) and Article 24 (Thai agreement);

Clause 5: Insertion of section 7A

Clause 6: Insertion of section 9B

Clause 7: Insertion of sections 11T and 11U

These clauses propose the insertion in the Principal Act of new sections 7A, 9B, 11T and 11U, which will give the force of law in Australia respectively to the protocols with Singapore and France and comprehensive taxation agreements with Papua New Guinea and Thailand with effect from the dates set out in the respective protocols and agreements - see the explanations of Article 17 of the Singapore protocol, Article 11 of the French protocol, Article 27 of the PNG agreement and Article 28 of the Thai agreement.

Clause 8: Schedule 5A

Clause 9: Schedule 11A

Clause 10: Schedules 29 and 30

These clauses will add the protocols with Singapore and France and comprehensive taxation agreements with PNG and Thailand (contained in Schedules 1-3 of this Bill) as Schedules 5A, 11A, 29 and 30 respectively to the Principal Act.

Clause 11: Amendments relating to notification

This amendment will remove from the Principal Act the Gazette notification provisions in relation to particular concluded tax treaties. Those provisions will be rendered redundant by the insertion in the Principal Act of new section 4A by clause 4 of this Bill.

Clause 12: Amendment of assessments

Clause 12 will provide authority for the re-opening of an income tax assessment made before the Bill becomes law should this be necessary for the purpose of giving effect to amendments proposed by the French and Singapore protocols to the existing comprehensive agreements with those countries. This amendment power is required to enable the application of certain provisions of each protocol which are expressed by the entry into force provisions of the protocol to have effect, following entry into force of the protocol, in relation to income derived before that time.

Clause 13: Transitional provisions relating to the Income Tax (International Agreements) Amendment Act 1989

Subclauses 13(1) and 13(2) are technical measures, the need for which arises by reason that the Income Tax International Agreements) Amendment Act 1989 had not commenced at the time of introduction of this Bill. That Act will, when it commences, give the force of law in Australia to a comprehensive taxation agreement with the People's Republic of China (the "Chinese agreement") which was signed in Canberra on 17 November 1988.

Subclause 13(1) has been drafted against the background that section 5 of the Income Tax (International Agreements) Amendment Act 1989 will add the text of the Chinese agreement as Schedule 28 to the Principal Act and that the Schedules containing the texts of the PNG agreement and the Thai agreement, to be added to the Principal Act by clause 10 of this Bill, are accordingly numbered Schedule 29 and Schedule 30 respectively. Subclause 13(1) is designed to ensure that the respective Schedules are inserted in the Principal Act in numerical order.

Subclause 13(2) takes into account that the Income Tax (International Agreements) Act 1989 will, when it commences, insert a new section 11S in the Principal Act. That new section will formally give the force of law to the Chinese agreement and provide for the notification in the Gazette of certain matters in relation to that agreement. In these circumstances, subclause 13(2) will ensure that, to the extent that clause 11 of this Bill will operate to amend the Principal Act to render redundant the Gazette notification provisions contained in new section 11S of that Act (as specified in Schedule 4 to this bill), those amendments will have effect as if they had commenced immediately after the commencement of the earlier Act.

PROTOCOL TO THE AGREEMENT WITH SINGAPORE

This protocol contains a number of amendments to the existing agreement with Singapore which vary or extend parts of that agreement to update it along the lines of Australia's more recently concluded comprehensive taxation agreements with other countries. The protocol will form an integral part of the agreement.

Article 1 - Insertion of new Article 1A

Consistent with modern tax treaty practice, new Article 1A will clarify the scope of application of the agreement by specifying that it applies to persons (which term includes companies) who are residents of either Australia or Singapore.

The situation of persons who are dual residents (i.e., residents of both countries) is already dealt with in Article 3 of the agreement.

Article 2 - Amendment of Article 1

Article 2 of the protocol will replace subparagraph (1)(a) of Article 1 of the agreement with a new subparagraph (1)(a). That subparagraph sets out the existing taxes of Australia to which the agreement applies.

New subparagraph (1)(a) will update the description of the relevant taxes on account of the introduction in Australia of the petroleum resource rent tax in respect of offshore petroleum projects and the repeal of the tax on undistributed profits of private companies following the introduction of a full imputation system of company taxation.

Article 3 - Amendment of Article 2

Article 3 of the protocol will make a technical amendment to paragraph (4) of Article 2 of the agreement.

The amendment will not disturb the basic general rule of interpretation contained in the paragraph that terms in the agreement that are otherwise undefined have, in each contracting country, their meaning according to the domestic law, but will clarify that this refers to the meaning under the domestic law as in force from time to time. This amendment will bring the agreement into line with Australia's more recently negotiated agreements and is to guard against any argument that the undefined terms be limited to the meanings they had in the respective domestic laws at the time of signature of the agreement.

Article 4 - Substitute Article 4

Article 4 of the agreement is being replaced to update the definition of "permanent establishment". The definition of "permanent establishment" is central to the right of one country to tax business profits of an enterprise of the other country pursuant to Article 5. Under that Article, profits of an enterprise of one country are taxable only by that country unless attributable to a trade or business carried on through a permanent establishment situated in the other country.

The substitute article retains the primary meaning of a "permanent establishment" as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. The changes include the specification of examples of what may constitute a "permanent establishment" and the circumstances in which an enterprise of one country is or is not to be taken to have a "permanent establishment"' in the other country.

Article 5 - Insertion of new Article 4A

New Article 4A is concerned with income from "real property", and defines the meaning of that expression. The new Article provides that income from a lease of land and any other interest in land, and royalties and other payments in relation to the exploration for or exploitation of natural resources, may be taxed in the country in which the land, or natural resource is situated or where the exploration may take place. The Article also contains a situs rule for that purpose. The purpose of the new Article is to ensure that the source country will retain full taxing rights over these classes of income.

Consistent with the established principle that whatever is affixed to or attached to land forms part of, or becomes part of, the land, the reference in the article to land is specified as meaning land whether improved or not. The definition of real property will encompass, for example, a lease of a building or any other interest in a building.

Article 6 - Substitute Article 5

Article 6 of the protocol will replace Article 5 of the agreement which deals with the taxation of business profits. As already indicated in relation to the amendment effected by Article 4 of the protocol, the taxing of business profits of an enterprise of a country depends on whether they are attributable to a "permanent establishment" situated in the other country. If they are not, the profits will be taxed only in the country of residence of the enterprise.

Paragraph 8 of new Article 5 introduces a provision, common to Australia's other more recently negotiated comprehensive tax treaties, which will clarify Australia's right to tax a share of business profits derived by a resident of Singapore as a beneficiary of a trust estate (other than a corporate unit trust) through which a business is carried on in Australia. It confirms that such a beneficiary is subject to tax in Australia where, in accordance with the principles set out in new Article 4, the trustee of the relevant trust estate has a "permanent establishment" in Australia in relation to that business.

Article 7 - Substitute Article 6

Article 7 of the protocol replaces and updates Article 6 of the agreement which is concerned with dealings between associated enterprises.

The new article preserves the right of each country where necessary to re-allocate profits between relevant enterprises on an arm's length basis and provides for each country to apply current domestic anti-profit shifting provisions as appropriate. The new article also provides that where a re-allocation of profits is effected by one country in accordance with this article, the other country is to relieve double taxation by making a compensating adjustment to the amount of tax charged by it on the subject profits.

Article 8 - Substitute Article 7

Article 8 replaces and updates the features of Article 7 of the agreement relating to international airline and shipping profits.

The article to be replaced provides for profits from the international operation of aircraft to be generally subject to tax only in the country of residence of the operator. The country from which income from freight, etc., is derived by a resident of the other country in the course of international shipping operations, however, retains taxing rights as to that income, but is required to reduce that tax by half.

The new article specifies that profits from the operation of aircraft and ships in international traffic are to be taxable only in the country of residence of the operator.

Both airline and shipping profits derived from voyages or operations confined solely to places in one country will be subject to the tax normally imposed on such profits in that country.

Paragraph (4) of new Article 7 also clarifies that interest derived from funds held in connection with the operation of aircraft or ships in international traffic (e.g., interest derived from investment of cash held for short terms prior to remittance to a head office and as a contingency for cash refunds on cancelled tickets) are to be treated as profits from such operations. This rule accords with the approach generally taken by Australia with respect to comparable articles of its other comprehensive taxation agreements. Under the "entry into force" provisions of Article 17 of the Protocol, this particular paragraph is to apply in respect of relevant interest income of the 1983/84 and subsequent years of income in the case of Australia and in Singapore for any year of assessment beginning on or after 1 January 1984.

Article 9 - Amendment of Article 8.

Article 9 of the protocol will make a minor technical amendment to paragraph (5) of Article 8 of the agreement. That article deals with the taxation of dividends flowing between the two countries.

