House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Rt. Hon. William McMahon).

Income Tax (International Agreements) Bill 1969

Introductory Note

The main purposes of this Bill are:

•

to give the force of law in Australia to comprehensive double taxation agreements between Australia and Singapore and Australia and Japan which were signed in Canberra on 11 February 1969 and 20 March 1969 respectively (an outline of the agreement with Singapore is at pages 4 to 17 of this memorandum, and of the agreement with Japan at pages 18 to 30) - Clause 4;

•

to give the force of law to an agreement between Australia and France for the avoidance of double taxation of income derived from international air transport which was signed in Canberra on 27 March 1969 (this agreement is outlined at pages 31 and 32) - Clause 4;

•

to specify that interest and royalties derived by residents of Australia from Singapore or Japan and in respect of which the overseas tax is limited by the agreements to 10 per cent will not, by reason of the payment of Singapore or Japanese tax, be exempt from Australian tax (credit for the overseas tax will be allowed against the Australian tax on the interest and royalties) - Clause 5.

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

Notes on Clauses

INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1969.

Clause 1: Short title and citation.

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

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that unless the contrary intention appears every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent. By this clause the Amending Act will come into operation on the day on which it receives the Royal Assent.

Clause 3: Interpretation.

Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Paragraphs (b) and (c) of this clause will insert in section 3 formal definitions of the Singapore, Japanese and French agreements which are being incorporated as Schedules to the Principal Act by clause 6 of the Bill. Paragraph (a) will formally provide that references to a 'calendar year' are to mean a year commencing on 1st January.

Paragraph (d) of clause 3 proposes the insertion of a new sub-section - sub-section (7.) - in section 3 of the Principal Act. This sub-section provides that, unless the contrary intention appears, in the English text of the Japanese agreement, words in the singular include the plural and words in the plural include the singular. This provision is normally made in an agreement itself but, as the Japanese language does not have singular and plural forms of expression, the provision would have had no meaning in the Japanese text.

Clause 4: Agreements.

Agreement with Singapore.

Agreement with Japan.

Agreement with France.

This clause proposes the insertion in the Principal Act of three sections - sections 7, 8 and 9 - which will respectively give the force of law in Australia to the agreements with Singapore, Japan and France. Each agreement will be given the force of law with effect from the times indicated in the agreement itself (see explanations of article 21 of the Singapore agreement, article 22 of the Japanese agreement and article 4(1.) of the French agreement).

Consistently with article 21 of the Singapore agreement and article 22 of the Japanese agreement each agreement will, on Assent being given to the Bill, have effect -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 July 1969; and

(b)

in respect of other income, for any year of income beginning on or after 1 July 1969.

(In the case of the Japanese agreement this is on the assumption that, as is expected, the exchange of instruments of ratification of the agreement takes place before the end of November 1969.)

In keeping with article 4(1.) of the French agreement, that agreement is to have effect for purposes of Australian tax for the 1966/67 and subsequent years of income.

Sub-section (2.) of the proposed new section 8 is a technical provision. It relates to paragraph 5 of the protocol to the Japanese agreement. In broad terms, that paragraph permits certain areas of Australia's continental shelf to be treated, for purposes of the agreement, as if they were part of Australia, provided Australian tax law is in force in relation to them. The new sub-section states that section 6AA of the Income Tax Assessment Act, which deals with Australia's taxing rights as to activities on the continental shelf, is to be taken as a provision under which Australian tax law is in force in relation to the areas.

Sub-section (3.) of section 8 and sub-section (2.) of section 9 provide for the notification in the Gazette of the dates on which the Japanese and French agreements enter into force. The purpose of these provisions is to provide a readily available and authoritative source from which persons generally may ascertain the fact and date of entry into force of these agreements. Because of the manner in which, under the terms of the Japanese and French agreements, those agreements will enter into force, it is not possible to indicate in this Bill the dates of entry into force of those agreements.

Each agreement will continue to have the force of law until it ceases to be effective in accordance with a notice of termination given by either country under article 22 of the Singapore agreement, article 23 of the Japanese agreement or article 4(2.) of the French agreement.

Clause 5: Provisions relating to certain income derived from sources in the United Kingdom, Singapore and Japan.

Introductory Note.

The primary purpose of this clause is, in effect, to apply the credit system of relief of double taxation to interest and royalties that are derived by residents of Australia from Singapore or Japan and in respect of which under the respective agreements, Singapore or Japanese tax is limited to 10 per cent. The Principal Act already contains corresponding provisions in relation to interest or royalties, derived by residents of Australia from the United Kingdom, which are subject to reduced United Kingdom tax under the new agreement with that country that was signed on 7 December 1967.

The clause will ensure that section 23(q) of the Income Tax Assessment Act - which provides an exemption from Australian tax for foreign-source income (other than dividends) taxed in the country of source - is not to apply to interest or royalties derived (either directly or through a trustee) by a resident of Australia from Singapore or Japan during income years commencing on or after 1 July 1969 where, under the agreements, the Singapore tax or the Japanese tax on that income is limited to 10 per cent of the gross amount of the income. The interest and royalties will then be assessable income for income tax purposes to the extent provided by the general provisions of the Assessment Act and the agreements will require a credit for the Singapore or Japanese tax to be allowed against the Australian tax on the interest and royalties. Existing sections 14 and 15 of the Principal Act will govern the allowance of credit for the Singapore or Japanese tax.

Paragraph (a) of clause 5 effects a formal drafting amendment.

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

The new paragraph (aa) will ensure that interest and royalties derived (either directly or through a trustee) by an Australian resident from Singapore, and subject to Singapore tax not exceeding 10 per cent of the gross amount, are not to be exempt from Australian tax. This will apply in respect of such income derived during income years commencing on or after 1 July 1969.

The new paragraph (ab) will serve a similar purpose as regards such income derived from Japan. On the assumption that the Japanese agreement will, as is expected, enter into force during the 1969 calendar year, the new provision will apply to income derived during income years commencing on or after 1 July 1969.

Clause 6: Fifth, Sixth and Seventh Schedules.

This clause will include a copy of each of the three agreements mentioned as a Schedule - the Fifth, Sixth and Seventh Schedules - to the Principal Act.

AGREEMENT WITH SINGAPORE.

Introductory Note

The agreement is generally similar to the agreements completed with the United Kingdom, the United States, Canada and New Zealand and to the later agreement with Japan.

The arrangements which it embodies for the relief of double taxation of income flowing between the two countries are consistent with those adopted in the other agreements. The agreement specifies that certain classes of income are to be taxed only in the country of residence of the recipient and that other classes of income are to be taxed in the country of origin, with the country of residence, if it also taxes the income, allowing a credit in respect of tax paid in the other country. In the latter case, the tax of the country of origin on certain income is limited by the terms of the agreement.

