House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Indian protocol

Outline of chapter

1.1 Schedule 1 to this Bill amends the International Tax Agreements Act 1953 (Agreement Act 1953) to define and give the force of law to the 2011 Protocol Amending the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Indian Protocol). Subsection 3AAA(1) of the Agreements Act 1953 will define the Indian Protocol and subsection 5(1) will give it the force of law in Australia. Subsections 3AAA(1) and 5(1) refer to the Indian Protocol as the Indian protocol (No . 1 ). This chapter explains the rules that apply in the Indian Protocol.

1.2 All references to the articles in the Indian Agreement are to Articles as amended by the Indian Protocol.

Context of amendments

1.3 The Indian Protocol was signed in New Delhi on 16 December 2011.

1.4 Once in force, the Indian Protocol will amend the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the Indian Agreement), which was signed in 1991.

1.5 The Indian Protocol will improve the administrative framework for tax cooperation between Australia and India and update the rules for the taxation of business profits and services to bring them more into line with international practice. It will also insert rules to protect taxpayers from tax discrimination.

Summary of new law

Main features of the Indian Protocol

1.6 The main features of the Indian Protocol are as follows:

•

A permanent establishment of an enterprise of one country is deemed to exist in the other country, unless otherwise excluded, where:

-

that enterprise furnishes services in the other country, through employees or other personnel, where the relevant activities continue for more than 183 days in any 12 month period [Article 5, subparagraph (3)(a) of the Indian Agreement];

-

that enterprise carries on activities in the other country in the exploration for or exploitation of natural resources located in that country, for more than 90 days in any 12 month period [Article 5, subparagraph (3)(b) of the Indian Agreement]; or

-

that enterprise operates substantial equipment in the other country for more than 183 days in any 12 month period [Article 5, subparagraph (3)(c) of the Indian Agreement].

•

Only the business profits attributable to an enterprise's permanent establishment in the other country may be taxed in that country [Article 7, paragraph 1 of the Indian Agreement].

•

Rules in the Indian Protocol will protect individuals and entities from tax discrimination in the other country and give them private rights of appeal. However, Article 24A does not restrict either country from applying provisions designed to prevent the avoidance or evasion of taxes (for Australia such measures include thin capitalisation rules or measures designed to ensure that taxes can be effectively collected or recovered and research and development concessions [Article 24A of the Indian Agreement].

•

The Indian Protocol provides for enhanced exchange of information, including bank information, between the two taxation authorities. It authorises and requires Australia to exchange information where the information relates to federal taxes [Article 26 of the Indian Agreement].

•

The Indian Protocol improves the integrity of the tax system by providing for the mutual assistance in the collection of tax debts. This would allow the Australian Taxation Office (ATO), in certain circumstances, to seek assistance from the Indian tax administration to collect Australian taxation debts in respect of all federal taxes, and vice versa [Article 26A of the Indian Agreement].

Comparison of key features of new law and current law

The Indian Protocol

1.7 A full transcript of the Indian Protocol and detailed explanation follows:

PROTOCOL AMENDING THE AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE REPUBLIC OF INDIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

(New Delhi, 16 December 2011)

The Government of Australia and the Government of the Republic of India,

Desiring to amend the Agreement between the Government of Australia and the Government of the Republic of India for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income signed at Canberra on the 25th day of July 1991 (in this Protocol referred to as "the Agreement"),

Have agreed as follows:

ARTICLE 1

Article 3 of the Agreement is amended by inserting new sub-paragraph k) in paragraph (1):

" (k) the term "national", in relation to a Contracting State, means:

(i)

any individual possessing the nationality or citizenship of that Contracting State; and

(ii)

any legal person, company, partnership or association deriving its status as such from the laws in force in that Contracting State."

ARTICLE 2

Article 5 of the Agreement is amended by omitting paragraph 3 and substituting:

"(3) Notwithstanding the provisions of paragraphs 1 and 2, where an enterprise of a Contracting State:

(a)

furnishes services, including consultancy services, through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) within that other State for a period or periods aggregating more than 183 days in any 12 month period;

(b)

carries on activities (including the operation of substantial equipment) in the other State in the exploration for or exploitation of natural resources situated in that other State for a period or periods exceeding in the aggregate 90 days in any 12 month period; or

(c)

operates substantial equipment in the other State (including as provided in subparagraph b)) for a period or periods exceeding in the aggregate 183 days in any 12 month period;

such activities shall be deemed to be carried on through a permanent establishment of the enterprise situated in that other State, unless the activities are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this place of business a permanent establishment under the provisions of that paragraph."

