Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Agreement with the Russian Federation
Main features of the tax treaty
1.1 The tax treaty between Australia and Russia accords substantially with Australias recent comprehensive tax treaties.
1.2 The features of the tax treaty include:
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- Dual resident persons (i.e. persons who are residents of both Australia and Russia according to the domestic law of each country) are, in accordance with specified criteria, to be treated for the purposes of the tax treaty as being residents of only one country.
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- Income from real property may be taxed in full by the country in which the property is situated. Income from real property for these purposes includes natural resource royalties.
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- Business profits are generally 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 prescribed permanent establishment in the other country, in which case the other country may tax the profits.
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- Profits from the operations of ships and aircraft are generally to be taxed only in the country of residence of the operator.
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- Profits of associated enterprises may be taxed on the basis of dealings at arms length.
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- Dividends, interest and royalties may generally be taxed in both countries, but there are limits on the tax that the country in which the dividend, interest or royalty is sourced may charge on such income flowing to residents of the other country who are beneficially entitled to that income. These limits are 10% for both interest and royalties. A limitation of 15% applies to dividends unless certain conditions are met which reduce the maximum rate of tax to 5%. These conditions are that the dividends have been fully taxed at the corporate level, the dividend recipient is a company that holds directly at least 10% of the capital of the company paying the dividends, and the resident of the other State has invested a minimum of $A700,000 or the Russian rouble equivalent in the company. For the 5% limit to apply, where dividends are paid by a company that is resident in Russia, the dividends must also be exempt from Australian tax.
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- Income or profits 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 independent personal services provided by an individual will generally be taxed only in the country of residence of the recipient. However, remuneration derived by a resident of one country in respect of professional services rendered in the other country may be taxed in the other country, if it is derived through a fixed base of the person concerned in the latter country.
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- Income from employment, that is, employees remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited.
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- Directors fees and other similar payments may be taxed in the country of residence of the paying company.
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- Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed.
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- Pensions and annuities may be taxed only in the country of residence of the recipient.
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- Income from government service will generally be taxed only in the country that pays the remuneration. However, the remuneration may be taxed in the other country in certain circumstances where the services are rendered in that other country. Similarly, government service pensions will generally be taxed only in the paying country. However, if the pensioner is both a resident and a citizen of the other country and the services for which the pension is paid were rendered in that other country, the pension will be taxable only in that other country.
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- Payments to students will be exempt from tax in the country visited insofar as it consists of payments made from abroad for the purposes of their maintenance or education.
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- Other income (i.e. income not dealt with by other Articles) may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief.
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- Double taxation relief
for income, which under the tax treaty may be taxed by both countries, is required to be provided by the country in which the taxpayer is resident under the terms of the tax treaty as follows:
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- in Australia , by allowing a credit against Australian tax for Russian tax paid on income derived by a resident of Australia from sources in Russia; and
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- in Russia , by allowing a credit against Russian tax for the Australian tax paid on income derived by a resident of Russia from sources in Australia.
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- In the case of Australia, effect will be given to the double tax relief obligations arising under the tax treaty by application of the general foreign tax credit provisions of Australias domestic law, or the relevant exemption provisions of that law where applicable.
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- Limitation of benefits rulesapply to ensure that income that is subject to preferential tax regimes are excluded from the benefits of the tax treaty.
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- Consultation and exchange of information between the 2 taxation authorities is authorised by the tax treaty.
Agreement between Australia and Russia
1.3 This Article establishes the scope of the application of the tax treaty by providing for it to apply to persons (defined to include companies and enterprises) who are residents of one or both of the countries. It generally precludes extra-territorial application of the treaty.
1.4 The application of the tax treaty to persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.
1.5 This Article specifies the existing taxes of each country to which the tax treaty applies. These are, in the case of Australia:
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- the Australian income tax; and
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- the resource rent tax in respect of offshore petroleum projects.
1.6 In the case of Australia, income tax (including that imposed on capital gains) and resource rent tax are covered by the tax treaty. Goods and services tax, fringe benefits tax, wool tax and levies, customs duties, State taxes and duties and estate tax and duties are not covered by the tax treaty. [Article 2, subparagraph 1(a)]
1.7 It is specifically stated that this Article applies only to taxes imposed under the federal law of Australia. This is to ensure that the tax treaty does not bind Australian States and Territories and applies only to federal taxes.
1.8 For Russia, the tax treaty applies to:
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- the tax on profits (income) of enterprises and organisations; and
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- the tax on the income of individuals.
[Article 2, subparagraph 1(b)]
Identical or substantially similar taxes
1.9 The application of the tax treaty will be automatically extended to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, the existing taxes. [Article 2, paragraph 2]
Notification of changes to the law
1.10 Although there is no formal requirement for the 2 countries to notify each other in the event of a significant change in the taxation law of the respective countries, such action is expected to occur from time to time using the mutual agreement procedures of Article 24.
Article 3 - General definitions
1.11 As with Australias other modern taxation agreements, Australia is defined to include certain external territories and areas of the continental shelf. By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by non-residents on the seabed and subsoil of the relevant continental shelf areas (under section 6AA of the ITAA 1936, certain sea installations and offshore areas are to be treated as part of Australia). The definition is also relevant to the taxation by Australia and Russia of shipping profits in accordance with Article 8 of the tax treaty. [Article 3, subparagraph 1(b)]
1.12 To accommodate Russian views concerning the claims of sovereignty by various countries to parts of the Antarctic continent (including Australias claim to the Australian Antarctic Territory), an additional clause has been added to the tax treaty which provides that this tax treaty in no way furthers or detracts from those claims as provided for in the Antarctic Treaty (signed 1 December 1959 in Washington, DC). [Protocol item 3]
1.13 The definition of company in the tax treaty accords with Australias tax treaty practice. It reflects the fact that Australias domestic tax law does not specifically use the expression body corporate for tax purposes.
1.14 The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships as companies for income tax purposes. These entities are included as companies for the purposes of the tax treaty. [Article 3, subparagraph 1(f)]
Definition of international traffic
1.15 In this tax treaty, this term is of relevance only for alienation of ships and aircraft (Article 13.3) and wages of crew (Article 15.3). [Article 3, subparagraph 1(h) and Protocol item 2]
1.16 For the purposes of the tax treaty, the term tax does not include any amount of penalty or interest imposed under the respective domestic law of the 2 countries. This is important in determining a taxpayers entitlement to a foreign tax credit under the double tax relief provisions of Article 22 (Methods of elimination of double taxation) of the tax treaty.
