Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 - Agreement with the Argentine Republic
Main features of the Argentine Agreement
4.1 The agreement between Australia and Argentina accords substantially with Australia's recent comprehensive double taxation agreements (DTAs). However a number of modifications to the usual provisions have been required to accommodate Argentina's tax treaty practices, some of which are included in a Protocol to the DTA.
4.2 The features of the DTA and Protocol include:
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- Dual residents individuals (i.e. persons who are residents of both Australia and Argentina according to the domestic law of each country) are, in accordance with specified criteria, to be treated for the purposes of the DTA as being residents of only one country.
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- Income from real (immovable) property may be taxed in full by the country in which the property is situated. Income from real property for these purposes includes natural resource royalties.
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- Business profits are to be generally taxed only in the country of residence of the recipient unless they are derived by a resident of one country through a branch or other prescribed `permanent establishment' in the other country, in which case that other country may tax the profits. Profits from sales of similar goods and merchandise not through a `permanent establishment' may in certain circumstances also attract `permanent establishment' country taxation.
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- The furnishing of services, including consultancy or managerial services by a resident of one country will constitute a `permanent establishment' in the other country where such activities are performed in the other country during a period of more than 183 days in a 12 month period.
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- Subject to a 10% limitation, provision is made for either country to impose a branch profits tax on the `after tax' amount of the profits of a `permanent establishment'.
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- Profits from international operations of ships and aircraft may be taxed only in the country of residence of the operator.
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- Profits of associated enterprises may be taxed on the basis of dealings at arm's length.
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- Dividends, interest and royalties
may generally be taxed in both countries, but there are limits on the tax that the country in which the dividend, interest or royalty is sourced may charge on such income flowing to residents of the other country who are beneficially entitled to that income. These limits are 12% for interest, and 10 or 15% for royalties, depending on the nature of the royalties.
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- In Australia , where a franked dividend is paid to a person that holds directly at least 10% of the voting power of the company paying the dividend, Australia may tax up to 10% of the dividend payment. A 15% limitation applies to other dividends in both countries.
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- In Argentina , a 10% limit applies where dividends are paid to a person who holds at least 25% of the capital of the paying company.
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- Income, profits or gains from the alienation of real property may be taxed in full by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and some shares, capital gains are to be taxed in accordance with the domestic law of each country.
- •
- Income from professional services and other similar activities provided by an individual will generally be taxed only in the country of residence of the recipient. However, remuneration derived by a resident of one country in respect of professional services rendered in the other country may, where that remuneration is derived through a `fixed base' of the person concerned in that country or if the person is present for more than 183 days in any 12 month period in that country.
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- Income from dependent personal services, that is, employee's remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will generally be exempt in the country visited.
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- Directors' fees and similar payments may be taxed in the country of residence of the paying company.
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- Income derived by entertainers may generally be taxed by the country in which the activities are performed. Specific provision is made for country sponsored cultural entertainment.
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- Pensions and annuities may be taxed only in the country of residence of the recipient.
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- Government service remuneration will generally be taxed only in that country. However, the remuneration may be taxed in the other country in certain circumstances where the services are rendered in that other country.
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- Remuneration of visiting professors and teachers received for teaching, study or research will generally be exempt from tax in the country visited so long as the period of the visit does not exceed 2 years.
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- Income of visiting students will be exempt from tax in the country visited insofar as it consists of payments made from abroad for the purposes of their maintenance or education.
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- Other income (i.e. income not dealt with by other articles) may be generally taxed in both countries, with the country of residence of the recipient providing double tax relief.
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- Double taxation relief
for income which under the DTA may be taxed by both countries is to provided by the country of residence of the recipient as follows:
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- in Australia , by allowing a credit for the Argentine tax paid in accordance with the DTA against Australian tax payable on the income derived by a resident of Australia from sources in Argentina.
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- in Argentina, by allowing a credit for Australian tax paid in accordance with the DTA, against any Argentine tax on that income.
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- In the case of Australia, effect will be given to the double tax relief obligations arising under the DTA by application of the general foreign tax credit system provisions of Australia's domestic law, or relevant exemption provisions of that law where applicable.
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- Provision is made for tax sparing relief to be provided by Australia in respect of certain business activities subject to concessional tax treatment by Argentina for development purposes if at a future time the 2 Governments exchange diplomatic notes for that purpose.
