Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. John Dawkins, M.P.)Agreement with Spain
Subject to some differences, the comprehensive double taxation agreement with Spain accords substantially with other comprehensive double taxation agreements to which Australia is a party. Like them, the agreement allocates to the country of source, sometimes at limited rates, a taxing right over some income, profits or gains. The country of residence is given the sole right to tax other types of income, profits or gains. The agreement also 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. In the case of Australia, effect is given to the relief obligations arising under the double taxation agreement by application of the general foreign tax credit system provisions of Australia's domestic law, or relevant exemption provisions of the law where applicable.
Article 1 - Personal Scope
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 application of the agreement to persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.
Article 2 - Taxes Covered
This article specifies the existing taxes of each country to which the agreement applies. These are, in the case of Australia:
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- the Australian income tax; and
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- the resource rent tax in respect of offshore petroleum projects.
For Spain the agreement applies to:
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- the income tax on individuals; and
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- the corporation tax.
The application of the agreement will be automatically extended to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, the existing taxes. A duty is imposed on Australia and Spain to notify each other within a reasonable time of any substantial changes to their respective laws to which the agreement applies.
Article 3 - General Definitions
As with Australia's other modern taxation agreements, "Australia" is defined to include certain external territories and areas of the continental shelf. By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by nonresidents on the seabed and subsoil of the continental shelf areas (under section 6AA of the ITAA, certain sea installations and offshore areas are treated as part of Australia). The definition is also relevant to the taxation by Australia and Spain of shipping profits in accordance with Article 8 of the agreement. [Subparagraph 1(a)]
For the purposes of the agreement, the terms "Australian tax" and "Spanish tax" do not include any amount of penalty or interest imposed under the respective domestic laws of Australia and Spain [Paragraph 2] . This is important in determining a taxpayer's entitlement to a credit under the double tax relief provisions of Article 23 of the agreement.
In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation laws of Spain with respect to income that Spain is entitled to tax under the agreement, would not be a creditable "Spanish tax" for the purposes of Article 23(1) of the agreement. This is in keeping with the meaning of "foreign tax" in the ITAA (subsection 6AB(2) -Foreign Income and Foreign Tax).
Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 23(1) (pursuant to Division 18 of Part III of the ITAA - Credits in Respect of Foreign Tax).
Terms not specifically defined
Where a term is not specifically defined within this agreement, that term (unless used in a context that requires otherwise) is to be taken to have the same interpretative meaning as it has under the domestic law of the country applying the agreement.
A term not defined in the agreement is to be given the meaning it has under that country's domestic law at the time of application of the agreement. The expression "at the time of the application" is designed to obviate the need for research into the meaning such a term had when the agreement was negotiated. [Paragraph 3]
Article 4 - Residence
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 if 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.
The agreement specifically provides that an individual's citizenship or nationality will be a factor in determining the degree of the individual's personal and economic relations with each country. [Paragraph 3]
Example
A dual resident who is deemed by Article 4 to be a resident solely of Spain for the purposes of the agreement, would be entitled to any exemption from, or reduction in, Australian tax provided by any article of the agreement for income derived from sources in Australia by a resident of Spain.
In this example, Spain is required under Article 23 to provide double tax relief for any income which remains taxable in both countries under the articles of the agreement. Thus, if the person has paid Australian income tax on income, Spain is required to allow a deduction from the Spanish tax on that income equal to the Australian tax paid.
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.
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 generally with definitions of the term in Australia's other double taxation agreements.
Meaning of "permanent establishment"
The primary meaning of the term "permanent establishment" is expressed as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. [Paragraph 1]
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" - for example:
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- an office;
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- a mine; or
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- an agricultural, pastoral or forestry property.