By existing paragraph (5), limitations set by paragraphs (1),(2) and (4) of Article 8 on the source country's right to tax outgoing dividends to which a resident of the other country is beneficially entitled do not apply in certain circumstances. Those circumstances are where a resident of the other country has a "permanent establishment" in the country from which the dividends are derived and the holding giving rise to the dividends is effectively connected with a trade or business carried on through that "permanent establishment".

The amendment will ensure that the dividends which are so effectively connected are treated as "business profits" and subject to full tax (on a net basis) in the source country in accordance with the provisions of Article 5 of the agreement.

In practice, 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 instead of being taxed by assessment.

Article 10 - Amendment of Article 9

This protocol will make two amendments to Article 9 of the agreement, which is concerned with interest beneficially derived by a resident of one country from the other country.

Existing paragraph (3) of Article 9 provides that the 10 percent rate limitation imposed by paragraphs (1) and (2) of the article on the source country's tax on interest beneficially derived by a resident of the other country will not apply if the indebtedness giving rise to the interest is effectively connected with a trade or business carried on by the resident of the other country thorough a "permanent establishment" of that person in the source country. Consistent with the amendment made to paragraph (5) of Article 8 of the agreement by Article 9 of the Protocol, paragraph (a) of protocol Article 10 will amend paragraph (3) of Article 9 of the agreement to make it clear that such interest is to be treated as "business profits" subject to full source country tax on a net basis in accordance with the provisions of Article 5 of the agreement.

Paragraph (b) of Article 10 will amend paragraph (5) of Article 9 of the agreement so that Article 9 does not apply in relation to interest to which paragraph (4) of new Article 7 of the agreement applies i.e., interest which is to be treated as profits from international aircraft or shipping operations.

Article 11 - Substitute Article 10

Paragraph (a) of protocol Article 11 will replace paragraph (3) of Article 10 of the agreement to introduce a revised definition of the term "royalties" for the purposes of the article.

It will ensure that the term includes an amount that has been credited or paid which is received as consideration for the use of, or the right to use, specified kinds of property or rights, including an amount received as consideration for total or partial forbearance in respect of the use or supply of any such property or right.

This amendment will bring the definition of royalties for the purpose of the article in line with the relevant definition in Australia's income tax law and modern comprehensive taxation agreements.

Paragraph (b) of protocol Article 11 will amend paragraph (4) of Article 10 of the agreement by providing, consistently with amendments being made to the dividends and interest articles, that the 10 per cent limitation of tax in the country of origin of royalties imposed by paragraphs (1) and (2) of Article 11, is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" which a resident of the other country has in the country of origin of the royalties.

Article 12- Insertion of new Article 10A

New article 10A deals with income or gains from the alienation of property and allocates taxing rights between the respective countries in relation to income or gains arising from the alienation of real property (as defined in new Article 4A) and other items of property.

By paragraph (1), 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 rule for such property contained in new Article 4A apply for purposes of this paragraph.

Paragraph (2) deals with income 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 fixed base is alienated. Such income or gains may be taxed in the country in which the permanent establishment or fixed base is situated. That treatment corresponds to the tax position for business profits and income from independent personal services contained respectively in new Article 5 and Article 12 of the agreement.

Paragraph (3) specifies that 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)) is to be taxable only in the country of residence of the operator of the ships or aircraft. This rule corresponds to the taxing rights allocated in new Article 7, i.e., that profits from the operation of ships or aircraft in international traffic are to be taxed only by the country of residence of the operator.

By paragraph (4) income 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), may be taxed in the country in which such assets or principal assets are situated.

The new article contains a sweep-up paragraph, paragraph (5), which enables each country to tax, according to its domestic law, any gains of a capital nature derived by a resident of the other country from the alienation of any property not specified in the other paragraphs of this article. It thus preserves the application of Australia's domestic law rules in relation to the taxation of capital gains as regards the alienation of such property.

This article applies, in relation to the income or gains it deals with, independently of the "business profits" provisions of new Article 5. Should the operation of article 10A result in an item of income or a gain being subjected to tax in both countries, the country of which the person deriving the income or gain is a resident would be obliged by new Article 18 (to be inserted by Article 15 of the Protocol) to allow a credit against its tax for the tax imposed by the other country.

Article 13 - Insertion of new Article 16A

New Article 16A establishes the general rule that items of income not expressly mentioned in the preceding articles of the agreement are be taxable according to the taxation laws of the respective Contracting States. Here again, should this rule result in double taxation, the country of residence of the recipient of the income would be required by new Article 18 to provide tax credit relief.

Article 14 - Substitute Article 17

This article will replace existing Article 17 of the agreement.

The amendment proposed by protocol article 14 will bring the agreement into line with Australia's more recently negotiated agreements by specifying more uniformly the rules for establishing the source of various classes of profits, income or gains which go to the exercise of the taxing rights allocated to each country by the agreement over residents of the other country. The source rules that the new article 17 contains are to apply for the purposes of new Article 18. The effect of this is to ensure that double taxation relief is given by the country of residence in respect of tax levied by the other country in accordance with the taxing rights allocated to that other country under the agreement.

Article 17 obviates any question of profits, income or gains not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.

Article 15 - Substitute Article 18

This Article will substitute in the agreement a new Article 18 which will require the country of residence of the recipient of profits, income or gains which, under the Agreement, is taxable by both countries, to provide relief from double taxation on a credit basis that is broadly consistent with current unilateral double taxation relief provisions of each country's domestic law.

Paragraph (1) of the new Article 18 thus provides for Australia to relieve double taxation by allowing a credit against its tax for tax paid under the law of Singapore and in accordance with the agreement on income derived by a resident of Australia from sources in Singapore. Where a dividend is paid by a Singapore resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Singapore company, paragraph (2) provides for the credit allowed by Australia to take into account, in addition to any Singapore tax paid in respect of the dividends, the underlying Singapore tax paid by the company in respect of the profits out of which the dividend is paid.

Australia's general foreign tax credit system, together with the terms of the agreement as amended by the protocol - particularly new Article 18 - will thus form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in Singapore. As in the case of Australia's other double taxation agreements, the source of income rules specified by new Article 17 for purposes of the agreement will also apply for those purposes.

Effect will be given to the tax credit relief obligation on Australia under paragraphs (1) and (2) of new Article 18 by application of the general foreign tax credit provisions of the Income Tax Assessment Act. This will include the allowance of "underlying" tax credit relief in respect of dividends paid by Singapore resident companies to related Australian companies, including for income passing through any number of tiers of related companies, in accordance with the relevant provisions of the Assessment Act.

It is noteworthy in this regard that under the Singapore taxation system company tax on profits out of which dividends are paid by a Singapore company is treated as meeting the Singapore tax on the dividends. While, therefore, Singapore does not currently impose a tax on dividends separately from the company tax on the profits from which the dividends are paid, only the foreign tax credit provisions of the Assessment Act related to underlying tax will be of practical relevance in relation to dividends flowing from Singapore.

Notwithstanding the credit form of relief provided for by paragraph (1) of new Article 18, the "exemption with progression" provisions of section 23AG of the Income Tax Assessment Act 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 in Singapore.

The new Article 18 does not contain a provision comparable to paragraph (2) of Article 18 of the existing agreement, under which Australia is required to provide a rebate for dividends received from Singapore by an Australian resident company where it has at least a 10 per cent shareholding interest in the Singapore company. The effect of the rebate has been to free those dividends from Australian tax.

Such a provision is incompatible with the withdrawal from the Australian domestic law of the section 46 intercorporate dividend rebate in relation to foreign dividends derived by an Australian company in conjunction with the introduction of the general foreign tax credit system from 1 July 1987.

By reason of paragraph (2) of Article 17 of the protocol, the intercorporate dividend rebate provisions of paragraph (2) of Article 18 of the existing agreement will continue to apply only in relation to relevant dividends paid by a Singapore company before 12 March 1988.

Paragraph (3) of Article 18 requires Australia to give "tax sparing" credit relief in respect of Singapore tax forgone under certain development incentive provisions of Singapore in relation to income derived by a resident of Australia. It provides for the Singapore tax forgone to be treated as if it had been paid for the purposes of the tax credit relief provisions of paragraphs (1) and (2) of new Article 18.

The Singapore development incentives in respect of which this tax sparing relief will apply are specified in paragraph (3). Tax sparing may also apply in relation to such other development incentive provisions as are introduced by Singapore subsequent to the date of signature of the protocol and which the Australian Treasurer and the Minister for Finance of Singapore agree in letters exchanged for that purpose to be of a substantially similar character.

By paragraph (4), the tax sparing provisions of the article are to apply only in relation to income derived in the 10 years of income beginning with the year of income that commenced on 1 July 1987, unless the relevant Ministers of Australia and Singapore agree in an exchange of letters to extend them beyond that period.