ARTICLE 3

Article 7 of the Agreement is amended by omitting paragraph 1 and substituting:

"(1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment."

ARTICLE 4

The Agreement is amended by inserting:

Article 24A

NON-DISCRIMINATION

(1) Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

(2) The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favorably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to individuals who are residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which a company of the other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar company of the first mentioned Contracting State, nor as being in conflict with the provisions of paragraph 3 of Article 7.

(3) Except where the provisions of paragraph 1 of Article 9, paragraph 6 of Article 11 or paragraph 6 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.

(4) Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.

(5) The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description.

(6) This Article shall not apply to any provision of the laws of a Contracting State which:

(a)

is designed to prevent the avoidance or evasion of taxes, including measures designed to address thin capitalization or to ensure that taxes can be effectively collected or recovered; or

(b)

provides tax incentives to eligible taxpayers for expenditure on research or development, provided that a company that is a resident of one Contracting State and is wholly or partly owned by residents of the other State can access such incentives on the same terms and conditions as any other company that is a resident of the first-mentioned State; or

(c)

is agreed between the Contracting States through an Exchange of Notes. "

ARTICLE 5

The Agreement is amended by omitting Article 26 and substituting:

"Article 26

EXCHANGE OF INFORMATION

(1) The competent authorities of the Contracting States shall exchange such information (including documents or certified copies of the documents) as is foreseeably relevant for carrying out the provisions of this Agreement, or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to the Agreement. The exchange of information is not restricted by Articles 1 and 2.

(2) Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorizes such use.

(3) In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

(a)

to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b)

to supply information (including documents or certified copies of the documents) which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c)

to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public).

(4) If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

(5) In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person."

ARTICLE 6

The Agreement is amended by inserting:

"Article 26A

ASSISTANCE IN THE COLLECTION OF TAXES

(1) The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistance is not restricted by Articles 1 and 2. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this Article.

(2) The term "revenue claim" as used in this Article means an amount owed in respect of taxes of every kind and description, imposed on behalf of the Contracting States, insofar as the taxation thereunder is not contrary to this Agreement or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.

(3) When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of collection by the competent authority of the other Contracting State. That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.

(4) When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of taking measures of conservancy by the competent authority of the other Contracting State. That other State shall take measures of conservancy in respect of that revenue claim in accordance with the provisions of its laws as if the revenue claim were a revenue claim of that other State even if, at the time when such measures are applied, the revenue claim is not enforceable in the first-mentioned State or is owed by a person who has a right to prevent its collection.

(5) Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be subject to the time limits or accorded any priority applicable to a revenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority applicable to that revenue claim under the laws of the other Contracting State.

(6) Proceedings with respect to the existence, validity or the amount of a revenue claim of a Contracting State shall only be brought before the courts or administrative bodies of that State. Nothing in this Article shall be construed as creating or providing any right to such proceedings before any court or administrative body of the other Contracting State.

(7) Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4 and before the other Contracting State has collected and remitted the relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be

(a)

in the case of a request under paragraph 3, a revenue claim of the first-mentioned State that is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, or

(b)

in the case of a request under paragraph 4, a revenue claim of the first-mentioned State in respect of which that State may, under its laws, take measures of conservancy with a view to ensure its collection

the competent authority of the first-mentioned State shall promptly notify the competent authority of the other State of that fact and, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request.

(8) In no case shall the provisions of this Article be construed so as to impose on a Contracting State the obligation:

(a)

to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b)

to carry out measures which would be contrary to public policy (ordre public);

(c)

to provide assistance if the other Contracting State has not pursued all reasonable measures of collection or conservancy, as the case may be, available under its laws or administrative practice;

(d)

to provide assistance in those cases where the administrative burden for that State is clearly disproportionate to the benefit to be derived by the other Contracting State."

ARTICLE 7

ENTRY INTO FORCE

The Contracting States shall notify each other in writing through the diplomatic channel of the completion of their domestic requirements for the entry into force of this Protocol. The Protocol, which shall form an integral part of the Agreement, shall enter into force on the date of the last notification, and thereupon shall have effect:

(a)

in the case of Australia, with regard to Australian tax, in relation to income, profits or gains of any year of income beginning on or after 1 July next following the date on which the Protocol enters into force;

(b)

in the case of India in respect of income derived in any fiscal year beginning on or after 1 April next following the date on which the Protocol enters into force;

(c)

for the purposes of Articles 24A (Non-Discrimination) and 26 (Exchange of Information) of the Agreement, from the date of entry into force of this Protocol;

(d)

notwithstanding the provisions of subparagraphs (a), (b) and (c), Article 26A (Assistance in the Collection of Taxes) of the Agreement shall have effect from the date agreed in an exchange of notes through the diplomatic channel.