Certain circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country are also specified. Those paragraphs generally correspond with the comparable paragraphs of Australia's existing double taxation agreements with the exception of subparagraph 4(b). Subparagraph 4(b) specifically deems an enterprise to have a permanent establishment in one of the countries if a structure, installation, drilling rig, ship or other like substantial equipment is used, either continuously or for a period exceeding twelve months, for the exploration for, or exploitation of, natural resources or connected activities. [Subparagraph 4(b)]
The principles set down in this article are also to be applied in determining whether a permanent establishment exists in a third country or whether a third country has a permanent establishment in Australia (or in Spain) for the purposes of :
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- paragraph 5 of Article 11 (Interest); and
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- paragraph 5 of Article 12 (Royalties). [Paragraph 8]
Article 6 - Income from Real Property
Where income from property is taxable
This article makes it clear that income from real property which is situated in one of the countries is taxable in the country where the property is situated [Paragraph 1] . Thus, income from real property in Australia will be subject to Australian tax laws.
In the case of Australia, income from real property is effectively defined as extending to:
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- the direct use, letting or use in any other form of any land or interest therein; and
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- royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.
In the case of Spain, real property is defined as immovable property and includes:
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- property accessory to immovable property;
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- rights to which the general law in respect of landed property applies;
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- usufruct of immovable property; and
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- rights to variable and fixed payments for the exploitation and exploration of mineral deposits, oil or gas wells, quarries and other natural resources.
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. For example, the definition of real property will encompass a lease of a building or any other interest in a building.
The operation of this article extends to income derived from the use or exploitation of real property of an enterprise and income derived from real property that is used for the performance of independent personal services. [Paragraph 5]
Accordingly, application of this article (when read with Articles 7 and 14) to such income ensures that the treaty country in which the real property is situated may impose tax on the income derived from that property by:
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- an enterprise of the other country; or
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- an independent professional person resident in that other country,
irrespective of whether or not that income is attributable to a "permanent establishment" of such an enterprise, or fixed base of such a person, situated in the firstmentioned country.
Where the ownership of shares or other rights in a company or other entity confers on the holder the right to let, use or otherwise enjoy real property the income from such letting, use, or enjoyment may be taxed where the property is situated. [Paragraph 6]
Article 7 - Business Profits
This article is concerned with the taxation of business profits derived by an enterprise carried on by a resident of one country from sources in the other country.
The taxing of these profits depends on whether they are attributable to a "permanent establishment" in that other country. If a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax the profits of the enterprise that are attributable to that permanent establishment. [Paragraph 1]
If a taxpayer who is a resident of one country carries on business through an enterprise that does not have a "permanent establishment" in the other country, the taxpayer will not be liable to tax in the other country on the business profits of that enterprise. [Paragraph 1]
Determination of business profits
Profits of a "permanent establishment" are to be determined on the basis of arm's length dealing. The provisions correspond to comparable provisions in Australia's other double taxation agreements. [Paragraphs 2 and 3]
No profits are to be attributed to a permanent establishment merely because it purchases goods or merchandise for the enterprise. [Paragraph 4]
Profits of a permanent establishment derived from business activities carried on in its own right will not be increased by adding to them any profits attributable to the purchasing activities undertaken for the head office. It follows, of course, that any expenses incurred by the permanent establishment in respect of those purchasing activities will not be deductible in determining the taxable profits of the permanent establishment.
The article allows for the application of the source country's domestic law (e.g. Australia's Division 13) where, due to inadequate information, the correct amount of profits attributable to a "permanent establishment" cannot be determined or can only be ascertained with extreme difficulty. [Paragraph 5]
Income dealt with under other articles
Where income is otherwise specifically dealt with under other articles of the agreement, the effect of those particular articles is not overridden by this article. [Paragraph 6]
This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other articles of the agreement (e.g. dividends, interest and royalties) are to be treated in accordance with the terms of those articles and as outside the scope of this article (except where otherwise provided, e.g. by paragraph 5 of Article 10).
Each country has the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance with non-residents. However, if the relevant law in force in either Contracting State at the date of signature of this agreement is varied (otherwise than in minor respects so as not to affect its general character), the Contracting States must consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate. An effect of this paragraph is to preserve, in the case of Australia the application of Division 15 of Part III of the ITAA (Insurance with Non-residents). [Paragraph 7]
The principles of the article will apply in relation to business profits derived by a resident of one of the countries (directly or through one of more interposed trust estates) as a beneficiary of a trust estate. [Paragraph 8]
Example
In accordance with this article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of Spain is beneficially entitled under the trust estate. Paragraph 8 ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business.