Paragraph (5) requires Singapore to provide tax credit relief, including underlying tax credit for certain dividends, in respect of Australian tax on income from sources in Australia that is derived by a resident of Singapore.

Article 16 - Amendment of Article 20

Article 16 of the protocol will amend paragraph (2) of Article 20 of the agreement to reflect the renumbering of what is to be new Article 5 (see explanation of Article 6 of the Protocol).

Article 17 - Entry Into Force

This article provides for the entry into force of the protocol. The protocol will enter into force on the date on which Notes are exchanged through the diplomatic channel notifying that the last of such things has been done in Australia and Singapore as is necessary to give the protocol the force of law in both countries.

Once it enters into force the protocol will form an integral part of the agreement. As mentioned earlier in this memorandum, the protocol will be given the force of law in Australia by new section 7A that is to be inserted in the Income Tax (International Agreements) Act 1953 by clause 5 of the Bill (see notes on that clause).

Under sub-paragraph (1)(a)(i) of protocol Article 17, the agreement will, on entry into force, have effect in Australia in the case of interest which is treated as profits derived from the international operation of aircraft or ships in respect of such income of any year of income beginning on or after 1 July 1983 (see notes on Article 8 and on paragraph (b) of Article 10 of the protocol).

In respect of other income the protocol will have effect in Australia in relation to income of the 1987/88 and subsequent years of income.

Paragraph (2) of Article 17 will protect the rights of taxpayers in the transition from the original agreement to that agreement as amended by the protocol. Where any provision of the original agreement that is affected by the protocol affords greater relief from tax than the corresponding provision of the agreement as amended by the protocol, that provision of the original agreement is to continue to have effect for a transitional period. Paragraph (2)(b) of Article 17 will continue the operation in Australia of the intercorporate dividend rebate provided under paragraph (2) of Article 18 of the original agreement in respect of relevant dividends paid before 12 March 1988. For other income that is afforded greater relief under the original agreement, the relevant provisions of the original agreement will continue to have effect in Australia in relation to such income of any year of income beginning before the protocol enters into force, and in Singapore for any year of assessment beginning before that date.

Note about rectification of the Singapore Protocol

A Note which appears at the end of the Bill formally records that the text of the Singapore protocol has been rectified to incorporate a number of minor drafting changes to the signed text. Those changes are listed in the Note.

PROTOCOL TO THE AGREEMENT WITH FRANCE

This protocol will amend the comprehensive taxation agreement with France, which was concluded in 1976, to take account of changed circumstances and current treaty policies of both countries.

Article 1 - Amendment of Article 2

Paragraph (a) of Article 1 of the protocol will amend subparagraph (1)(b) of Article 2 of the agreement to alter the definition of the term "France". The existing definition of "France" refers to France's European and the Overseas Departments specifically as being Guadeloupe, Guiana, Martinique and Reunion. The new definition expresses the term "France" more generally to include the European and Overseas Departments within the scope of the agreement. This will allow for the future inclusion or deletion of French European and Overseas Departments within the scope of the agreement, as appropriate, without requiring an amendment to the agreement.

Paragraph (b) of Article 1 will make a technical amendment to the definition of "company" (in the English language text of the agreement only) in subparagraph (1)(e) of Article 2 of the agreement. The amendment does not alter the substance or application of the definition, but merely ensures the compatibility of the English and French language texts.

Article 2 - Amendment of Article 4

Paragraph (a) of Article 2 of the protocol will amend subparagraph (2)(g) of Article 4 of the agreement to insert the words "situated in Australia" after the word "property".

Subparagraph (2)(g) of Article 4 defines the term "permanent establishment" to include, amongst other things, an agricultural, pastoral or forestry property. The amendment will restrict the application of Article 4 to such property situated in Australia. Income from an agricultural, pastoral or forestry property situated in France will be considered separately under Article 5 (Income from Real Property). This amendment is being made in conjunction with the substitution of a new Article 5 of the agreement by Article 3 of the protocol and is necessary to reflect the differences in the treatment of property under the respective domestic laws (see explanation of Article 3).

Paragraph (b) of Article 2 will amend subparagraph (2)(h) of Article 4 of the agreement to increase from six to twelve months the period during which a building site or construction, installation or assembly project must exist for it to constitute a "permanent establishment".

Article 3 - Substitute Article 5

This article will replace existing Article 5 of the agreement with a new Article 5 which will add a number of new features.

Existing Article 5 provides that income from real property, including royalties and similar payments relating to the operation of mines or quarries or of the exploitation of natural resources, may be taxed in the country in which the property is situated. The new Article 5 expands on the meaning of income from real property of this kind, so as to expressly include income from a right to receive variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, oil or gas wells, quarries or other places of extraction or exploitation of natural resources.

In addition to these features, new Article 5 will ensure that the respective domestic laws relating to real property are recognised, in particular to make allowance for the classification as immovable property under French law of what is known as real property under Australian law. This is accommodated in the new article which makes clear that income derived from agricultural, pastoral or forestry property in France will be taken as income from real property. However, income from agricultural, pastoral or forestry property in Australia will not fall for consideration under new Article 5, but will be dealt with by Article 4 (permanent establishment) and the related "business profits" provisions of Article 6 of the agreement - see the explanatory note on Article 2 of the protocol.

The new article also specifies that real property in the case of France includes livestock and equipment used in agriculture and forestry. It also provides that income arising from shares or other corporate rights that provide a right to enjoy immovable property situated in France are to be taxed in France.

Article 4 - Amendment of Article 9

Paragraph (a) of protocol Article 4 will amend paragraph (1) of Article 9 of the agreement to remove a taxing right nominally conferred on Australia but ineffective for practical purposes.

Paragraph (1) of Article 9 provides generally for the taxing by Australia of up to 15% of certain dividends paid by an Australian resident company where a resident of France is beneficially entitled to that income. It also allows Australia to tax dividends paid from profits sourced in Australia where they are paid to such a resident of France by a French resident company. This latter right is unenforceable in practice and is being deleted from the agreement.

Paragraph (b) will replace paragraph (5) of Article 9. Existing paragraph (5) operates on a unilateral basis to allow France to impose a branch profits tax on an Australian company which has a permanent establishment in France.

New paragraph (5) allows both Australia and France to impose a branch profits tax on certain income derived by a company which is a resident of the other country. The paragraph also imposes restrictions on the amount of branch profits tax that may be imposed by each country.

This measure was negotiated while a branch profits tax was operative in Australia. However, as that tax was abolished by Australia with effect from 1 July 1987 the measure will, in practice, only affect the rate of branch profits tax that may be imposed by France.

Article 5 - Substitute Article 11(2)

Article 5 of the protocol will replace paragraph (2) of Article 11 of the agreement (definition of "royalties") with a new paragraph (2).

Article 11 limits the tax Australia and France may charge on royalties beneficially derived by a resident of the other country to 10 per cent of the gross amount of the royalties. Existing paragraph (2) of Article 11 provides a definition of the term "royalties".

New paragraph (2) will extend this definition to ensure that the term includes an amount credited or paid as consideration in respect of the use or supply of various property or rights including in respect of a total or partial forbearance in respect of the use or supply of any such property or right.

This amendment will bring the definition of "royalties" for the purpose of the Article in line with the relevant definition in Australia's income tax law and modern comprehensive taxation agreements.

Under the entry into force provisions of Article 11 of the protocol, this amendment will apply in relation to income derived after the date on which the protocol was signed (19 June 1989).

Article 6 - Amendment of Article 17

Article 6 of the protocol will amend Article 17 of the agreement, relating to pensions and annuities, in two respects.

Paragraph (a) of Article 6 will replace paragraph (1) of Article 17 of the agreement. The effect of the new paragraph will be that pensions and annuities (other than certain government service pensions dealt with in Article 18 of the agreement, as amended by Article 7 of the protocol) will be taxable only by the country of residence of the pension recipient.

Existing paragraph (1) of Article 17 provides generally for pensions and annuities to be taxable only in the country of residence of the recipient. However, paragraph (4) allows recipients of retirement pensions to elect to be taxable only by the source country for as long as paragraph 23(q) of the (Australian) Income Tax Assessment Act 1936 is in force. That provision previously operated to exempt from Australian tax foreign source pensions and certain other income provided the income was not exempt from tax in the source country. With the general repeal of paragraph 23(q) from 1 July 1987 upon the introduction in Australia of the foreign tax credit system paragraph (4) of Article 17 ceased to apply in relation to pensions derived on or after that date. This meant that existing paragraph (1) of the Article applied so that all pensions thereafter became taxable solely in the country of residence of the recipient.

The proposed amendment of paragraph (1) of Article 17 (together with the proposed amendment to paragraph (3) of Article 18 by Article 7 of the protocol, and the entry into force provisions of Article 11 of the protocol) will partially restore the previous arrangement by providing that certain government service pensions paid on or after 1 July 1987 are not to be taxable by the country of residence of the pension recipient under Article 17, but are to be taxable by the country of source under new paragraph (3) of Article 18.