Briefly stated, the following classes of income are to be subject to tax only in the country of residence of the recipient -

•

business profits not attributable to a permanent establishment in the country of origin (articles 4 and 5);

•

airline profits derived from operations in international traffic (article 7);

•

remuneration or other income derived by an individual for personal (including professional) services, unless the services are performed or exercised in the other country and the person exercised in the other country and the person deriving the income is in that other country for more than half the taxation year (articles 11 and 12);

•

pensions (other than Government pensions ) and purchased annuities (article 13);

•

remuneration of Government employees (article 14);

•

payments for the maintenance, education or training of visiting students and trainees (article 15).

The country of origin will retain taxing rights in respect of international shipping profits but will reduce its tax on such profits by one-half (article 7).

Other income in respect of which the tax of the country of origin is limited by the agreement comprises -

•

dividends - limit of 15 per cent (article 8);

•

interest - limit of 10 per cent (article 9);

•

royalties - limit of 10 per cent (article 10).

Singapore does not at present levy a separate tax on dividends (the Singapore tax on company profits being treated by Singapore law as tax on dividends paid out of those profits) but the agreement provides that the 15 per cent limit will apply to any tax on dividends which might subsequently be introduced in Singapore. In the absence of a separate Singapore tax on dividends, the method of taxation in Australia of Singapore dividends will remain unchanged - an Australian resident will continue to be taxed on the amount of dividends actually received and there will be no Singapore tax on the dividends for which Australia is to give credit. Tax at the rate of 15 per cent will be withheld from dividends paid by Australian companies to residents of Singapore, with credit being allowed by Singapore for Australian tax.

Australian parent companies are, by the rebate on inter-company dividends provided in section 46 of the Income Tax Assessment Act, effectively freed from Australian tax on dividends derived from Singapore subsidiary companies. The agreement ensures that this rebate will continue to apply for the duration of the agreement where the Australian investment in a Singapore company is by way of a 10 per cent or greater holding by an Australian company (article 18(2.)).

A feature peculiar to this agreement is that a credit for Singapore tax will also be allowed to an Australian resident in receipt of interest or royalties where relief from payment of the Singapore tax of 10 per cent has been granted under 'economic incentive' provisions of Singapore legislation. The agreement provides, in effect, that where Singapore forgoes its tax of 10 per cent the Australian resident will be taxed on the actual amount of the interest or royalties received by him, increased by the amount of the Singapore tax forgone. Credit will be allowed in Australia for that tax as though it had been paid (article 18(3.)).

Explanatory notes on each article of the agreement are given in the following paragraphs -

Notes on Articles

Article 1: Taxes the subject of the agreement.

This article lists the existing taxes to which the agreement applies. These are the Commonwealth income tax (including withholding tax) and the Singapore income tax. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may be imposed by either Government in the future in addition to, or in place of, the existing taxes.

Article 2: Definitions.

Paragraph 1 of this article defines a number of terms used in the agreement. Definitions of other terms are to be found in the articles to which the terms relate.

Definitions in paragraph 1 of article 2 calling for comment are -

'Australia': In common with Australia's other double taxation agreements, this term is defined as including Australian external territories. It also includes areas of the Australian continental shelf specified in the Petroleum (Submerged Lands) Act which, by section 6AA of the Income Tax Assessment Act, are to be treated in relation to petroleum exploration and exploitation as if they were part of Australia.

'Profits of a Singapore enterprise' and 'profits of an Australian enterprise': Article 5 of the agreement provides for the taxation of business profits of an Australian or Singapore enterprise. These profits, which are described as 'industrial or commercial profits' in other agreements are to be taxed only in the country of residence, except where the profits are attributable to a permanent establishment (as defined in article 4) in the other country. The definition defines 'profits' for these purposes as meaning, broadly, business profits, as distinct from remuneration for personal services or investment income such as dividends, interest, royalties or rents. The term includes, however, dividends, interest or royalties that are effectively connected with a trade or business carried on through a permanent establishment.

Profits from the operation of ships or aircraft are excluded from the 'profits' to which article 5 relates as are certain payments (described in sub-paragraphs (v) and (vi) of the definition) which would otherwise be classed as 'royalties' and which would, as royalties, not generally come within the ambit of article 5.

Paragraph 2 of article 2 excludes from the terms 'Australian tax' and 'Singapore tax' amounts payable by way of interest of penalty, e.g. for late lodgment of a return or late payment of tax.

Paragraph 3 relates to provisions of the Singapore law which have no counterpart in Australian taxation law. A person resident in Singapore is taxed there on foreign-source income only if the income is remitted to or received in Singapore. Paragraph 3 will ensure that Australia is not to exempt or reduce its tax on income that, because it is not remitted to or received in Singapore by the Singapore resident who derives it, is not subject to Singapore tax.

Paragraph 4 of article 2 is a conventional provision which specifies that terms in the agreement that are not defined in the agreement are to have the meanings which they have under the respective taxation laws of Singapore and Australia.

Article 3: Residence.

The extent to which a double taxation agreement provides relief for a taxpayer is generally governed by his residential status. The income tax laws of both countries contain tests for determining whether a person is, for taxation purposes, a resident but those tests vary somewhat between each country and it is possible that in isolated cases each may regard a particular taxpayer as its own resident. Article 3 deals with these situations by specifying, for the purposes of the agreement, the circumstances in which a taxpayer (whether a company, an individual, or other entity) will be treated as being a resident of one country or the other. The article will, of course, apply also where a taxpayer is, under the respective taxation laws, a resident of only one of the two countries.

The relevant provisions are found in paragraphs 1 to 4 of article 3 which is modelled on article 3 of the Australia/United Kingdom double taxation agreement.

Article 4: Permanent establishment.

Application of various provisions of the agreement is dependent upon whether or not income of a taxpayer resident in one country is attributable to, or connected with, a trade or business carried on through a 'permanent establishment' in the other country. This article defines the term for purposes of the agreement and follows the corresponding definition in the new United Kingdom agreement.

The primary meaning of the defined term is stated in paragraph 1 as being a fixed place of trade or business in which the trade or business of the enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with giving examples of what constitutes a permanent establishment and defining the circumstances in which a resident of one country shall, or shall not, be deemed to have a permanent establishment in the other country.

Article 5: Business profits.

This article governs the taxing of 'profits' (as defined in article 2) derived by a resident of one country from sources in the other country.

The taxing of these profits depends on whether profits of a person resident in one country relate to a 'permanent establishment' in the other country. If they do not the profits will be taxed only in the country of residence of the taxpayer. If, however, the resident of one country carries on trade or business through a permanent establishment (as defined in article 4) in the other country, the country in which the permanent establishment is situated may tax profits attributable to that establishment.

A Singapore resident who is taxed in Australia on profits attributable to a permanent establishment in Australia will be entitled to a credit for Australian tax under article 18 against any Singapore tax on that income. In the case of an Australian resident, profits (other than any dividend component of the profits) attributable to a permanent establishment in Singapore and subject to tax in that country will qualify for exemption from Australian tax under section 23(q) of the Income Tax Assessment Act.