1.17 In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of Russia with respect to income that Russia is entitled to tax under the tax treaty, would not be a creditable Russian tax for the purposes of Article 22.1 of the tax treaty. This is in keeping with the meaning of foreign tax in the ITAA 1936 (subsection 6AB(2) - Foreign Income and Foreign Tax). Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayers foreign tax credit entitlement under Article 22.1 (pursuant to Division 18 of Part III of the ITAA 1936 - Credits in Respect of Foreign Tax). [Article 3, subparagraph 1(j)]
Terms not specifically defined
1.18 Where a term is not specifically defined within this tax treaty, that term (unless used in a context that requires otherwise) is to be taken to have the same interpretative meaning as it has under the domestic taxation law of the country applying the tax treaty at the time of its application, with the meaning it has under the taxation law of the country having precedence over the meaning it may have under other domestic laws.
1.19 If a term is not defined in the tax treaty, but has an internationally understood meaning in tax treaties and a meaning under the domestic law, the context would normally require that the international meaning be applied. [Article 3, paragraph 2]
1.20 This Article sets out the basis by which the residential status of a person is to be determined for the purposes of the tax treaty. Residential status is one of the criteria for determining each countrys taxing rights and is a necessary condition for the provision of relief under the tax treaty. The concept of who is a resident according to each countrys taxation law provides the basic test. [Article 4, paragraph 1]
1.21 In the Australian context this means that Norfolk Island residents, who are generally subject to Australian tax on Australian source income only, will not be residents of Australia for the purposes of the tax treaty. Accordingly, Russia will not have to forgo tax in accordance with the tax treaty on income derived by residents of Norfolk Island from sources in Russia (which will not be subject to Australian tax). [Article 4, paragraph 2]
1.22 This Article also includes a set of tie-breaker rules for determining how residency is to be allocated to one or other of the countries for the purposes of the tax treaty if a taxpayer, whether an individual, a company or other entity, qualifies as a dual resident, that is, as a resident under the domestic law of both countries.
1.23 The tie-breaker rules for individuals apply certain tests, in a descending hierarchy, for determining the residential status (for the purposes of the tax treaty) of an individual who is a resident of both countries under their respective domestic laws.
1.24 These rules, in order of application, are:
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- If the individual has a permanent home in only one of the countries, the person is deemed to be a resident solely of that country for the purposes of the tax treaty.
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- If the individual has a permanent home available in both countries or in neither, then the persons residential status takes into account the persons personal or economic relations (including habitual abode) with Australia and Russia, and the person is deemed to be a resident only of the country for the purposes of the tax treaty with which the person has the closer personal and economic relations. An individuals citizenship shall be a factor in determining the degree of the persons personal and economic relations with that country.
[Article 4, paragraph 3]
1.25 Dual residents remain, however, in relation to each country, a resident for the purposes of their domestic law, and subject to its tax as such, insofar as the tax treaty allows.
1.26 Where a non-individual (such as a body corporate) is a resident of both countries for their domestic tax purposes, the entity will be deemed to be a resident of the country in which its place of effective management is situated. [Article 4, paragraph 4]
Article 5 - Permanent establishment
1.27 Application of various provisions of the tax treaty (principally Article 7 relating to business profits) is dependent upon whether a person who is a resident of one country carries on business through a permanent establishment in the other, and if so, whether income derived by the person in the other country is attributable to, or effectively connected with, that permanent establishment. The definition of the term permanent establishment which this Article embodies, corresponds generally with definitions of the term in Australias more recent tax treaties.
Meaning of permanent establishment
1.28 The primary meaning of the term permanent establishment is expressed as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. A permanent establishment must comply with the following requirements:
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- there must be a place of business;
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- the place of business must be fixed (both in terms of physical location and in terms of time); and
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- the business of the enterprise must be carried on through this fixed place.
[Article 5, paragraph 1]
1.29 Other paragraphs of this Article elaborate on the meaning of the term by giving examples (by no means intended to be exhaustive) of what may constitute a permanent establishment - for example:
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- an office;
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- a workshop; or
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- a mine.
As paragraph 2 of Article 5 is subordinate to paragraph 1 of Article 5, the examples listed will only constitute a permanent establishment if the primary definition in paragraph 1 is satisfied. [Article 5, paragraph 2]
Agricultural, farming or forestry activities
1.30 Most of Australias comprehensive tax treaties include as a permanent establishment an agricultural, pastoral or forestry property. This reflects Australias policy of retaining taxing rights over exploitation of Australian land for the purposes of primary production. This approach ensures that the arms length profits test provided for in Article 7 (Business profits) apply to the determination of profits derived from these activities. This position is also reflected in this tax treaty. [Article 5, subparagraph 2(g)]
Building sites or construction, installation or assembly projects
1.31 Also consistent with Australias tax treaty practice, subparagraph 2(h) of the tax treaty includes building sites or construction, installation or assembly projects, which exist for more than 12 months as examples of a permanent establishment. Building sites, construction, installation and assembly projects lasting less than 12 months, which nevertheless meet the requirements for a fixed place of business, will be permanent establishments.
1.32 Supervisory activities carried on for more than 12 months in connection with a building site or a construction, installation or assembly project are deemed to constitute a permanent establishment. Australia has a reservation to Article 5 of the OECD Model reflecting this position. The rationale for inclusion of this provision is the prevalence of the use in Australia of imported expertise in relation to supervision of such projects.
1.33 The term a building site or construction, installation or assembly project covers constructional activities such as excavating or dredging. The term building site can only mean such work as is directly connected with the erection of buildings and similar projects (earthwork, masonry, painting, roofing, glazing and plumbing). Planning and supervision are certainly part of the building site if carried out by the construction contractor. However, planning and supervision of work does not represent a building site permanent establishment if carried out by another enterprise. [Article 5, subparagraph 2(h)]
Preparatory and auxiliary activities
1.34 Certain activities are deemed not to give rise to a permanent establishment (e.g. the use of facilities solely for storage or display).
1.35 Generally these activities are of a preparatory or auxiliary character and are unlikely to give rise to substantial profits. The necessary economic link between the activities of the enterprise and the country in which the activities are carried on does not exist in these circumstances.
1.36 Unlike the OECD Model, which provides that the listed activities are deemed not to constitute a permanent establishment, the tax treaty incorporates the Australian tax treaty approach of stating that an enterprise will not be deemed to have a permanent establishment merely by reason of such activities. This is to prevent the situation where enterprises structure their business so that most of their activities fall within the exceptions when - viewed as a whole - the activities ought to be regarded as a permanent establishment.