IN WITNESS WHEREOF the undersigned, being duly authorised, have signed this Protocol.

DONE in duplicate at New Delhi this sixteenth day of December, 2011, in the English and Hindi languages, both texts equally authentic, the English text to be the operative one in any case of doubt.

Detailed explanation of the Indian Protocol

Article 1

Amends Article 3 (General Definitions) of the Indian Agreement

1.8 This Article inserts a new subparagraph into Article 3 ( General Definitions ) of the Indian Agreement to define the term 'national'. National is defined by reference to an individual's nationality or citizenship. A legal person, company, partnership or association will also be a national if it is created, organised or treated as such under the laws of Australia or India. For example, a company's nationality is determined by where it is incorporated. [Article 3, subparagraph (1)(k) of the Indian Agreement]

Article 2

Amends Article 5 (Permanent Establishment)of the Indian Agreement

1.9 This article amends the circumstances under which an enterprise is deemed to have a permanent establishment in a country.

Deemed permanent establishment

Services

1.10 Where an enterprise of one country furnishes services, including consultancy services, in the other country through its employees or other personnel engaged by it for that purpose, the enterprise will be deemed to have a permanent establishment in that other country through which those services are carried on. This rule only applies, however, where the relevant activities continue, for the same project or for a connected project, for a period or periods aggregating more than 183 days in any 12 month period.

1.11 In addition, this rule is subject to the provisions of paragraph 4 of Article 5 of the Indian Agreement which deems that certain activities that are ordinarily of a preparatory or auxiliary character do not constitute a permanent establishment. Examples of such activities include the use of facilities solely for the purpose of storage or display of goods or merchandise. [Article 5, new subparagraph (3)(a) of the Indian Agreement]

Natural resource activities

1.12 Where an enterprise of one country carries on activities (including the operation of substantial equipment) in the exploration for or exploitation of natural resources located in the other country for a period or periods exceeding in the aggregate 90 days in any 12 month period, the enterprise will be deemed to have a permanent establishment in that other country through which those activities are carried on (unless the activities are of a type described in paragraph 4 of Article 5 of the Indian Agreement). [Article 5, new subparagraph (3)(b) of the Indian Agreement]

1.13 This rule replaces the corresponding rule in the Indian Agreement which deems a permanent establishment to exist in relation to natural resource activities, regardless of the duration of those activities.

Substantial equipment

1.14 An enterprise of a country is deemed to have a permanent establishment in the other country where it operates substantial equipment (including in relation to natural resource activities) for a period or periods exceeding in the aggregate 183 days in any 12 month period (unless the activities are of a type described in paragraph 4 of Article 5 of the Indian Agreement).

1.15 Subparagraphs 3b) and c) together reflect Australia's reservation to the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (OECD Model) concerning activities relating to natural resources and the use of substantial equipment. Australia's experience is that the permanent establishment provision in the OECD Model may be inadequate to deal with high value mobile activities; in particular those involving the use of such equipment.

1.16 The words 'operation' and 'operates' have been included to clarify that only active use of substantial equipment assets will be captured by subparagraphs 3b) and c). This means that an enterprise that merely leases substantial equipment to another person for that other person's own use in a country, would not be deemed to have a permanent establishment in that country under these provisions.

1.17 For example, if an Indian enterprise itself operates a mobile crane at an Australian port for more than 183 days in a 12 month period, the Indian enterprise would be deemed to have a permanent establishment in Australia under subparagraph 3c). If, however, that Indian enterprise merely leases the mobile crane to another person and that other person operates the crane at an Australian port for its own purposes, the Indian enterprise would not be deemed to have a permanent establishment in Australia under subparagraph 3c). However, if that other person operates the substantial equipment for or on behalf of the Indian enterprise in Australia, the Indian enterprise would be considered to operate the equipment in Australia.

1.18 The meaning of the term 'substantial equipment' depends on the relevant facts and circumstances of each individual case. Factors such as size, quantity or value of the equipment, or the role of the equipment in income producing activities, are relevant in determining whether the equipment is substantial. However, some examples of substantial equipment would include:

•

industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction;

•

manufacturing or processing equipment used in a factory; or

•

oil or drilling rigs, platforms and other structures used in the petroleum, gas or mining industry.

Article 3

Amends Article 7 (Business Profits) of the Indian Agreement

1.19 This article revises the rules that allow for the taxation by one country of business profits derived by an enterprise that is a resident of the other country.