Article 5 is on all fours with corresponding articles in Australia's other double taxation agreements. As with those agreements, the article specifies an arm's length basis for ascertaining the amount of profits attributable to a permanent establishment.

The article preserves the application of the special provisions of the Australian income tax law relating to film businesses controlled abroad and insurance with non-residents of Australia.

Article 6: Associated companies.

This article is supplementary to the provisions of article 5, which sets out the basis upon which profits are to be attributed to a permanent establishment. The main purpose of article 6 is to enable an allocation of profits between inter-connected companies in Australia and Singapore.

Broadly, the article provides for allocation of profits between associated companies where the commercial or financial arrangements that apply differ from those that might be expected to exist between independent companies. The basis of allocation is fixed by having regard to the profits which the company concerned might have been expected to derive if it had been an independent company dealing at arm's length with its associate.

Article 7: Shipping and aircraft profits.

This article specifies that profits from the operation of aircraft in international traffic will be subject to tax only in the country of residence of the operator.

On the other hand, the country from which income from freights etc. is derived in the course of international shipping traffic by a resident of the other country will retain taxing rights as to the income. At present, the tax imposed on such income in Australia and Singapore is limited, broadly, to five per cent of the gross receipts from the carriage of passengers, livestock, mails or goods shipped in Australia or Singapore respectively. The agreement requires, however, that the tax of the country of shipment be reduced by one-half.

Both airline and shipping profits derived from voyages or operations confined solely to places in one country will remain subject to the tax normally imposed on the profits in that country. This will mean, for example, that a Singapore resident shipowner would not be entitled to any relief from Australian tax in respect of income from shipments from a place in Australia to another place in Australia or its territories, including the Territory of Papua-New Guinea.

Article 8: Dividends.

The broad scheme of this article is to limit to 15 per cent of the gross amount of dividends the tax (other than tax on the profits out of which the dividends are paid) imposed by the country of source on dividends payable to shareholders resident in the other country.

Paragraph 1 specifies the 15 per cent limit in respect of dividends paid by an Australian company to a Singapore resident. The paragraph will operate to reduce the withholding tax on dividends payable by a company that is a resident of Australia to a shareholder resident in Singapore from 30 per cent to 15 per cent. This is the rate at which tax is withheld by an Australian company from dividends payable to residents of the United Kingdom, the United States, Canada and New Zealand in accordance with the double taxation agreements effected with those countries.

Paragraphs 2, 3, and 4 deal with the taxation by Singapore of dividends paid to residents of Australia. At present, a Singapore company is taxed in Singapore at the rate of 40 per cent and this is also the rate of tax on dividends received by non-residents of Singapore. Under the Singapore taxation system the company tax on the profits out of which dividends are paid by a Singapore company is treated as meeting the Singapore tax on the dividends and this means that an Australian resident is not called on to pay any Singapore tax on the dividends he receives from a Singapore company. This is also the position as regards dividends paid by a Malaysian company out of profits earned in Singapore in respect of which, under arrangements between Singapore and Malaysia, Singapore has taxing rights.

Paragraph 2 sets out the general rule that the position just outlined is to continue while Singapore retains its present taxing system, i.e., Australian residents are to be effectively exempt from tax on Singapore dividends. Paragraph 3, however, will permit Singapore to collect an appropriate amount of tax on dividends paid to Australian residents where, due to an upwards change in the company rate, the non-resident rate on dividends has failed temporarily to coincide with the company rate.

Paragraph 4 deals with the possible future introduction by Singapore of a tax on dividends that is distinct from the company tax on the profits out of which the dividends are paid. In this event the Singapore tax on dividends derived by an Australian resident is to be limited to 15 per cent of the dividends.

Paragraph 5 specifies that the 15 per cent tax limit will not apply to dividends where, broadly, the shareholder has a permanent establishment in the country from which the dividends are paid and the shareholding giving rise to the dividends is effectively connected with a trade or business carried on through that permanent establishment. Such dividends come within the definition in article 2 of 'profits of a Singapore enterprise' or 'profits of an Australian enterprise' and fall to be taxed in accordance with article 5.

Paragraph 6 of article 8 is a conventional provision which ensures, broadly, that one country will not tax dividends paid by a company resident in the other country if the person deriving the dividend is not a resident of the first country.

Article 9: Interest.

This article limits to 10 per cent of the gross amount of the interest the tax Australia and Singapore may, in general, charge on interest derived by a resident of the other country. Paragraph 1 applies to Australian tax - which in any event is at the rate of 10 per cent - while paragraph 2 limits the tax Singapore may charge on interest derived by Australian residents.

At present, interest derived from sources in Singapore by a resident of Australia is normally subject to Singapore tax at the rate of 40 per cent and is exempted from tax in Australia by section 23(q) of the Income Tax Assessment Act. As explained earlier in this memorandum, however, interest derived by a resident of Australia which is subject to reduced Singapore tax in accordance with paragraph 2 will be subject to tax in Australia and a credit will be allowed for the reduced Singapore tax.

Paragraph 3 of the article specifies that the 10 per cent limit will not apply to interest where the person deriving the interest has a permanent establishment in the country in which the interest arises and the indebtedness giving rise to the interest is effectively connected with a trade or business carried on through that permanent establishment. Article 5 applies to this category of interest.

Paragraph 4 will restrict the application of paragraphs 1 and 2 to interest which would have been agreed upon by persons at arm's length in cases where, because of a special relationship between the persons associated with the loan transaction, the amount of interest paid is excessive. Paragraph 5 defines the term 'interest' for the purposes of the article.

Article 10: Royalties.

The purpose of this article is to limit to 10 per cent of the gross royalties the tax Australia and Singapore may charge on royalties derived by a resident of the other country. The Australian tax which paragraph 1 limits is currently imposed at ordinary general rates of tax on the gross royalties as reduced by allowable deductions, while paragraph 2 - which applies to Singapore tax - is set in the context of a present general rate of 40 per cent on royalties received by non-residents of Singapore.

Paragraph 3 defines the term 'royalties' for the purposes of the article in a way that gives it a somewhat more restricted meaning than the term has for the general purposes of the Income Tax Assessment Act. Under the article 'royalties' means, in general, industrial royalties (including various 'know-how' payments) but does not include literary and artistic copyright, film and related royalties, or royalties or other payments in respect of the operation of mines or quarries or of the exploitation of natural resources. The tax in the country of source on the payments which are not treated as 'royalties' will not, of course, be limited to 10 per cent.

As in the case of interest, royalties (as defined in paragraph 3) derived by a resident of Australia from sources in Singapore which are subject to reduced Singapore tax in accordance with the article, will be subject to tax in Australia and a credit will be allowed for the reduced Singapore tax.