1.37 Another feature consistent with Australias tax treaty practice is that subparagraph 4(f) of Article 5 of the OECD Model - dealing with combinations of the activities in subparagraphs 4(a) to (e) - is not included. Australia does not consider that an enterprise undertaking multiple functions of the kind indicated in subparagraphs 4(a) to (e) could reasonably be regarded as only engaged in preparatory or auxiliary activities. [Article 5, paragraph 3]
1.38 Consistent with Russian views, the delivery of goods or merchandise is to be treated as a business activity conducted through a permanent establishment. Accordingly, the provision of a delivery service is not an activity that may be excluded from constituting a permanent establishment under the terms of paragraph 3 of Article 5.
Deemed permanent establishments
1.39 The inclusion of subparagraph 4(a) is consistent with another of Australias reservations to the OECD Model. It deals with so-called cost-toll situations, under which a mineral plant, for example, refines minerals at cost, so that the plant operations produce no Australian profits. Title to the refined product remains with the mining consortium and profits on sale are realised mainly outside of Australia.
1.40 Subparagraph 4(a) deems such a plant to be a permanent establishment because the manufacturing or processing activity (which gives the processed minerals their real value) is conducted in Australia, and therefore Australia should have taxing rights over the business profits arising from the sale of the processed minerals to the extent that they are attributable to the processing activity carried on in Australia. This subparagraph prevents an enterprise which carries on very substantial manufacturing or processing activities in a country through an intermediary from claiming that it does not have a permanent establishment in that country.
1.41 The inclusion of this subparagraph is insisted upon by Australia in its tax treaties and is consistent with Australias policy of retaining taxing rights over profits from exploitation of its mineral resources. [Article 5, subparagraph 4(a)]
1.42 Under subparagraph 4(b) an enterprise is deemed to have a permanent establishment in a country if heavy industrial equipment is being used in that country by, for or under contract with the enterprise.
1.43 This provision aligns with Australias reservation to the OECD Model concerning the use of substantial equipment and is designed to further protect Australias right to tax income from natural resources. Australias experience is that the permanent establishment provision in the OECD Model may be inadequate to deal with high value activities involved in the development of natural resources, particularly in offshore regions.
1.44 Some examples of heavy industrial equipment would include:
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- large industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction, etc;
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- manufacturing or processing equipment used in a factory;
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- oil and drilling rigs, platforms and other structures used in the petroleum/mining industry; and
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- grain harvesters and other large agricultural machinery.
1.45 For the purposes of the tax treaty the enterprise is deemed to carry on business through the heavy industrial equipment permanent establishment. [Article 5, subparagraph 4(b)]
1.46 Paragraph 5 reflects Australias tax treaty practice in relation to a person who acts on behalf of an enterprise of another country of deeming that person to constitute a permanent establishment if that person either has and habitually exercises an authority to conclude contracts on behalf of the enterprise or maintains a stock of goods or merchandise to make deliveries in that State. With regard to the authority to conclude contracts, this will not apply if the agents activities are limited to the purchase of goods or merchandise for the enterprise. [Article 5, paragraph 5]
1.47 Business carried on through an independent agent does not, of itself, constitute a permanent establishment, provided that the independent agent is acting in the ordinary course of that agents business as such an agent. [Article 5, paragraph 6]
1.48 Generally, a subsidiary company will not be a permanent establishment of its parent company. A subsidiary, being a separate legal entity, would not usually be carrying on the business of the parent company but rather its own business activities. However, a subsidiary company gives rise to a permanent establishment if the subsidiary permits the parent company to operate from its premises such that the tests in paragraph 1 of Article 5 are met, or acts as an agent such that a dependent agent permanent establishment is constituted. [Article 5, paragraph 7]
1.49 The principles set down in this Article are also to be applied in determining whether a permanent establishment exists in a third country or whether a third country has a permanent establishment in Australia (or in Russia) when applying the source rule contained in:
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- paragraph 5 of Article 11 (Interest); and
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- paragraph 5 of Article 12 (Royalties).
[Protocol item 4]
Article 6 - Income from real property
Where income from real property is taxable
1.50 This Article provides that the income of a resident of one country from real property situated in the other country may be taxed by that other country. Thus, income from real property in Australia will be subject to Australian tax laws. [Article 6, paragraph 1]
1.51 Income from real property is effectively defined as extending, in the case of Australia, to:
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- the direct use, letting or use in any other form of real property and any other interest in or over land (including exploration and mining rights); and
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- royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.
1.52 In the case of Russia, real property is generally defined as immovable property and includes:
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- property accessory to immovable property;
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- usufruct of immovable property (generally, a right to use property without degrading it and to retain any profits derived from it);
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- rights to which the provisions of the general law respecting landed property apply including direct use, letting or use in any other form of such property; and
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- rights to variable or fixed payments either as consideration for or in respect of the exploitation of, or the right to explore for or exploit, mineral deposits, oil or gas wells, quarries or other places of extraction or exploitation of natural resources.
[Article 6, paragraphs 2 and 4]
1.53 Ships and aircraft shall not be regarded as real property. [Article 6, subparagraph 2(c)]
1.54 Under Australian law the situation of an interest in land, such as a lease, is not necessarily where the underlying property is situated - there may not necessarily be a situs. Paragraph 3 puts the situation of the interest or right beyond doubt. [Article 6, paragraph 3]
Real property of an enterprise and of persons performing independent personal services
1.55 The operation of this Article extends to income derived from the use or exploitation of real property of an enterprise and income derived from real property that is used for the performance of independent personal services.
1.56 Accordingly, application of this Article (when read with Articles 7 and 14) to such income ensures that the country in which the real property is situated may impose tax on the income derived from that property by:
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- an enterprise of the other country; or
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- an independent professional person resident in that other country,
irrespective of whether or not that income is attributable to a permanent establishment of such an enterprise, or fixed base of such a person, situated in the firstmentioned country. [Article 6, paragraph 5]
1.57 This Article is concerned with the taxation of business profits derived by an enterprise that is a resident of one country from sources in the other country.
1.58 The taxing of these profits depends on whether they are attributable to the carrying on of a business through a permanent establishment in the other country. If a resident of one country carries on business through a permanent establishment (as defined in Article 5) in the other country, the country in which the permanent establishment is situated may tax the profits of the enterprise that are attributable to that permanent establishment.
1.59 If an enterprise which is a resident of one country carries on business in the other country other than through a permanent establishment in that other country, the general principle of this Article is that the enterprise will not be liable to tax in the other country on its business profits (except where paragraph 5 of this Article applies - see the explanation in paragraphs 1.62 and 1.63). [Article 7, paragraph 1]
Determination of business profits
1.60 Profits of a permanent establishment are to be determined for the purposes of this Article on the basis of arms length dealing. The provisions in the tax treaty correspond to international practice and the comparable provisions in Australias other tax treaties. [Article 7, paragraphs 2 and 3]
1.61 No profits are to be attributed to a permanent establishment merely because it purchases goods or merchandise for the enterprise. Accordingly, profits of a permanent establishment will not be increased by adding to them any profits attributable to the purchasing activities undertaken for the head office. It follows, of course, that any expenses incurred by the permanent establishment in respect of those purchasing activities will not be deductible in determining the taxable profits of the permanent establishment. [Article 7, paragraph 4]
Profits dealt with under other Articles
1.62 Where income or gains are otherwise specifically dealt with under other Articles of the tax treaty the effect of those particular Articles is not overridden by this Article.