Paragraph (b) of Article 6 will insert new paragraph (5) in Article 17 of the agreement. Broadly, the new paragraph allows pension contributions by residents of one country to a pension or superannuation fund that is recognised for tax purposes in the other country to receive the same tax treatment as if they were made to a like fund in the country of residence.

Under this amendment, contributions to a fund recognised by France may qualify for an "undeducted purchase price" deduction for offset against pension income for Australian tax purposes if they would have so qualified had the fund been one recognised in Australia. Under the entry into force provisions of Article 11 of the protocol, this amendment will first have effect in Australia in relation to the 1989/90 year of income.

Article 7 - Amendment of Article 18

Article 7 of the protocol will make a number of amendments to Article 18 of the agreement, which refers to the taxing of income from government service.

Paragraph (a) of Article 7 will make a technical amendment to the heading of Article 18 to ensure that it more accurately reflects the subject matter.

Paragraph (b) of Article 7 will amend paragraphs (1) and (2) of Article 18 to ensure that remuneration of a professor or teacher that might fall for consideration under both amended Article 18 and Article 19 (Visiting professors and teachers), as amended by Article 8 of the protocol, will be considered only under amended Article 19. This measure will ensure, for example, that an Australian teacher working in France for the French government will not have his or her French earnings exempted from Australian tax under Article 18 and also be exempt from French tax under amended Article 19. Such earnings would normally be treated as being taxable under amended Article 19 by the country of residence of the recipient.

Paragraph (c) of Article 7 will amend Article 18 of the agreement by replacing existing paragraph (3) with new paragraphs (3) and (4).

New paragraph (3) of Article 18 will give the source (paying) country the sole right to tax government service pensions paid to a resident of the other country. However, the government service pension will be taxed only in the country of residence of the recipient if that person is a citizen or national of that country. By reason of the "entry into force" provisions of Article 11 of the protocol these rules for government service pensions will have effect in relation to pensions derived on or after 1 July 1987. All other pensions derived on or after that date will continue to be taxable by the country of residence in accordance with amended Article 17 of the agreement (see the explanation of Article 6 of this protocol).

New paragraph (4) of Article 18 is similar to existing paragraph (3) of the article and provides that the article does not apply in relation to governmental remuneration or a government service pension where the relevant service was rendered in connection with any trade or business carried on by a government body or authority.

Article 8 - Amendment of Article 19

Article 8 will make a technical amendment to paragraph (1) of Article 19 of the agreement.

That paragraph provides that remuneration derived by a professor or teacher who is a resident of one country and is visiting the other country for a period up to two years for the purpose of teaching or conducting research at an educational institution shall be exempt from tax in that other country.

Article 8 will amend the paragraph by deleting the reference to qualifying remuneration being exempt from tax in the country visited. It will substitute a reference to that remuneration being subject to tax only in the country of residence of the recipient. This amendment will avoid possible situations of "double non-taxation" by ensuring that the remuneration will remain taxable in the country of residence of the visiting professor or teacher.

Article 9 - Insertion of Article 22A

This Article will insert new Article 22A in the agreement.

Article 22A, under the heading "Rules of Taxation", will operate where the commercial or financial relations between a resident of Australia and a resident of France differ from those that might be expected between independent persons dealing wholly independently with one another.

The new Article will ensure that nothing in the existing agreement prevents either country from applying its domestic law to tax its residents on those profits which might otherwise have been expected to have accrued to the resident.

The new Article is complementary to existing paragraph (2) of Article 8 of the agreement which applies where related enterprises are not dealing on an arm's length basis. That paragraph allows recourse to relevant domestic laws only if the information available to a Contracting State is inadequate to determine properly attributable profits. Article 22A will permit a wider recourse to the domestic law in other cases of non-arm's length dealings.

Article 10 - Insertion of Article 27A

Article 10 will insert in the agreement new Article 27A.

Article 27A applies so that if Australia subsequently agrees to certain provisions in a comprehensive taxation agreement with another OECD member country, Australia will negotiate with France with a view to providing the same treatment for France as provided to that other country. The provisions specified consist of a lesser rate limit for source country tax on dividends, interest or royalties paid to a resident of the other country than is specified in the agreement with France, or the inclusion of a Non-Discrimination Article.

Article 11

This article provides for the entry into force of the protocol on the date of the later of the notifications by each country to the other of the completion of the procedures necessary under its laws for the entry into force of the protocol.

Under paragraph (a) of Article 11 the provision of the protocol will, on its entry into force, have effect in Australia (except for the provisions referred to in paragraphs (b) and (c) of the article) in respect of income of any year of income beginning on or after the date of signature of the protocol (19 June 1989), i.e., the 1989/90 income year and any accounting period approved under the Income Tax Assessment Act 1936 in lieu of that year of income.

In France, the protocol will generally have effect pursuant to paragraph (a) of Article 11 in respect of income of any assessment year beginning on or after 19 June 1989.

Paragraph (b) of Article 11 gives the substituted definition of royalties to be inserted in Article 11 of the agreement by Article 5 effect in both countries in relation to income derived after 19 June 1989.

By paragraph (c) of Article 11, the amendments in relation to the taxation of government service pensions effected by paragraph (a) of Article 6 and by paragraph (c) of Article 7 of the protocol have effect in both countries in relation to pensions derived on or after 1 July 1987.

Note about rectification of the French Protocol

A Note which appears at the end of the Bill formally records that the text of the French protocol has been rectified to incorporate a number of minor drafting changes to the signed text. Those changes are listed in the Note.

AGREEMENT WITH PAPUA NEW GUINEA

Subject to some differences, the agreement accords in substantial practical effect with other double taxation agreements to which Australia is a party. Like them, the agreement allocates the right to tax some income to the country of source, sometimes at limited rates, while the country of residence is given the sole right to tax other types of income. It contains provisions to the effect that where income may be taxed in both countries, the country of residence, if it taxes, is to allow a credit against its own tax for the tax imposed by the country of source.

Article 1 - Personal Scope

This article establishes the general scope of the agreement and provides for it to apply to persons (which term includes companies) who are residents of either Australia or Papua New Guinea.

The situation of 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 to which the agreement applies. These are, in the case of Australia, the income tax and the petroleum resource rent tax in respect of offshore petroleum (oil and gas) projects. For PNG, its income tax, including salary and wages tax, additional profits tax on mining and petroleum operations, specific gains tax, and dividend withholding tax are specified. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.

Article 3 - General Definitions

This article provides definitions for a number of the terms used in the agreement. Some other terms are defined in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law from time to time in force of the country applying the agreement.

As with Australia's other modern taxation agreements, "Australia" is effectively defined as including certain external territories and areas of the continental shelf. By reason of this definition, Australia retains taxing rights in relation to mineral exploration and mining activities on its continental shelf. The definition is also relevant to the taxation by Australia of shipping profits in accordance with Article 8 of the agreement.

Article 4 - Residence

This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. 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. Residence according to each country's taxation law provides the basic test. The article also includes rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under the domestic laws of both countries.

Article 5 - Permanent Establishment

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 effectively connected with that "permanent establishment". The definition of the term "permanent establishment" which this article embodies corresponds closely with definitions of the term in Australia's other double taxation agreements.

The primary meaning of the defined term is expressed in paragraph 1 as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with elaborating on the meaning of the term by giving examples of what may constitute a "permanent establishment" - such as an office, a mine or an agricultural, pastoral or forestry property - and by specifying the circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country.

One particular feature of the article is that it provides that the furnishing, by an enterprise of one country, of consultancy or other services will constitute a permanent establishment in the other country where those activities continue (for the same or a connected project) within the latter country for a period or periods aggregating more than 90 days in any year of income. That feature, and the operation of Article 7, ensures preservation of the "business profits" principle in relation to the allocation between the two countries of taxing rights over such fees.

Article 6 - Income from Real Property

By this article, income from real property, including income from the 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, may be taxed in the country in which the land, mine, quarry or natural resource is situated.

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. Accordingly, the definition of real property will encompass, for example, a lease of a building or any other interest in a building.

As with other items of income dealt with separately in specific articles of the agreement, income to which this article applies is excluded from the scope of the "business profits" provisions of Article 7 (by paragraph 6 of that article) and is therefore taxable in the country of source whether or not the recipient has a "permanent establishment" in that country.

Article 7 - Business Profits

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

The taxing of these profits depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer. If, however, a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment. That country may also tax income attributable to certain related sales of goods or merchandise or other business activities where those sales are made or business activities are carried on within that country.

The article provides for profits of a "permanent establishment" to be determined on the basis of arm's length dealing. These provisions correspond in their practical effect with comparable provisions in Australia's other double taxation agreements, and with Division 13 of the Income Tax Assessment Act 1936.

