Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. John Kerin, M.P.)E. DETAILED NOTES ON CLAUSES
An explanation of the various articles of each double tax agreement follows.
AGREEMENT WITH INDIA
The comprehensive double taxation agreement with India generally accords in substantial practical effect with other comprehensive double taxation agreements to which Australia is a party but it differs from them in certain respects as a consequence of India's status as a major developing country.
The agreement follows the conventional tax treaty format of allocating the right to tax some income to the country of source, sometimes at limited rates, while the country of residence is given the sole right to tax other types of income. It also allocates to the respective countries taxing rights in relation to certain gains. It provides that where income, profits or gains may be taxed in both countries, the country of residence, if it taxes, is to allow double tax relief against its own tax for the tax imposed by the country of source.
A notable feature of the agreement is the royalty provisions of Article 12, which contain several significant departures from standard Australian tax treaty practice. They prescribe different source country tax rate limits for various categories of royalty payments and provide for certain fees for services to be treated as royalties.
This article establishes the scope of application of the agreement, by providing for it to apply to persons (which term includes companies) who are residents of one or both countries.
The issue of residential status, including the situation of persons who are dual residents (i.e. residents of both countries), is dealt with in Article 4.
This article specifies the existing taxes of each country to which the agreement applies. These are, in the case of Australia, the Australian income tax and the resource rent tax in respect of offshore petroleum projects. For India, its income tax (including any surcharge thereon) and the surtax imposed on the chargeable profits of companies are specified.
Paragraph 2 of the article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes. The paragraph also obligates the taxation authority of each country to notify the other of any substantial changes to the relevant domestic laws.
Article 3 - General Definitions
Paragraph 1 of this article provides definitions for a number of the terms used in the agreement. Some other terms are defined in the articles to which they relate.
Paragraph 2 of this article addresses terms that are not defined within the agreement. It provides that such a term, unless used in a context that requires otherwise, is to be taken to have the same interpretative meaning ascribed that particular term under the domestic law from time to time in force of the country applying the agreement. The effect of the inclusion in this paragraph of the expression "from time to time in force" is to clarify that a term not defined in the agreement be given the meaning it has under that country's domestic law at the time of application of the agreement, rather than the meaning it had when the agreement was negotiated.
As with Australia's other modern taxation agreements, "Australia" is effectively defined in paragraph 1 as including certain external territories and areas of the continental shelf. By reason of this definition, Australia fully preserves the taxing rights effectively provided by section 6AA of the ITAA over mineral exploration and mining activities carried on by non residents on its continental shelf areas. The reference to "India" is similarly defined to include maritime zones etc in which India has sovereign rights under international law. The definitions are particularly relevant to the taxation by Australia and India of shipping profits in accordance with Article 8 of the agreement.
Subparagraph 1(h) makes it clear that, for the purposes of the agreement, the terms "Australian tax" and "Indian tax" do not include any amount of penalty or interest imposed by the operation of the respective domestic laws of Australia and India.
This is of particular relevance in determining a taxpayer's entitlement under the double tax relief provisions of Article 24 (Methods of Elimination of Double Taxation) of the agreement. In the case of a resident of Australia, any such penalty or interest component of a liability determined under the domestic taxation laws of India with respect to income that India is entitled to tax under the agreement would not be a creditable "Indian tax" for purposes of Article 24(1) of the agreement. This result accords with the meaning of "foreign tax" in subsection 6AB(2) of the ITAA. Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 24(1), pursuant to Division 18 of Part III of the ITAA.
This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residential status is one of the criteria for determining each country's taxing rights and is a necessary condition for the provision of double tax relief under the agreement. The concept of resident according to each country's taxation law provides the basic test.
The article, specifically paragraphs 2 and 3, also includes a set of "tie-breaker" rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - qualifies as a dual resident, i.e. as a resident under the domestic laws of both countries.
A dual resident, for example, who is deemed by Article 4 to be resident solely of India would be entitled to any exemption from, or reduction in, Australian tax provided by an article of the agreement in respect of income derived from sources in Australia by a resident of India. For the categories of income which under the agreement remain taxable in both countries, the obligation placed by Article 24 (Methods of Elimination of Double Taxation) on the country of residence of the recipient of the income to provide double tax relief would in that example rest with India.
Dual residents remain, however, in relation to each country a resident of that country for the purposes of its domestic law and subject to its tax as such so far as the agreement allows. Attention is drawn, however, to Article 22 (Income Not Expressly Mentioned) which would operate in relation to the dual resident referred to above as if the person were a resident of India and thus preclude Australia from taxing items of income not expressly dealt with by another article of the agreement where the income is derived from sources in India, or from sources in a third country. Paragraph 5 of Article 13 (Alienation of Property) would, however, preserve the application of Australia's capital gains tax rules in relation to gains to which that paragraph applies on the basis that the dual resident remains a resident of Australia for those purposes.
Article 5 - Permanent Establishment
Application of various provisions of the agreement (principally Article 7 relating to Business Profits) is dependent upon whether a person who is a resident of one country has a "permanent establishment" in the other, and if so, whether income derived by the person in the other country is attributable to or effectively connected with a business carried on through that "permanent establishment". The definition of the term "permanent establishment" which this article embodies generally corresponds closely with definitions of the term in Australia's other double taxation agreements. However, some aspects of the definition in this article are peculiar to this agreement.
The primary meaning of the defined term is expressed in paragraph 1 as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with elaborating on the meaning of the term by giving examples (by no means intended to be exhaustive) of what may constitute a permanent establishment - such as an office, a minor or a warehouse or a sales outlet - and by specifying the circumstances in which a resident of one country shall, or shall not, be deemed to have a permanent establishment in the other country.
A particular feature of this article in this agreement is that subparagraph 3(b) deems an enterprise which carries on activities in one of the Contracting State in connection with the exploration for or exploitation of natural resources in that State to have permanent establishment in that State through which it carries on business. This provision is designed to ensure source country taxing rights over profits derived from such activities under Article 7 (Business Profits). Natural resource royalties, however, fall within the definition of "real property" in Article 6 and will remain subject to full source country taxing rights under that Article. See the notes below on Article 6.
Another particular feature of this article is to be found in subparagraph 3(c). This subparagraph forms part of the general scheme of the agreement in relation to the taxation of fees for services - whereby fees paid for certain services are to be treated as royalties and taxable in accordance with Article 12, while fees paid for other services will remain subject to the taxing rules applicable under Article 7 for business profits or under Article 14 for independent personal services, as appropriate.
Subparagraph 3(c) effectively deems the furnishing by an enterprise of one of the Contracting States of the latter services within the other Contracting State to constitute a permanent establishment of the enterprise in that other Contracting State in certain circumstances. These circumstances are where the services are furnished within that State either for an aggregate of more than 90 days within any 12 month period or for an associated enterprise (within the meaning of either subparagraph 1(a) or 1(b) of Article 9).
Fees paid for services which are not treated as royalties are, when the services are furnished in either of those circumstances, thus brought within the scope of profits that may be taxed pursuant to Article 7 by the Contracting State in which the deemed permanent establishment is situated. Paragraph 7 or Article 7 would operate, however, where such fees represent income from independent personal services, to preserve the application of Article 14 in relation to those fees - see further the notes below on that paragraph.
Article 6 - Income from Real Property (Immovable Property)
By this article, income from real property is effectively defined, in the case of Australia, as extending to the letting or use in any other form of any land or interest therein, and royalties and other payments relating to rights for the working of, or the exploration for or exploitation of, mines or quarries or other natural resources. The article provides for such income to be taxed in accordance with the domestic tax law rules of the country in which the land, mine, quarry or natural resource is situated.
It is the usual rule that whatever is affixed to or attached to land forms part of, or becomes part of, the land. The definition of real property specifically provides for that result as the reference to land is expressed to cover improved or unimproved land. Accordingly, the definition of real property will encompass, for example, a lease of a building or any other interest in a building.
Indian law uses the concept of "immovable property" rather than real property. That expression is separately defined, primarily by reference to India's laws concerning immovable property. However, it too is defined to cover royalties and other payments relating to rights for the working of, or the exploration for or exploitation of, natural resources.
Paragraph 5 makes it clear that the operational effects of paragraphs 1, 3 and 4 of the article extend to income derived from the use or exploitation of real property (within the meaning of the article) of an enterprise and income derived from real property that is used for the performance of professional services. Accordingly, the application of this article, when read with Articles 7 and 14, to such income effectively ensures that the treaty partner country in which the real property is situated may impose tax on the income derived from that property by an enterprise of the other country or independent professional person resident in that other country irrespective of whether or not that income is attributable to a permanent establishment of such an enterprise, or fixed base of such a person, situated in the first mentioned country.
This article is concerned with the taxation of business profits of an enterprise carried on by a resident of one country that are derived from sources in the other country.
The taxing of these profits depends on whether they are attributable to a permanent establishment of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer who carries on the enterprise. If, however, a resident of one country carries on business through a permanent establishment (as defined in Article 5) in the other country, the country in which the permanent establishment is situated may tax the profits of the enterprise attributable to the permanent establishment. That 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.
Paragraphs 2 and 3 of the article provide for profits of a permanent establishment to be determined on the basis of arm's length dealings. These provisions correspond in their practical effect with comparable provisions in Australia's other double taxation agreements.
Paragraph 4 provides that no profits are to be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for that enterprise. Subparagraph 4(d) of Article 5 provides that an enterprise shall not be deemed to have a permanent establishment merely by reason of that activity alone. This paragraph complements that provision and is concerned with a permanent establishment which, although carrying on certain business activities in its own right, also undertakes purchasing of goods or merchandise for its head office. Paragraph 4 is designed to make it clear that the profits of the permanent establishment derived from the business activities carried on in its own right will not be increased by adding to them any amount in respect of 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.
Paragraph 5 of the article allows for the application of provisions of the source country's domestic law (e.g. Australia's Division 13) where, due to the inadequacy of available information, the correct amount of profits attributable to a permanent establishment is incapable of determination or the ascertainment thereof presents exceptional difficulties.
Paragraph 6 establishes that once a method of allocation has been used it should not be changed merely because, for example, in a particular tax year some other method produces more favourable results. This paragraph ensures a degree of continuity and consistency of the tax treatment of the permanent establishment.
Paragraph 7 effectively provides that where income is otherwise specifically dealt with under other articles of the agreement the operational effect of those particular articles is not overridden by Article 7. The paragraph thus specifies a general rule of interpretation to the effect that the reference to profits in Article 7 may include categories of income that are the subject of other articles of the agreement. It also specifies that such categories of income are to be treated in accordance with the terms of those articles and as outside the scope of Article 7, except where otherwise provided, e.g. by paragraph 4 of Article 10 (see the notes below on that paragraph).
Paragraph 8 preserves to each country the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non-residents. An effect of this paragraph is to preserve, in the case of Australia, the application of Division 15 of Part III of the ITAA.