1.63 This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other Articles of the tax treaty (e.g. shipping, dividends, interest, royalties and alienation of property) are to be treated in accordance with the terms of those Articles (except where otherwise provided - e.g. by Article 10.5 where the income is effectively connected to a permanent establishment). [Article 7, paragraph 5]
1.64 This provision allows for the application of the domestic law of the country in which the profits are sourced (e.g. Australias Division 13 of the ITAA 1936) where, due to inadequate information, the correct amount of profits attributable on the arms length principle basis to a permanent establishment cannot be determined or can only be ascertained with extreme difficulty. For the purposes of this provision competent authority for Russia also includes the Ministry of Taxes and Duties as this Ministry assists the Russian Ministry of Finance in transfer pricing cases. [Protocol item 5(a)]
1.65 Each country has the right to continue to apply any provisions in its domestic law relating to the taxation of income from insurance. However, if the relevant law in force in either country at the date of signature of the tax treaty is varied (otherwise than in minor respects so as not to affect its general character), the countries must consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate. An effect of this paragraph is to preserve, in the case of Australia, the application of Division 15 of Part III of the ITAA 1936 (Insurance with non-residents). [Protocol item 5(b)]
1.66 The principles of this Article will apply to business profits derived by a resident of one of the countries (directly or through one or more interposed trust estates) as a beneficiary of a trust estate. [Protocol item 5(c)]
Example 1.1
In accordance with this Article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of Russia is beneficially entitled under the trust estate. Protocol item 5(c) ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business.
Article 8 - Profits from the operation of ships and aircraft
1.67 The main effect of this Article is that the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from participation in a pool service or other profit sharing arrangement, is generally reserved to the country in which the operator is a resident for tax purposes. [Article 8, paragraphs 1 and 3]
1.68 However, this Article reflects Australian treaty policy to reserve to the source country the right to tax profits from internal traffic, profits from other coastal and continental shelf activities, including non-transport shipping and aircraft activities, within its own waters.
1.69 Thus, the term transport is not used in the title of this Article, as the Article applies to survey ships, oil drilling ships, etc, where transport is not necessarily involved. [Article 8, paragraph 2]
1.70 By reason of the definition of Contracting State contained in Article 3 and the terms of Protocol item 6, any shipments by sea or air from a place in Australia (including the continental shelf areas and external territories) for discharge at another place in or for return to that place in Australia, is to be treated as constituting internal traffic. [Protocol item 6]
Example 1.2
Profits that are derived from the transport of goods between Perth and Sydney, that were uploaded in Perth onto a ship operated by a Russian enterprise making that stopover as part of an international voyage from Vladivostok to Sydney, would be profits from internal traffic. As such, 5% of the amount paid in respect of the internal traffic carriage would be deemed to be taxable income of the operator for Australian tax purposes pursuant to Division 12 of Part III of the ITAA 1936.
Article 9 - Adjustments to profits of associated enterprises
1.71 This Article deals with associated enterprises (parent and subsidiary companies and companies under common control). It authorises the reallocation of profits between related enterprises in Australia and Russia on an arms length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing wholly at arms length with one another.
1.72 This Article would not generally authorise the rewriting of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms. [Article 9, paragraph 1]
1.73 Each country retains the right to apply its domestic law relating to the determination of the tax liability of a person (e.g. Australias Division 13 of the ITAA 1936) to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, consistently with the principles of the Article. [Article 9, paragraph 2]
1.74 Australias domestic law provisions relating to international profit shifting arrangements were revised in 1981 in order to deal more comprehensively with arrangements under which profits are shifted out of Australia, whether by transfer pricing or other means. The broad scheme of the revised provisions is to impose arms length standards in relation to international dealings, but where the Commissioner cannot ascertain the arms length consideration, it is deemed to be such an amount as the Commissioner determines. Paragraph 2 is designed to preserve the application of those domestic law provisions.
1.75 Where a reallocation of profits is made (either under this Article or, by virtue of paragraph 2, under domestic law) so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so reallocated continued to be subject to tax in the hands of an associated enterprise in the other country. To avoid this result, the other country is required to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation.
1.76 It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the reallocation of profits for an appropriate compensatory adjustment to reflect the reallocation of profits made by the other treaty partner country. If necessary, the competent authorities of Australia and Russia will consult with each other to determine the appropriate adjustment. [Article 9, paragraph 3]
1.77 To allay Russian concerns about their need to automatically grant double taxation relief by correlative adjustment for all transfer pricing adjustments made by Australia, it was necessary to include a provision in the Protocol mirroring the OECD Model Commentarys amplification of this point. This clause clarifies that Russia need only make correlative adjustments when the original adjustments made by Australia are appropriate but that this consideration depends on applying objective international standards. [Protocol item 7(a)]
1.78 Australia also agreed to Russias request to include the Ministry of Taxes and Duties as a competent authority for certain administrative purposes concerning such adjustments. [Protocol item 7(b)]
1.79 This Article broadly allows both countries to tax dividends flowing between them but in general limits the rate of tax that the country of source may impose on dividends payable by companies that are residents of that country under its domestic law to residents in the other country who are beneficially entitled to the dividends. [Article 10, paragraph 1]
1.80 Under subparagraph 2(a) of Article 10, both Australia and Russia are required to reduce their respective rates of dividend withholding tax to 5% in certain cases. In the case of Australia, this is to occur where those dividends are franked (i.e. are paid out of profits which have borne the normal rate of company tax), are flowing to a Russian company which directly holds at least 10% of the capital of the Australian company and the investment in that Australian company is at least $A700,000. However, at present, Australias domestic law does not subject fully franked dividends to withholding tax and as such, Russian shareholders will continue to receive these dividends free of any withholding tax whilst this remains a feature of the Australian domestic law.
1.81 In the case of Russia, the 5% rate is to be applied to dividends flowing to an Australian company which directly holds at least 10% of the capital of the Russian company, where those dividends are paid out of profits that are assessable to tax in Russia and the minimum investment level has been reached, and the dividends are exempt from Australian tax in Australia.