1.20 The business profits of an enterprise that is a resident of one country will be taxable only in that country unless the profits are attributable to the carrying on of a business through a permanent establishment in the other country. To the extent that they are attributable to a permanent establishment located in the other country, such profits may also be taxed in that other country.

1.21 This article will remove the 'force of attraction' rule contained in the corresponding article of the existing Indian Agreement. The force of attraction rule provides that a country may also generally tax income attributable to certain related sales of goods or merchandise or other business activities where those sales are made or business activities are carried on within that country other than through the permanent establishment.

1.22 The force of attraction rule is inconsistent with current international treaty practice which generally does not permit source country taxation of 'indirect profits' earned by a foreign enterprise and its removal will place Australian investors in India on an equal footing with investors from other countries with similar treaty protection. [Article 7, paragraph (1) of the Indian Agreement]

Article 4

Inserts new Article 24A (Non-Discrimination) into the Indian Agreement

1.23 The Indian Protocol inserts new rules into the Indian Agreement to prevent tax discrimination. The Australian tax system is generally non-discriminatory. However, for clarity this Article provides that certain features of the Australian tax system should not be seen as coming within the Article's terms.

Discrimination based on nationality

1.24 Article 24A prevents discrimination on the grounds of nationality by providing that nationals of one country may not be less favourably treated than nationals of the other country in the same circumstances. [New Article 24A, paragraph (1) of the Indian Agreement]

1.25 The discrimination that this Article precludes applies to both taxation and any requirement connected with such taxation. Accordingly, discrimination in the administration of the tax law is also generally precluded.

1.26 The term national is defined in new sub-paragraph (k) of Article 3 of the Indian Agreement ( General Definitions ) and covers both an individual who is a national or citizen of one country or the other, and any legal person, company, partnership or association deriving its status as such from the laws in force in one country or the other. Accordingly, a company that is incorporated in Australia would be a national of Australia while a company that is incorporated under a law of India would be a national of India for the purposes of this paragraph.

The meaning of 'in the same circumstances' and 'in particular with respect to residence'

1.27 The expression 'in the same circumstances' refers to persons who, from the point of the application of the ordinary taxation laws, are in substantially similar circumstances both in law and in fact.

1.28 Where a person operates in an industry that is subject to government regulation such as prudential oversight, another person operating in the same industry but not subject to the same oversight, would not be in the same circumstances.

1.29 The inclusion of the further clarification 'in particular with respect to residence' makes clear that the residence of the taxpayer is one of the factors that are relevant in determining whether taxpayers are placed in similar circumstances. Therefore, different treatment accorded to an Indian resident compared to an Australian resident will not constitute discrimination for the purposes of this Article. A potential breach of paragraph 1 of this Article only arises if two persons who are residents of the same country are treated differently solely by reason of one being a national of Australia and the other a national of India.

The meaning of 'other or more burdensome' taxation

1.30 The words 'more burdensome' taxation refer to the quantum of taxation while 'other' taxation may refer to some form of income tax other than the form of income tax to which a national of the country is subject ( Woodend Rubber Co . v Commissioner of Inland Revenue [1971] A.C. 321 at 332).

1.31 The phrase 'any requirement connected therewith' makes the Article also applicable to administrative or compliance requirements that a taxpayer may be called upon to meet where those requirements differ based on nationality grounds.

Non-residents of Australia/India

1.32 Consistent with paragraph 1 of Article 24 ( Non-Discrimination ) of the OECD Model, paragraph 1 of this Article applies to persons who are residents of neither Australia nor India. Consequently, residents of third countries who are nationals of either Australia or India are able to seek the benefits of this provision. Paragraph 1 does not, however, extend to residents of either country who are not 'nationals' (as defined in sub-paragraph (k) of paragraph 1 of Article 3 ( General Definitions ) of either country.

Non-discrimination and permanent establishments

1.33 The tax on permanent establishments of enterprises of the other country will not be levied less favourably than on the country's own enterprises carrying on the same activities. This applies to all residents of a treaty country, irrespective of their nationality, who have a permanent establishment in the other country. The purpose of this provision is to prevent discrimination in the treatment of permanent establishments as compared with resident enterprises. [Article 24A, paragraph (2) of the Indian Agreement]

1.34 For this paragraph to apply, the comparison must therefore be made between a permanent establishment and local enterprises carrying on the same activities. Paragraphs 37 and 38 of the OECD Model Commentary on Article 24 ( Non-discrimination ) note, by way of example, that the legal structure of the permanent enterprise and the regulation of its activities may be relevant in determining whether or not those activities are the same as those of local enterprises.