As in the case of dividends and interest, it is specified in paragraph 4 that the limitation of tax in the country of origin is not to apply to royalties effectively connected with a permanent establishment in that country. Paragraph 5 provides that the 10 per cent limitation will apply to royalties (as defined) flowing between persons not at arm's length only to the extent that the royalties paid do not exceed the amount that would have been paid in the absence of a special relationship between the parties.

Article 11: Income from personal services.

Under paragraph 1 of this article, remuneration or other income derived by a resident of one country from personal (including professional) services which are performed or exercised in the other country, are deemed to have a source in, and (subject to later articles - particularly article 12) may be taxed in, that other country. Otherwise, the income is to be taxed only in the country of residence of the recipient.

The provisions of articles 11 and 12 are specified in paragraph 2 as applying to a company director's remuneration as if it was in respect of personal services. The paragraph further provides that director's fees and similar payments derived by a resident of one country as a director of a company resident in the other country shall be deemed to be derived in respect of personal services performed in that other country.

Paragraph 3 is designed to ensure that income from an employment exercised on ships or aircraft in international traffic will be subject to tax only in the country of residence of the employee.

Article 12: Income from short term visits and Income of public entertainers.

Paragraph 1 of this article qualifies article 11 by exempting from tax in the country in which personal services are performed or exercised, income derived by a resident of the other country in respect of such personal services where the services are performed or exercised for or on behalf of a resident of that other country. The exemption applies if the recipient is present in the first-mentioned country during not more than one-half of the taxation year and the remuneration is not deductible in determining the profits of a permanent establishment in that country.

Paragraph 2 ensures that the exemption in paragraph 1 does not apply to income derived by visiting public entertainers.

Paragraph 3 applies to profits derived by an enterprise of one country from the provision of the services of public entertainers in the other country. These profits are generally to be taxed in the country where the services are performed except that if the enterprise providing the services is substantially supported from the public funds of its government (as defined in paragraph 4) the profits will be exempt from tax in the country of source.

Article 13: Pensions and annuities.

This article is designed to ensure that pensions and purchased annuities derived by a resident of one country from sources within the other country may be subject to tax only in the country of residence of the recipient. The right of the country of source to tax pensions paid to residents of the other country will, however, be preserved in the case of a government pension paid in respect of services rendered in the discharge of governmental functions, i.e., to pensions paid to former civil or public servants. A civil service pension paid by the Government of Singapore to a resident of Australia will, if the pension is taxed by Singapore, qualify for exemption from Australian tax under section 23(q) of the Income Tax Assessment Act.

Article 14: Governmental remuneration.

This article provides for the reciprocal exemption from tax by Singapore and Australia respectively of remuneration derived by Australian and Singapore government employees for services rendered to their respective Governments. The exemption conferred by the article will not apply where the services are rendered in connection with a trade or business carried on by a Government for purposes of profit.

Article 15: Visiting students and trainees.

Under this article, each country will exempt from its tax payments received from abroad by a student or trainee for his maintenance, education or training, if the student or trainee is present in the country solely for the purpose of his education or training and is, at the time, or was immediately before visiting that country, a resident of the other country.

Article 16: Income of dual residents.

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

The residential status of such a person for the purposes of the agreement is established by application of the rules set out in article 3 and article 16 reserves to the country to which the person's residence is allotted the sole right to tax income from sources in that country or from a third country.

Article 17: Source of income.

It is important for the application of the agreement that the source of income is clearly established. Article 17 defines the source of various classes of income for the purposes of the agreement and obviates difficulties which might arise should each country, by application of the source rules applicable under its domestic law, claim to be the source of that income. Source rules in relation to some classes of income are contained in other provisions of the agreement.

Very broadly, under article 17 -

•

dividends have a source where the paying company is resident;

•

shipping profits have a source in the country in which passengers, goods etc. are embarked;

•

income from insurance and film businesses have a source according to the law of the country which taxes this income under special provisions;

•

Government pensions have a source in the country of the paying Government;

•

interest has a source in the country in which is situated the business against the profits of which the interest is charged;

•

royalties have a source where the knowledge, right etc. giving rise to the royalties is used.

Article 18: Relief from double taxation.

This article provides, broadly, for the relief of double taxation on a credit basis where income that is derived by a resident of one country from sources in the other country is taxed in both countries.

As outlined earlier in this memorandum, some income flowing between the two countries may be taxed only in the country of residence of the recipient in which case there is no need to give further relief. Other income may be taxed in the country of source and if the country of residence also taxes this article requires the country of residence to relieve the ensuing double taxation by crediting the tax of the country of source against the tax imposed by the country of residence. This method of relieving double taxation is common to Australia's other double taxation agreements.

Paragraph 1 of the article requires Australia to allow a credit for Singapore tax against its own tax on income derived by a resident of Australia from sources in Singapore. Australia is not obliged to give credit, in respect of dividends, for the Singapore company tax on the profits out of which dividends are paid and this will mean that while Singapore's taxing system stays as it is, there will be no credit in Australia in relation to dividends from Singapore.

Under the paragraph Australia does not, of course, have any obligation to give credit for Singapore tax in cases where the income is exempt from Australian tax under section 23(q) of the Income Tax Assessment Act. However, as explained at page 4 of this memorandum it is proposed that section 23(q) should not apply to interest or royalties in respect of which, under articles 9 and 10 of the agreement, Singapore tax is limited to 10 per cent. Paragraph 1 of article 18 will ensure that a credit for the reduced Singapore tax will be allowed against Australian tax imposed on income of that nature.

Paragraph 2 of article 18 is designed to ensure that the provisions of section 46 of the Income Tax Assessment Act, under which an Australian resident company is entitled to a rebate of the tax payable on dividends it receives from other companies, will endure for the duration of the agreement in respect of dividends derived from a Singapore company by an Australian resident company which owns at least 10 per cent of the paid- up share capital of the Singapore company. An Australian company will be assured, therefore, of continued freedom from Australian tax on dividends from a Singapore investment providing the 10 per cent holding specified in the article is maintained.

Paragraph 3 of article 18 has no counterpart in other double taxation agreements to which Australia is a party and is a provision of some significance. Australia will allow a credit for tax forgone by Singapore, in accordance with its economic incentive legislation, in respect of interest and royalties which would, under the agreement, otherwise be subject to reduced Singapore tax of 10 per cent.

Under Singapore's Economic Expansion Incentives (Relief from Income Tax) Act, 1967, Singapore authorities have power to reduce to nil the tax that would otherwise by payable by a non-resident of Singapore in respect of certain interest or royalties. If Singapore were, because of this legislation to refrain from collecting its tax on interest and royalties the income would be collected by Australia and this could nullify the incentive which Singapore sought to grant to the Australian taxpayer.

To meet this situation, paragraph 3 requires Australia to give credit for Singapore tax forgone as if the tax had been paid. In cases where, under its special legislation, Singapore wholly forgoes the tax of 10 per cent which it is entitled under the agreement to charge, the Australian resident deriving the interest or royalties will be taxed in Australia on the amount received as 'grossed-up' by the amount of tax forgone by Singapore. The resident will be treated as having paid the Singapore tax of 10 per cent and this amount will, under paragraph 1, be allowed as a credit against his Australian tax.