1.82 It was agreed that the 5% rate limit should be restricted to cases where the dividends flowing from Russia to Australia are exempt from tax in the hands of the Australian shareholder. Russia wishes to ensure that the full benefit of any reduction in dividend withholding tax would flow to the investor. Should Russia be listed as a comparable tax country (in either the broad or limited exemption list) under Australias controlled foreign corporation regime, in the future inter-company non-portfolio dividends would then become exempt in Australia.
1.83 In all other cases, the tax treaty provides that Australia and Russia will generally limit its tax to 15% of the dividend. In the case of Australia, this will mean that the normal withholding tax rate imposed on unfranked dividends will be reduced from 30% to 15%. [Article 10, paragraph 2(b)]
1.84 There is also provision for flexibility if there is a change to either countrys general approach to dividend withholding tax, such as a change to domestic law arrangements for franked dividends flowing overseas. In such a case, the 2 countries are obliged to consult to make appropriate amendments to this paragraph. [Protocol item 8]
1.85 The limitation on the tax of the country in which the dividend is sourced does not apply to dividends derived by a resident of the other country who has a permanent establishment or fixed base in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that permanent establishment or fixed base.
1.86 Where the dividends are so effectively connected, they are to be treated as business profits or income from independent personal services and therefore subject to the full rate of tax applicable in the country in which the dividend is sourced (in accordance with the provisions of Article 7 or Article 14, as the case may be). In practice, however, under changes made to Australias domestic law with the introduction from 1 July 1987 of a full imputation system of company taxation, such dividends, to the extent that they are franked dividends, remain exempt from Australian tax, while unfranked dividends will be subject to withholding tax at the rate of 15% instead of being taxed by assessment. [Article 10, paragraph 5]
Extra-territorial application precluded
1.87 The extra-territorial application by either country of taxing rights over dividend income is precluded by providing, broadly, that one country (the first country) will not tax dividends paid by a company resident solely in the other country, unless:
- •
- the person deriving the dividends is a resident of the first country; or
- •
- the shareholding giving rise to the dividends is effectively connected with a permanent establishment or fixed base in the first country.
1.88 An example of the effect of this paragraph is that Australia may not tax dividends paid by a Russian company to a resident of Russia out of profits derived from Australian sources, otherwise than through a permanent establishment or a fixed base.
1.89 However, the exemption does not apply where the dividend paying company is a resident of both Australia and Russia. This proviso ensures that Australia retains the right to tax dividends paid to a person resident outside of both countries by a company which is a resident of Australia under its domestic law, notwithstanding that the company is deemed to be a resident of Russia for the purposes of the tax treaty under the dual resident tie-breaker test for companies contained in Article 4. [Article 10, paragraph 6]
1.90 This Article provides for interest income to be taxed by both countries but requires the country of source to generally limit its tax to 10% of the gross amount of the interest where a resident of the other country is beneficially entitled to the interest. [Article 11, paragraphs 1 and 2]
1.91 The limitation of the source country tax rate to 10% accords with the general rate of interest withholding tax applicable under Australias domestic law.
1.92 The term interest is defined for the purposes of this Article in a way that, in relation to Australia, encompasses items of income such as discounts on securities and payments under certain hire purchase agreements which are treated for Australian tax purposes as interest or amounts in the nature of interest. [Article 11, paragraph 3]
Interest effectively treated as business profits
1.93 Interest derived by a resident of one country which is effectively connected to a permanent establishment or fixed base of that person in the other country, will form part of the business profits of that permanent establishment or fixed base and be subject to the provisions of Article 7 (Business profits) or Article 14 (Income from independent personal services). Accordingly, the 10% tax rate limitation does not apply to such interest in the country in which the interest is sourced. [Article 11, paragraph 4]
1.94 Interest source rules are set out in this Article. Those rules operate to allow Australia to tax interest to which a resident of Russia is beneficially entitled where the interest is paid by a resident of Australia. Australia may also tax interest paid by a resident of Russia to which another Russian resident is beneficially entitled if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment.
1.95 However, consistent with Australias interest withholding tax provisions, an Australian source is not deemed in respect of interest that is an expense incurred by an Australian resident in carrying on a business through a permanent establishment outside Australia. [Article 11, paragraph 5]
1.96 This Article includes a general safeguard against payments of excessive interest where a special relationship exists between the persons associated with a loan transaction - by restricting the 10% source country tax rate limitation to an amount of interest which might have been expected to have been agreed upon if the parties to the loan agreement were dealing with one another at arms length . Any excess part of the interest remains taxable according to the domestic law of each country but subject to the other Articles of the tax treaty. [Article 11, paragraph 6]
1.97 This Article in general allows both countries to tax royalty flows but limits the tax of the country of source to 10% of the gross amount of royalties paid or credited to residents of the other country beneficially entitled to the royalties. [Article 12, paragraphs 1 and 2]
1.98 The 10% rate limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed.
1.99 In the absence of a tax treaty, Australia taxes royalties paid to non-residents at 30% of the gross royalty.
1.100 The definition of royalties in the tax treaty largely reflects the definition in Australias domestic income tax law. The definition encompasses payments for the use of, or the right to use industrial, commercial or scientific equipment. It also includes payments for the supply of scientific, technical, industrial or commercial know-how but not payments for services rendered, except as provided for in subparagraph 3(d). Payments made for the right to copy or adapt computer software in a manner which would, without the permission of the copyright owner, constitute an infringement of copyright, also constitute royalty payments. [Article 12, paragraph 3]
Payments for the supply of know-how versus payments for services rendered
1.101 It is considered that a German Supreme Court decision (Bundesfinanzhof (No. IR 44/67) of 16 December 1970) provides a definitive test to distinguish between a know-how contract and a contract for services. A know-how contract, it was held, involved the supply by a person of their know-how to the paying entity (e.g. teaching a personal expertise), whereas in a contract for services, although it may involve the use of know-how , that know-how is applied by the person in the performance of their services.
1.102 Payments for design, engineering or construction of plant or building, feasibility studies, component design and engineering services may generally be regarded as being in respect of a contract for services, unless there is some provision in the contract for imparting techniques and skills to the buyer .
1.103 In cases where both know-how and services are supplied under the same contract, if the contract does not separately provide for payments in respect of know-how and services, an apportionment of the 2 elements of the contract may be possible.
1.104 Payments for services rendered are to be treated under Article 7 (Business profits) or Article 14 (Income from independent personal services).