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- Consultation and exchange of information and between the 2 taxation authorities is authorised by the DTA.
Agreement between Australia and the Argentine Republic
4.3 This article establishes the scope of application of the DTA, by providing for it to apply to persons (defined to include companies) who are residents of one or both countries. It generally precludes extra-territorial application of the DTA.
4.4 The application of the DTA to persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.
4.5 This article specifies the existing taxes of each country to which the DTA 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.
4.6 It is specifically stated that the article applies only to taxes imposed under the federal law of Australia. This is to ensure that the DTA does not bind Australian States and Territories and applies only to federal taxes.
4.7 For Argentina the DTA applies to the income tax ( impuesto a las ganancias ).
4.8 In the case of Australia, income tax (including that imposed on capital gains) and resource rent tax are covered by the DTA. Sales tax, goods and services tax, fringe benefits tax, wool tax and levies, customs duties, State tax and duties and estate tax and duties are not covered by the DTA.
4.9 The application of the DTA 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 Argentina to notify each other within a reasonable time of any significant changes to their respective laws to which the DTA applies.
Article 3 - General definitions
4.10 As with Australia's other modern taxation agreements, Australia , when used in a geographical sense, is defined to include certain external territories and areas of the continental shelf. This definition preserves Australia's taxing rights over mineral exploration and mining activities carried on by nonresidents on the seabed and subsoil of the relevant continental shelf areas.
4.11 The definition of Australia includes the 12 nautical mile territorial sea, the contiguous zone for purposes consistent with international law, and the continental shelf and exclusive economic zone of Australia in relation to exploration for and exploitation of the living and non-living natural resources, and tourism or recreation on offshore installations.
4.12 The definition of company in the DTA accords with Australia's DTA practice. It reflects the fact that Australia's domestic tax law does not specifically use the expression body corporate for tax purposes.
4.13 The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships as companies for income tax purposes. These entities will be regarded as companies for the purposes of the DTA. [Sub-paragraph 1(e)]
Definition of international traffic
4.14 This term is of relevance only for alienation of ships and aircraft used in such traffic (Article 13.4) and wages of crew (Article 15.3). [Sub-paragraph 1(i)]
4.15 For the purposes of the DTA, the term tax does not include any amount of penalty or interest imposed under the respective domestic law of the 2 countries. This is important in determining a taxpayer's entitlement to a foreign tax credit under the double tax relief provisions of Article 24 of the DTA. [Sub-paragraph 1(k)]
4.16 In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of Argentina with respect to income that Argentina is entitled to tax under the DTA, would not be a creditable tax for the purposes of Article24.1 of the DTA. This is in keeping with the meaning of foreign tax in the Income Tax Assessment Act 1936 (ITAA 1936) (subsection 6AB(2) Foreign Income and Foreign Tax). Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 24.1 (pursuant to Division 18 of PartIII of the ITAA 1936 Credits in Respect of Foreign Tax).
Terms not specifically defined
4.17 Where a term is not specifically defined within this DTA, 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 DTA at the time of its application, with the meaning it has under the taxation law of the country having precedence over the meaning it may have under other domestic laws.
4.18 If a term is not defined in the DTA, but has an internationally understood meaning in double tax treaties and a meaning under the domestic law the context would normally require that the international meaning be applied. [Paragraph 2]
4.19 This article sets out the basis by which the residential status of a person is to be determined for the purposes of the DTA. 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 DTA. The concept of who is a resident according to each country's taxation law provides the basic test. [Paragraph 1]
4.20 A person is not a resident of Australia for the purposes of the DTA if that person is liable to tax in Australia in respect only of income from sources in Australia. The provision means, for example, that Norfolk Island residents, who are generally subject to Australian tax on Australian source income only, will not be residents of Australia for the purposes of the DTA. Accordingly, Argentina will not have to forgo tax in accordance with the DTA on income derived by residents of Norfolk Island from sources in Argentina (which will not be subject to Australian tax). [Paragraph 2]
4.21 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 DTA if a taxpayer whether an individual, company or other entity qualifies as a dual resident, that is, as a resident under the domestic law of both countries.
4.22 The tie-breaker rules for individuals applies certain tests, in a descending hierarchy, for determining the residential status (for the purposes of the DTA) of an individual who is a resident of both countries under their respective domestic laws.