Paragraph 4 specifies that the arrangement contained in paragraph 3 will operate initially for a five year period but envisages that the two Governments may agree to extend it for a further period or periods.

Paragraph 5 of the article provides for the allowance by Singapore to its residents of a credit for Australian tax against Singapore tax levied on income derived from sources in Australia. In addition to giving credit for the Australian withholding tax on dividends Singapore is to allow a credit for the Australian company tax on the profits out of which the dividends are paid if the recipient company holds 10 per cent or more of the paid-up share capital in the Australian dividend-paying company.

Paragraph 6 relates to article 6 of the agreement which allows reconstruction, for income tax purposes, of accounts of associated companies. It ensures that double taxation relief is available in these cases.

Article 19: Exchange of information.

This article authorises the usual exchange of information between the taxation authorities of countries which are parties to a double taxation agreement.

The purposes for which information may be exchanged, the restrictions placed on that information and the persons to whom it may be disclosed are consistent with Australia's other double taxation agreements.

Article 20: Implementation of agreement.

One of the purposes of this article is to provide for the taxation authorities of both countries to consult with a view to reaching a satisfactory adjustment where a taxpayer is able to demonstrate that he has been, or is likely to be, subjected to double taxation contrary to the provisions of the agreement.

The other object of the article is to authorise consultation between the authorities for the purpose of implementing the agreement and assuring its consistent interpretation and application.

Article 21: Commencement.

This article provides for the coming into operation of the agreement.

The agreement is to come into force on the day on which both countries have completed all action necessary to give it the force of law in their respective territories. In the case of Singapore, a declaration by the Minister of Finance is required and, as the necessary declaration by the Minister was made on 11 February 1969 and published in the Singapore Government Gazette Subsidiary Legislation Supplement No. 10, the date of entry into force will be the day on which the present Bill receives the Royal Assent.

On Royal Assent being given to the Bill, the agreement will have effect as specified in the article. In Australia, the agreement will, broadly, have effect from 1 July 1969. As the income taken into account for a year of assessment in Singapore is generally the income of the preceding year, the agreement will, in general, have effect for purposes of Singapore tax as regards income derived on or after 1 January 1969.

Article 22: Termination.

This concluding article of the agreement states that the agreement shall continue in effect indefinitely but that it shall cease to be effective as specified in the article should either country give notice of termination.

AGREEMENT WITH JAPAN.

Introductory Note.

In common with the Singapore agreement, the agreement with Japan is broadly along the lines of the agreements negotiated with the United Kingdom, the United States, Canada and New Zealand.

As with those agreements, the country of residence of the recipient of certain classes of income is given the sole right to tax that income. The relief of double taxation on other classes of income is assured by provisions in the agreement which require the country of residence of the recipient to give a credit against its own tax for the tax imposed in the country of origin. The tax of the country of origin on certain income is limited by the terms of the agreement.

In broad terms, the right to impose tax is reserved to the country of residence of the recipient in respect of the following classes of income -

•

business profits not attributable to a permanent establishment in the country of origin (articles 3 and 4);

•

airline and shipping profits derived from operations in international traffic (article 6);

•

remuneration derived by an individual in respect of professional services or like activities where the income is not attributable to a fixed base regularly available to the recipient in the other country (article 10);

•

salaries, wages and similar remuneration derived by an individual in respect of an employment, unless the employment is exercised in the other country and the person deriving the income is in that other country for more than half the taxation year (article 11);

•

pensions (other than Government pensions) and purchased annuities (article 13);

•

remuneration of Government employees (article 14);

•

remuneration of visiting professors and teachers for visits not exceeding two years (article 15);

•

payments for the maintenance or education of visiting students (article 16).

The tax of the country of origin is limited by the agreement in respect of the following classes of income -

•

dividends - limit of 15 per cent (article 7);

•

interest - limit of 10 per cent (article 8);

•

royalties - limit of 10 per cent (article 9).

Interest and royalties which are derived by an Australian resident from sources in Japan and which are, under the agreement, subject to reduced Japanese tax as described above will, together with dividends received by Australian residents from Japanese sources, be subject to Australian tax and a credit will be allowable against the Australian tax in respect of the Japanese tax. Other income derived by an Australian resident from sources in Japan and subject to Japanese tax will be exempt from tax in Australia in accordance with section 23(q) of the Income Tax Assessment Act.

Explanatory notes on each article of the agreement are given in the following paragraphs -

Notes on Articles

Article 1: Taxes the subject of the agreement.

This article specifies the existing taxes to which the agreement applies. These are the Commonwealth income tax (including withholding tax) and the Japanese income tax and corporation tax. For certain purposes which are outlined in the notes on paragraph (2.) of article 6 of the agreement, the agreement also applies to a Japanese local government tax on profits known as the 'enterprise tax'.

The agreement will, of course, apply to any identical or substantially similar taxes which may be imposed by either Government in the future in addition to, or in place of, the Commonwealth income tax or the Japanese income or corporation taxes.

Article 2: Definitions.

Paragraph 1 of this article defines some of the terms used in the agreement. Definitions of other terms are contained in the articles to which the terms relate.

As with Australia's other double taxation agreements, 'Australia' is defined as including Australia's external territories (except Papua and New Guinea). A protocol to the agreement (which is explained later in this memorandum) provides, in effect, for the areas of continental shelf specified in the Second Schedule to the Petroleum (Submerged Lands) Act 1967-1968 to be treated as part of Australia, for the purposes of the agreement, to the same extent as the Australian income tax law so treats them.

The definitions relating to the residential status of taxpayers may be noted. The terms 'resident of Australia' and 'resident in Japan' are the terms used in each country's taxation law to describe taxpayers who are resident in it for taxation purposes. These terms contrast with the terms 'Australian resident' and 'Japanese resident' which mean a person who is resident solely in one or other of the countries. A person who is a 'dual resident', i.e. both a 'resident of Australia' and 'resident in Japan' will not therefore be entitled to the reliefs which are available under the agreement to 'Australian residents' and 'Japanese residents'.

Paragraph 2 of article 2 excludes from the taxes subject to the agreement amounts payable by way of interest or penalty, e.g. for late lodgment of a return or late payment of tax.

Paragraph 3 is related to a provision of the Japanese taxation law, which has no counterpart in the Australian taxation law, whereby a person who is resident in Japan may in some circumstances (broadly, if he is a 'non-permanent' resident) be taxed there on foreign-source income only if that income is remitted to Japan. Paragraph 3 provides that Australia is not to allow exemption from, or reduction of, its tax on income that, because it is not remitted to or received in Japan by a Japanese resident who derives it, is not subject to Japanese tax.

Paragraph 4 of article 2 is a conventional provision which specifies that terms in the agreement that are not defined in it are to have the meanings which they have under the respective taxation laws of Japan and Australia.