1.105 A provision has been included in this tax treaty that deems radiofrequency spectrum licence payments to be royalties for the purposes of the tax treaty. This is the first occasion that such a provision has been included in an Australian tax treaty and is in accordance with Treasurers Press Release No. 26 of 11 March 1998 concerning revised taxation treatment to be afforded to spectrum licences. [Article 12, subparagraph 3(h)]
1.106 Consistent with Australian tax treaty practice, subparagraph 3(i) expressly treats as a royalty, amounts paid or credited in respect of forbearance to grant to third persons, rights to use property covered by the
Royalties Article
. This is designed to prevent arrangements along the lines of those contained in
Aktiebolaget Volvo v. Federal Commissioner of Taxation
(1978)
8 ATR 747
;
78 ATC 4316
, where instead of amounts being payable for the exclusive right to use the property they were made for the undertaking that the right to use the property will not be granted to anyone else, not being subject to tax as a royalty payment under the terms of Article 12.
[Article 12, subparagraph 3(i)]
Other royalties effectively treated as business profits
1.107 As in the case of interest income, it is specified that the 10% tax rate limitation is not to apply to royalties effectively connected with a permanent establishment or fixed base in the country in which the income is sourced - such income being subject to full taxation under either Article 7 or Article 14 as the case may be. [Article 12, paragraph 4]
1.108 The royalties source rule provided for in the tax treaty effectively corresponds in the case of Australia with the deemed source rule contained in section 6C (Source of royalty income derived by a non-resident) of the ITAA 1936 for royalties paid to non-residents of Australia. It broadly mirrors the source rule for interest income contained in paragraph 5 of Article 11 (Interest). [Article 12, paragraph 5]
1.109 If royalties flow between the payer and the person beneficially entitled to the royalties as the result of a special relationship between them, the 10% source country tax rate limitation will apply only to the extent that the royalties are not excessive. Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other Articles of this tax treaty.
1.110 A special relationship is generally taken to exist where royalties are paid to an individual by an associate or legal person who is directly or indirectly controlled by an individual or associated legal person or to a subordinate, or a group having a common interest with them. It covers those relationships that exist by way of blood or marriage and in general any community of interest. [Article 12, paragraph 6]
Article 13 - Income from alienation of property
1.111 This Article allocates between the respective countries taxing rights in relation to income or profits arising from the alienation of real property and other items of property.
1.112 With regard to alienation of real property it has been Australias treaty practice since the introduction of CGT to use the phrase income, profits or gains in this Article. However, Russian domestic law draws no distinction between income and capital. As a result, a compromise solution was agreed so that references in the tax treaty to income and profits, in the case of Australia, are to include capital gains.
1.113 The reference to income or profits in this Article is designed to put beyond doubt that a gain from the alienation of property which in Australia is income or a profit under ordinary concepts, will be subject to tax in accordance with this Article, rather than the Business Profits Article (Article 7), together with relevant capital gains. [Protocol item 1(b)]
1.114 Income or profits from the alienation of real property may be taxed by the country in which the property is situated. The term real property is to be defined for the purposes of this Article as it is under Article 6. Where the property is situated is determined in accordance with paragraph 3 of Article 6. [Article 13, paragraph 1]
1.115 Paragraph 2 deals with income or profits 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 itself (alone or with the whole enterprise) or the fixed base is alienated. Such income or profits may be taxed in the country in which the permanent establishment or fixed base is situated. This corresponds to the rules for taxation of business profits and income from independent personal services contained in Articles 7 and 14 respectively. [Article 13, paragraph 2]
1.116 Income or profits from the disposal of ships or aircraft operated in international traffic, or of associated property (other than real property covered by paragraph 1) are taxable only in the country in which the operator of the ships or aircraft is resident. This rule corresponds to the operation of Article 8 in relation to profits from the international operation of ships or aircraft in international traffic. [Article 13, paragraph 3]
1.117 For the purposes of this Article, the term international traffic shall not include any transportation which commences at a place in a country and returns to that place, after travelling through international waters but not visiting another country (e.g. so called voyages to nowhere by cruise ships). [Protocol item 2]
Shares and other interests in land-rich entities
1.118 Paragraph 4 applies to situations involving the alienation of shares or other interests in companies, and other entities, whose assets consist principally of real property (as defined in Article 6) which is situated in the other country (again, in the terms of Article 6). Such income or profits may be taxed by the country in which the real property is situated. This paragraph complements paragraph 1 of this Article and is designed to cover arrangements involving the effective alienation of incorporated real property, or like arrangements.
1.119 This is to be the case whether the real property is held directly or indirectly through a chain of interposed entities. While not limited to chains of companies, or even chains of entities only some of which are companies, the example of chains of companies is used to make clear that the corporate veil should be lifted in examining direct or indirect ownership.
1.120 This provision responds to the tax planning opportunities exposed by the decision of the Full Federal Court in the
Commissioner of Taxation v. Lamesa Holdings BV
(1997)
77 FCR 597
. It is designed to protect Australian taxing rights over income or profits on the alienation or effective alienation of Australian real property (as defined) despite the presence of interposed bodies corporate or other entities.
[Article 13, paragraph 4]
1.121 This Article contains a sweep-up provision in relation to capital gains which enables each country to tax, according to its domestic law, any gains of a capital nature derived by its own residents or by a resident of the other country from the alienation of any property not specified in the preceding paragraphs of the Article. It thus preserves the application of Australias domestic law relating to the taxation of capital gains in relation to the alienation of such property. [Article 13, paragraph 5]
1.122 Generally, Australian tax treaties have referred to gains of a capital nature in this paragraph, rather than capital gains as agreed in this tax treaty. It was agreed with the negotiators for the Russian Federation that in this context Article 13.5 relates only to gains of a capital nature.
1.123 As indicated earlier, income, profits or gains from the alienation of property that fall within the scope of this Article are not affected by the business profits provisions of Article 7. In the event that the operation of this Article should result in an item of income or gain being subjected to tax in both countries, the country of which the person deriving the income or gain is a resident (as determined in accordance with Article 4) would be obliged by Protocol item 1(a) and Article 22 (Methods of elimination of double taxation) to provide double tax relief for the tax imposed by the other country.
Article 14 - Income from independent personal services
1.124 Under this Article, income derived by an individual in respect of professional services or other activities of an independent character will be subject to tax in the country in which the services or activities are performed only if the recipient has a fixed base regularly available in that other country for the purposes of performing their activities.
1.125 If this condition is met, the country in which the services or activities are performed will be able to tax so much of the income as is attributable to the activities exercised from that fixed base. [Article 14, paragraph 1]
1.126 If the above test is not met, the income will be taxed only in the country of residence of the recipient.
1.127 Remuneration derived as an employee and income derived by public entertainers are the subject of other Articles of the tax treaty and are not covered by this Article.
Article 15 - Income from employment
1.128 This Article generally provides the basis upon which the remuneration of visiting employees is to be taxed. The provisions of this Article do not apply, however, in respect of income that is dealt with separately in:
- •
- Article 16 (Directors fees);
- •
- Article 18 (Pensions and annuities); and
- •
- Article 19 (Income from government service),
of the tax treaty.