4.23 These rules, in order of application are:
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- if the individual has a permanent home in only one of the countries, the person is deemed to be a resident only of that country for the purposes of the DTA;
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- if the individual has a permanent home available in both countries or in neither, then their residential status takes into account the person's personal or economic relations (including the person's habitual abode) with Australia and Argentina, and the person is deemed to be a resident only of the country for the purposes of the DTA with which they have the closer personal and economic relations.
[Paragraph 3]
4.24 In circumstances where the dual resident is a company the DTA provides that, for the purposes of the DTA, the company will be deemed to be a resident for the purposes of the DTA only of the country in which its place of effective management is situated. [Paragraph 4]
Article 5 - Permanent establishment
4.25 Application of various provisions of the DTA (principally Article7 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 carrying on a business through that `permanent establishment'. The definition of the term `permanent establishment' which this article embodies, corresponds generally with definitions of the term in Australia's more recent DTAs.
Meaning of `permanent establishment'
4.26 The primary meaning of the term `permanent establishment' is expressed as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. A `permanent establishment' must comply with the following requirements:
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- there must be a place of business; and
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- the place of business must be fixed (both in terms of physical location and in terms of time); and
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- the business of the enterprise must be carried on through this fixed place.
[Paragraph 1]
4.27 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:
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- an office;
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- a workshop; or
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- a mine.
As paragraph 2 is subordinate to paragraph 1, the examples listed will only constitute a `permanent establishment' if the primary definition in paragraph 1 is satisfied. [Paragraph 2]
Agricultural, pastoral or forestry activities
4.28 All of Australia's comprehensive DTAs include as a `permanent establishment' an agricultural, pastoral or forestry property. This reflects Australia's policy of retaining taxing rights over exploitation of Australian land for the purposes of primary production. This approach ensures that the arm's length profits test provided for in Article 7 (Business profits) applies to the determination of profits derived from these activities. This position is also reflected in this DTA. [Sub-paragraph2(g)]
Building sites or construction, installation or assembly projects
4.29 Also consistent with Australia's DTA practice, sub-paragraph 2(h) of the DTA includes building sites or construction, installation or assembly projects which exist for more than 6 months as examples of a `permanent establishment'. Building sites, construction, installation and assembly projects lasting less than 6 months, which nevertheless meet the requirements of other `permanent establishment' rules will be `permanent establishments'.
4.30 The term a building site or construction, installation or assembly project covers constructional activities such as excavating or dredging. The term `building site' can only mean such work as is directly connected with the erection of buildings and similar projects (earth work, masonry, painting, roofing, glazing and plumbing). Planning and supervision are certainly part of the building site if carried out by the construction contractor. However, planning and supervision of work does not represent a building site if carried out by another enterprise (see paragraph 4.35 regarding sub-paragraph 4(a) of Article 5). [Sub-paragraph 2(h)]
Preparatory and auxiliary activities
4.31 Certain activities are deemed not to give rise to a permanent establishment, for example, use of facilities or maintenance of a stock of goods solely for storage, or display, or other preparatory or auxiliary activities.
4.32 Generally activities of a preparatory or auxiliary character are unlikely to give rise to substantial profits. The necessary economic link between the activities of the enterprise and the country in which the activities are carried on does not exist in these circumstances.
4.33 Unlike the OECD Model Tax Convention on Income and on Capital (the OECD Model), which provides that the listed activities are deemed not to constitute a `permanent establishment', the DTA incorporates the Australian DTA approach of stating that an enterprise will not be deemed to have a `permanent establishment' merely by reason of such activities. This is to prevent the situation where enterprises structure their business so that most their activities fall within the exceptions when viewed as a whole the activities ought to be regarded as a `permanent establishment'.