Article 3: Permanent establishment.

The definition of the term 'permanent establishment' which this article embodies corresponds with definitions of the term in Australia's other double taxation agreements, including the agreements with the United Kingdom and Singapore.

The necessity for a detailed definition of the term arises because application of various provisions of the agreement is dependent upon whether or not income of a taxpayer resident in one country is attributable to, or connected with, a trade or business carried on through a 'permanent establishment' in the other country. For example, Australia is entitled by article 4 to tax the business profits of a Japanese resident company that are attributable to the company's permanent establishment in Australia.

Paragraph 1 of the article sets out the basic meaning of the term 'permanent establishment' as being a fixed place of trade or business in which the trade or business of the enterprise is wholly or partly carried on. Other paragraphs of the article, particularly paragraph (2.), provides examples of what constitutes a permanent establishment and defines the circumstances in which a resident of one country shall, or shall not, be deemed to have a permanent establishment in the other country.

Article 4: Industrial or commercial profits.

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

As is the case under Australia's other agreements, the general position is that these profits will be subject to tax only in the country of residence of the recipient, unless the recipient carries on trade or business through a permanent establishment (as defined in article 3) in the other country, in which case the country in which the permanent establishment is situated may tax the profits which are attributable to the permanent establishment.

A Japanese resident who is taxed in Australia on profits attributable to a permanent establishment in Australia will be entitled to a credit for Australian tax under article 17 against any Japanese tax on that income. In the case of an Australian resident, profits (other than any dividend component of them) attributable to a permanent establishment in Japan and subject to tax in that country will qualify for exemption from Australian tax under section 23(q) of the Income Tax Assessment Act.

The article specifies an arm's length basis for ascertaining the amount of profits attributable to a permanent establishment and the deductions to be allowed when determining those profits. In other words, despite any special arrangements which might be made between the branch in Australia of a Japanese company on the one hand and its overseas head office or affiliates on the other, Australia will be entitled to tax as the profits of the branch in Australia the profits which the branch might have been expected to derive if it were independent of its head office and affiliates.

Paragraph 5 of the article defines the term 'industrial or commercial profits' as meaning profits derived from the conduct of a trade or business. Dividends, interest, rents or royalties that are effectively connected with a trade or business carried on through a permanent establishment are to be treated as 'industrial or commercial profits'. However, such income not so connected is specifically excluded from the term, as is income from operation os ships or aircraft and remuneration for personal (including professional) services. Other articles govern the taxation of the excluded classes of income.

Article 5: Associated companies.

This article, which is supplementary to the provisions for taxing 'industrial or commercial profits' set out in article 4, enable the allocation of profits between inter-connected companies in Australia and Japan on an arm's length basis where the commercial or financial arrangements between the companies differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.

In these cases profits may be re-allocated for taxing purposes to ensure that a company resident in one country that has participation from the other country in its ownership or control pays tax on the basis of the profits which it might have been expected to derive if its dealings with its overseas parent or associate company were at arm's length.

The article deems profits that are allocated to an enterprise in accordance with the article to be income derived from sources in the country in which the enterprise is resident and declares that they are to be taxed accordingly.

Article 6: Shipping and aircraft profits.

By this article, the right to tax profits from the operation of ships or aircraft in international traffic is restricted to the country of residence of the recipient.

The right of the country of origin to tax shipping or airline profits derived by a resident of the other country is, however, preserved in respect of profits from the carriage of cargoes, mails or passengers from one place in the first-mentioned country for discharge at another place in that country. For this purpose, places in Australia's external territories included in the definition of Australia in article 2 will, of course, be treated as places in 'Australia'. Also, by virtue of paragraphs (4) and (5) of the Protocol to the Agreement, places in Papua or New Guinea and on Australia's continental shelf will be so treated to the appropriate extent.

Paragraph (2) extends the operation of the exemption for profits from operation in international traffic to the enterprise tax which is levied by Japanese local authorities and which is akin to an income tax. An Australian airline or shipowner will therefore not be obliged to pay this tax on profits which it derives from carrying passengers and cargoes between Japan and overseas.

Article 7: Dividends.

Paragraphs (1) and (2) of this article limit to 15 per cent of the gross amount of dividends the tax (other than tax on the profits out of which the dividends are paid) that the country of source may impose on dividends payable to shareholders resident in the other country.

The effect of the article will be to reduce the withholding tax on dividends payable by a company that is a resident of Australia to a shareholder resident in Japan to the rate at which tax is withheld from dividends payable residents of the other countries with which comprehensive double taxation agreements have been concluded by Australia. The article will effect a reduction from 20 per cent in the rate of Japanese tax on dividends derived from Japanese companies by residents of Australia.

The gross amount of dividends derived from a Japanese company by an Australian resident shareholder will be subject to tax in Australia under the normal assessment provisions of the Income Tax Assessment Act and a credit for the reduced Japanese tax will be allowable against the Australian tax on those dividends.

Paragraph (3) declares that the 15 per cent limitation will not apply to dividends derived by a resident of one country who has a permanent establishment in the country from which the dividends are derived if the holding giving rise to the dividends is effectively connected with a trade or business carried on through that establishment. Dividends of that nature are included in the definition of 'industrial or commercial profits' as defined in article 4 and fall to be taxed in accordance with that article.

Paragraphs (4) and (5) of the article are conventional provisions which, in broad terms, ensure that a country (be it Australia or Japan) will not tax a dividend paid by a company resident in the other country if the person deriving the dividend is not a resident of the first- mentioned country.

Article 8: Interest.

By paragraphs (1) and (2) of this article the tax which the country of source may impose on interest payable to a resident of the other country is generally limited to 10 per cent of the gross amount of the interest.

This is the rate at which the withholding tax provisions of the Australian law otherwise require tax to be withheld from interest payable to persons resident in Japan and Japan will, under the agreement, give credit against its tax for the 10 per cent Australian tax. In converse circumstances an Australian resident deriving interest from sources in Japan will be taxed in Australia on the interest and a credit will be allowed against the Australian tax for the reduced Japanese tax on that income (the normal rate of Japanese tax being 20 per cent.)

Interest derived by a resident of one country which is effectively connected with a trade or business carried on through a permanent establishment of that person in the other country will form part of the `industrial or commercial profits' of that establishment and be subject to the provisions of article 4. Accordingly, paragraph (3) of article 8 provides that the 10 per cent limitation specified in the article is not to apply to such interest.

Paragraph (4) will restrict the application of the 10 per cent limitation to the amount of interest which might have been expected to have been agreed upon by persons at arm's length in cases where, because of a special relationship between the persons associated with the loan transaction, the amount of interest paid is excessive.

Article 9: Royalties.

Paragraphs (1) and (2) of this article limit to 10 per cent of the gross amount of royalties the tax which the country of source may charge on royalties derived by a resident of the other country. In the absence of the article, the Australian tax on royalties derived by a Japanese resident is imposed at general rates of tax on the amount of royalties as reduced by allowable deductions, while the Japanese tax on royalties received by an Australian resident amounts to 20 per cent of the gross amount of them.