Article 8 - Ships and Aircraft
Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from:
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- participation in a pool service;
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- a joint transport operating organization; or
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- 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.
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 internal traffic. [Paragraph 4]
Example
Profits derived from a shipment of goods taken on board (during the course of an international voyage between a place in Spain and Sydney) at Cairns for delivery to Brisbane, 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 amount paid in respect of 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 Spain 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 would not generally authorise the re-writing of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms.
Each country retains the right to apply its domestic law relating to the determination of the tax liability of a person (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. [Paragraph 2]
Where a re-allocation of profits is made (either under this article or, by virtue of paragraph 2, under domestic law) so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. To avoid this result, provision is made for the other country to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation. [Paragraph 3]
The adjustment made by the other country to the profits of the associated enterprise will be based on the arrangements that might be expected to have operated between independent enterprises dealing wholly at arm's length with one another.
It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the re-allocation of profits for an appropriate compensatory adjustment to reflect the re-allocation of profits made by the competent authority of the other treaty partner country. If necessary, the competent authorities of Australia and Spain will consult with each other to determine the appropriate adjustment.
Article 10 - Dividends
This article broadly allows both countries to tax dividends flowing between them but in general limits the tax that the country of source may impose on dividends payable 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 residents of Spain 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 Spain on outgoing dividends is also limited to 15 per cent. [Paragraph 2]
The 15 per cent withholding tax will not apply to income which, under the Spanish taxation law relating to transparent companies, is attributable to shareholders of such companies. Spain retains the right to tax such income under its domestic law provided that the income has not been subject to Spanish corporation tax. This exception applies whether or not the income has been distributed to the shareholders. [Paragraph 4]
The limitation on the source country's tax does not apply to dividends derived by a resident of the other country who has a "permanent establishment" or "fixed base" in the country from which the dividends are derived if the holding giving rise to the dividends is effectively connected with that "permanent establishment" or "fixed base".
Where the dividends are so effectively connected, they are to be treated as "business profits" or "income from independent personal services" and therefore subject to the source country's tax (in accordance with the provisions of Article 7 or Article 14, as the case may be). [Paragraph 5]
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.
Income or profits derived from the other country
The article generally provides that where an Australian company derives profits or income from Spain, Spain may not tax the dividends paid by the Australian company unless:
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- the dividends are paid to a resident of Spain; or
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- the holding giving rise to the dividends is effectively connected with a "permanent establishment" or a "fixed base" situated in Spain,
even if the dividends consist wholly or partly of profits or income arising in Spain.
Spain also cannot subject to tax any undistributed profits of the Australian company, even if such profits consist wholly or partly of profits or income arising in Spain.
The reverse equally applies to Spanish companies deriving profits or income from Australia. [Paragraph 6]
Article 11 - Interest
This article provides for interest income to be taxed by both countries but requires the country of source to generally limit its tax to 10 per cent of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. [Paragraphs 1 and 2]
The limitation of the source country tax rate to 10 per cent accords with the general rate of interest withholding tax applicable under Australia's domestic law.
The term "interest" is defined for the purposes of the article in a way that, in relation to Australia, encompasses items of income such as discounts on securities and payments under certain hire purchase agreements which are treated for Australian tax purposes as interest or amounts in the nature of interest. [Paragraph 3]
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, the 10 per cent source country tax rate limitation does not apply to such interest.