Paragraph 9 is intended to clarify Australia's right to tax, in accordance with the principles of the article, a share of business profits originally derived by a trustee of a trust estate (other than a corporate unit trust) from the carrying on of a business in Australia, to which a resident of India is beneficially entitled under the trust estate. It ensures that such distributions will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business. It is comparable in effect to subsection 3(11) of the IT(IA)A, which has a similar effect where the beneficiary is a resident of a country with which Australia had signed a comprehensive taxation agreement on or before 19 August 1984.
Article 8 - Ships and Aircraft
Under this article the right to tax profits from the operation of ships or aircraft (including interest on funds connected with that operation) in international traffic, including profits derived from participation in a pool service, a joint transport operating organisation or an international operating agency, is generally reserved to the country of residence of the operator.
However, any shipping or aircraft profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. By reason of the definition of "Australia" contained in Article 3 and the terms of paragraph 4 of this article, any shipments by air or sea from a place in Australia (including the continental shelf and external territories) to another place in Australia, are treated as forming part of internal traffic. Accordingly, profits derived, for example, from a shipment of goods taken on board at Fremantle for delivery to Sydney, during the course of an international voyage between a place in India and Sydney, would be profits from internal traffic.
Article 9 - Associated Enterprises
This article authorises the re-allocation of profits between related enterprises in Australia and India on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another. The article would not generally authorise therefore the re-writing of the 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.
By virtue of paragraph 2 of the article, each country retains the right to apply its domestic law (e.g. Australia's Division 13) to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, in accordance with the principles of this article.
Where a re-allocation of profits is effected under this article (including pursuant to the domestic law in accordance with paragraph 2), so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. Paragraph 3 therefore requires the other country concerned to make an appropriate adjustment to the amount of tax charged on the profits involved with a view to relieving any such double taxation.
It would generally be necessary for the affected enterprise to make application to the competent authority of the country not initiating the re-allocation of profits for an appropriate compensatory adjustment to be made to reflect the re-allocation of profits made by the competent authority of the other treaty partner country.
Paragraphs 1 and 2 of this article allow both countries to tax dividends flowing between them but in general limit the tax that the country of source may impose on dividends payable to beneficial owners resident in the other country. Under this article, Australia will reduce its rate of withholding tax on unfranked dividends paid by Australian resident companies to residents of India from 30 per cent to 15 per cent of the gross amount of the dividends. Franked dividend payments will, of course, remain free of withholding tax under Australia's domestic law. The Indian rate of withholding tax on dividends paid to residents of Australia is likewise not to exceed 15 per cent of the gross amount of the dividends.
Paragraph 4 effectively provides that the 15 per cent source country tax rate limit it not to apply to dividends derived by a resident of the other country who has a permanent establishment or fixed base in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that permanent establishment or fixed base. Where the dividends are so effectively connected, they will be treated as "business profits" or "income from independent personal services" and subject to the source country's tax in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be. In practice, however, under the full imputation system of company taxation contained in Australia's domestic law, such dividends that are franked dividends will remain exempt from Australian tax while unfranked dividends will be subject to withholding tax at the rate of 15 per cent instead of being taxed by assessment.
The purpose of paragraph 5 of this article is to ensure against the extra-territorial application by either country of taxing rights over dividend income. It does this by providing that one country will not tax dividends paid by a company resident solely in the other country unless the person deriving the dividends is a resident of the first country or the holding giving rise to the dividends is effectively connected with a permanent establishment or fixed base in that country.
Paragraphs 1 and 2 of this article generally provide for interest income to be taxed by both countries but require the country of source to generally limit its tax on interest income to which a resident of the other country is beneficially entitled to 15 per cent of the gross amount of the interest income. This limitation will not affect the rate of Australian withholding tax on interest derived by residents of India, which will continue to be imposed at the general rate of 10 per cent applicable under Australia's domestic law.
Paragraph 3 defines the term "interest" for the purposes of the articles in a way that encompasses items of income such as discounts on securities and payments under certain hire purchase agreements which are treated for Australian tax purposes as interest or amounts in the nature of interest, and therefore as falling within the definition of "interest" for domestic withholding tax purposes. However, interest on funds connected with the operation of ships or aircraft is excluded from this definition and therefore the scope of this article because it is dealt with in Article 8 (Ships and Aircraft).
Paragraph 4 requires that the 15 per cent source country tax rate limitation will not apply to interest derived by a resident of one country which is effectively connected with a permanent establishment or fixed base of that person in the other country. Such interest is to be subject to the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as appropriate.
The interest "source" rules set out in paragraph 5 accord with the scheme of the interest withholding tax provisions of Australia's domestic law. Those rules will therefore operate to allow Australia to tax interest to which a resident of India is beneficially entitled where the interest is paid by a resident of Australia and is not an expense of a business carried on by that resident in a country outside Australia through a permanent establishment in that other country, or where it is interest paid by a person who is a resident of India or other non resident of Australia and is an expense incurred by that person in carrying on a business in Australia through a permanent establishment.
The article also contains a general safeguard (paragraph 6) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 15 per cent source country tax rate limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.
This article in general allows both countries to tax royalty flows but limits the tax of the country of source of the payments to either 10, 15 or 20 per cent of the gross amount of the royalties (as specially defined in paragraph 3 of the Article) paid or credited to beneficial owners resident in the other country.
The 10/15/20 per cent limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed.
In the absence of a double taxation agreement, Australia generally taxes royalties paid to non-residents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rate of tax.
Paragraph 2, however, provides for three separate source country tax rate limits for different categories of royalty payments. Broadly, these rate limits and categories are:
- •
- 10% for rentals and other royalties, including fees for related ancillary services, concerning the use of industrial, commercial and scientific equipment
- and for other royalty payments -
- •
- 15% where the payee is the Government or a public sector body of the source country; and
- •
- 20% in respect of other payees for the first 5 years of the life of the treaty, reducing to 15% after that.
The definition of "royalties" contained in paragraph 3 varies from the comparable definition in Australia's domestic income tax law and other modern comprehensive tax treaties in that it includes fees for the furnishing of certain technical and consultancy services. Those services are the services described in subparagraphs 3(d) or 3(g) that are not specifically excluded by subparagraphs 3(h) to 3(l) inclusive.
More particularly, fees paid or credited for technical and consultancy services may qualify for inclusion in the definition of royalties in paragraph 3 only to the following extent:
- (i)
- as described in subparagraph 3(d), if they are for technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of a right, property or information referred to in subparagraphs 3(a), (b) or (c): or
- (ii)
- as described in subparagraph 3(g), if they are for the rendering of services which make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or design.
But even where services fall within the descriptions of those covered by subparagraph 3(d) or 3(g), the fees paid or credited for such services will not qualify as royalties for the purposes of the article where they are for services of the types referred to in subparagraphs 3(h) to 3(l) inclusive. Fees paid for the latter services, and for all other services outside the scope of the services described in subparagraphs 3(d) and 3(g), remain subject to taxation under the agreement in accordance with the "business profits" provisions of Article 7 (in respect of which subparagraph 3(c) of Article 5 is particularly relevant) or Article 14 (Independent Personal Services) - see the notes elsewhere in this Memorandum on that subparagraph and on Articles 7 and 14.
The examples in the Addendum which follows the notes in this Memorandum on the Australia - India DTA are designed to provide guidance with respect to the interpretation and practical application of the royalties definition as it relates to fees for services. Those examples need to be read in conjunction with the following explanatory notes on subparagraphs 3(d), 3(g) and 3(h) to 3(l) inclusive.
Subparagraph 3(d) refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information described in subparagraph 3(a), (b) or (c).
Broadly, technical services mean in this context services requiring expertise in a technology and consultancy services mean advisory services. These categories may overlap because a consultancy service could also be a technical service. However, the category of consultancy services includes an advisory service whether or not expertise in a technology is required to perform it.
In other respects, the language of subparagraph 3(d) closely follows that of paragraph (d) of the definition of royalties in subsection 6(1) of the ITAA and in Australia's existing modern double taxation agreements with other countries - which relate to the supply of assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, a property, right, equipment, knowledge or information for which a royalty is paid or credited. The established rules for the application of those paragraphs will be pertinent, therefore, to the practical application of subparagraph 3(d).
In particular, in order for a service fee to be "ancillary and subsidiary" to the application or enjoyment of some right, property, or information described in subparagraph 3(a), (b) or (c), the service must be directly related to the application or enjoyment of the right, property or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and the payment for the right, property or information are made must be the application or enjoyment of the right, property or information described in subparagraphs 3(a), (b) or (c), as distinct from the performance of the service itself.
The question of whether the service is related to the application or enjoyment of the right, property or information described in subparagraphs 3(a), (b) or (c) and whether the predominant purpose of the arrangement is such application or enjoyment must be determined by reference to the facts and circumstances of each case.
Relevant factors to be taken into consideration (although not necessarily conclusive) include:
- (i)
- the extent to which the services in question facilitate the effective application or enjoyment of the relevant right, property, or information;
- (ii)
- the extent to which such services are usually provided in the ordinary course of business or commercial arrangements involving the supply of those rights, property or information;
- (iii)
- whether the payments made or credited for the services and for the relevant right, property or information are made under a single contract or a set of related contracts;
- (iv)
- whether the amount paid or credited for the services (or which would be paid or credited by parties operating at arm's length) represents and insubstantial portion, or the major portion, of the combined payments or credits for the services and for the relevant right, property, or information; and
- (v)
- whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in subparagraphs 3(a), (b) or (c) - including for this purpose persons whose relationship is as described in subparagraphs 1(a) or 1(b) of Article 9 (Associated Enterprises) - or if the person providing the service is doing so in connection with an overall arrangement which includes the payer and the recipient of the royalties.
To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a royalty is paid or credited under subparagraphs 3(a), (b) or (c), the fees paid or credited for such services shall be considered "royalties" only to the extent that the services fall within the description of the services described in subparagraph 3(g) and are not services of the types described in subparagraphs 3(h) to 3(l) inclusive. Amounts paid or credited for services of one of the latter types would also not qualify as "royalties", or course, notwithstanding that the service falls within the scope of subparagraph 3(d).
The services covered by subparagraph 3(g) are those which make available to the person acquiring the service (or that person's agent, nominee or transferee) technical knowledge or technology or consist of the development and transfer of a technical plan or design to that person. The expression "make available" is used in the sense of one person supplying or transferring technical knowledge or technology to another. It contrasts with the mere application by the person rendering the services of that person's own technical knowledge or technology in the performance of the services.
Generally, technology will be considered "made available" therefore when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not mean per se that technical knowledge, skills, etc are made available to the person purchasing the service, within the meaning of subparagraph 3(g). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.
As the subparagraph covers only the supply or transfer of technical knowledge or technology, or the development and transfer of a technical plan or design, the rendering of consultancy or advisory services which are not of a technical nature are outside its scope. In other words, the category of services covered by subparagraph 3(g) is narrower than the category described in subparagraph 3(d) because subparagraph 3(g) excludes any service that does not make technology available to the person acquiring the service. Here again, amounts paid or credited for the services covered by subparagraph 3(g) may nevertheless be excluded from treatment as royalties if the services concerned are any of the types described in subparagraphs 3(h) to 3(l) inclusive.
Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in subparagraph 3(g), include:
- (i)
- engineering services (including the subcategories of bio engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering);
- (ii)
- architectural services; and
- (iii)
- computer software development.
Under subparagraph 3(g), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas:
- (i)
- bio-technical services;
- (ii)
- food processing
- (iii)
- environmental and ecological services;
- (iv)
- communication through satellite or otherwise;
- (v)
- energy conservation;
- (vi)
- exploration or exploitation of mineral oil or natural gas;
- (vii)
- geological surveys;
- (viii)
- scientific services; and
- (ix)
- technical training.
These subparagraphs exclude from the definition of "royalties" for the purposes of Article 12 payments or credits for certain services notwithstanding the fact that those services may meet the descriptions of the services covered by subparagraph 3(d) or 3(g). Fees for the services encompassed by subparagraphs 3(h) to 3(l) are to be treated, therefore, as business profits for the purposes of Article 7, except for those covered by subparagraph 3(1) which fall to be treated as independent personal services income under Article 14. The examples in the Addendum to the notes in this Memorandum on the Australia - India DTA include illustrative examples of services covered by those subparagraphs.
As in the case of dividends and interest, it is specified in paragraph 4 of Article 12 that the 10/15/20 per cent limitation of tax in the country of origin is not to apply to royalties (as defined in paragraph 3) effectively connected with a permanent establishment or fixed base in that country. Such royalties are to be subject to the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services) as appropriate.
By paragraph 6, if royalties flow between related persons, the 10/15/20 per cent limitation will apply only to the extent that the royalties are not excessive.
Article 13 - Alienation of Property
This article allocates between the respective countries taxing rights in relation to income or gains arising from the alienation of real property (as defined in Article 6) and other items of property.
By paragraph 1, income or gains from the alienation of real property may be taxed by the country in which the property is situated. The definition of real property and the situs rules for such property in Article 6 apply for purposes of this paragraph.
Paragraph 2 deals with income or gains arising from the alienation of property (other than real property covered by paragraph 1) forming part of the business property of a permanent establishment of an enterprise or pertaining to a fixed base used for performing independent personal services. It also applies where the permanent establishment (alone or with the whole enterprise) or the fixed base is alienated. Such income or gains may be taxed in the country in which the permanent establishment or fixed base is situated, which corresponds to the rules for business profits and income from independent personal services contained in Articles 7 and 14 respectively.
Paragraph 3 specifies that income or gains from the disposal of ships or aircraft operated in international traffic, or associated property (other than real property covered by paragraph 1) shall be taxable only in the country of residence of the operator of the ships or aircraft. This rule corresponds to the taxing rights contained in Article 8 of this agreement in relation to profits from the operation of ships or aircraft in international traffic.
Paragraph 4 assimilates the treatment of income or gains from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally of real property covered by paragraph 1, to the treatment by paragraph 1 of the alienation of that real property. Such income or gains may thus be taxed by the country in which the real property is situated.
In accordance with paragraph 5, income or gains derived from the alienation of shares or comparable interests in a company, other than those covered by paragraph 4, may be taxed in the country of residence of the company.
The article contains a sweep-up paragraph, paragraph 6, 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. This paragraph is expressed to be not affected by other aspects of the agreement. It thus fully preserves the application of Australia's domestic law rules in relation to the taxation of capital gains as regards the alienation of such property, notwithstanding, for example, the "business profits" provisions of Article 7. Should such a gain be taxed pursuant to this paragraph under the domestic law rules of both countries, the country of residence of the recipient of the gain would be obliged (by Article 24) to provide double tax relief for the tax imposed by the other country.
It should be noted that Article 22 effectively contains sweep-up provisions in relation to items of income not expressly dealt with in other articles of the agreement.
Article 14 - Independent Personal Services
At present, an individual or firm of individuals (other than a company) resident in Australia or in India may be taxed in the other country on income derived from the performance in that other country of professional services or other similar independent activities.
By this article, such income will continue to be subject to tax in the country in which the services are performed in cases where;
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- the individual or firm of individuals has a fixed base regularly available in that country for the purposes of performing the individual's or the firm's activities and the income is attributable to activities exercised from that base; or
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- if the individual stays or in the case of a firm, one or more members of the firm stay (alone or together), in that country for a period or periods aggregating 183 days or more in a year of income and the income is derived from the activities in that country of the individual, or member or members of the firm, as the case may be.
If neither of the tests mentioned above are met, the income will be taxed only in the country of residence of the recipient.
Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and are not covered by this article.
Article 15 - Dependent Personal Services
Article 15 provides the basis upon which the remuneration of visiting employees is to be taxed. Generally, salaries, wages, etc derived by a resident of one country for 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.
By paragraph 2, the conditions for that exemption are that:
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- the visit or visits not exceed, in the aggregate, 183 days in the year of income of the country visited;
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- the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited; and
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- the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in the country being visited.
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. The provisions of this article do not apply, however, in respect of income that is dealt with separately in Articles 16, 17, 18, 19, or 20 of the agreement.
By paragraph 3 of the article, income from an employment exercised aboard a ship or aircraft operated in international traffic is to be taxed only in the country of residence of the operator.
Where the source country short term visit exemption provided by paragraph 2 is not applicable, remuneration derived by a resident of Australia from an employment exercised in India may be subject to tax in India. However, the article does not allocate sole taxing rights to India in that situation. Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the ITAA that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the agreement allows both countries to tax a category of income, Australia would be required (pursuant to paragraph 1 of Article 24) as the country of residence of the income recipient, to relieve the double taxation that would otherwise occur.
Although that paragraph provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Indian tax paid, the "exemption with progression" provisions of section 23AG of the ITAA would normally be applicable in practice, so far as they are relevant, in relation to the employment income derived in the situation described.
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.
By this article, income derived by visiting entertainers (including athletes) from their personal activities as such may generally be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The words "income derived by entertainers .... from their personal activities as such..." extend the application of this article to income generated from promotional and associated kinds of activities engaged in by the entertainer while present in the visited country.
Paragraph 2 of this article is a safeguarding provision designed to ensure that income in respect of personal activities exercised by an entertainer, whether received by the entertainer or by another person, e.g. a separate enterprise which formally provides the entertainer's services, is taxed in the country in which the entertainer performs, whether or not that other person has a permanent establishment or fixed base in that country.
Paragraphs 3 and 4 are designed to facilitate cultural and sporting exchanges between the two countries. They effectively provide for income attributable to a visiting entertainer's activities - whether derived by the entertainer or another person - to be free from tax in the country visited and taxable only in the other country where the activities of the entertainer in the country visited are, or the other person is, wholly or substantially supported by public funds of the other country.
Article 18 - Pensions and Annuities
Paragraph 1 of this article ensures that pensions (other than government service pensions dealt with in Article 19) and annuities are taxed only by the country of residence of the recipient.
It is intended that the operation of this article (and Article 19 as it relates to a government service pension) extends to pension and annuity payments made to dependants, for example the widow or children, of the person in respect of whom the pension or annuity entitlement accrued where upon that person's death, such entitlement has passed to that person's dependants.
Article 19 - Government Service
Paragraph 1 of this article generally provides for remuneration (other than a pension or annuity) paid by a government (including a State or local authority) of one of the countries to an individual in respect of services rendered in discharge of governmental functions to be taxed only in that country. However, such remuneration is to be taxable only in the other country if the services are rendered in that country and the recipient is a resident of that country as determined in accordance with Article 4 and is a citizen of, or ordinarily resides in, that country. Typically, the latter rule would apply in respect of locally engaged staff of the respective countries' diplomatic or consular missions.
Correspondingly, paragraph 2 provides that a government service pension shall be taxable only in the country from which the pension is paid, unless the recipient is a resident of, and is a citizen of the other country, in which case the pension is taxable only in the country of residence of the recipient.
Paragraph 3 precludes from the scope of this article remuneration, including a pension or annuity, for services rendered in connection with a trade or business carried on by a government. Such remuneration will remain subject to the provisions of Article 15 (Dependent Personal Services), Article 16 (Directors' Fees) or Article 18 (Pensions and Annuities), as the case may be.
Article 20 - Professors and Teachers
This article applies in respect of professors or teachers who are resident in one country and visit, for example during sabbatical leave, the other country for a period of not more than two years for the purpose of teaching or advanced study or research at an educational institution. In these circumstances, the remuneration of the professor or teacher for his or her teaching, study or research work are to be exempt from tax in the country visited to the extent to which it remains subject to tax in their country of residence.
In the latter respect, the application of this article to exempt from Indian tax remuneration derived by an Australian resident professor or teacher visiting India will generally operate to cause the remuneration to be excluded from the scope of the "exemption with progression" provisions of section 23AG of the ITAA, so that it will remain subject to Australian tax.
The exemption provided by the article does not apply to remuneration received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons. For example, where a professor or teacher who is a resident of one country receives a grant or is otherwise paid by an enterprise to undertake, in the other country, work associated with the refinement and further development of a particular product that is to be commercially marketed by that organisation, the income so received by the professor or teacher will not fall within the operational scope of this article but will come within the ambit of either Article 14 or Article 15.
Article 21 - Students and Trainees
This article applies to students and trainees temporarily present in a treaty partner country solely for the purpose of their education or training who are, or immediately before the visit were, resident in the other country. In these circumstances, the students and trainees will be exempt from tax in the country visited in respect of payments received from abroad for the purposes of their maintenance or education or training (even though they may qualify as a resident of the country visited during the period of their visit). The exemption from tax provided by the visited country is treated as extending to maintenance payments received from abroad by the student or trainee that are made in respect of the maintenance of dependent family members who have accompanied the student or trainee to the visited country.
Where however, a student or trainee from India who is visiting Australia solely for educational or training purposes undertakes some part time work (for example, working at night in a restaurant) with a local employer or, during a semester break undertakes work with a local employer, the income earned by that student or trainee as a consequence of that employment may, as provided in Article 15, be subject to tax in Australia. In this situation the payments received from abroad for the purposes of the student's or trainee's maintenance or education will not however be taken into account in determining the tax payable on the employment income that is subject to tax in Australia.
In that regard, whether or not the student is regarded as a resident of Australia for the purposes of the ITAA during the period of his or her stay in Australia, and thus the students eligibility or not for the Australian tax-free threshold, will often govern whether there will be any Australian tax liability in respect of the student's employment income. Taxation Ruling No IT 2268 is relevant to this situation.
Article 22 - Income Not Expressly Mentioned
This article provides for the allocation between the two countries of taxing rights in relation to items of income not expressly mentioned in the preceding articles of the agreement. The scope of the article is not confined to items of income arising in one of the Contracting States; it extends also to income from sources in a third State.
Broadly, such income derived by a resident of one country is to be taxed only in his or her country of residence unless it is derived from sources in the other country, in which case the income may also be taxed in the other country. Where this occurs, the country of residence of the recipient of the income would be obliged by Article 24 (Methods of Elimination of Double Taxation) to provide double taxation relief.