1.129 Generally, salaries, wages and similar remuneration derived by a resident of one country from an employment exercised in the other country will be liable to tax in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where visits of only a short-term nature are involved. [Article 15, paragraph 1]
1.130 The conditions for this exemption are that:
- •
- the visit or visits does not exceed, in the aggregate, 183 days in any 12 month period commencing or ending in the year of income of the visited country;
- •
- the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited; and
- •
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the country being visited.
1.131 Where all of these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient. [Article 15, paragraph 2]
1.132 Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from employment in Russia may be taxed in Russia. However, the Article does not allocate sole taxing rights to Russia in that situation.
1.133 Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the ITAA 1997 that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the tax treaty allows both countries to tax a category of income, Australia would be required in this situation (pursuant to Article 22), as the country in which the income recipient is resident for tax purposes, to relieve the double taxation that would otherwise occur.
1.134 Although that Article provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Russian tax paid, the exemption with progression method of providing double tax relief in relation to employment income derived in the situation described would normally be applicable in practice pursuant to the foreign service income provisions of section 23AG of the ITAA 1936. This method takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.
Employment on a ship or aircraft
1.135 Income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country in which the enterprise is situated. [Article 15, paragraph 3]
1.136 For the purposes of this Article, the term international traffic shall not include any transportation which commences at a place in a country and returns to that place, after travelling through international waters but not visiting another country (e.g. so called voyages to nowhere by cruise ships). [Protocol item 2]
1.137 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 - Income of entertainers and sportspersons
1.138 By this Article, income derived by visiting entertainers (which has a reasonably wide meaning in international tax treaty usage) and sportspersons from their personal activities as such may generally be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The words, income derived by entertainers ... from their personal activities as such ... extend the application of this Article to income generated from promotional and associated kinds of activities engaged in by the entertainer or sportsperson while present in the visited country. [Article 17, paragraph 1]
1.139 There is a safeguard provision included in this Article which is designed to ensure that income in respect of personal activities exercised by an entertainer or sportsperson, whether received:
- •
- by the entertainer or sportsperson; or
- •
- by another person, for example, a separate enterprise which formally provides the entertainers or sportspersons services,
is taxed in the country in which the entertainer or sportsperson performs, whether or not that other person has a permanent establishment or fixed base in that country. [Article 17, paragraph 2]
Article 18 - Pensions and annuities
1.140 Pensions (excluding government service pensions dealt with under Article 19.2) and annuities (the term annuity as used in this Article is defined in paragraph 2) are taxable only by the country in which the recipient is resident. This Article extends to pension and annuity payments made to dependants, for example, a widow, widower or children of the person in respect of whom the pension or annuity entitlement accrued where, upon that persons death, such entitlement has passed to that persons dependants. [Article 18, paragraphs 1 and 2]
Article 19 - Income from government service
1.141 Salary and wage type income, other than pensions or annuities, paid to an individual for services rendered in the discharge of governmental functions to a government (including a political subdivision or local authority) of one of the countries, is to be taxed only in that country. However, such remuneration will be taxable only in the other country if:
- •
- the services are rendered in that other country; and
- •
- the recipient is a resident of that other country for the purposes of that countrys tax, who is either:
- -
- a citizen of that country; or
- -
- did not become a resident of that other country solely for the purpose of rendering the services.
[Article 19, paragraph 1]
1.142 Pensions paid by, or out of funds created by, one of the countries (or a political subdivision or local authority of that country) for services rendered in the discharge of governmental functions to that country will be taxable only in that country. It has been agreed with the Russian negotiators that governmental functions will only include those core activities of government (e.g. police, defences, foreign affairs, judiciary). [Article 19, subparagraph 2(a)]
1.143 However if the recipient is a resident and a citizen of the other country, the pension will be taxable in that other country provided the services in respect of which that pension is paid were rendered in that country. Thus, an Australian government service pension paid to a Russian resident who is also a Russian citizen will only be taxable in Russia, if the services which gave rise to that pension were rendered in Russia. [Article 19, paragraph 2]
1.144 Remuneration for services rendered in connection with a trade or business carried on by any governmental authority referred to in paragraphs 1 and 2 of the Article is excluded from the scope of this Article. Such remuneration will remain subject to the provisions of Article 15 (Income from employment), Article 16 (Directors fees) or Article 18 (Pensions and annuities). [Article 19, paragraph 3]
Article 20 - Payments to students
1.145 This Article applies to students temporarily present in one of the countries solely for the purpose of their education if the students are, or immediately before the visit were, resident in the other country. In these circumstances, payments from abroad received by the students solely for their maintenance or education will be exempt from tax in the country visited, even though they may qualify as a resident of the country visited during the period of their visit, and therefore might be taxable but for this Article.
1.146 The exemption from tax provided by the visited country is treated as extending to maintenance payments received by the student that are made for maintenance of dependent family members who have accompanied the student to the visited country.
1.147 Where, however, a student from Russia who is visiting Australia solely for educational purposes undertakes:
- •
- some part-time work with a local employer; or
- •
- during a semester break undertakes work with a local employer,
the income earned by that student as a consequence of that employment may, as provided for in Article 15, be subject to tax in Australia. In this situation the payments received from abroad for the students maintenance or education will not however be taken into account in determining the tax payable on the employment income that is subject to tax in Australia. No Australian tax would be payable on the employment income, however, if the student qualifies as a resident of Australia during the visit and the taxable income of the student does not exceed the tax-free threshold applicable to residents.
1.148 This Article provides rules for the allocation between the 2 countries of taxing rights to items of income not dealt with in the preceding Articles of the tax treaty. The scope of the Article is not confined to such items of income arising in one of the countries - it extends also to income from sources in a third country.
1.149 Broadly, such income derived by a resident of one country is to be taxed only in the country of residence unless it is derived from sources in the other country, in which case the income may also be taxed in the other country. Where this occurs, the country of residence of the recipient of the income would be obliged by Article 22 (Methods of elimination of double taxation) to provide double taxation relief. [Article 21, paragraphs 1 and 3]
1.150 This Article does not apply to income (other than income from real property as defined in Article 6.2) where the right or property in respect of which the income is paid 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, Article 7 (Business profits) or Article 14 (Income from independent personal services), as the case may be, will apply. [Article 21, paragraph 2]
Article 22 - Methods of elimination of double taxation
1.151 Double taxation does not arise in respect of income flowing between the 2 countries where the terms of the tax treaty provide either:
- •
- for the income to be taxed only in one country; or
- •
- where the domestic taxation law of one of the countries exempts the income from its tax.