4.34 Another feature consistent with Australia's DTA practice is that sub-paragraph 4(f) of the OECD Model dealing with combinations of the activities in sub-paragraphs (a) to (e) is not included. Australia does not consider that an enterprise undertaking multiple functions of the kind indicated in sub-paragraphs (a) to (e) could reasonably be regarded as only engaged in preparatory or auxiliary activities. [Paragraph 3]
Deemed permanent establishments
4.35 Supervisory activities carried on for more than 6months in connection with a building site or a construction, installation or assembly project are deemed to constitute a permanent establishment. Australia has a reservation on Article 5 of the OECD Model reflecting this position. The rationale for inclusion of this provision is the prevalence of the use in Australia of imported expertise in relation to supervision of such projects. [Sub-paragraph 4(a)]
The furnishing of services in relation to a project
4.36 The furnishing of services, including consultancy or managerial services, will constitute a permanent establishment where the services are performed (for the same or a connected project) by an enterprise of one country in the other country for a period aggregating more than 183 days in any 12month period. This provision is consistent with Argentine treaty practice. It reflects Argentine domestic law which taxes payments made by Argentine firms for technical, engineering, or consultancy services that are utilised in Argentina.
4.37 Sub-paragraph 4(b) forms part of the general scheme of the DTA in relation to the taxation of technical services, whereby certain payments for technical assistance are to be subject to limited rates of tax as royalties in accordance with Article 12, while fees paid for other services will remain subject to the rules in Article 7 or Article 14. Paragraphs 4.111 to 4.115 discuss the treatment of technical assistance in relation to Article12. [Sub-paragraph4(b)]
4.38 Under sub-paragraph 4(c) an enterprise is deemed to have a `permanent establishment' in a State if substantial equipment is being used in that State by, for or under contract with the enterprise.
4.39 This position is reflected in Australia's reservation to the OECD Model and one effect is to further protect Australia's right to tax income from natural resources. Australia's experience is that the `permanent establishment' provision in the OECD Model may be inadequate to deal with high value activities involved in the development of natural resources, particularly in offshore regions.
4.40 Some examples of substantial equipment would include:
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- large industrial earth moving equipment or construction equipment used in road building, dam building or powerhouse construction etc.;
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- manufacturing or processing equipment used in a factory;
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- oil and drilling rigs, platforms and other structures used in the petroleum/mining industry; and
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- grain harvesters and other large agricultural machinery.
4.41 For the purposes of the application of Article 7.1 the enterprise is deemed to carry on business through the substantial equipment permanent establishment. [Sub-paragraph 4(c)]
4.42 Paragraph 5 reflects Australia's DTA practice in relation to a person who acts on behalf of an enterprise of another country of deeming that person to constitute a `permanent establishment' if that person has and habitually exercises an authority to conclude contracts on behalf of the enterprise. This will apply unless the agent's activities are limited to the purchase of goods or merchandise for the enterprise, or the agent is an `independent agent' to whom paragraph 6 applies. [Sub-paragraph 5(a)]
4.37 The inclusion of sub-paragraph 5(b) is consistent with another of Australia's reservations to the OECD Model. It deals with so-called cost-toll situations, under which, for example, a mineral plant refines minerals at cost, so that the plant operations produce no Australian profits. Title to the refined product remains with the mining consortium and profits on sale are realised mainly outside of Australia.
4.44 Sub-paragraph 5(b) deems such a plant to be a `permanent establishment' because the manufacturing or processing activity (which gives the processed minerals their real value) is conducted in Australia, and therefore Australia should have taxing rights over business profits arising from the sale of the processed minerals to the extent that they are attributable to the processing activity carried on in Australia. This sub-paragraph prevents an enterprise which carries on very substantial manufacturing or processing activities in a country through an intermediary from claiming that it does not have a `permanent establishment' in that country.
4.45 The inclusion of this sub-paragraph is insisted upon by Australia in its DTAs and is consistent with Australia's policy of retaining taxing rights over exploitation of its mineral resources. [Sub-paragraph 5(b)]
4.46 Business carried on through an independent agent does not, of itself, constitute a `permanent establishment' provided that the independent agent is acting in the ordinary course of the agent's business as such an agent. [Paragraph 6]
4.47 Generally a subsidiary company will not be a `permanent establishment' of its parent company. A subsidiary, being a separate legal entity, would not usually be carrying on the business of the parent company but rather its own business activities. However a subsidiary company gives rise to a `permanent establishment' if the subsidiary permits the parent company to operate from its premises such that the tests in paragraph 1 are met, or acts as an agent such that a dependent agent `permanent establishment' is constituted. [Paragraph 7]
Article 6 - Income from real (immovable) property
Where income from real property is taxable
4.48 This article provides that the income of a resident of one country from real property situated in the other country may be taxed by the other country. Thus income from real property in Australia will be subject to Australian tax laws. [Paragraph 1]
4.49 Income from real property is effectively defined as extending, in the case of Australia and Argentina, to:
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- the direct use, letting or use in any other form of real property, a lease of land and any other interest in or over land (including exploration and mining rights); and
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- royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.