Paragraph 3 of the article nevertheless ensure the application of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, in respect of income which is effectively connected with a permanent establishment or fixed base which a resident of one country has in the other country.
It should be noted that this article effectively contains "sweep-up" provisions in relation to items of income not expressly dealt with in other articles of the agreement and that paragraph 5 of Article 13 (Alienation of Property) effectively "sweeps-up" capital gains not dealt with other wise in Article 13.
Article 23 effectively deems income, profits or gains derived by a resident of one country which, under the agreement, may be taxed in the other country, to be income from sources in the latter country for the purposes of the domestic laws of both countries and Article 24 (Methods of Elimination of Double Taxation) of the agreement. It thus ensures the jurisdictional (source) right of each country to exercise the taxing rights allocated to it by the agreement over residents of the other country.
The Article is also designed to ensure that where an item of income, profits or gains is taxable under the agreement by both countries, double taxation relief will be given by the country of residence of the recipient of the income, profits or gains (pursuant to Article 24) in respect of tax levied by the other country in accordance with the taxing rights allocated to it under the agreement. To this end, the article effectively provides for income, profits or gains derived by a resident of Australia which is taxable by India under the agreement to be treated as foreign income for the purposes of the foreign tax credit provisions of the ITAA.
Article 24 - Methods of Elimination of Double Taxation
Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax.
It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income which are subject under the agreement to tax in both countries. Australia's other double taxation agreements provide for a credit basis for the relief of double taxation to be applied by Australia and, usually, the other country. In these cases, the country of residence is required to give credit against its tax for the tax of the country of source. This approach has generally been adopted in this agreement.
Subparagraph 1(a) of the article thus provides for Australia to relieve double taxation by allowing a credit against its own tax for Indian tax paid under the law of India and in accordance with the agreement on income derived by a resident of Australia from sources in India. Where a dividend is paid by an Indian resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Indian company, subparagraph 1(b) provides for the credit allowed by Australia to also take into account, in addition to the Indian tax paid in respect of the dividends, the underlying Indian tax paid by the company in respect of the profits out of which the dividend is paid.
Australia's general foreign tax credit system, together with the terms of this article and of the agreement generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in India. As in the case of Australia's other double taxation agreements, the source of income rules specified for purposes of the agreement will also apply (by reason of Article 23 in this case) for those purposes.
Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraph 1 of Article 24 by application of the general foreign tax credit provisions of the ITAA. This will include the allowance of underlying tax credit relief in respect of dividends paid by Indian resident companies to related Australian companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA.
Notwithstanding the credit form of relief provided for by subparagraph 1(a) of the article, the "exemption with progression" provisions of section 23AG of the ITAA will be applicable, as appropriate, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of "foreign service" (as defined in subsection 23AG(7) of the ITAA) in India.
It is also relevant that India is a listed "comparable tax" country for purposes of the measures recently introduced into the ITAA to give effect to the foreign income accruals system. Accordingly, dividends and branch profits derived from India which are exempted from Australian tax where derived by an Australian resident company under those measures (e.g., sections 23AH or 23AJ of the ITAA) will continue to qualify for exemption from Australian tax under those provisions.
Paragraphs 2 and 3 of Article 24 contain "tax sparing" provisions under which an Australian resident recipient of income on which India - under specified incentive measures - has forgone tax, will obtain tax credit relief as if the Indian tax forgone had been paid.
The development incentive provisions for which tax sparing relief will be available are those specified in paragraph 2.
Subparagraph 2(a)(i) specifies the current development incentive provisions of India in respect of which the tax sparing provisions of the article apply. Details of the Indian incentive provisions specified in subparagraph 2(a)(i) are as follows:
Section 10(4) of the Indian Income-tax Act 1961
In accordance with this section non-residents of India receive an exemption from Indian tax on any interest income (including premiums on redemption of bonds) derived from -
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- certain securities as specified by the Central Government by notification in the Official Gazette.
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- any bonds issued by the Central Government under a loan agreement with the International Bank for Reconstruction and Development, or the Development Loan Fund of the US; or any industrial undertaking or financial corporation in India, under a loan agreement with that Bank or Fund, which is guaranteed by the Central Government.
Section 10(15)(iv) of the Indian Income-tax Act, 1961
This section provides either an unlimited or limited exemption for interest payable on loans from sources outside India for industrial development. The unlimited exemption is for interest payable on foreign loans raised by the Central Government or a local authority, or by an industrial undertaking on a foreign loan approved by the Central Government.
The limited exemption is available for interest, which does not exceed an amount calculated at a rate approved by the Government, on foreign loans raised by -
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- an industrial undertaking for the purchase outside India of raw materials, capital plant or machinery;
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- the Indian Industrial Finance Corporation, the Industrial Development Bank, the Export Development Bank, or the Industrial Credit and Investment Corporation;
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- any other financial institution or bank, for approved purposes of advancing loans to industrial undertakings to purchase outside India raw materials, capital plant or machinery, or for importing goods which have been approved as necessary to import in the public interest;
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- an industrial undertaking, under a loan agreement approved by the Government having regard to the need for industrial development in India; and
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- by an Indian public company whose main objective is to provide long-term finance for construction/purchase of residential houses.
Section 10A of the Indian Income-tax Act, 1961
This section is a special provision which allows for an exemption for profits or gains from any industrial undertaking operating in a Free Trade Zone (FTZ) for any 5 consecutive years out of the first 8 years of operation. This measure is specific to the development of particular regions, i.e. Kandla FTZ and Santa Cruz Electronics Export Processing Zone, or any other zone which the Central Government may by notification in the Official Gazette specify for the purposes of this section. This measure is not restricted to foreign investors.
Section 10B of the Indian Income-tax Act, 1961
Section 10B is a special provision exempting profits and gains of a taxpayer, in respect of newly established hundred per cent export oriented undertakings, for any five consecutive years out of the first 8 years of operation.
Section 80HHC of the Indian Income-tax Act, 1961
Under this section an Indian company or any other person resident in India who exports any goods or merchandise (other than mineral oil and minerals and ores) is allowed a deduction equal to the aggregate of 4% of the net foreign exchange realisation and 50% of the remaining export profits, subject to the condition that the aggregate deduction shall not exceed the export profits.
Section 80HHD of the Indian Income-tax Act, 1961
In accordance with this section an Indian company or any other person resident in India who is engaged in the business of a hotel or tour operator (approved by the prescribed authority) or a travel agent is allowed a deduction, in respect of earnings received in convertible foreign exchange, equal to the aggregate of 50% of profits derived from services provided to foreign tourist and so much of the remaining profits debited to the profit and loss account of the previous year (in respect of which the deduction is to be allowed) and credited to a reserve account to be used by the taxpayer for any of the following business purposes (within 5 years next following the previous year):
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- construction of new hotels approved by the prescribed authority in this behalf or expansion of facilities in existing hotels already so approved;
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- purchase of new cars and new coaches by tour operators already so approved or by travel agents;
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- purchase of sports equipment for mountaineering, trekking, golf, river-rafting and other sports in or on water;
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- construction of conference or convention centres; or
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- provision of such new facilities for the growth of Indian tourism as the Central Government may specify by notification in the Official Gazette.
Section 80I of the Indian Income-tax Act, 1961
By this section the taxable income of taxpayers deriving income from a newly established industrial undertaking, a ship, the business of a hotel or the business of repairs to ocean-going vessels, is reduced by 25% in the case of a company, and 20% in the case of a non-corporate taxpayer, for an 8 year period. Industrial undertakings that produce alcoholic beverages, tobacco and other specified items are not eligible for the incentive.
By subparagraph 2(a)(ii) of Article 24 the tax sparing provisions will also apply in relation to other development incentive provisions that may be introduced by India subsequent to the date of signature of the agreement which the Australian treasurer and the Indian Minister of Finance agree from time to time in letters exchanged for that purpose to be a substantially similar character. Section 4A of the Principal Act provides for the publication in the Gazette of a notice specifying any later incentive provisions that may be so agreed.
Subparagraph 2(b) of Article 24 effectively limits the tax sparing credit to be provided by Australia in respect of tax forgone by India, under a development incentive referred to in subparagraph 2(a), on interest income derived by a resident of Australia to 10 per cent of the gross amount of the interest income.
Paragraph 3 provides for the tax sparing arrangements to apply only in relation to income derived in any of the first 10 years of income in relation to which this agreement generally has effect in Australia and in relation to income derived in any later year of income that may be agreed in an exchange of letters for this purpose by the authorised representatives of the Governments of Australia and India. Section 4A of the Principal Act provides for any later year of income so agreed to be notified by the Treasurer in the Gazette.
Where a tax sparing credit is allowable, paragraph 2 has the effect that tax sparing is to be granted on the "direct credit" method and not the "gross-up and credit" method for the purposes of calculating the Australian tax. In other words, there will be no "grossing-up" for Australian tax assessments purposes of the relevant income by the amount of Indian tax forgone. For example, in the case of income received by a resident of Australia from India in respect of which Indian tax has been wholly forgone under one of the specified incentive measures, the amount included in the income recipient's assessable income in Australia will be the amount received, and a credit will be granted for the Indian tax forgone.
The tax sparing credit provisions of paragraphs 2 and 3 were negotiated in advance of the introduction into the ITAA of the foreign income accruals system measures, including the exemptions from Australian tax accorded under those measures to certain dividends and branch profits derived from comparable tax countries by Australian resident companies. Where those exemptions apply in relation to income which may have qualified for tax relief in India under the specified incentive measures, the need for application of the tax sparing credit provisions of the article will be obviated in those cases.
Paragraph 4 provides for India to relieve double taxation by allowing a credit against its own tax for Australian tax paid under the law of Australia and in accordance with the agreement on income derived by a resident of India from sources in Australia.
Consistent with the position applicable under India's domestic law (section 91 of the Indian Income-tax Act, 1961), this tax credit relief obligation does not extend to the underlying Australian tax paid on the profits out of which a dividend is paid by an Australian resident company to a resident of India.
Article 25 - Mutual Agreement Procedure
One of the purposes of this article is to provide for consultation between the taxation authorities of the two countries with a view to reaching a satisfactory solution where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the agreement. A person wishing to use this procedure must present a case to the competent authority of the State of which the person is a resident within three years of the first notification of the action the taxpayer considers gives rise to taxation not in accordance with the agreement.
The article also authorises consultation and direct communication between the taxation authorities of the two countries for the purpose of resolving any difficulties regarding the interpretation or application of the agreement and to give effect to it.
Article 26 - Exchange of Information
Paragraph 1 of this article authorises and limits the exchange of information by the two taxation authorities to information necessary for the carrying out of the agreement or of domestic laws concerning the taxes to which the agreement applies. The limitation placed on the kind of information authorised to be exchanged effectively means that information access requests relating to taxes not within the coverage provided by Article 2 (Taxes Covered), for example sales taxes, are not within the scope of the article.