Royalties derived by a person resident in Japan from sources in Australia will continue to be subject to tax in Australia under the normal assessment provisions of the Income Tax Assessment Act but the article will operate to limit the Australian tax on the royalties to 10 per cent. As in the case of interest, royalties derived by a resident of Australia from sources in Japan which are subject to reduced Japanese tax in accordance with the article will be subject to tax in Australia. Each country will allow its residents a credit for the tax of the other.

The definition of the term 'royalties' in paragraph (3) of the article is on all fours with the corresponding definition in the new United Kingdom agreement. As such, it has the same meaning which the term has for the general purposes of the Income Tax Assessment Act.

As in the case of dividends and interest, the limitation of tax in the country of origin is specified in paragraph (4) as not applying to royalties effectively connected with a permanent establishment of the recipient in that country.

Paragraph (5) provides that the 10 per cent limitation will apply to royalties flowing between persons not dealing at arm's length only to the extent that the royalties paid do not exceed the amount that might be expected to be paid in the absence of the special relationship between the parties.

Article 10: Income from professional services or similar independent activities.

At present, an individual resident in Australia or Japan may be taxed in the other country on the remuneration derived from the performance in the other country of professional services or other similar independent activities. This article provides that such remuneration will continue to be subject to tax in the country in which the services are performed if the recipient has a fixed base regularly available to him in that country for the purposes of performing his activities and the remuneration is attributable to that base. If the tests mentioned are not met the remuneration will be taxed only in the country of residence.

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

Article 11: Income from an employment.

The basis for the taxing of remuneration derived by visiting employees is set out in this article. The article does not apply to remuneration of employees who are public entertainers, Government officials, professors or teachers as these classes of persons are the subject of other articles of the agreement.

Paragraph (1) states two general principles. One is that a resident of one country may not be taxed in the other country on salaries, wages etc. from an employment unless the remuneration for an employment exercised in the other country is deemed to have a source in that other country and, subject to paragraph (2), may be taxed by it.

Paragraph (2) qualifies the second general principle by providing an exemption from tax in the country in which an employment is exercised where a visiting employee is present in that country for one-half or less of the taxation year of that country. This exemption applies where the services of the visiting employee are performed for or on behalf of an employer who is not a resident of the country visited and the remuneration is not deductible in determining the profits of a permanent establishment or fixed base which the employer has in that country.

Paragraphs (3) and (4) of the article provide respectively that income from an employment exercised on ships or aircraft in international traffic may be taxed in the country of residence of the operator and that the remuneration of a director of a company will be subject to the provisions of the article as if it were remuneration of an employee.

Article 12: Public entertainers.

This article ensures that income derived by public entertainers and athletes from their personal activities as such will continue to be taxed in the country in which these activities are exercised.

The article further deems an enterprise of one country which is controlled, directly or indirectly, by a public entertainer or athlete to have a 'permanent establishment' in the other country if the enterprise provides in that country the services of the public entertainer or athlete. This is designed to ensure that the enterprise will be subject to tax in that other country on the p profits derived by the enterprise from the provision of those services in that other country.

Article 13: Pensions and annuities.

By this article, pensions (other than Government pensions) and purchased annuities derived by a resident of one country from sources within the other country may be subject to tax only in the country of residence of the recipient.

Although the country of source will be entitled to tax a Government pension, i.e. a pension paid to a former official in respect of services to the Commonwealth or to the Government of Japan, such a pension derived by a resident of Australia from sources in Japan will remain subject to tax in one country only as the pension, if taxed in Japan, will qualify for exemption from tax in Australia under section 23(q) of the Income Tax Assessment Act. In converse circumstances, Japan will give credit for the Australian tax on a pension paid to a former Commonwealth official who is resident in Japan.

Article 14: Governmental remuneration.

This article provides for a reciprocal exemption from tax by the respective countries in respect of remuneration of government employees (including local government employees). The article is subject to the proviso, however, that the exemption conferred by the article will not apply where the services are rendered in connection with a trade or business carried on by a governing body. It will not apply either where, in broad terms, the employee is a citizen of, or normally resides in, the country where he performs his governmental duties for the other country.

Article 15: Visiting professors and teachers.

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

Article 16: Visiting students.

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

Article 17: Relief from double taxation.

Double taxation cannot arise, of course, in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in the country of residence of the recipient.

It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income which remain subject to tax in both the country of source of the income and the country of residence of the recipient. Australia's other double taxation agreements provide a credit basis for the relief of double taxation in these cases and the same basis has been adopted in this agreement.

Paragraphs (1) and (2) of the article provide for the relief of double taxation by the credit method by requiring each country to give a credit against its own tax, on income derived by its residents from sources in the other country of source.

There will not, of course, be any scope for Australia to give credit for Japanese tax in respect of income that is exempt from Australian tax under section 23(q) of the Income Tax Assessment Act. However, as explained earlier in this memorandum, it is proposed that the section 23(q) exemption will not apply to interest or royalties in respect of which, under articles 8 and 9 of the agreement, Japanese tax is limited to 10 per cent. Instead, paragraph (1) of this article will operate to provide that a credit for the reduced Japanese tax will be allowed against Australian tax imposed on that income.

Paragraph (2) of the article requires Japan, in addition to giving credit for the Australian withholding tax on dividends, to allow a credit for the Australian company tax on the profits out of which the dividends are paid if the recipient is a Japanese resident company owning not less than 10 per cent of the voting shares or of the total shares of the dividend-paying Australian company. Although there is no corresponding obligation on Australia in converse circumstances, the rebate of tax in respect of inter-company dividends under section 46 of the Income Tax Assessment Act ensures that an Australian company is effectively freed from Australian tax in respect of dividends from Japan.

Paragraph (3) of article 17 specifies the source of various items of income for the purposes of the agreement. It obviates any difficulties which might arise should each country, by the application of the source rules applicable under its domestic law, claim to be the source of the income. (Source rules in relation to other classes of income are included in other articles of the agreement.) In broad terms, paragraph (3) of article 17 provides that -

•

dividends have a source where the paying company is resident;

•

interest and royalties have a source in the country in which is situated the business against the profits of which the interest or royalties are charged;

•

remuneration in respect of an employment exercised aboard an international ship or aircraft has a source in the country of residence of the operator of the ship or aircraft;

•

profits derived by a resident of one country from carriage by ships or aircraft between places in the other country have a source in that other country.

Paragraph (5) of article 17 relates to article 5 of the agreement which allows reconstruction, for income tax purposes, of accounts of associated companies. It ensures that double taxation relief is available in those cases.

Article 18: Exchange of information.

This article authorises the normal exchange of information between the taxing authorities of each country where this is necessary for carrying out the provisions of the agreement, or for the prevention of fraud, etc.. The reservations which it contains correspond with those included in comparable provisions in Australia's other double taxation agreements.