1.35 Permanent establishments of non-resident enterprises may be treated differently from resident enterprises as long as the treatment does not result in more burdensome taxation for the former than for the latter. That is, a different mode of taxation may be adopted with respect to non-resident enterprises, to take account of the fact that they often operate in different conditions to resident enterprises. The provision would not affect, for example, domestic law provisions that tax a non-resident by withholding, provided that calculation of the tax payable is not greater than that applying to a resident taxpayer.

1.36 Paragraph 2 permits a country to charge a higher rate of tax on the profits of a permanent establishment of a non-resident company than it charges on the profits of similar resident companies. Such treatment would not breach this paragraph or paragraph 3 of Article 7 of the Indian Agreement. This provision is consistent with India's long-standing differential tax rate treatment between its resident companies and non-resident companies. [Article 24A, paragraph 2 of the Indian Agreement]

1.37 In determining whether taxation has been less favourably levied, regard would be had only to the rules applicable to the taxation of the permanent establishment's own activities, and how those rules compare with those applicable to the taxation of similar activities carried on by a local enterprise. As noted in paragraph 41 of the Commentary on Article 24 of the OECD Model, the equal treatment principle in this paragraph 'does not extend to rules that take account of the relationship between an enterprise and other enterprises (for example, rules that allow consolidation, transfer of losses or tax-free transfers of property between companies under common ownership), since the latter rules do not focus on the taxation of an enterprise's own business activities similar to those of the permanent establishment'. Accordingly, this paragraph does not affect Australia's roll-over rules for capital gains, consolidation rules or loss transfer rules. Nor does it affect rules concerning the allowance of rebates or credits in relation to dividends, since these do not relate to the business activities of the permanent establishment.

Non-resident individuals

1.38 Non-resident individuals do not have to be granted the personal allowances, reliefs or reductions granted on account of civil status or family responsibilities to residents of the tax treaty countries. [Article 24A, paragraph (2) of the Indian Agreement]

1.39 This means that Australia will continue to be able to grant certain tax offsets only to resident individuals, such as the tax offset for dependents contained in Division 13 of the ITAA 1997.

Deductions for payments to foreign residents

1.40 The treaty partner countries must allow the same deductions for interest, royalties and other disbursements paid to residents of the other country as it does for payments to its own residents. However, the treaty countries are allowed to reallocate profits between related enterprises on an arm's length basis under Article 9 ( Associated Enterprises ) and to limit deductions in accordance with paragraph 6 of Article 11 ( Interest ), and paragraph 6 of Article 12 ( Royalties ). [Article 24A, paragraph (3) of the Indian Agreement]

Companies owned or controlled abroad

1.41 A country must not give less favourable treatment to companies, the capital of which is owned or controlled, wholly or partly, directly or indirectly, by one or more residents of the other country. That is, Australian companies owned or controlled by Indian residents may not be given other or more burdensome treatment than locally owned or controlled Australian companies. [Article 24A, paragraph (4) of the Indian Agreement]

1.42 Differential tax treatment based on residency is not affected by this paragraph. Nor does the paragraph require the same treatment of non-resident shareholders in the company as resident shareholders. Accordingly, there is no obligation under paragraph 4 or any other provision of this Article to allow imputation credits to non-resident shareholders.

Taxes to which this Article applies

1.43 This Article applies to 'taxes of every kind and description'. It is intended that the Article extend to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, these taxes.

1.44 In the case of Australia, the relevant taxes include the income tax (including the petroleum resource rent tax, the mineral resource rent tax and tax on capital gains), the GST and the fringe benefits tax. The provisions of this Article also apply to taxes imposed by the Australian states and territories.

1.45 In the case of India, the relevant taxes are all taxes levied by, or on behalf of, India, its political subdivisions or local authorities. In addition to the income tax and the surtax imposed on chargeable profits of companies, this would also include, for example, Value-Added Tax (VAT) both levied by the Indian Union Government and India's state governments. [Article 24A, paragraph (5) of the Indian Agreement]

Exclusions

1.46 Certain provisions of the law of both countries are not restricted in their application by this Article. The specific exclusion of these provisions will ensure that they can continue to operate for their intended purpose. The provisions of the law of Australia and India which are not restricted in the application by this Article are those that:

•

are 'designed to prevent the avoidance or evasion of taxes', including measures designed to address thin capitalisation. In the case of Australia these laws include, dividend stripping, transfer pricing, controlled foreign companies and transferor trust provisions. Although it is commonly accepted by most Organisation for Economic Co-operation and Development (OECD) member countries that such provisions do not contravene Non-Discrimination Articles, this outcome is specifically provided for in the amended Indian Agreement by the exclusion of such rules from the operation of the Article;