The purposes for which the exchange information may be used and the persons to whom it may be disclosed are generally restricted along the lines of Australia's other double taxation agreements. Any information received by a Contracting State is to be treated as secret in the same manner as information obtained under the domestic laws of that State.
An exchange of information that would disclose any trade, business, industrial or professional secret or trade process or which would be contrary to public policy is not permitted by the article. However, the competent authorities may disclose information in public court proceedings or in judicial decisions.
Paragraph 2 of the article makes specific provision for the relevant taxation authorities to settle, through consultation, on various arrangements for the exchange of information.
Article 27 - Diplomatic and Consular Officials
The purpose of this article is to ensure that the provisions of the agreement do not result in members of diplomatic and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international laws. In Australia, such persons are entitled to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act 1967 and the Consular (Privileges and Immunities) Act 1972.
This article provides for the agreement to enter into force on the date on which Notes are exchanged through the diplomatic channel notifying that the last of such things has been done in Australia and India, as the case may be, as is necessary to give the agreement the force of law in both countries. In the case of Australia the enactment of the legislation which gives the force of law in Australia to be the agreement is the necessary prerequisite to the exchange of diplomatic notes taking place.
Once it enters into force, the agreement will have effect in Australia for purposes of withholding taxes in respect of income derived on or after 1 July in the calendar year next following that in which the agreement enters into force. In respect of taxes other than withholding tax, the agreement will have effect in Australia in relation to income, profits or gains addressed by the respective articles of the agreement of any year of income beginning on or after 1 July in the calendar year following that in which it enters into force. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year of income beginning on 1 July in the calendar year following the calendar year in which the agreement enters into force will be the date from which the agreement will first take effect in respect of Australian tax other than withholding tax.
In India, the agreement will first have effect in relation to Indian taxes (including withholding taxes) in respect of income, profits or gains arising in its year of income beginning on 1 April in the calendar year following that in which the agreement enters into force.
Paragraph 2 terminates the 1983 air transport agreement (the Indian airline profits agreement) with effect in respect of tax to which this agreement applies by virtue of paragraph 1. The termination is by way of mutual agreement between the respective governments and does not bring into operation the termination provisions (Article 5) of the Indian airline profits agreement. Paragraph 2 ensures that the Indian airline profits agreement continues in effect for periods prior to the date on which this agreement becomes effective under paragraph 1.
Paragraph 3 effectively sets the last date of operation of the airline profits agreement as the day prior to the day on which this agreement first applies.
By this article the agreement is to continue in effect indefinitely. However, either country may give through the diplomatic channel written notice of termination of the agreement on or before 30 June in any calendar year beginning after the expiration of five years from the date of its entry into force.
In that event, the agreement would cease to be effective in Australia for purposes of withholding taxes in respect of income derived on or after 1 July in the calendar year next following that in which the notice of termination is given. For other Australian taxes, it would cease to be effective in relation to income, 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.
The agreement would cease to be effective in India for all Indian taxes (including tax withheld at source) in respect of income, profits or gains derived on or after 1 April in the calendar year next following that in which the notice of termination is given.
ADDENDUM TO NOTES ON THE AGREEMENT WITH INDIA
Article 12 of Australia - India Double Taxation Agreement: - Fees for services included in the definition of "royalties".
The purpose of this addendum is to provide guidance, by means of illustrative examples, of the services intended to be covered by the definition of "royalties" in paragraph 3 of Article 12 - that is, primarily the services described in subparagraphs 3(d) or 3(g).
Some of the examples illustrate services which are intended to be excluded from treatment as "royalties" - either because they do not fall within the scope of the services described in subparagraph 3(d) or 3(g), or because, although meeting those descriptions, they are the types of services described in subparagraphs 3(h) to 3(l) inclusive.
For ease of understanding, the examples given relate to Australian residents providing services to residents of India. However, the definition of "royalties" in Article 12 is of course reciprocal in its practical application.
Examples of services which qualify (or fail to qualify) as "royalties" under subparagraph 3(d) and/or subparagraph 3(g).
Example (1)
An Australian manufacturer grants rights to an Indian company to use manufacturing processes in which the transferor has exclusive rights by virtue of process patents or the protection otherwise extended by law to the owner of the process. As part of the contractual arrangement, the Australian manufacturer agrees to provide certain consultancy services to the Indian company in order to improve the effectiveness of the latter's use of the processes. Such services include, for example, the provisions of information and advice on sources of supply for materials needed in the manufacturing process, and on the development of sales and service literature for the manufacture product. The payments allocable to such services do not form a substantial part of the total consideration payable under the contractual arrangement.
In this example the payments for these services are royalties. The services described in this example are ancillary and subsidiary to the use of a manufacturing process protected by law as described in subparagraph 3(a) of Article 12, because the services are related to the application or enjoyment of that process and the granting of the right to use the process is clearly the predominant purpose of the arrangement. Because the services are ancillary and subsidiary to the use of the manufacturing process, the fees for these services are considered royalties under subparagraph 3(d) of Article 12.
Example (2)
An Indian manufacturer's products must be manufactured under sterile conditions using machinery to be kept completely free of bacterial or other harmful deposits. An Australian company has developed a special cleaning process for removing such deposits from that type of machinery. The Australian company enters into a contract with the Indian company under which the former will clean the latter's machinery on a regular basis. As part of the arrangement, the Australian company leases to the Indian company a piece of equipment which allows the Indian company to measure the level of bacterial deposits on its machinery in order for it to know when cleaning is required.
In this example, the provision of cleaning services by the Australian company and the rental of monitoring equipment are related to each other. However, the clearly predominant purpose of the arrangement is the provisions of cleaning services. Thus, although the cleaning services might be considered technical services, they are not "ancillary and subsidiary" to the rental of such equipment as mentioned in subparagraph 3(b), in this case the monitoring equipment. Rather, the rental of the monitoring equipment is "ancillary and subsidiary" to the provision of the cleaning services. Accordingly, the cleaning services are not royalties within the meaning of subparagraph 3(d).
Nor are the cleaning services royalties within the meaning of subparagraph 3(g), because the Australian company is to perform the services without "making available" to the India manufacturer the special cleaning process involved.
Example (3)
An Australian manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the Australian company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The Australian contractors work with the technicians in the Indian firm for a few months.
The payments to the Australian firm would be treated as royalties under subparagraph 3(g). The services are of a technical or consultancy nature which make available to the Indian company technical knowledge, skill, and processes.
Example (4)
An Australian manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the Australian company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the Australian manufacturer fabricates the wallboard in its plant, using advanced technology.
The fees would not be royalties within the meaning of either subparagraph 3(d) or 3(g). Although the Australian company is clearly performing a technical service, no technical knowledge, skill, etc., is made available to the Indian company, nor is there any development and transfer of a technical plan or design. The Australian company is merely performing a contract manufacturing service.
Example (5)
An Indian firm owns inventory control software for use in its own chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company's wares. The company wants to modify its software to permit salesmen to access the company's central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires and Australian computer programming firm to modify its software for this purpose.
The fees which the Indian firm pays are royalties within the meaning of subparagraph 3(g). The Australian company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer program) which it has developed for that company.
Example (6)
An Indian vegetable oil manufacturing company wants to produce a cholesterol-free oil from a plant which produces oil normally containing cholesterol. An Australian company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the Australian company to modify the formulae which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulae.
The fees which the India company pays are royalties within the meaning of subparagraph 3(g). The services are technical, and the technical knowledge is made available to the Indian company.
Example (7)
The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world-wide. It hires an Australian marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies.
The fees paid to the Australian company would not be royalties for the purpose of the agreement under either subparagraph 3(d) or 3(g). The Australian company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skills, etc., nor it is transferring a technical plan or design. What is transferred to the Indian company through the service contract is merely the commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of subparagraph 3(g).
Note, however, that the fees paid or credited to the Australian company may nevertheless qualify for consideration as "royalties" under subparagraph 3(b) of Article 12.
Examples of services which qualify as "royalties" under subparagraph 3(d) and/or 3(g) but would be excluded from treatment as "royalties" because of subparagraphs 3(h) to 3(l) inclusive.
Example (8)
An Indian company purchases a computer from an Australian computer manufacturer. Under the terms of the contract, the Australian company is to assist the Indian company in setting up the computer and installing the operating system, and to train the staff of the Indian company to operate the computer. Also, as part of the contract, the Australian company agrees to provide, for a period of ten years, any updates to the operating system and any training necessary to apply the update. Both of these service elements to the contract would qualify under subparagraph 3(g) as royalties.
However, the installation assistance and initial training, although making available to the purchaser of the computer technical knowledge etc., are ancillary and subsidiary to the sale of property i.e., the computer. They are also inextricably and essentially linked to the sale. The computer would be of little value to the Indian purchaser without these services, which are most readily and usefully provided by the sellers. The fees for installation assistance and initial training, therefore, are not royalties by reason of subparagraph 3(h).
On the other hand, the services of updating the operating system and providing associated necessary training may well be ancillary and subsidiary to the sale of the computer, but they are not inextricably and essentially linked to the sale. Without the upgrades, the computer will continue to operate as it did when purchased, and will continue to accomplish the same functions. Acquiring the updates cannot, therefore, be said to be inextricably and essentially linked to the sale of the computer for the purposes of subparagraph 3(h). The treatment by subparagraph 3(g) of the fees for those services as royalties would not therefore be nullified by subparagraph 3(h).
Example (9)
An Indian hospital purchases an X-ray machine from an Australian manufacturer. Under the terms of the contract, the manufacturer agrees to install the machine, to perform an initial inspection of the machine in India, to train hospital staff in the use of the machine, and to service the machine periodically during the usual warranty period (2 years). Under an optional service contract purchased by the hospital, the manufacturer also agrees to perform certain other services throughout the life of the machine, including periodic inspections and repair services, advising the hospital about developments in X-ray film or techniques which could improve the effectiveness of the machine, and training hospital staff in the application of those new developments. The cost of the initial installation, inspection, training, and warranty service is relatively minor as compared with the cost of the X-ray machine.
The initial installation, inspection, and training services in India and the periodic services are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of the X-ray machine (property) because the usefulness of the machine to the hospital depends on this service, the manufacturer has full responsibility during this period, and the cost of the services is a relatively minor component of the contract. Therefore, under subparagraph 3(h) these fees are not royalties, regardless of whether they would otherwise would fall within subparagraph 3(g).
Neither the post-warranty period inspection and repair services, nor the advisory and training services relating to new developments are "inextricably and essentially linked" to the initial purchase of the X-ray machine. Accordingly, fees for these services may be treated as royalties to the extent that they meet the tests of subparagraph 3(g).
Example (10)
An Indian automobile manufacturer decides to expand into the manufacture of helicopters. It sends a group of engineers from its design staff to a course of study conducted by Sydney University (SU) for two years to study engineering. The Indian firm pays tuition fees to SU on behalf of the firm's employees.