Interest "source" rules which are in accord with the scheme of the interest withholding tax provisions of Australia's domestic law are set out in this article. Those rules operate to allow Australia to tax interest to which a resident of Spain is beneficially entitled where the interest is paid by a resident of Australia and is not an expense of a business carried on by the Australian resident through a permanent establishment in a country outside Australia and borne by that permanent establishment. Australia may also tax interest paid by a resident of Spain to which another Spanish resident is beneficially entitled if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment. [Paragraph 5]
For the purposes of paragraph 5, a person is a resident of one country if the person is a resident of that country under the country's taxation laws, irrespective of the way in which paragraph (3) or paragraph (4) of Article 4 operates in relation to that person. Thus, for the purposes of paragraph 5, a "resident" of Spain is a person who is a resident under Spain's taxation law even if under paragraph (3) of Article 4 the person is deemed to be a resident of Australia for the purposes of this agreement. [Paragraph 6]
It is also possible that a person may be a resident under each of the country's domestic taxation laws. In such a case, the person may be treated as a resident of both countries for the purposes of paragraph 6.
The article also contains a general safeguard 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. [Paragraph 7]
Any excess part of the interest remains taxable according to the domestic law of each country, but subject to the other articles of this agreement.
Article 12 - Royalties
The article in general allows both countries to tax royalty flows but limits the tax of the country on royalties paid or credited to beneficial owners resident in the other country. [Paragraphs 1 and 2]
The 10 per cent 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.
In the absence of a double taxation agreement, Australia generally taxes royalties paid to nonresidents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax.
The definition of "royalties" reflects the definition in Australia's domestic income tax law and in Australia's other existing double taxation agreements.
In negotiations for this agreement, Australia and Spain expressly agreed that computer software royalties would fall within the subparagraph 3(a) definition.
As in the case of interest income, it is specified 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. [Paragraph 4]
The royalties "source" rule effectively corresponds in the case of Australia with the deemed source rule mentioned in section 6C (Source of royalty income derived by a non-resident) of the ITAA for royalties paid to nonresidents of Australia [Paragraph 5] . It broadly mirrors the "source" rule for interest income contained in paragraph 5 of Article 11 (Interest).
For the purposes of paragraph 5, a person is a resident of one country if the person is a resident of that country under the country's taxation laws, irrespective of the way in which paragraph (3) or paragraph (4) of Article 4 operates in relation to that person. Thus, for the purposes of paragraph 5, a "resident" of Spain is a person who is a resident under Spain's taxation law even if under paragraph (3) of Article 4 the person is deemed to be a resident of Australia. [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. [Paragraph 7]
Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other articles of the agreement.
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.
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 1]
Paragraph 2 deals with income or gains arising from the alienation of property (other than real property referred to in Article 6 (Income from Real Property)) 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. This corresponds to the rules for business profits and for income from independent personal services contained in Articles 7 and 14 respectively.
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) are 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 3]
The treatment of income, profits 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, is assimilated to the treatment by paragraph 1 of the alienation of that real property [Paragraph 4] . Such income or gains may thus be taxed by the country in which the real property is situated.
Income or gains from the alienation of shares (or comparable interests) in a company which is a resident of one country, which are not covered by paragraph 4, may be taxed in that country if the recipient of the income or gains, during the 12 month period preceding the alienation, had a participation (either directly or indirectly) of at least 10 per cent in the capital of that company. [Paragraph 5]
Thus, an Australian shareholder who, during the 12 month period preceding the alienation of his or her shares, had a participation of at least 10 per cent in the capital of a company which is resident of Spain, may be taxed in Spain on the income or gain from the alienation of those shares.
The article contains a sweep-up provision in relation to capital gains which enables each country to tax, according to its domestic law, any gains of a capital nature derived by its own residents or by a resident of the other country from the alienation of any property not specified in the preceding paragraphs of the article. It thus ensures that Australia's domestic law relating to the taxation of capital gains may be applied to the alienation of such property. [Paragraph 6]
This paragraph operates independently of Article 21, 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 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 23 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 Spain 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 if 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 these conditions are not 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
This article generally provides the basis upon which the remuneration of visiting employees is to be taxed. The provisions of this article do not apply, however, in respect of income that is dealt with separately in:
- •
- Article 16 (Directors' Fees);
- •
- Article 18 (Pensions and Annuities); and
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- Article 19 (Government Service)
of the agreement.
Generally, salaries, wages and similar remuneration derived by a resident of one country from an employment exercised in the other country will be liable to tax in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where visits of only a short-term nature are involved.