•

ensure that taxes are effectively collected or recovered. This preserves the rules relating to the enforcement and operation of the various aspects of the withholding tax provisions relating to non-residents. For example, section 26-25 ( Interest or royalty ) of the ITAA 1997 provides that where interest and royalties are paid to a non-resident and the payer fails to deduct withholding tax, the interest or royalty expense cannot be claimed as a deduction. No similar measure exists in relation to payments from a resident to another resident;

•

provide tax incentives for research and development expenditure, provided that a company that is a resident of one country and is wholly or partly owned by residents of the other country can access such incentives on the same terms and conditions as any other company that is a resident of the first-mentioned country; or

•

are agreed in an exchange of notes between the two Governments to be unaffected by this Article.

[Article 24A, paragraph (6) of the Indian Agreement]

More favourable treatment

1.47 Nothing in this Article prevents either country from treating residents of the other country more favourably than its own residents.

Article 5

Substitutes new Article 26 (Exchange of Information) into the Indian Agreement

1.48 The Indian Protocol aligns the information exchange provisions to the current OECD standard by replacing Article 26 ( Exchange of Information ) of the Indian Agreement. The new Article 26 continues to provide for the exchange of tax information by the tax administrations of the two countries, but differs from the previous approach in the following ways:

•

the scope is expanded to a wider range of taxes;

•

the new provision clarifies that the tax authorities in India and Australia are obliged to obtain information for the tax authorities of the other country regardless of whether the first country has a domestic tax interest in the information sought or whether the information concerns a resident of either country;

•

bank secrecy laws do not limit the exchange of information; and

•

information received by a tax authority may be used for other purposes when the laws of both countries permit this and where the tax authority supplying the information authorises such use.

Foreseeably relevant information

1.49 Article 26 authorises and limits the exchange of information by the two competent authorities to information foreseeably relevant to the administration or enforcement of the relevant taxes. The exchange of information is not restricted by Article 1 ( Personal Scope ) of the Indian Agreement, and may therefore cover persons who are not residents of Australia or India.

1.50 The change in wording from 'necessary' used in Article 26 of the Indian Agreement to a 'foreseeably relevant' standard reflects the wording in Article 26 ( Exchange of Information ) of the OECD Model.

1.51 The standard of foreseeable relevance is intended to ensure that information may be exchanged to the widest possible extent and, at the same time, to clarify that competent authorities of Australia and India are not entitled to request information from the other country which is unlikely to be relevant to the tax affairs of a taxpayer, or to the administration and enforcement of tax laws. [Article 26, paragraph (1) of the Indian Agreement]

Taxes to which this Article applies

1.52 Under the corresponding Article in the Indian Agreement, the information that could be requested and obtained between the two countries was limited to information in relation to taxes to which that agreement applied (generally income taxes).

1.53 Under the Article 26, the range of taxes for which information may be exchanged has been expanded. The exchange of information is not restricted by Article 2 ( Taxes Covered ) of the Indian Agreement. The Australian competent authority can now request and obtain information concerning all Australian federal taxes from the Indian competent authority. This means, for example, that information concerning Australian indirect taxes (such as the goods and services tax (GST)) may be requested and obtained from India. [Article 26, paragraph (1) of the Indian Agreement]

1.54 Similarly, in the case of India, the Indian competent authority can now request and obtain information concerning all Indian national taxes from the Australian competent authority.

Use of exchanged information

1.55 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted in a manner which is consistent with the approach taken in the OECD Model. However, the final sentence of paragraph 2 permits the information to be used for other purposes when the laws of both countries permit this and the tax authority supplying the information authorises such use. [Article 26, paragraph (2) of the Indian Agreement]

1.56 Any information received by a country must be treated as secret in the same manner as information obtained under the domestic law of that country, and can only be disclosed to the persons identified in paragraph 2 of the Article. [Article 26, paragraph (2)of the Indian Agreement]

No domestic tax interest required

1.57 When requested, a country is required to obtain information under the new Article in the same manner as if it were administering its domestic tax system, notwithstanding that the country may not require the information for its own purposes. Australia would recognise this obligation to obtain relevant information for treaty partner countries, even in the absence of an explicit provision to this effect. [Article 26, paragraph (4) of the Indian Agreement]

Limitations

1.58 The country requested to provide information is not obliged to do so where:

•

it would be required to carry out administrative measures at variance with the law and administrative practice of either Australia or India; or

•

such information is not obtainable under the domestic law or in the normal course of administration of either Australia or India.