The tuition fees are clearly intended to acquire a technical service for the firm and are therefore capable of falling within the ambit of subparagraph 3(g). However, the fee paid is for teaching by an educational institution, and is, therefore, precluded by subparagraph 3(j) from being treated as royalties. It is irrelevant for this purpose whether SU conducts the course on its campus or some other location.
Example (11)
As in Example (10), the automobile manufacturer wishes to expand into the manufacture of helicopters. It approaches an Indian university about establishing a course of study in aeronautical engineering. The university contracts with an Australian helicopter manufacturer to send an engineer to be a visiting professor of aeronautical engineering on its faculty for a year.
The fees paid by the university are technically covered by subparagraph 3(g). However, there are for teaching in an educational institution. As such, pursuant to subparagraph 3(j), they are precluded from treatment as royalties.
Example (12)
An Indian resident individual wishes to install a computerised system in his home to control lighting, heating and air conditioning, a stereo sound system and a burglar and a fire alarm system. The Indian resident hires an Australian electrical engineering firm to design the necessary wiring system, adapt standard software, and provide instructions for installation.
The services in respect of which the fees are paid or credited to the Australian firm by the Indian individual are of the type which would generally be treated as royalties under subparagraph 3(g). However, because the services are for the personal use of the individual making the payment the fees paid or credited are precluded by subparagraph 3(k) from treatment as royalties.
AGREEMENT WITH POLAND
Subject to some differences, the comprehensive agreement accords in substantial practical effect with other comprehensive double taxation agreements to which Australia is a party. Like them, the agreement allocates a taxing right over some income, profits or gains to the country of source, sometimes at limited rates, while the country of residence is given the sole right to tax other types of income, profits or gains. It provides that where income, profits or gains may be taxed in both countries, the country of residence, if it taxes, is to allow double tax relief for the tax imposed by the country of source. In the case of Australia, effect is given to this double taxation relief obligation by application of the general foreign tax credit system provisions of Australia's domestic law, or relevant exemption provisions of the law where applicable.
This article establishes the scope of application of the agreement, by providing for it to apply to persons (which term includes companies) who are residents of one or both countries.
The issue of who such persons are for the purposes of the agreement, and the situation of persons who are dual residents (i.e. residents of both countries) are dealt with in Article 4. Refer to the notes below on Article 4.
This article specifies the existing taxes to which the agreement applies. These are, in the case of Australia, the Australian income tax and the petroleum resource rent tax in respect of offshore projects. For Poland, the agreement applies to its income tax, the tax on wages and salaries, the equalisation tax, the corporate tax and the agricultural tax.
Individuals who are residents of Poland and who, amongst other things, receive employment income or other income subject to the tax on wages are obliged to pay an equalisation tax levied by the federal Polish government if and to the extent that the aggregated income from any of the two abovementioned sources exceeds 16,000,000 zloties per year.
The agricultural tax is levied by the federal Polish government on agricultural cooperatives, State farms and individual farmers producing common rural goods, e.g. rye, potatoes, etc and on those in receipt of income from land put to special purposes.
Paragraph 2 of the article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.
Paragraph 2 also imposes a duty on Australia and Poland to notify each other within a reasonable period of time of any substantial changes to their respective laws relating to taxes on income.
Article 3 - General Definitions
Paragraph 1 of this article provides definitions for a number of the terms used in the agreement. Some other terms are defined in the articles to which they relate.
As with Australia's other modern taxation agreements, "Australia" is effectively defined as including certain external territories and areas of the continental shelf. By reason of this definition, Australia fully preserves the taxing rights effectively provided by section 6AA of the ITAA over mineral exploration and mining activities carried on by non residents on the seabed and subsoil of Australia's continental shelf areas. The definition is also relevant to the taxation by Australia of shipping profits in accordance with Article 8 of the agreement.
The term "international traffic" is defined in the case of this agreement to effectively cover all shipping and aircraft transport operations other than those confined solely between places within either country. The definition is relevant primarily for the purposes of Article 8. That article elaborates on the meaning of such operations confined solely to places within either country. See further the notes below on Article 8.
Paragraph 2 makes it clear that, for the purposes of the agreement, the terms "Australian tax" and "Polish tax" do not include any amount of penalty or interest imposed by the operation of the respective domestic laws of Australia or Poland.
This is of particular relevance in determining a taxpayer's entitlement under the double tax relief provisions of Article 24 of the agreement. In the case of a resident of Australia, any such penalty or interest component of a liability determined under the domestic taxation laws of Poland with respect to income that Poland is entitled to tax under the agreement would not be a creditable "Polish tax" for purposes of Article 24(1) of the agreement. This result accords with the meaning of "foreign tax" in subsection 6AB(2) of the ITAA. Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 24(1), pursuant to Division 18 of Part III of the ITAA.
Paragraph 3 of this article provides that where a term is not specifically defined within the agreement that term, unless used in a context that requires otherwise, is to be taken to have the same interpretative meaning ascribed that particular term under the domestic law of the country applying the agreement that it has under that law at the time of that application. This is designed to obviate the need for research into the meaning such a term had under the domestic law when the agreement was negotiated.
This article sets out the basis by which the residential status of a person is to be determined for the purposes of the agreement. Residential status is one of the criteria for determining each country's taxing rights and is a necessary condition for the provision of relief under the agreement. The concept of resident according to each country's taxation law provides the basic test.
The article also includes a set of "tie-breaker" rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - qualifies as a dual resident, i.e. as a resident under the domestic laws of both countries.
A dual resident, for example, who is deemed by Article 4 to be a resident solely of Poland would be entitled to any exemption from, or reduction in, Australian tax provided by an article of the agreement in respect of income derived from sources in Australia by a resident of Poland. For the categories of income which under the agreement remain taxable in both countries, the obligation placed by Article 24 (Methods of Elimination of Double Taxation) on the country of residence of the recipient of the income to provide double tax relief would in that example rest with Poland.
Dual residents remain, however, in relation to each country a resident of that country for the purposes of its domestic law and subject to its tax as such so far as the agreement allows. Attention is drawn, however, to Article 22 (Income Not Expressly Mentioned) which would operate in relation to the dual resident referred to above as if that person were a resident of Poland and thus preclude Australia from taxing items of income not expressly dealt with by another article of the agreement where the income is derived from sources in Poland, or items of income derived from sources in a third country. Paragraph 5 of Article 13 (Alienation of Property) would, however, preserve the application of Australia's capital gains tax rules in relation to gains to which that paragraph applied, on the basis that the dual resident remains a resident of Australia for those purposes. Refer to the notes below on Article 13.
Article 5 - Permanent Establishment
Application of various provisions of the agreement (principally Article 7 relating to business profits) is dependent upon whether a person who is a resident of one country has a "permanent establishment" in the other, and if so, whether income derived by the person in the other country is attributable or effectively connected with that "permanent establishment". The definition of the term "permanent establishment" which this article embodies corresponds closely with definitions of the term in Australia's other double taxation agreements.
The primary meaning of the defined term is expressed in paragraph 1 as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with elaborating on the meaning of the term by giving examples of what may constitute a permanent establishment - such as an office, a mine or an agricultural, pastoral or forestry property - and by specifying the circumstances in which a resident of one country shall, or shall not, be deemed to have a permanent establishment in the other country. Those paragraphs generally correspond with comparable paragraphs of other Australian double taxation agreements.
Article 6 - Income from Real Property
By this article, income from real property, including the letting or use in any other form of any land or interest therein, and royalties and other payments relating to the working of, or the exploration for or exploitation of, mines or quarries or other natural resources or rights in relation thereto, may be taxed in the country in which the land, mine, quarry or natural resource is situated.
Consistent with the usual rule that whatever is affixed to or attached to land forms part of, or becomes part of, the land, the reference to land is to be read as meaning either improved or unimproved land. Accordingly, the definition of real property will encompass, for example, a lease of a building or any other interest in a building.
Paragraph 4 makes it clear that the operational effects of paragraphs 1 and 3 of the article extend 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 professional services. Accordingly, application of this article, when read with Articles 7 and 14, to such income effectively ensures that the treaty partner country in which the real property is situated may impose tax on the income derived from that property by an enterprise of the other country or an independent professional person resident in that other country irrespective of whether or not that income is attributable to a permanent establishment of such an enterprise, or fixed base of such a person, situated in the firstmentioned country.
Ships and aircraft are specifically excluded from the scope of this article because the treatment of profits arising from their operation is to be determined in accordance with Article 8.
This article is concerned with the taxation of business profits of an enterprise carried on by a resident of one country that are derived from sources in the other country.
The taxing of these profits turns on whether or not they are attributable to a permanent establishment of the enterprise in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer which carries on the enterprise. If, however, the business of the enterprise is carried on 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.
Paragraphs 2 and 3 of the article provide for profits of a permanent establishment to be determined on the basis of arm's length dealing. These provisions correspond in their practical effect with comparable provisions in Australia's other double taxation agreements.
Paragraph 4 provides that no profits are to be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for that enterprise. Subparagraph 3(d) of Article 5 provides that an enterprise shall not be deemed to have a permanent establishment merely by reason of that activity alone. This paragraph complements that provision and is concerned with a permanent establishment which, although carrying on certain business activities in its own right, also undertakes purchasing of goods or merchandise for its head office. Paragraph 4 is designed to make it clear that the profits of the permanent establishment derived from the business activities carried on in its own right will not be increased by adding to them any amount in respect of 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.
Paragraph 5 of the article allows for the application of provisions of the source country's domestic law (e.g. Australia's Division 13) where, due to the inadequacy of available information, the correct amount of profits attributable to a permanent establishment is incapable of determination or the ascertainment of the correct amount presents exceptional difficulties.
Paragraph 6 effectively provides that where income is otherwise specifically dealt with under other articles of the agreement the operational effect of those particular articles is not overridden by Article 7. The paragraph thus specifies a general rule of interpretation to the effect that the reference to profits in Article 7 may include categories of income that are the subject of other articles of the agreement. It also specifies that such categories of income are to be treated in accordance with the terms of those articles and as outside the scope of Article 7 except where otherwise provided, e.g. by paragraph 4 of Article 10 (Dividends) - see the notes below on that paragraph.
Paragraph 7 preserves to each country the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non residents. The paragraph provides, however, for the Contracting States to consult with a view to agreeing to any amendment of this paragraph that may be appropriate on account of a variation by either State of those special provisions in a way that affects their general character. This paragraph preserves in the case of Australia the application of Division 15 of Part III of the ITAA.
Paragraph 8 is intended to ensure that the principles of the article will apply in relation to business profits derived (indirectly) by a resident of one of the Contracting States as a beneficiary of a trust estate. In the case of Australia, for example, it clarifies Australia's right to tax in accordance with this article a share of business profits, originally derived by a trustee of a trust estate (other than a corporate unit trust) from the carrying on of a business through a permanent establishment in Australia, to which a resident of Poland is beneficially entitled. It ensures that such distributions will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business. It is comparable in effect to subsection 3(11) of the IT(IA)A, which has a similar effect where a beneficiary of a trust is a resident of a country with which Australia had signed a double taxation agreement on or before 19 August 1984.