Article 19: Consultation between taxing authorities.

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

Article 20: Implementation of agreement.

This article authorises consultation between the respective taxing authorities for the purpose of giving effect to the agreement and assuring its consistent interpretation and application.

Article 21: Extension to territories.

The purpose of this article is to provide for extension of the agreement, either as it stands or with modifications, to any territory for whose international relations Australia is responsible. Any extension would be on conditions which might be agreed to between Australia and Japan.

Under this article the two Governments could agree to extend the agreement to the Territory of Papua and New Guinea. In the absence of any such extension the agreement between Australia and Japan does not apply in relation to income tax levied by the Territory.

Article 22: Commencement.

This article provides for the coming into operation of the agreement.

The article provides for ratification of the agreement by the Government of each country and for the agreement to enter into force on the thirtieth day after the exchange of instruments of ratification. Ratification of the agreement is a stage that follows consideration of the agreement by the Commonwealth Parliament and the Japanese Diet. As mentioned earlier in this memorandum, it is proposed that there will be a notification inserted in the Commonwealth Gazette of the day on which the agreement enters into force in Australia. This will be the thirtieth day after the exchange of instruments of ratification and the Gazette notice will provide an authoritative statement of the date of its entry into force in Australia.

Assuming ratification takes place before the end of November 1969, the agreement will in general have effect for purposes of Australian tax as from 1 July 1969, and for purposes of Japanese tax as regards income or profits derived on or after 1 January 1969.

Article 23: Termination.

This article declares that the agreement shall continue in effect indefinitely. Either country may, however, give to the other country written notice of termination on or before 30 June in any calendar year beginning after the expiration of three years from the date of entry into force of the agreement. In that event the agreement would cease to be effective in accordance with the terms of the article.

Protocol to the Japanese agreement

The protocol contains a number of provisions which are normally contained in the body of double taxation agreements to which Australia is a party but which have, at Japan's request, been dealt with in a separate document in the arrangements with it. This does not give the provisions any limited legal effect as the protocol itself provides that its provisions are to form an integral part of the double taxation agreement.

Paragraph 1 of the protocol operates to preserve the application of the special provisions of the Australian income tax law relating to film businesses controlled abroad and insurance with non-residents of Australia. The paragraph deems an amount included in a person's taxable income under those provisions to be income derived from sources in Australia for the purposes of the tax credit relief provisions in article 17 of the agreement.

Paragraph 2 of the protocol relates to the methods which may be used, for the purposes of article 4 of the agreement, in determining the 'industrial or commercial profits' which are attributable to a permanent establishment. It provides for the continued application of methods customarily used by each country for this purpose, including in the case of Australia the procedure spelt out in section 38 of the Income Tax Assessment Act which applies where goods manufactured out of Australia are imported into Australia and sold in Australia by the manufacturer.

Paragraph 3 of the protocol covers the situation where there is insufficient information available to enable the arm's length basis of determining profits to be properly applied for purposes of articles 4 and 5 of the agreement.

In effect, the paragraph will authorise the Commissioner of Taxation in Australia, in an appropriate case, to apply the provisions of section 136 of the Income Tax Assessment Act. That section provides, under certain conditions, for assessment on the basis of such portion of the total receipts of a business as the Commissioner determines. The paragraph requires, however, that the Commissioner is to apply those provisions, so far as is practicable, in accordance with the arm's length principle set out in articles 4 and 5 of the agreement.

Paragraph 4 of the protocol provides in effect that, for the purposes of articles 6 and 17 of the agreement, the carriage by ship or aircraft of passengers, cargo or mails from a place in Australia (as defined in article 2) for discharge in Papua or New Guinea is to be treated as carriage between places in Australia. This will give Australia prior taxing rights in respect of profits from this carriage.

Paragraph 5 of the protocol will, subject to the general provisions of the agreement, have the same practical effect as regards Japanese residents as does section 6AA of the Income Tax Assessment Act. It ensures that Australia continues to have the right to tax, in accordance with the agreement, income derived by a Japanese resident from, or in connection with, the exploration for or exploitation of petroleum in the areas of the continental shelf specified in the Second Schedule to the Petroleum (Submerged Lands) Act as if those areas were part of Australia.

Paragraph 6 of the protocol is the source of paragraph (d) of clause 3 of the Bill, which has been explained on page 2 of this memorandum.

AGREEMENT WITH FRANCE

Introductory Note.

This agreement is limited to the taxation of profits of airlines in international traffic. It will reserve the right to tax such profits solely to the country in which the operator is resident. This will mean that an Australian resident airline will be exempt from French tax on profits derived in France from international traffic to or through that country. The converse will apply in relation to a French resident airline.

Notes on Articles

Article 1: Taxes subject to the agreement.

The taxes subject to the agreement are the existing income taxes of the Commonwealth of Australia and the French Republic (including those imposed on behalf of the French Overseas Territories). The agreement will also apply in respect of any substantially similar taxes subsequently imposed by either Government.

Article 2: Definitions.

This article defines terms used in the agreement. The more important are explained hereunder -

'Australia' For the agreement, Australia includes its external territories, except Papua and New Guinea. As the agreement is, by later definitions, confined to profits from international traffic, the definition of Australia will ensure that flights solely between places in Australia or between places in Australia and its external territories are not treated as international traffic. (By virtue of article 3(3.), flights solely from Australia to Papua or New Guinea will also be excluded from international traffic.)

'France' For the agreement, France includes its external territories, with corresponding effects as outlined for the definition of Australia.

'Income from the operation of aircraft in international traffic' This term defines the income which, for a resident of one country, is to be exempt in the other country. In broad terms, the income to be exempt is income from the carriage of passengers, cargo or mail other than between places in Australia or France (as those terms are defined), as the case may be. Exempt income will include income from sale of tickets for international flights. A further effect of the definition is that flights solely between Australia and places on the continental shelf are not to be regarded as international flights.

Article 3: Relief from double taxation.

This is the operative provision conferring the reciprocal exemptions from tax on the bases already described.

Article 4: Commencement and termination.

This article contains provisions relating to the coming into operation of the agreement and to its termination.

Paragraph (1) provides that each country is to advise the other when it has completed all action necessary to give the agreement the force of law in its territory. In Australia the necessary action will be complete when the present Bill receives the Royal Assent. The agreement will enter into force when both countries have advised the other that the necessary action has been completed, as from the date on which the later of these advices is received.

On coming into force the agreement will have effect as specified in the paragraph. In Australia it will have effect in respect of the 1966-67 and subsequent income years, while in France it will have effect in respect of the 1967 calendar year or accounting period ending in 1967, and subsequent years.

Paragraph (2) states that the agreement shall continue in effect indefinitely but either country may terminate the agreement by giving notice, on or after 1 January 1972, to the other country. In that event the agreement shall cease to be effective as specified in the paragraph.