The conditions for this exemption are that:
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- the visit or visits not exceed, in the aggregate, 183 days in the year of income of that other State;
- •
- 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 borne by (in the sense it 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.
Employment on a ship or aircraft
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. [Paragraph 3]
Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from an employment exercised in Spain may be subject to tax in Spain. However, the article does not allocate sole taxing rights to Spain 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 23(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 Spanish tax paid, the "exemption with progression" method of providing double tax relief in relation to the employment income derived in the situation described would normally be applicable in practice. This method takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.
Article 16 - Directors' Fees
Under this article, remuneration derived by a resident of one country in the capacity of a director of a company which is a resident of the other country may be taxed in the latter country.
Article 17 - Entertainers
By this article, income derived by visiting entertainers (including athletes) from their personal activities as such may generally continue to 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.
There 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. [Paragraph 2]
Visits supported by public funds
Income derived by an entertainer who is a resident of one country from entertainment activities exercised in the other country, will be exempt from tax in that other country if the visit is substantially supported by the public funds of the country of residence or a political subdivision or local authority thereof. Thus, if an Australian resident's entertainment activities in Spain are substantially supported by Australian government funds, the income derived by the Australian entertainer from entertaining in Spain will be exempt from tax in Spain [Paragraph 3] . This paragraph is included to facilitate cultural and sporting exchanges between Australia and Spain.
Article 18 - Pensions and Annuities
Pensions (excluding government pensions) and annuities are to be taxed only by the country of residence of the recipient. [Paragraph 1]
Government service pensions are specifically dealt with under Article 19(2).
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.
Alimony and maintenance payments
The taxing right in respect of alimony and other maintenance payments is allocated solely to the country of residence of the payer [Paragraph 3] . The purpose of this 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
Salary and wage type income, other than a pension or annuity, paid to an individual for services rendered to a government (including a State or local authority) of one of the countries, is 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;
- •
- the recipient is a resident of that other country as determined in accordance with Article 4; and
- •
- the recipient is a citizen or national of that other country or did not become a resident of that other country solely for the purpose of performing the services. [Paragraph 1]
Pensions paid by, or out of funds created by, one of the countries (or a political subdivision or local authority of that country) for services rendered to that country will be taxable only in that country. [Subparagraph 2(a)]
However, if the recipient is a resident of and a citizen or national of the other country, the pension will be taxable in that other country. Thus, an Australian government service pension paid to a Spanish resident who is also a Spanish national will only be taxable in Spain. [Subparagraph 2(b)]
Remuneration and pensions for services rendered in connection with business carried on by a government are precluded from the scope of this article. This 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. [Paragraph 3]
Article 20 - Students
This article applies to students temporarily present in one of the countries solely for the purpose of their education if the students are, or immediately before the visit were, resident in the other country. In these circumstances, the students will be exempt from tax in the country visited for payments received from abroad for 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 for maintenance of dependent family members who have accompanied the student to the visited country.
Where however, a student from Spain who is visiting Australia solely for educational purposes undertakes:
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- some part time work with a local employer; or
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- 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 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.
Article 21 - Income not Expressly Mentioned
This article provides rules for the allocation between the two countries of taxing rights to items of income 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 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 23 (Methods of Elimination of Double Taxation) to provide double taxation relief.
This article does not apply to income effectively connected with a "permanent establishment" or "fixed base" derived by a resident of a Contracting State in the other Contracting State. In such a case, Article 7 (Business Profits) or 14 (Independent Personal Services) as the case may be shall apply. [Paragraph 3]
Article 22 - Source of Income
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 23 (Methods of Elimination of Double Taxation) and the domestic income tax laws of the respective countries. It therefore ensures the jurisdiction 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 in both countries, double taxation relief will be given by the income recipient's country of residence (pursuant to Article 23) for tax levied by the other country as prescribed under the agreement. In this way, income derived by a resident of Australia, which is taxable by Spain under the agreement, will be treated as being foreign income for the purposes of the ITAA, including the foreign tax credit provisions of the ITAA.