Article 8 - Ships and Aircraft
Under this article the right to tax profits from the operation of ships or aircraft in international traffic (as defined in Article 3(1)(j)), including profits derived from participation in a pool service, a joint transport operating organisation or an international operating agency, is generally reserved to the country of residence of the operator.
Any profits derived by a resident of one country from internal traffic in the other country (i.e. from operations confined solely to places in the other country) may be taxed in that other country. Paragraph 4 of the article defines the scope of operations confined solely to places in one country.
By reason of the definition of "Australia" contained in Article 3 and the terms of paragraph 4 of this article, any shipments by sea or air from a place in Australia (including the continental shelf areas and external territories covered by the definition of Australia) to another place in Australia, are treated as forming part of internal traffic. Accordingly, profits derived, for example, from a shipment of goods taken on board at Fremantle for delivery to Sydney, during the course of an international voyage by a ship or aircraft operated by a Polish resident between Poland and Sydney, would be profits from internal traffic and would fall within the scope of section 129 of the ITAA. As such 5 per cent of the profit derived from internal traffic would be deemed to be taxable income of the operator for Australian tax purposes.
Article 9 - Associated Enterprises
This article authorises the re-allocation of profits between related enterprises in Australia and Poland on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing wholly at arm's length with one another. The article does not however authorise the re-writing of the accounts of enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place broadly on normal open market commercial terms.
By virtue of paragraph 2 of the article, each country retains the right to apply its domestic law (e.g. Australia's Division 13) to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, in accordance with the principles of this article.
Where a re-allocation of profits is effected under this article or, by virtue of paragraph 2 under domestic law, so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. To avoid this result, paragraph 3 requires the other country concerned to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved with a view to relieving any such double taxation.
It would generally be necessary for the affected enterprise to make application to the competent authority of the country not initiating the re-allocation of profits for an appropriate compensatory adjustment to be made to reflect the re-allocation of profits made by the competent authority of the other treaty partner country.
The broad effect of paragraphs 1 and 2 of this article is to allow both countries to tax dividends flowing between them but to generally limit the tax that the country of source may impose on dividends payable by companies that are residents of that country under its domestic law to beneficial owners resident in the other country. Under this article, Australia will reduce its rate of withholding tax on unfranked dividends paid by Australian resident companies to shareholders resident in Poland from 30 per cent to 15 per cent of the gross amount of the dividends. Franked dividend payments will, of course, remain free of withholding tax under Australia's domestic law. The rate of withholding tax to be imposed by Poland on outgoing dividends is also limited to 15 per cent.
Paragraph 4 provides that the limitation provided by paragraph 2 on the source country's tax shall not apply to dividends derived by a resident of the other country who has a permanent establishment of fixed based in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that permanent establishment or fixed base. Where the dividends are so effectively connected, the paragraph provides for them to be treated as "business profits" or "income from independent personal services" and subject to the source country's tax on an assessment basis in accordance with the provisions of Article 7 or Article 14, as the case may be. In practice, however, under changes made to Australia's domestic law with the introduction from 1 July 1987 of a full imputation system of company taxation, such dividends that are franked dividends will remain exempt from Australian tax while unfranked dividends will be subject to withholding tax at the rate of 15 per cent instead of being taxed by assessment.
The primary purpose of paragraph 5 of this article is to broadly preclude the extra-territorial application by either country of taxing rights over dividend income. It achieves this by providing, broadly, that one country will not tax dividends paid by a company resident in the other country which derives profits, income or gains from the first country, unless the person deriving the dividends is a resident of the first country or the holding giving rise to the dividends is effectively connected with a permanent establishment or fixed base in that country.
Paragraphs 1 and 2 of this article generally provide for interest income to be taxed by both countries but require that the country of source limit its tax to 10 per cent of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. This source country tax rate limitation accords with the general rate of interest withholding tax applicable under Australia's domestic law.
Paragraph 3 defines the term "interest" for the purposes of the articles in a way that encompasses items of income such as discounts on securities and payments under certain hire purchase agreements which are treated for Australian tax purposes as interest or amounts in the nature of interest, and therefore as falling within the definition of "interest" for domestic withholding tax purposes.
Interest derived by a resident of one country which is effectively connected with a permanent establishment or fixed base of that person in the other country will form part of the business profits of that permanent establishment or fixed base and be subject to the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services). Accordingly, paragraph 4 of Article 11 precludes the 10 per cent source country tax rate limitation provided by paragraph 2 from applying to such interest.
The interest "source" rules set out in paragraph 5 are broader than those effectively applicable under Australian law and under Australia's double taxation agreements generally, to the extent that interest paid by an Australian resident that is an expense of a permanent establishment (branch) in a third country is treated by paragraph 5 as having a source in Australia and as thus being potentially liable to Australian tax in accordance with paragraph 2 of the article. The interest withholding tax provisions of the ITAA do not apply, however, in relation to such interest. It has been necessary, therefore, to propose an ameliatory amendment of the IT(IA)A. This is to be found in clause 4 of the Bill (proposed subsection 11ZA(2)).
The article also contains a general safeguard (paragraph 6) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 10 per cent source country tax rate limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.
This article in general allows both countries to tax royalties (as defined) but limits to 10 per cent of the gross amount of the royalties the tax that the country of source may impose on royalties paid or credited to beneficial owners resident in the other country. The definition of royalties contained in paragraph 3 is consistent with the definition of royalties in subsection 6(1) of the ITAA and in Australia's existing modern comprehensive tax treaties.
The 10 per cent source country tax 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.
As in the case of interest income, it is specified in paragraph 4 that the 10 per cent source country tax rate limitation is not to apply to royalties effectively connected with a permanent establishment or fixed base in that country. The royalties "source" rule in paragraph 5 broadly corresponds in the case of Australia with the deemed source rules contained in section 6C of the ITAA for royalties paid to non residents of Australia. However, it is wider and would thus enlarge the taxing rights applicable under Australia's domestic law, in that it effectively includes royalties paid by an Australian resident that are an expense of a business carried on through a permanent establishment outside Australia. As with the interest Article, the ameliatory amendment proposed by clause 4 of the Bill - proposed subsection 11ZA(2) - is designed to remedy this position.
By paragraph 6, if royalties flow between related persons, the 10 per cent source country tax rate limitation will apply only to the extent that the royalties are not excessive.
Article 13 - Alienation of Property
This article allocates between the respective countries taxing rights in relation to income or gains arising from the alienation of real property (as defined in Article 6) and other items of property.
By paragraph 1, income or gains from the alienation of real property may be taxed by the country in which the property is situated. The definition of real property and the situs rules for such property in Article 6 apply for the purposes of this paragraph.
Paragraph 2 deals with income or gains arising from the alienation of property (other than real property covered by paragraph 1) forming part of the business assets of a permanent establishment of an enterprise or pertaining to a fixed base used for performing independent personal services. It also applies where the permanent establishment (alone or with the whole enterprise) or the fixed base is alienated. Such income or gains may be taxed in the country in which the permanent establishment or fixed base is situated, which corresponds to the rules for business profits and for income from independent personal services contained in Articles 7 and 14 respectively.
Paragraph 3 specifies that income or gains from the disposal of ships or aircraft operated in international traffic, or associated property (other than real property covered by paragraph 1) shall be taxable only in the country of residence of the operator of the ships or aircraft. This rule corresponds to the taxing rule contained in Article 8 in relation to profits from the operation of ships or aircraft in international traffic.
Paragraph 4 assimilates the treatment of income or gains from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally of real property covered by paragraph 1, to the treatment by paragraph 1 of the alienation of that real property.
The article contains a sweep-up paragraph, paragraph 5, 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 property not specified in the preceding paragraphs of the article. This paragraph is expressed to be not affected by other aspects of the agreement. It thus fully preserves the application of Australia's domestic law rules in relation to the taxation of capital gains as regards the alienation of such property.
Paragraph 5 of this article operates independently of Article 22 (Income Not Expressly Mentioned), which contains sweep-up provisions in relation to items of income not expressly dealt with in other articles of the agreement.
As indicated earlier, income or gains from the alienation of property that fall within the scope of this article are not affected by the business profits provisions of Article 7. In the event that the operation of this article should result in an item of income or a gain being subjected to tax in both countries, the country in which the person deriving the income or gain is a resident, as determined in accordance with Article 4, would be obliged by Article 24 (Methods of Elimination of Double Taxation) to provide double tax relief for the tax imposed by the other country.
Article 14 - Independent Personal Services
At present, an individual resident in Australia or in Poland may be taxed in the other country on income derived from the performance in that other country of professional services or other similar independent activities. By this article, such income will continue to be subject to tax in the country in which the services are performed in cases where the recipient has a fixed base regularly available in that country for the purposes of performing his or her activities and the income is attributable to activities exercised from that base.
If the above test is not met, the article requires that the income will be taxed only in the country of residence of the recipient.
Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and are not covered by this article.
Article 15 - Dependent Personal Services
Article 15 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 Articles 16 (Directors' Fees), 18 (Pensions and Annuities), 19 (Government Service), or 21 (Professors and Teachers) of the agreement.
Generally, salaries, wages, etc. derived by a resident of one country from an employment exercised in the other country will be liable to tax in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where only certain visits of a short term nature are involved.
The conditions for this exemption are that the visit or visits not exceed, in the aggregate, 183 days in the year of income of the country visited; that the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited; and that the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in the country being visited. Where all of these conditions are met, the taxing rights in relation to that remuneration are allocated by the article solely to the country of residence of the recipient.
By paragraph 3 of the article, income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of residence of the operator if the domestic law of that country allows this.
Where the short term visit exemption provisions of paragraph 2 are not applicable, remuneration derived by a resident of Australia from an employment exercised in Poland may be subject to tax in Poland. However, the article does not allocate sole taxing rights to Poland in that situation.
Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the ITAA that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the agreement allows both countries to tax a category of income, Australia would be required in this situation (pursuant to Article 24(1)), as the country of residence of the income recipient, to relieve the double taxation that would otherwise occur.
Although that paragraph provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Polish tax paid, the "exemption with progression" provisions of section 23AG of the ITAA could be expected to provide double tax relief in relation to the employment income derived in the situation described.
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.
By this article, income derived by visiting entertainers (including athletes) from their personal activities as such will generally continue to be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. It is considered that the words "income derived by entertainers.... from their personal activities as such..." extend the application of this article to income generated from promotional and associated kinds of activities engaged in by the entertainer while present in the visited country.
Paragraph 2 of this article is a safeguarding provision designed to ensure that income in respect of personal activities exercised by an entertainer, whether received by the entertainer or by another person, e.g. a separate enterprise which formally provides the entertainer's services, is taxed in the country in which the entertainer performs, whether or not that other person has a permanent establishment of fixed base in that country.
Paragraph 3 provides that income derived by an entertainer from entertainment activities undertaken under a program of cultural or sports exchange agreed between the governments of the two countries shall be exempt from tax in the country visited. This provision is included to facilitate cultural and sporting exchanges between the two countries.