[Paragraph 2]
4.50 Under Australian law the situation of an interest in land, such as a lease, is not necessarily where the underlying property is situated there may not necessarily be a situs. Paragraph 3 puts the situation of the interest or right beyond doubt. [Paragraph 3]
Real property of an enterprise and of persons performing independent personal services
4.51 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.
4.52 Accordingly, application of this article (when read with Articles7 and 14) to such income ensures that the country in which the real property is situated may impose tax on the income derived from that property by:
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- an enterprise of the other country; or
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- an independent professional person resident in that other country,
irrespective of whether or not that income is attributable to a `permanent establishment' of such an enterprise, or `fixed base' of such a person, situated in the firstmentioned country. [Paragraph 4]
4.53 This article is concerned with the taxation of `business profits' derived by an enterprise that is a resident of one country from sources in the other country.
4.54 Under paragraph 1(a), taxation rights over `business profits' depend firstly on whether the profits are attributable to a `permanent establishment' in the other country. If a resident of one country carries on business through a `permanent establishment' (as defined in Article 5) in the other country, the country in which the `permanent establishment' is situated may only tax the profits of the enterprise that are attributable to that `permanent establishment'.
4.55 Paragraph 1(a) has 2 main consequences:
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- first, where an enterprise of a country carries on business in the other country, but does not have a `permanent establishment' there, the profits of the enterprise may not be taxed in that other country;
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- secondly, where an enterprise has a `permanent establishment' in the other country, that other country may only tax so much of the profits that are attributable to that `permanent establishment'.
Limited force of attraction rule
4.56 Sub-paragraph 1(b) contains a limited force of attraction rule. This rule ensures that where an enterprise carries on business in a country through a `permanent establishment' situated in that other country, sales of similar goods or merchandise, or the carrying on of similar kinds of business activities, which are not conducted through the `permanent establishment' are treated as if they were made through the `permanent establishment'. There is an important test in the application of this rule those sales or activities would not have been made but for the existence of the `permanent establishment' or the continued provision of goods or services by the `permanent establishment'. Australia has agreed to similar provisions with a number of developing countries. [Paragraph 1]
Determination of business profits
4.57 Profits of a `permanent establishment' are to be determined for the purposes of the article on the basis of arm's length dealing. The provisions in the DTA correspond to international practice and the comparable provisions in Australia's DTAs. [Paragraph 2]
4.58 Paragraph 3 provides that in determining the profits of a `permanent establishment', certain expenses of the enterprise shall be allowed as deductions.
4.59 In accordance with Australian treaty practice, the paragraph further provides that expenses which are not deductible under the domestic law of either country cannot be claimed by the `permanent establishment'. Consistently with this (and in accordance with Argentine treaty practice) Protocol Item 1(b)(i) expressly confirms that a country is not required to allow as deductions expenses which are not deductible under the domestic law of the country in determining the profits of a `permanent establishment'. [Paragraph 3 and Protocol Item 1(b)(i)]
4.60 Item 1(b)(ii) of the Protocol provides that in determining the profits of a `permanent establishment', no deduction is allowed in respect of certain amounts paid or received by the `permanent establishment' to or from the head office of the enterprise or any other of the branch offices of the enterprise. [Protocol Item 1(b)(ii)]
Mere purchase of goods or merchandise
4.61 No profits are to be attributed to a `permanent establishment' merely because it purchases goods or merchandise for the enterprise. Accordingly, profits of a `permanent establishment' 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'.
4.62 Item 1(c) of the Protocol reflects Argentine treaty practice and permits domestic law to apply in relation to the export of goods or merchandise purchased by an enterprise. Notwithstanding that sub-paragraph 5(3)(d) deems the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise not to be a permanent establishment, Item 1(c) provides that the export of goods or merchandise purchased by an enterprise remains subject to the domestic legislation concerning export.
4.63 The scope of the Argentine export legislation was recorded in a Memorandum dated 15 November 1994 between officials of both countries as follows:
- "3.