Article 23 - Methods of Elimination of Double Taxation
Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide either:
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- for the income to be taxed only in one country or the other; or
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- where the domestic taxation law of one of the countries frees the income from tax.
It is necessary, however, to prescribe a method for relieving double taxation for other classes of income which, under the agreement, remain 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.
Australia relieves double taxation by allowing a credit (or other relief) against its own tax for Spanish tax paid under the law of Spain and in accordance with the agreement on income derived by a resident of Australia from sources in Spain. [Paragraph 1]
Where a dividend is paid by a Spanish resident company to an Australian resident company which controls 10 per cent or more of the voting power in the Spanish company, paragraph 2 provides for the credit allowed by Australia to also take into account, in addition to the Spanish tax paid in respect of the dividends, the underlying Spanish tax paid by the company in respect of the profits out of which the dividend is paid. [Paragraph 2]
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 Spain. As in the case of Australia's other double taxation agreements, the source of income rules specified by Article 22 for purposes of the agreement will also apply for those purposes.
Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraphs 1 and 2 of 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 Spanish 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" method of relief will be applicable, as appropriate, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of "foreign service" (as defined in subsection 23AG(7) of the ITAA) in Spain.
It is also relevant that Spain 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 Spain 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. In these cases, the credit form of relief would not be relevant.
Spain is required to allow to its residents a deduction for Australian tax paid where they have derived income, profits or gains which are taxed in Australia and which are also subject to tax in Spain. The deduction is of an amount equal to the Australian tax paid and is made against the Spanish tax payable on the income.
In the case of dividends paid by Australian companies to Spanish companies who hold at least 25 per cent of the capital of the Australian company, Spain is also required to allow as a deduction against Spanish tax payable on the profits out of which the dividend is paid, an amount equal to the underlying Australian tax paid on such profits. [Paragraph 3]
Article 24 - Mutual Agreement Procedure
One of the purposes of this article is to provide for consultation between the competent 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 [Paragraph 1] . 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. [Paragraph 2]
The article also authorises consultation between the competent 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. [Paragraph 4]
Article 25 - Exchange of Information
This article authorises and limits the exchange of information by the two competent authorities to information which is necessary for the carrying out of the agreement or for the administration of domestic laws concerning the taxes to which the agreement applies. [Paragraph 1]
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, for example sales tax, are not within the scope of this article.
The purposes for which the exchanged 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. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State. [Paragraph 1]
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. [Paragraph 2]
Article 26 - Diplomatic and Consular Officials
The purpose of this article is to ensure that the provisions of the agreement do not result in members of diplomatic and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international laws. In Australia, such persons are entitled, for example, to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act 1967 and the Consular (Privileges and Immunities) Act 1972.
Article 27 - Entry into Force
This article provides for the entry into force of the agreement. This will be on the date on which diplomatic notes are exchanged through the diplomatic channel notifying that the last of the necessary processes to give the agreement the force of law in their respective countries has been completed. 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 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 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 income of the Australian year of income beginning on or after 1 July in the calendar year following that in which it enters into force.
In Spain, the agreement will first have effect in respect of Spanish withholding tax on or after 1 January in the calendar year next following that in which the agreement enters into force. For other Spanish tax on income, the agreement will first have effect in Spain in relation to taxes chargeable for the taxable year beginning on or after 1 January in the calendar year following that in which it enters into force.
Article 28 - Termination
By this article the agreement is to continue in effect indefinitely. However, either country may give through the diplomatic channel written notice of termination of the agreement on or before 30 June in any calendar year beginning after the expiration of three years from the date of its entry into force.
In that event, the agreement would cease to be effective in Australia for purposes of withholding tax in respect of income derived on or after 1 January in the calendar year next following that in which the notice of termination is given. For other Australian taxes, it would cease to be effective in relation to income of any year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given.
It would correspondingly cease to be effective in Spain in respect of withholding tax on income derived on or after 1 January in the calendar year subsequent to that in which the notice of termination is given, and in relation to other Spanish tax on income, termination would first apply in relation to taxes chargeable for any taxable year beginning in the calendar year following the calendar year in which the notice of termination is given.
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