1.152 It is necessary, however, to prescribe a method for relieving double taxation for other classes of income which, under the terms of the tax treaty, remain subject to tax in both countries. In accordance with international practice, Australias tax treaties provide for double tax relief to be provided by the country of residence of the taxpayer by way of a credit basis of relief against its tax for the tax of the country of source of the income. This Article also reflects that approach.
Source of income - double taxation relief
1.153 A special rule has been included in the Protocol which is designed to ensure that where an item of income, profits or gains is taxable in both countries, double taxation relief will be given by the income recipients country of residence (pursuant to this Article) for tax levied in the other country as prescribed under the tax treaty. In this way, income derived by a resident of Australia, which is taxable in Russia under the tax treaty, will be treated as being foreign income for the purposes of the ITAA 1936, including the foreign tax credit provisions of that Act. [Protocol item 1(a)]
1.154 Australias general foreign tax credit system, together with the terms of this Article and of the tax treaty generally, will form the basis of Australias arrangements for relieving a resident of Australia from double taxation on income arising from sources in Russia. The source of income rules specified by Protocol item 1(a) for the purposes of the tax treaty will also apply for those purposes.
1.155 Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraph 1 of this Article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA 1936. This will include the allowance of underlying tax credit relief in respect of dividends paid by Russian resident companies that are related to Australian resident companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA 1936.
1.156 Notwithstanding the credit basis of relief provided for by paragraph 2 of this Article, the exemption with progression method of relief will be applicable, as appropriate, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of foreign service (as defined in subsection 23AG(7) of the ITAA 1936) in Russia. Other foreign source income exemptions in Australias domestic law will also continue to be applicable in respect of relevant Russian source income. [Article 22, paragraph 1]
1.157 Russia is required to allow its residents a credit for Australian tax paid where they have derived income which is taxed in Australia and which is also taxed in Russia. [Article 22, paragraph 2]
Article 23 - Limitation of benefits
1.158 This Article provides that any income or profits which benefits from a preferential tax regime established under the law of either Australia or Russia which could potentially deny access to information by the other treaty partner is not to be accorded treaty benefits. Such treaty benefits are to be denied in relation to income or profits derived from certain specified activities. These activities generally do not require a substantial presence in the other treaty partner country, are preferentially taxed in that country and the information concerning that income or profits is granted greater than usual confidentiality by that country.
1.159 Preferentially taxed for these purposes means income or profits which are exempt from tax, or subject to a lower than normal rate of tax or are receiving other benefits in relation to that income or those profits (other than by reason of the application of other Articles of the tax treaty). [Article 23, paragraph 2]
Article 24 - Mutual agreement procedure
1.160 One of the purposes of this Article is to provide for consultation between the competent authorities of the 2 countries with a view to reaching a satisfactory solution where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the tax treaty.
1.161 A person wishing to use this procedure must present a case to the competent authority of the country of which the person is a resident within 3 years of the first notification of the action which the taxpayer considers gives rise to taxation not in accordance with the tax treaty. [Article 24, paragraph 1]
1.162 If, on consideration by the competent authorities, a solution is reached, it may be implemented irrespective of any time limits imposed by the domestic tax law of the relevant country. [Article 24, paragraph 2]
1.163 This Article also authorises consultation between the competent authorities of the 2 countries for the purpose of resolving any difficulties regarding the interpretation or application of the tax treaty and to give effect to it. [Article 24, paragraphs 3 and 4]
Article 25 - Exchange of information
1.164 This Article authorises and limits the exchange of information by the 2 competent authorities to information necessary for the carrying out of the tax treaty or for the administration of domestic laws concerning the taxes to which the tax treaty applies. [Article 25, paragraph 1]
1.165 The limitation placed on the kind of information authorised to be exchanged means that information access requests relating to taxes not within the coverage provided by Article 2 (Taxes covered), for example, goods and services tax, are not within the scope of the Article.
1.166 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted consistently with Australias other tax treaties. Any information received by a country shall be treated as secret in the same manner as information obtained under the domestic law of that country. [Article 25, paragraph 1]
1.167 An exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process or which would be contrary to public policy is not permitted by this Article. [Article 25, paragraph 2]
Article 26 - Members of diplomatic missions and consular posts
1.168 The purpose of this Article is to ensure that the provisions of the tax treaty do not result in members of diplomatic missions and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international conventions. Such persons are entitled, for example, to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act 1967 and the Consular (Privileges and Immunities) Act 1972 which reflect Australias international diplomatic and consular obligations.
1.169 This Article provides for the entry into force of the tax treaty. This will be on the last date on which notes are exchanged notifying that the last of the domestic processes to give the tax treaty the force of law in the respective countries has been completed. In Australia, enactment of the legislation giving the force of law in Australia to the tax treaty along with tabling the treaty in Parliament are prerequisites to the exchange of diplomatic notes.
Date of application for Australian withholding taxes
1.170 Once it enters into force, the tax treaty will apply in Australia in respect of withholding tax on income that is derived by a non-resident in relation to income derived on or after 1 July in the calendar year next following that in which the tax treaty enters into force.
Date of application for other Australian taxes
1.171 In Australia the tax treaty will first apply to other Australian taxes on income, profits or gains of the Australian year of income beginning on or after 1 July in the calendar year next following that in which the tax treaty enters into force.
Substituted accounting periods
1.172 Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the accounting period that has been substituted for the year of income beginning on 1 July of the calendar year next following that in which the tax treaty enters into force will be the relevant year of income for the purposes of the application of other Australian tax.
1.173 In Russia, the tax treaty will first apply to taxable years and periods beginning on or after 1 January in the calendar year following that in which the tax treaty enters into force.
1.174 The tax treaty is to continue in effect indefinitely. However, either country may give written notice of termination of the tax treaty through the diplomatic channel on or before 30 June in any calendar year beginning after the expiration of 5 years from the date of its entry into force.
1.175 In the event of either country terminating the tax treaty, the tax treaty would cease to be effective in Australia for the purposes of withholding tax on income derived by a non-resident in relation to income derived on or after 1 July in the calendar year next following that in which the notice of termination is given.
1.176 For other Australian tax, it would cease to be effective in relation to income, profits or gains of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.
1.177 The tax treaty would correspondingly cease to be effective in Russia for taxable years and periods beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.
Protocol item 1(a) - Deemed source
1.178 Item 1(a) of the Protocol, which has application to the tax treaty as a whole, effectively deems income, profits or gains derived by a resident of one country which, under the tax treaty, may be taxed in the other country to have a source in the latter country for the purposes of the tax treaty and the domestic income tax law of the respective countries. It therefore avoids any difficulties arising under domestic law source rules in respect of, for example, the exercise by Australia of the taxing rights to Australia by the tax treaty over income derived by residents of Russia. [Protocol item 1(a)]
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