Paragraph 5 of the article allows the application of provisions of the source country's domestic law (e.g., Australia's Division 13) where, due to the inadequacy of available information, the correct amount of profits attributable to a "permanent establishment" is incapable of determination or the ascertainment thereof presents exceptional difficulties.

Paragraph 7 preserves to each country the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non-residents. It also preserves to PNG the right to continue to apply provisions in its domestic law that relate to the specific gains tax or the taxing of income derived by an Australian contractor from a prescribed contract within the meaning of the PNG law where the contractor has a permanent establishment in PNG.

Paragraph 8 is intended to clarify Australia's right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a corporate unit trust) from the carrying on of a business in Australia, to which a resident of PNG is beneficially entitled. It ensures that such distributions 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. It is comparable in effect to subsection 3(11) of the Income Tax (International Agreements) Act 1953, which has a similar effect where the beneficiary is a resident of a country with which Australia had signed a comprehensive taxation agreement on or before 19 August 1984.

Article 8 - Ships and Aircraft

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.

Any profits derived by a resident of one country from internal (domestic) traffic 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 air or sea from a place in Australia to another place in Australia, its continental shelf or external territories are treated as forming part of internal traffic.

Article 9 - Associated Enterprises

This article authorises the re-allocation of profits between related enterprises in Australia and PNG on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.

By virtue of paragraph 2 of the article, each country retains the right to apply its domestic anti-profit shifting provisions (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.

Where a re-allocation of profits is effected 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. Paragraph 3 requires the other country concerned to make an appropriate adjustment to the amount of tax charged on the profits involved with a view to relieving any such double taxation.

Article 10 - Dividends

This article 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 to beneficial owners resident in the other country. Under this article, Australia will reduce its rate of withholding tax on unfranked dividends paid by Australian resident companies to residents of PNG 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. PNG's withholding tax on dividends paid by PNG resident companies to residents of Australia is limited by the article to 20 per cent of the gross amount of the dividends.

Paragraph 4 provides that the limitation on the source country's tax shall 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. Where the dividends are so effectively connected, they will be treated as "business profits" or "income from independent personal services" and 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, 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 instead of being taxed by assessment.

The purpose of paragraph 5 of this article is to ensure, broadly, against the extra-territorial application by either country of taxing rights over dividend income. It provides that dividends paid by a company resident solely in one country to a beneficial owner of the dividends who is not a resident of the other country is exempt from tax in that other country, except where the holding giving rise to the dividends is effectively connected with a "permanent establishment" or "fixed base" in that other country. The paragraph will not apply in relation to dividends paid by a company that is a dual resident of both countries.

By paragraph 6, the amount of specific gains tax that can be imposed by PNG on the disposal of shares by an Australian resident in a PNG resident company is limited to 20 per cent of the vendor's proportion of the total dividends to which the vendor would have been entitled in respect of those shares had the company declared a dividend. The broad purpose of paragraph 6 is to place a comparable dividend income tax limit on PNG's specific gains tax attributable to the share of undistributed profits of the PNG company effectively realised by the vendor on disposal of the shares in the PNG company.

Article 11 - Interest

This article requires the country of source generally to limit its tax on interest income to which a resident of the other country is beneficially entitled to 10 per cent of the gross amount of the interest. This limitation will not affect the rate of Australian withholding tax on interest derived by residents of PNG which will continue to be imposed at the general rate of 10 per cent applicable under Australia's domestic law.

Paragraph 3 defines the term "interest" for the purposes of the article in a way that will ensure the definition 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, and therefore as falling within the definition of "interest" for withholding tax purposes.

Paragraph 4 requires that the 10 per cent tax rate limitation is not to apply to interest derived by a resident of one country which is effectively connected with a "permanent establishment" or "fixed base" of that resident in the other country, or with related business activities. Such interest will be treated as forming part of the business profits of that "permanent establishment", "fixed base" or related business activities and will be subject to the provisions of Article 7 or Article 14.

The interest "source" rules set out in paragraph 5 accord with the scheme of the interest withholding tax provisions of Australia's domestic law. Those rules will therefore operate to allow Australia to tax interest to which a resident of PNG is beneficially entitled where the interest is paid by a resident of Australia and is not an expense of a business carried on by that resident in a country outside Australia through a permanent establishment in that other country, or where it is interest paid by a resident of PNG and is an expense incurred by that person in carrying on a business in Australia through a permanent establishment.

The article also contains a general safeguard (paragraph 6) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 10 per cent limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.

Article 12 - Royalties

This article in general limits to 10 per cent of the gross amount of the royalties the tax that the country of source may impose on royalties paid or credited to beneficial owners resident in the other country. The definition of "royalties" contained in paragraph 3 is consistent with the comparable definition in Australia's domestic income tax law and other modern comprehensive tax treaties.

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

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

As in the case of interest income, it is specified in paragraph 4 that the 10 per cent limitation of tax in the country of origin is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" in that country, or related business activities.

The royalties "source" rule in paragraph 5 mirrors the "source" rule for interest income contained in paragraph 5 of Article 11.

By paragraph 6, if royalties flow between related persons, the 10 per cent limitation will not apply at all if the basis of payment or credit is not at arm's length, and would otherwise apply only to the extent that the royalties are not excessive.

Article 13 - Alienation of Property

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.

By paragraph 1, 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 purposes of this paragraph.

Paragraph 2 deals with income or gains arising from the alienation of property (other than real property covered by paragraph l) forming part of the business property 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. That rule is consistent with the rules for taxing business profits and income from independent personal services contained in Articles 7 and 14.

Paragraph 3 specifies that income or gains from the disposal of ships or aircraft operated in international traffic, or associated property (other than real property covered by paragraph l) shall be taxable only in the country of residence of the operator of the ships or aircraft. This rule corresponds to the taxing rights contained in Article 8 of this agreement, whereby profits from the operation of ships or aircraft in international traffic are to be taxed only by the country of residence of the ship or aircraft operator.

By paragraph 4, income 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 may be taxed in the country in which such assets or principal assets are situated. The paragraph thus assimilates the treatment of the alienation of those shares or comparable interests to the treatment by paragraph 1 of the alienation of such real property.

The article contains a sweep-up paragraph, paragraph 5, which enables each country to tax, according to its domestic law, any gains of a capital nature derived by a resident of the other country from the alienation of any property not specified in paragraphs 1, 2, 3 and 4 of this article. It thus preserves the application of Australia's domestic law rules in relation to the taxation of capital gains as regards the alienation of such property.

As indicated earlier, because the income or gains concerned are dealt with separately by this article, it also applies independently of the "business profits" provisions in Article 7. In the event that the operation of this article should result in an item of income or a gain being subjected to tax in both countries, the country of which the person deriving the income or gain is a resident would be obliged by Article 23 to allow a credit against its own tax for the tax imposed by the other country.

Article 14 - Independent Personal Services

At present, an individual resident in Australia or in PNG 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 in the following cases:

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where 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;

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where income exceeding A$8000 (or the PNG Kina equivalent) is derived in a 12 month period from a resident or permanent establishment of that country; or

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where the income is derived during a period or periods exceeding 90 days in any year of income in which the recipient is present in that country.

If none of the tests mentioned above are 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

Article 15 provides the basis upon which the remuneration of visiting employees is to be taxed. Generally, salaries, wages, etc., 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 only visits of a short-term nature are involved.

By paragraph 2, the conditions for exemption are that:

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the visit or visits not exceed, in the aggregate, 90 days in the year of income of the country visited;

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the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited;

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the remuneration 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;

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the remuneration will be subject to tax in the country of residence.

Where these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient. The provisions of this article do not apply, however, in respect of income that is dealt with separately in Articles 16, 18, 19 or 20 of the agreement.

By paragraph 3 of the article, income from an employment exercised aboard a ship or aircraft operated in international traffic is to be taxed only in the country of residence of the operator.

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

By this article, income derived by visiting entertainers (including athletes) from their personal activities as such will continue to be taxed in the country in which the activities are exercised, irrespective of the duration of the visit.

Paragraph 2 of this article 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.

Article 18 - Pensions and Annuities

Under this article pensions, including government service pensions and annuities, are to be taxed only by the country of residence of the recipient.

Article 19 - Government Service

Paragraph 1 of this article provides that remuneration, other than a pension or annuity, paid to an individual in respect of services rendered in the discharge of governmental functions (including remuneration paid by a State or local authority) of one of the countries will be taxed only in that country. However, such remuneration is to be taxable only in the other country if the services are rendered in that country and the recipient is a citizen or national of, or ordinarily resides in, that country.

Paragraph 2 provides that paragraph 1 does not apply where the services are rendered in connection with a trade or business carried on by a government. In such cases, the provisions of Articles 15 or 16, as the case may be, shall apply.

Article 20 - Students

This article applies to students temporarily present in one country solely for the purpose of their education who 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 in respect of payments received from abroad for the purposes of their maintenance or education.