[Article 26, subparagraphs (3)(a) and (b) of the Indian Agreement]

1.59 Also, in no case is the country receiving the request obliged to supply information that would:

•

disclose any trade, business, industrial, commercial or professional secret or trade process; or

•

be contrary to public policy.

[Article 26, subparagraph (3)(c)]

1.60 Paragraph 5 ensures that paragraph 3 of Article 26 cannot be used to prevent the supply of information solely because the information is held by entities including banks, other financial institutions, trusts, foundations, nominees. The addition of this paragraph will not have any practical application for Australia, since Australian domestic tax law already permits the Commissioner to obtain information from banks and financial institutions in order to meet obligations under exchange of information articles in tax treaties or Tax Information Exchange Agreements. [Article 26, paragraph 5 of the Indian Agreement]

Information that existed prior to the entry into force of the Indian Protocol

1.61 Once the new Article 26 is effective, the competent authorities can exchange information that relates to transactions or events occurring prior to entry into force of the Indian Protocol. This approach conforms to the international practice contained in paragraph 10.3 of the OECD Model Commentary on Article 26 ( Exchange of Information ).

Article 6

Inserts new Article 26A (Assistance in Collection of taxes) into the Indian Agreement

1.62 The Indian Protocol inserts rules into the Indian Agreement to provide for assistance in the collection of taxes. Australia and India will be authorised and required to provide assistance to each other in the collection of revenue claims. This assistance is not to be restricted by the terms of Article 1 ( Personal Scope ) of the Indian Agreement. Assistance must therefore be provided as regards a revenue claim owed to either country by any person, whether or not a resident of Australia or India. The form of the assistance is set out in paragraphs 3 and 4 of this Article. [Article 26A, paragraph (1) of the Indian Agreement]

1.63 The term 'revenue claim' is defined for the purposes of this Article to mean an amount owed in respect of taxes of every kind and description, imposed on behalf of Australia or India. A revenue claim may cover any Indian tax, or any Australian federal tax, but only insofar as the imposition of such taxes is not contrary to the amended agreement or any other instrument in force between Australia and India. It also applies to interest, administrative penalties and costs of collection or conservancy related to such amount. [Article 26A, paragraph (2) of the Indian Agreement]

Enforceable revenue claims

1.64 Assistance in collection will only be provided by Australia in relation to a revenue claim that is enforceable in India. Similarly, India is not required to provide assistance in collection in respect of an Australian revenue claim that is not enforceable in Australia. A revenue claim will be enforceable where the requesting country has the right, under its domestic law, to collect the revenue claim. Further, the revenue claim must be owed by a person who, at that time, under the law of that country, has no administrative or judicial rights to prevent its collection.

1.65 The way in which the revenue claim of the requesting country is to be collected by the requested country is stipulated. Other than in relation to time limits and priority (see paragraphs 1.68 to 1.71), the requested country is required to collect the revenue claim as though it were its own revenue claim. This obligation applies even if, at that time, the requested country has no need to undertake collection actions related to that taxpayer for its own tax purposes. [Article 26A, paragraph (3) of the Indian Agreement]

1.66 Where a request from India or Australia concerns a tax that does not exist in the other country, the country that received the request will follow the procedure applicable to a claim for a similar domestic tax or any other appropriate procedure if no similar tax exists.

Measures of conservancy

1.67 Australia or India may request the other country to take measures of conservancy even where it cannot yet ask for assistance in collection, such as where the revenue claim is not yet enforceable or when the debtor still has the right to prevent its collection. An example of a conservancy measure is the seizure or the freezing of assets before final judgment to guarantee that the assets will still be available when collection can subsequently take place.

1.68 If requested to do so by India, Australia is required to take measures of conservancy in respect of the revenue claim in accordance with the provisions of Australian law as if the revenue claim were an Australian revenue claim. Although Australia does not have specific conservancy measures, the Commissioner may apply for a Mareva injunction, which would prevent the taxpayer and the taxpayer's associates from dealing with certain assets. [Article 26A, paragraph (4) of the Indian Agreement]

Time limits

1.69 The requested country's domestic law time limitations beyond which a revenue claim cannot be enforced or collected do not apply to a revenue claim in respect of which the other country has made a request for assistance in collection. Rather, the time limits of the requesting country apply. [Article 26A, paragraph (5) of the Indian Agreement]

1.70 This paragraph follows the OECD provision but has no practical effect in Australia as there is currently no time limit imposed on the collection of a revenue claim.