Article 18 - Pensions and Annuities
Paragraph 1 of this article ensures that pensions (including government pensions) and annuities are taxed only by the country of residence of the recipient.
It is intended that the operation of this article extends to pension and annuity payments made to dependants, for example a widow or children, of the person in respect of whom the pension or annuity entitlement accrued where, upon that person's death, such entitlement has passed to that person's dependants.
Paragraph 3 addresses the position of alimony and other maintenance payments and provides that the taxing right be allocated solely to the country of residence of the payer. The purpose of this paragraph is to remove any possibility of double taxation of such payments arising by reason of the treatment accorded such payments under the respective domestic laws. In the case of Australia, those payments will generally remain exempt from Australian tax under the ITAA in the hands of the recipient and non-deductible to the payer.
Article 19 - Government Service
Paragraph 1 of this article provides for remuneration, other than a pension or annuity, that is, salary and wage type income, paid to an individual in respect of services rendered to a government (including a State or local authority) of one of the countries to be taxed only in that country. However, such remuneration is to be taxable only in the other country if the services are rendered in that other country and the recipient is a resident of that country as determined in accordance with Article 4 and is a citizen of, or in effect ordinarily resides in, that country.
Paragraph 2 effectively precludes from the scope of this article remuneration of this type for services rendered in connection with a trade or business carried on by a government, which will remain subject to the provisions of Article 15 (Dependent Personal Services ) or 16 (Directors' Fees) as the case may be.
This article applies to students temporarily present in one of the treaty partner countries solely for the purpose of their education who are, or immediately before the visit were, resident in the other country. In these circumstances, the students will be exempt from tax in the country visited in respect of payments received from abroad for the purposes of their maintenance or education (even though they may qualify as a resident of the country visited during the period of their visit). The exemption from tax provided by the visited country is treated as extending to maintenance payments received by the student that are made in respect of the maintenance of dependent family members who have accompanied the student to the visited country.
Where, however, a student from Poland who is visiting Australia solely for educational purposes undertakes some part time work (for example, working at night in a restaurant) with a local employer or, during a semester break undertakes work with a local employer, the income earned by that student as a consequence of that employment may, as provided in Article 15, be subject to tax in Australia. In this situation the payments received from abroad for the purposes of the student's maintenance or education will not however be taken into account in determining the tax payable on the employment income that is subject to tax in Australia. In that regard, whether or not the student is regarded as a resident of Australia for the purposes of the ITAA during the period of his or her stay in Australia, and thus the student's eligibility or not for the Australian tax-free threshold, will be pertinent to the determination of any Australian tax liability.
Taxation Ruling No IT 2268 sets out general guidelines relating to the residential status for Australian tax purposes of overseas students studying in Australia and will generally be relevant to the application of Australian tax in relation to income derived by visiting students that are not exempted from Australian tax by reason of an article of this type in a double taxation agreement.
Article 21 - Professors and Teachers
This article applies in respect of professors and teachers who are resident in one country and visit, for example during sabbatical leave, the other country for a period of not more than two years for the purpose of teaching or carrying out advanced study or research at an educational institution. In these circumstances, the remuneration received by the professor or teacher for that teaching, study or research work are to be exempt from tax in the country visited provided it is, or upon the application of this article will be, subject to tax in the country of residence. In the latter respect, the application of this article to exempt from Polish tax remuneration derived by an Australian resident teacher visiting Poland will generally operate to cause the remuneration to be excluded from the scope of the "exemption with progression" provisions of section 23AG of the ITAA, so that it will remain subject to Australian tax.
The exemption provided by the article does not however apply to remuneration received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons. For example, where a professor or teacher who is a resident of one country receives a grant or is otherwise paid by an enterprise to undertake, in the other country, work associated with the refinement and further development of a particular product that is to be commercially marketed by that organisation, the income so received by the professor or teacher will not fall within the operational scope of this article but will come within the ambit of either Article 14 (Independent Personal Services) or Article 15 (Dependent Personal Services).
Article 22 - Income Not Expressly Mentioned
This article provides rules for the allocation between the two countries of taxing rights in relation to items of income, wherever arising, not expressly mentioned in the preceding articles of the agreement. The scope of the article is not confined to such items of income arising in one of the contracting countries; it extends also to income from sources in a third State.
Broadly, such income derived by a resident of one country is to be taxed only in his or her country of residence unless it is derived from sources in the other country, in which case the income may also be taxed in the other country. Where this occurs, the country of residence of the recipient of the income would be obliged by Article 24 (Methods of Elimination of Double Taxation) to provide double taxation relief.
It should be noted that this article effectively contains "sweep-up" provisions in relation to items of income not expressly dealt with in other articles of the agreement and that paragraph 5 of Article 13 (Alienation of Property) effectively "sweeps-up" capital gains not dealt with other wise in Article 13.
Paragraph 2 of the article ensures the application of Article 7 (Business Profits) or Article 14 (Independent Personal services), as the case may be, in respect of income which is effectively connected with a permanent establishment or fixed base which a resident of one country has in the other country.
This article effectively deems income, profits or gains derived by a resident of one country which, under the agreement, may be taxed in the other country to have a source in the latter country for the purposes of Article 24 and the domestic income tax laws of the respective countries. It thus ensures the jurisdictional right of each country to exercise the taxing rights allocated to it by the agreement over residents of the other country. It is also designed to ensure that where an item of income, profits or gains is taxable also by the country of residence of the recipient, double taxation relief will be given by that country (pursuant to Article 24) in respect of tax levied by the other country in accordance with the taxing rights allocated to it under the agreement. The provision resolves any conflict in domestic law source rules and thus obviates any question of income, profits or gains not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income, profits or gains in the hands of a resident of the other country.
Article 24 - Methods of Elimination of Double Taxation
Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax.
It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes of income which remain under the agreement subject to tax in both countries. Australia's other double taxation agreements provide for a credit basis for the relief of double taxation to be applied by Australia and, usually, the other country. In these cases, the country of residence is required to give credit against its tax for the tax of the country of source. This article also reflects that approach.
Paragraph 1 of the article provides for Australia to relieve double taxation by allowing a credit against its own tax for Polish tax paid under the law of Poland and in accordance with the agreement on income derived by a resident of Australia from sources in Poland.
Where a dividend is paid by a Polish resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Polish company, paragraph 2 provides for the credit allowed by Australia to also take into account, in addition to the Polish tax paid in respect of the dividends, the underlying Polish tax paid by the company in respect of the profits out of which the dividend is paid.
Australia's general foreign tax credit system, together with the terms of this article and of the agreement generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in Poland. As in the case of Australia's other double taxation agreements, the source of income rules specified by Article 23 for purposes of the agreement will also apply for those purposes.
Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraphs 1 and 2 of this article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA. This will include the allowance of underlying tax credit relief in respect of dividends paid by Polish resident companies that are related to Australian resident companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA.
Notwithstanding the credit form of relief provided for by paragraph 1 of the article, the "exemption with progression" provisions of section 23AG of the ITAA will be applicable, as appropriate, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of "foreign service" (as defined in subsection 23AG(7) of the ITAA) in Poland. Likewise, dividends and branch profits derived from Poland which are exempted from Australian tax where derived by an Australian resident company under measures related to the introduction in Australia of the foreign income accruals system (e.g., sections 23AH or 23AJ of the ITAA) will continue to qualify for exemption from Australian tax under those provisions.
For Poland's part, paragraph 3 of the article effectively requires Poland to provide a corresponding foreign tax credit form of relief to Polish residents in respect of taxes payable in Australia on their Australian source income, against the Polish tax payable on that income.
Article 25 - Mutual Agreement Procedure
One of the purposes of this article is to provide for consultation between the taxation authorities of the two countries with a view to reaching a satisfactory solution where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the agreement. A person wishing to use this procedure must present a case to the competent authority of the State of which the person is a resident within three years of the first notification of the action the taxpayer considers gives rise to taxation not in accordance with the agreement. If, on consideration, a solution is reached, it may be implemented irrespective of any time limits imposed by domestic tax laws of the relevant country.
The article also authorises consultation and direct communication between the taxation authorities of the two countries for the purpose of resolving any difficulties regarding the interpretation or application of the agreement and to give effect to it.
Article 26 - Exchange of Information
This article authorises and limits the exchange of information by the two taxation authorities to information that is necessary for the carrying out of the agreement or for the administration of domestic laws concerning the taxes to which the agreement applies. The limitation placed on the kind of information authorised to be exchanged effectively means that information access requests relating to taxes not within the coverage provided by Article 2 (Taxes Covered), for example sales taxes, do not have to be complied with.
The purposes for which the exchange information may be used and the persons to whom it may be disclosed are restricted along the lines of Australia's other double taxation agreements. The Article ensures that any information received by a Contracting State is to be treated as secret in the same manner as information obtained under the domestic laws of that State.
An exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process, or which would be contrary to public policy, is not permitted by the article.
Article 27 - Diplomatic and Consular Officials
The purpose of this article is to ensure that the provisions of the agreement do not result in members of diplomatic and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international laws. In Australia, such persons are entitled, for example, to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act 1967 and the Consular (Privileges and Immunities) Act 1972.
This article provides for the entry into force of the agreement. This will be on the date on which instruments of ratification are exchanged through the diplomatic channel. In the case of Australia, the enactment of the legislation which gives the force of law in Australia to the agreement is the necessary prerequisite to the exchange of instruments of ratification taking place.
Once it enters into force, the agreement will have effect in Australia and Poland for purposes of withholding taxes in respect of income derived on or after 1 January in the calendar year next following that in which the agreement enters into force. In respect of tax other than withholding tax, the agreement will first have effect in Australia in relation to profits, income or gains addressed by the respective articles of the agreement of the Australian year of income beginning on 1 July in the calendar year following that in which it enters into force. Where a taxpayer has adopted an accounting period ending on a date other than 30 June, profits, income or gains derived on or after the beginning of the accounting period that has been substituted for the year of income beginning on 1 July in the calendar year following the calendar year in which the agreement enters into force will be first subject to the agreement for purposes of Australian tax other than withholding tax.
In Poland, the agreement will first have effect in relation to taxes other than withholding tax, in respect of profits, income or gains of the year of income beginning on 1 January in the calendar year following that in which the agreement enters into force.
By this article the agreement is to continue in effect indefinitely. However, either country may give through the diplomatic channel written notice of termination of the agreement on or before 30 June in any calendar year beginning after the expiration of five years from the date of its entry into force.
In that event, the agreement would cease to be effective in Australia and in Poland for purposes of withholding tax in respect of income derived on or after 1 January in the calendar year next following that in which the notice of termination is given. For other Australian taxes, it would cease to be effective in relation to profits, income or gains of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.
It would correspondingly cease to be effective in Poland for other taxes in respect of profits, income or gains of any year of income beginning on or after 1 January in the calendar year next following that in which the notice of termination is given.
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