Article 21 - Income Not Expressly Mentioned

This article provides rules for the allocation between the two countries of taxing rights in relation to items of income not expressly mentioned in the preceding articles of the agreement.

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 country of source.

However, the first-mentioned exclusive taxing right of the country of residence does not apply to income which is effectively connected with a "permanent establishment" or "fixed base" which a resident of one country has in the other country. In such cases, the provisions of Article 7 or Article 14, as the case may be, will apply.

Article 22 - Miscellaneous

Article 22 specifies the source of various classes of income or gains for the purpose of ensuring that each country is empowered to exercise the taxing rights allocated to it by the agreement over residents of the other country. It is also designed to ensure that where an item of income is also taxable by the country of residence of the recipient, double taxation relief will be given by that country in respect of tax levied by the country of source in accordance with the taxing rights allocated to it under the agreement. The provision resolves any conflict in domestic law source rules and obviates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.

Paragraph 3 qualifies the operation of paragraph 1 so that interest to which article 11 applies and to which an Australian resident is beneficially entitled will not be deemed to have a source in PNG for purposes of PNG's domestic tax law until source rules relating to interest are provided for in PNG's tax law.

Paragraphs 4 and 5 allow only the country of residence to tax income derived by its residents from fisheries activities carried on within the Protected Zone of the Torres Strait (as referred to in the Sovereignty and Maritime Boundaries Treaty).

Article 23 - Methods of Elimination of Double Taxation

Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax. It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income which are 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 approach has generally been adopted in this agreement.

Paragraph 1 of the article thus provides for Australia to relieve double taxation by allowing a credit against its own tax for PNG tax paid under the law of PNG and in accordance with the agreement on income derived by a resident of Australia from sources in PNG. Where a dividend is paid by a PNG resident company to an Australian resident company which controls 10 per cent or more of the voting power in the PNG company, paragraph 2 requires the credit allowed by Australia to also take into account, in addition to the PNG tax paid in respect of the dividends, the underlying PNG tax paid by the company in respect of the profits out of which the dividend is paid.

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 PNG. 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 Article 23 by application of the general foreign tax credit provisions of the Income Tax Assessment Act 1936 (the Assessment Act). This will include the allowance of "underlying" tax credit relief in respect of dividends paid by PNG resident companies to related Australian companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the Assessment Act.

Notwithstanding the credit form of relief provided for by paragraph 1 of the article, the "exemption with progression" provisions of section 23AG of the Assessment Act 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 in PNG.

Paragraphs 3, 4 and 5 of Article 23 contain "tax sparing" provisions under which an Australian resident recipient of income on which PNG - under specified incentive measures - has forgone tax, will obtain tax credit relief as if the PNG tax forgone had been paid.

The development incentive provisions for which tax sparing relief will be available are those that are agreed by the Australian Treasurer and the Minister for Finance and Planning of PNG from time to time in letters exchanged for that purpose. Paragraph 5 also provides for the tax sparing arrangements to apply only in relation to those years of income agreed by those Ministers in letters exchanged for that purpose. Proposed new section 4A of the Income Tax (International Agreements) Act 1953 (see notes on clause 4 of the Bill) will provide for particulars of the provisions agreed, and the years agreed, for tax sparing in such an exchange of letters to be notified by the Treasurer in the Gazette.

Where a tax sparing credit is allowable, paragraph (3) has the effect that tax sparing is to be granted on the "direct credit" method and not the "gross-up and credit" method for the purposes of calculating the Australian tax. In other words, there will be no "grossing-up" for Australian tax assessment purposes of the relevant income by the amount of PNG tax forgone. For example, in the case of income received by a resident of Australia from PNG in respect of which PNG tax has been wholly forgone, the amount included in the income recipient's assessable income in Australia will be the amount received, and a credit will be granted for the PNG tax forgone.

For its part PNG will, broadly, allow a credit to PNG residents in respect of taxes payable in Australia in accordance with the agreement on their Australian source income, against the PNG tax payable on that income. Where a dividend is paid by an Australian resident company to a PNG resident company which owns not less than 10 per cent of the shares in the Australian company, the credit allowed by PNG is also to take into account, in addition to the Australian tax paid in respect of the dividends, the underlying Australian tax paid by the company in respect of the profits out of which the dividend is paid.

The tax credit relief provisions of Article 23, including the tax sparing relief provisions, reflect the fact that they were negotiated on the basis of the existing Australian and PNG income tax laws. It is relevant, however, that changes foreshadowed by the Australian Government to the basis of taxing foreign income of Australian residents may lead to changes to the unilateral double tax relief provisions of Australia's domestic law. If, as has been indicated, certain dividends and branch income derived by Australian residents from PNG should generally qualify in the future for exemption from Australian tax, that general exemption would normally be expected to be made available in respect of such income in lieu of the tax credit and tax sparing relief provisions of Article 23 of the agreement.

Article 24 - Mutual Agreement Procedure

One of the purposes of this article is to provide for consultation between the taxation authorities of the two countries with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case within three years of the first notification of the action giving rise to the taxation not in accordance with the agreement and 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.

The article also authorises consultation between the taxation 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.

Article 25 - Exchange of Information

This article authorises the two taxation authorities to exchange information necessary for the carrying out of the agreement or for the administration of domestic laws concerning the taxes to which the agreement applies. The purposes for which this 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.

The exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process or which would be contrary to public policy is not permitted by the article.

Article 26 - 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 to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.

Article 27 - Entry into Force

This article provides for the entry into force of the agreement. This will occur on the date on which Notes are exchanged through the diplomatic channel notifying that the last of such things has been done in Australia and PNG as is necessary to give the agreement the force of law in both countries.

Once it enters into force, the agreement will have effect in Australia for purposes of withholding 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. In respect of tax other than withholding tax, the agreement will have effect in Australia in relation to income of any year of income beginning on or after 1 July in the calendar year following that in which it enters into force. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year beginning on 1 July in the year in which the agreement first has effect will be the date from which the agreement will take effect in respect of tax other than withholding tax.

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

Article 28 - 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.

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 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 .

The agreement would cease to be effective in PNG 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 PNG taxes, it would cease to be effective in relation to income of any year of income beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.

AGREEMENT WITH THAILAND

Like the Papua New Guinea agreement, the Thailand agreement accords in substantial practical effect with other comprehensive double taxation agreements to which Australia is a party. Similarly, this agreement allocates the right to tax some income to the country of source, sometimes at limited rates, while the country of residence is given the sole right to tax other types of income. It contains provisions to the effect that where income may be taxed in both countries, the country of residence is to allow a credit against its own tax for the tax imposed by the country of source.

Article 1 - Personal Scope

The agreement will apply to persons (which term includes companies) who are residents of either Australia or Thailand.

The situation of persons who are dual residents (i.e. who qualify as residents of both countries) is dealt with in Article 4.

Article 2 - Taxes Covered

This article specifies the existing taxes to which the agreement applies. These are, in the case of Australia, the income tax and the resource rent tax in respect of profits from offshore petroleum projects. For Thailand, the agreement applies to its income tax and its petroleum income tax. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.

Article 3 - General Definitions

This article defines a number of the terms used in the agreement. Other terms are defined in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law from time to time in force of the country applying the agreement.

Consistent with Australia's other modern taxation agreements, "Australia"' is effectively expressed to embrace certain external territories and areas of the continental shelf. This allows Australia to retain taxing rights in relation to mineral exploration and mining activities on its continental shelf. The definition is also relevant to the taxation by Australia of shipping profits in accordance with Article 8 of the agreement.

Article 4 - Residence

This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. 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. Residence according to each country's taxation law provides the basic test.

The article also includes rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under the domestic laws of both countries.

Article 5 - Permanent Establishment

Several provisions of the agreement (principally Article 7 which relates to business profits) are dependent for their application on 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 effectively connected with that "'permanent establishment"'. The definition of the term "permanent establishment" which this article embodies corresponds closely with definitions of the term in Australia's other double taxation agreements.

The primary meaning of "permanent establishment" is expressed in paragraph 1 as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with elaborating on the meaning of the term by giving examples of what may constitute a "permanent establishment" - such as an office, a mine or an agricultural, pastoral or forestry property - and by specifying the circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country.

One feature of the article is that the furnishing by a resident of one country of consultancy or other services will constitute a permanent establishment in the other country where those activities continue (for the same or a connected project) within the latter country for a period or periods aggregating more than 183 days within any 12 month period. That feature, and the operation of Article 7, ensures preservation of the "business profits" principle in relation to the allocation between the two countries of taxing rights over such fees.

Article 6 - Income from Real Property

Income from real property, including income from the letting or use in any other form of any land or interest in land and royalties and other payments relating to the exploration for or exploitation of, mines or quarries or other natural resources, by article 6, may be taxed in the country in which the land, mine, quarry or natural resource is situated.