Priority of claims

1.71 Any rules of Australia and India which give priority to tax debts over the claims of other creditors do not apply to a revenue claim of the other country. This restriction applies regardless of the fact that the requested country must generally treat the claim as its own revenue claim.

1.72 The words 'by reason of its nature as such' in paragraph 5 indicate that any time limits and priority rules to which the paragraph applies are only those that are specific to unpaid taxes. Consequently, paragraph 5 does not prevent the application of general rules concerning time limits or priority which would apply to all debts, such as rules giving priority to a claim by reason of that claim having arisen or having been registered before another one. [Article 26A, paragraph (5) of the Indian Agreement]

Restriction on judicial and administrative proceedings

1.73 VAny legal or administrative objection concerning the existence, validity or the amount of a revenue claim of the requesting country is to be exclusively dealt with in that country. For example, no legal or administrative proceedings, such as a request for judicial review, may be initiated in Australia with respect to the existence, validity or amount of an Indian revenue claim. [Article 26A, paragraph (6) of the Indian Agreement]

Change in circumstances

1.74 Where the relevant conditions in paragraph 3 or 4 of this Article are no longer satisfied after a request for assistance has been made, but before the revenue claim has been collected and remitted by the requested country, the competent authority of the requesting country is required to promptly notify the competent authority of the other country of that fact. [Article 26A, paragraph (7) of the Indian Agreement]

1.75 An example of such a situation would be where a request for assistance in collection has been made by India, but the revenue claim ceases to be enforceable in India prior to its collection by Australia.

1.76 Following such notification, the requested country has the option to ask the requesting country to either suspend or withdraw its request for assistance. If the request is suspended, the suspension applies until such time as the requesting country informs the other country that the conditions necessary for making a request as regards the revenue claim are again satisfied or that it withdraws its request. [Article 26A, paragraph (7) of the Indian Agreement]

Limitations

1.77 The requested country is permitted to refuse the request for assistance in certain circumstances.

1.78 The first limitation on the obligations of the country receiving the request is that it is not required to exceed the bounds of its own domestic laws and administrative practice or those of the other country in fulfilling its obligations under this Article. [Article 26A, subparagraph (8)(a) of the Indian Agreement]

1.79 However, this does not prevent Australia from applying administrative measures to collect an Indian revenue claim, even though invoked solely to provide assistance in the collection of Indian taxes.

1.80 The second limitation provides that the country is not required to satisfy a request where it would require the carrying out of measures that are contrary to public policy, such as where providing assistance may affect the vital interests of the country itself. [Article 26A, subparagraph (8)(b) of the Indian Agreement]

1.81 The third limitation provides that neither country is obliged to satisfy a request for assistance if the other country has not pursued all reasonable measures of collection or conservancy that are available under its own laws or administrative practice. [Article 26A, subparagraph (8)(c) of the Indian Agreement]

1.82 The final limitation allows either country to reject a request for assistance on the basis of practical administrative considerations such as when the costs of recovering a revenue claim would exceed the amount of the revenue claim itself. [Article 26A, subparagraph (8)(d) of the Indian Agreement]

Article 7

Date of entry into force of the Indian protocol

1.83 This Article provides for the entry into force of the Indian Protocol, which will form an integral part of the Indian Agreement. The Indian Protocol will enter into force on the last date on which diplomatic notes are exchanged notifying that the domestic processes to approve the Indian Protocol in the respective countries have been completed. In Australia, enactment of the legislation giving the force of law in Australia to the Indian Protocol, along with tabling the protocol in Parliament, are prerequisites to the exchange of diplomatic notes. [Article 7 of the Indian Protocol]

Date of application for Australian taxes

1.84 Once it enters into force, the Indian Protocol will apply in Australia with regard to Australian tax, in relation to income, profits or gains of any year of income beginning on or after 1 July next following the date on which the Indian Protocol enters into force. [Article 7, paragraph (a) of the Indian Protocol]

Date of application for Indian taxes

1.85 The Indian Protocol will apply in India in respect of income derived in any fiscal year beginning on or after 1 April next following the date on which the Indian Protocol enters into force. [Article 7, paragraph (b) of the Indian Protocol]

Non-Discrimination and Exchange of Information

1.86 Article 24A ( Non-Discrimination ) and Article 26 ( Exchange of Information ) are intended to have effect from the date of entry into force of the Indian Protocol. [Article 7, paragraph (c) of the Indian Protocol]

Assistance in Collection

1.87 Article 26A ( Assistance in the Collection of Taxes ) shall have effect from a date agreed in a subsequent Exchange of Notes through the diplomatic channel between Australia and India. [Article 7, paragraph (d) of the Indian Protocol]