On the basis of the accepted rule that whatever is affixed to or attached to land forms part of, or becomes part of, the land, the Article provides for a reference to land to be read as meaning either improved or unimproved land. The definition of real property will thus encompass, for example, a lease of a building or any other interest in a building.

As in the case of other classes of income dealt with in specific articles of the agreement, income to which this article applies is excluded from the scope of the "business profits" provisions of Article 7 (by paragraph 6 of that article) and is therefore taxable in the country of source regardless of whether the recipient has a "permanent establishment" in that country.

Article 7 - Business Profits

The taxation of business profits derived by a resident of one country from sources in the other country depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, this article provides that the profits will be taxed only in the country of residence of the taxpayer. If, however, a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment. That country may also tax income attributable to certain related sales of goods or merchandise or other business activities where those sales are made or business activities are carried on within that country.

Profits of a "permanent establishment" are to be determined on the basis of arm's length dealing. These provisions correspond in their practical effect with comparable provisions in Australia's other double taxation agreements, and with Division 13 of the Income Tax Assessment Act.

Paragraph 5 of the article allows the application of provisions of the source country's domestic law (e.g. Australia's Division 13) where, due to the inadequacy of available information the correct amount of profits attributable to a "permanent establishment" is incapable of determination or the ascertainment of those profits presents exceptional difficulties.

Paragraph 7 preserves to each country the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non-residents. It also requires the country of residence of the recipient of such income to provide tax credit relief in accordance with Article 24 where the income is taxed by both countries.

Paragraph 8 is intended to clarify Australia's right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a corporate unit trust) from the carrying on of a business in Australia, to which a resident of Thailand is beneficially entitled. It ensures that such distributions 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. It is comparable in effect to subsection 3(11) of the Income Tax (International Agreements) Act 1953, which has a similar effect where the beneficiary is a resident of a country with which Australia had signed a comprehensive taxation agreement on or before 19 August 1984.

Article 8 - Ships and Aircraft

Under this article the right to tax profits from the operation of 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. Shipping profits from international traffic may be taxed by both countries with the source country reducing its tax on those profits by one half.

Any profits derived by a resident of one country from internal (domestic) aircraft or shipping traffic in the other country may be taxed in that other country and without the reduction of source country tax in the case of shipping profits that otherwise applies.

By reason of the definition of "Australia" contained in Article 3 and the terms of paragraph 5 of this Article, any shipments by air or sea from a place in Australia to another place in Australia (including the continental shelf or external territories) are treated as forming part of internal traffic.

Article 9 - Associated Enterprises

Under this article, profits declared between related enterprises in Australia and Thailand may be reallocated on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.

Paragraph 2 of the article retains for each country the right to apply its domestic law (e.g. the anti-profit shifting provisions of 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.

Where a re-allocation of profits is effected 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. Paragraph 3 requires the other country concerned to make an appropriate adjustment to the amount of tax charged on the profits involved with a view to relieving any such double taxation.

Article 10 - Dividends

Under this article both countries may tax dividends flowing between them. However, the tax that the country of source may impose on dividends payable to a beneficial owner resident in the other country is limited where the beneficial owner is a company which holds directly 25 per cent of the capital of the company which pays the dividends. The source country tax rate limit in such cases is 15 per cent of the gross amount of the dividends if the company which pays the dividend engages in an industrial undertaking (as defined in paragraph 7) and 20 per cent of the gross payment in other cases. Those source country tax rate limits may be expected to apply in relation to dividends paid by a Thai resident company to a relevant related Australian resident company. However, they will only be relevant in Australia in relation to the rate of Australian withholding tax on unfranked dividends paid by an Australian resident company to a relevant related Thai resident company. Franked dividend payments will, of course, remain free of withholding tax under Australia's domestic law.

Paragraph 4 specifies that the limitation imposed by paragraphs 1 and 2 on the source country's tax is not to 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. Dividends so connected will be treated as business profits or income from independent personal services and subject to the source country's tax in accordance respectively with the provisions of Article 7 or Article 14. In practice, under changes made to Australia's domestic law with the introduction from 1 July 1987 of a full imputation system of company taxation, dividends that are franked dividends will remain exempt from Australian tax while unfranked dividends will be subject to withholding tax instead of being taxed by assessment.

Paragraph 5 of this article broadly precludes the extra-territorial application by either country of taxing rights over dividend income. It provides that dividends paid by a company resident solely in one country to a beneficial owner of the dividends who is not a resident of the other country is exempt from tax in that other country, unless the holding giving rise to the dividends is effectively connected with a permanent establishment or fixed base in that other country. The paragraph will not apply in relation to dividends paid by a company that is a dual resident of both countries.

Paragraph 6 allows the imposition by either country of branch profits tax provisions of its domestic law, where applicable. As Australia's domestic law does not currently contain such provisions, the paragraph is not presently relevant in the case of Australia.

Article 11 - Interest

Article 11 generally requires the country of source to limit its tax on interest derived by residents of the other country to 10 per cent of the gross amount of the interest if it is interest to which any financial institution (including an insurance company) is beneficially entitled and 25 per cent in all other cases. This limitation will not affect the rate of Australian withholding tax on interest derived by residents of Thailand which will continue to be imposed at the general rate of 10 per cent applicable under Australia's domestic law.

Paragraph 3 defines "interest" for the purposes of the article to encompass 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, and therefore as falling within the definition of "interest" for withholding tax purposes.

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 or Article 14. Accordingly, paragraph 4 of Article 11 requires that the source country tax rate limitations specified by the article for outgoing interest payments not apply to such interest.

The interest "source" rules set out in paragraph 5 accord with the scheme of the interest withholding tax provisions of Australia's domestic law. Those rules operate to allow Australia to tax interest to which a resident of Thailand is beneficially entitled where the interest is paid by a resident of Australia and is not an expense of a business carried on by that resident in a country outside Australia through a permanent establishment in that country. Australia may also tax interest paid by a resident of Thailand if it is an expense incurred by that person in carrying on a business in Australia through a permanent establishment.

The article also contains a general safeguard (paragraph 6) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the source country tax rate limitations in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.

By paragraph 7, 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 is to be treated as exempt from tax in that country.

Article 12 - Royalties

This article in general limits to 15 per cent of the gross amount of the royalties the tax that the country of source may impose on royalties (as defined in paragraph 3 of the Article) paid or credited to beneficial owners resident in the other country. The definition of royalties contained in paragraph 3 is consistent with the comparable definition in Australia's domestic income tax law and other modern comprehensive tax treaties.

The 15 per cent limit is also to apply, by paragraph 4, to the source country tax on income derived from the alienation of property or rights referred to in the definition of royalties. However, it will not 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 non-residents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax.

As in the case of dividends and interest, paragraph 5 specifies that the 15 per cent limitation of tax in the country of origin is not to apply to royalties effectively connected with a permanent establishment or fixed base in that country.

The royalties "source" rule in paragraph 6 mirrors the source rule for interest income contained in paragraph 5 of Article 11.

By paragraph 7, if royalties flow between related persons, the 15 per cent limitation will apply only to the extent that the royalties are not excessive.

Article 13 - Alienation of Property

Article 13 allocates taxing rights between the respective countries in relation to income or gains arising from the alienation of real property (as defined in Article 6) and other items of property.

By paragraph 1, 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 purposes of this paragraph.

Paragraph 2 deals with income or gains arising from the alienation of property (other than real property covered by paragraph l) forming part of the business property of a permanent establishment of an enterprise or pertaining to a fixed base used for performing independent personal services. It also applies to income or gains arising 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. That rule corresponds to the rules for taxing business profits and for income from independent personal services contained in Articles 7 and 14.

Paragraph 3 specifies that income or gains from the disposal of ships or aircraft operated in international traffic, or associated property (other than real property covered by paragraph l) is to be taxable only in the country of residence of the operator of the ships or aircraft.

By paragraph 4, income 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, may be taxed in the country in which such assets or principal assets are situated. This treats the alienation of those shares or comparable interests similarly to the treatment by paragraph 1 of the alienation of real property to which that paragraph applies.

The article contains a sweep-up paragraph, paragraph 5, which enables each country to tax, according to its domestic law, any gains of a capital nature derived by a resident of the other country from the alienation of any property not specified in paragraphs 1, 2, 3 and 4 of this article. It thus preserves the application of Australia's domestic law rules in relation to the taxation of capital gains as regards the alienation of such property.

As indicated earlier, because the income or gains concerned are dealt with separately by this article, it also applies independently of the "business profits" provisions in Article 7. In the event that the operation of this article should result in an item of income or a gain being subjected to tax in both countries the country of which the person deriving the income or gain is a resident would be obliged by Article 24 to allow a credit against its own tax for the tax imposed by the other country.

Article 14 - Independent Personal Services

At present, an individual resident in Australia or in Thailand 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. However, by this article, such income will be taxable only by the country of residence of the recipient if:

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the performance of those services in the other country is for a period or periods not exceeding in the aggregate 183 days in the tax year or year of income of that other country;

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the recipient does not have a fixed base there for the purpose of performing such activities for a longer period; and

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the income is not deductible in determining taxable profits of an enterprise or a permanent establishment situated in that country.;

Article 15 - Dependent Personal Services

Article 15 provides the basis upon which the remuneration of visiting employees is to be taxed. Generally, salaries, wages, etc., 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, it is conventional to exempt from tax in the country being visited where only visits of a short-term nature are involved.

The conditions for exemption are:

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that the visit or visits not exceed, in the aggregate, 183 days in the tax year or year of income of the country visited;

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that the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited; and

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that the remuneration 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 these conditions are met, the remuneration so derived will be liable to tax only in the country of residence. The provisions of this article do not apply, however, in respect of income that is dealt with separately in Articles 16, 18, 19 and 20 of the agreement.

By paragraph 3 of the article, income from an employment exercised aboard a ship or aircraft operated in international traffic is to be taxed only in the country of residence of the operator.

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

By this article, income derived by visiting entertainers (including athletes) from their personal activities as such will continue to be taxed in the country in which the activities are exercised, irrespective of the duration of the visit.

Paragraphs 2 and 3 of this article are safeguarding provisions designed to ensure that income in respect of personal activities exercised by an entertainer, whether received by the entertainer or by another person, and profits derived by an enterprise which formally provides the entertainer's services, is taxed in the country in which the entertainer performs, whether or not that other person or enterprise has a permanent establishment or fixed base in that country.

Paragraph 4 effectively provides that income derived by an entertainer visiting one of the countries from his or her activities as an entertainer shall be taxed only in the country of residence of the enterprise if the visit of the entertainer is substantially funded by public funds of the resident country. Such income derived by an entertainer, but accruing to another person will also be taxed by the resident country.

Article 18 - Pensions

Under this article pensions and annuities paid to a resident of one country (other than government service pensions referred to in Article 19) are to be taxed only by the country of residence of the recipient.

Article 19 - Government Service

Paragraph 1 of this article provides that remuneration, other than a pension, paid to an individual in respect of services rendered in the discharge of governmental functions (including remuneration paid by a State or local authority) of one of the countries will be taxed only in that country. However, such remuneration is to be taxable only in the other country if the services are rendered in that country and the recipient is a citizen or national of, or ordinarily resides in, that country.

Paragraph 2 provides that, primarily, any pension paid by a government (including a State government or local authority) of one country in respect of services rendered in the discharge of governmental functions may be taxed only in that country. However, if the recipient is a resident of, and a citizen or a national of, the other country, the pension is to be taxed only in the other country.

Paragraph 3 provides that the provisions of Articles 15, 16 or 18, as the case may be, will apply (and not paragraphs 1 and 2 of Article 19) where the services are rendered in connection with any trade or business carried on by a government.

Article 20 - Professors and Teachers

This article applies in respect of professors and teachers who are resident in one country and visit the other country for a period of not more than two years at the invitation of, and solely for the purpose of teaching or research or both at, a recognised educational institution situated there. In these circumstances, the remuneration of the professor or teacher for his or her teaching or research work are to be exempt from tax in the country visited. The exemption provided by the article does not apply to remuneration received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons.

Article 21 - Students and Trainees

This article applies to students and trainees temporarily present in a country solely for the purpose of their education or training who are, or immediately before the v-sit were, resident in the other country. In these circumstances, the students and trainees will be exempt from tax in the country visited in respect of payments received from abroad for the purposes of their maintenance, training or education.

Article 22 - Income Not Expressly Mentioned

This article provides rules for the allocation between the two countries of taxing rights in relation to items of income not expressly mentioned in the preceding articles of the agreement.

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 country of source.

However, the first-mentioned exclusive taxing right of the country of residence does not apply to income which is effectively connected with a permanent establishment or fixed base which a resident of one country has in the other country. In such a case, the provisions of Article 7 or Article 14, as the case may be, will apply.

Article 23 - Source of Income

Article 23 specifies the source of various classes of income for the purpose of ensuring that each country is empowered to exercise the taxing rights allocated to it by the agreement over residents of the other country. It is also designed to ensure that where an item of income is taxable also by the country of residence of the recipient, double taxation relief will be given by that country in respect of tax levied by the country of source in accordance with the taxing rights allocated to it under the agreement. The provision resolves any conflict in domestic law source rules and obviates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.

Article 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 for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax. It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income which are 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 approach has also generally been adopted in this agreement.

Paragraph 1 of the article thus provides for Australia to relieve double taxation by allowing a credit against its own tax for Thai tax paid under the law of Thailand and in accordance with the agreement on income derived by a resident of Australia from sources in Thailand. Where a dividend is paid by a Thai resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Thai company, paragraph 2 provides for the credit allowed by Australia to also take into account, in addition to the Thai tax paid in respect of the dividends, the underlying Thai tax paid by the company in respect of the profits out of which the dividend is paid.

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 Thailand. 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 Article 24 by application of the general foreign tax credit provisions of the Income Tax Assessment Act. This will include the allowance of "underlying" tax credit relief in respect of dividends paid by Thai resident companies to related Australian companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the Assessment Act.

Paragraphs 3 and 4 of Article 24 contain "tax sparing" provisions under which an Australian resident recipient of income on which Thailand - under specified incentive measures - has forgone tax, will obtain tax credit relief as if the Thai tax forgone had been paid.

The development incentive provisions for which tax sparing relief will be available are those specified in paragraph 3 and any subsequent provisions introduced in Thailand which may be agreed by the authorised representatives of Australia and Thailand to be of a substantially similar character in letters exchanged for that purpose. Proposed section 4A (see notes on clause 4 of the Bill) will provide for particulars of the provisions agreed in such an exchange of letters to be notified by the Treasurer in the Gazette.

Where a tax sparing credit is allowable, paragraph 3 has the effect that tax sparing is to be granted on the "direct credit" method and not the "gross-up and credit" method for the purposes of calculating the Australian tax. In other words, there will be no "grossing-up"' for Australian tax assessment purposes of the relevant income by the amount of Thai tax forgone. For example, in the case of income received from Thailand in respect of which Thai tax has been wholly forgone, the amount included in the assessable income in Australia will be the amount received, and a credit will be granted for the Thai tax forgone.

By reason of paragraph 4, the tax sparing provisions of the article are only to apply in relation to income derived in any of the first ten years of income to which the agreement has effect unless authorised representatives of Australia and Thailand agree in an exchange of letters to extend them beyond that period. Proposed new section 4A (see notes on clause 4 of the Bill) will also provide for any such extension to be notified by the Treasurer in the Gazette.

For its part Thailand will, broadly, allow a credit to Thai residents in respect of taxes payable in Australia in accordance with the agreement on their Australian source income, against the Thai tax payable on that income.

The tax credit relief provisions of Article 24, including the tax sparing relief provisions, reflect the fact that they were negotiated on the basis of the existing Australian and Thai income tax laws. It is relevant, however, that changes that have been foreshadowed by the Australian Government to the basis of taxing foreign income of Australian residents may lead to changes to the unilateral double tax relief provisions of Australia's domestic law. If, as has been indicated, certain dividends and branch income derived by Australian residents from Thailand should generally qualify in the future for exemption from Australian tax, that general exemption would normally be expected to be made available in respect of such income in lieu of the tax credit and tax sparing relief provisions of Article 24 of the agreement.

Article 25 - Mutual Agreement Procedure

One of the purposes of this article is to provide for consultation between the taxation authorities of the two countries with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case within three years of the first notification of the action giving rise to the taxation not in accordance with the agreement.

The article also authorises consultation between the taxation 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.

Article 26 - Exchange of Information

This article authorises the two taxation authorities to exchange information necessary for the carrying out of the agreement or of domestic laws concerning the taxes to which the agreement applies. The purposes for which this 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.

The exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process or which would be contrary to public policy is not permitted by the article.

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 to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.

Article 28 - Entry into Force

This article provides for the entry into force of the agreement. This will occur on the last of the dates on which Notes are exchanged through the diplomatic channel notifying that the necessary procedures to give the agreement the force of law in both countries have been completed.

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 Notes are exchanged. In respect of tax other than withholding tax, the agreement will have effect in Australia in relation to income of any year of income beginning on or after 1 July in the calendar year following that in which the notes are exchanged. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year beginning on 1 July in the year in which the agreement first has effect will be the date from which the agreement will take effect in respect of tax other than withholding tax.

In Thailand, the agreement will first have effect, for all taxes, in respect of income derived on or after 1 January in the calendar year next following that in which the Notes are exchanged.

Article 29 - 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.

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. It would cease to be effective in Thailand, for all taxes, 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.