- With respect to paragraph 1(b) of the draft protocol [ now Protocol Item 1(c) ], it is noted that in accordance with Article 5 of the Argentine Income Tax Law, profits, arising from activities carried out within the territory of the country, are of a domestic source. Likewise, that legislation requires that both in the case of individuals and corporations in order to carry out import or export activities they must register previously in the National Custom's Office. That registration furthermore requires that they register with the Local Tax Administration, have a domicile in the Argentine Republic and keep accounting records in accordance with specific local regulations.
- 4.
- It is also understood that Article 8 of the Argentine Income Tax Law stipulates:
- a)
- that income arising from the export of goods produced or purchased in the country are entirely of Argentine source;
- b)
- that when the sales price agreed in the case of an export is lower than the wholesale sales price in force in the country of destination, it will be assumed, unless proof is provided to the contrary, that the value of the exported goods is that corresponding to the wholesale price in the country of destination;
- c)
- that the net income will be established by deducting from said price, the cost of goods, insurance and freight costs to the point of destination, commission and sales expenses and any other expense necessary incurred within the country, in order to determine the income subject to tax."
[Paragraph 4 and Protocol Item 1(c)]
4.64 This article allows for the application of the domestic law of the country in which the profits are sourced (e.g. Australia's Division 13 of the ITAA1936) where, due to inadequate information, the correct amount of profits attributable on the arm's length principle basis to a `permanent establishment' cannot be determined or can only be ascertained with extreme difficulty. [Paragraph 5]
Income or gains dealt with under other articles
4.65 Where income or gains are otherwise specifically dealt with under other articles of the DTA the effect of those particular articles is not overridden by this article.
4.66 This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other articles of the DTA (e.g.shipping, dividends, interest, royalties and alienation of property) 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 Article 10.5 where the income is effectively connected to a permanent establishment). [Paragraph 6]
4.67 Each country has the right to continue to apply any special provisions in its domestic law relating to the taxation of profits from insurance or reinsurance. However, if the relevant law in force in either country at the date of signature of the DTA is varied (otherwise than in minor respects so as not to affect its general character), the countries shall consult each other with a view to agreeing to any amendment of the paragraph that may be appropriate. An effect of this paragraph is to preserve, in the case of Australia, the application of Division 15 of Part III of the ITAA 1936 (Insurance with Non-residents). [Paragraph 7]
4.68 The principles of this article will apply to business profits derived by a resident of one of the countries (directly or through one or more interposed trust estates) as a beneficiary of a trust estate.
Example 4.1
In accordance with this article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a `permanent establishment' in Australia, to which a resident of Argentina 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.
[Paragraph 8]
4.69 Item 1(a) of the Protocol authorises the imposition by either of the countries of a branch profits tax at the rate of 10% of the amount by which profits of a company resident in the other country exceeds the tax payable on those profits in the firstmentioned country.
4.70 In the absence of a Non-discrimination article it may not be necessary to include such a provision as the Business profits article itself would generally seem to permit a branch profits tax. However it is Argentine treaty practice to include such a provision and without it Australian companies operating through a `permanent establishment' in Argentina may be exposed to higher rates of any Argentine branch profits tax than enterprises of Argentina's other treaty partners. [Protocol Item 1(a)]
Article 8 - Ships and aircraft
4.71 The main effect of this article is that the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from participation in a pool service or other profit sharing arrangement, is generally reserved to the country of residence of the operator. [Paragraphs 1 and 2]
4.72 However, the article reflects Australian treaty policy to reserve to the other country the right to tax profits from internal traffic, profits from other coastal and continental shelf activities including non transport shipping and aircraft activities within its own waters.
4.73 Thus, the term transport is not used in the title of the article, as the article applies to survey ships, oil drilling ships etc. where transport is not necessarily involved.
4.74 Consistent with Australia's reservations to Article 8 of the OECD Model and Argentina's DTA practice, Item 2 of the Protocol explicitly states that the operation of the ships or aircraft referred to in Article 8 includes non transport activities such as dredging, fishing and surveying, and such operations conducted in a place in a country are to be treated as operations confined solely to places in that country. [Protocol Item 2]
4.75 Paragraph 4 provides that interest derived from funds invested in connection with the overseas operation of ships or aircraft, and any other income incidental to such operations, is part of the profits from the operation of the ships or aircraft.
4.76 Most countries accept that the principles contained within paragraph 4 are valid. Argentina considered that express reference to the principles contained in the provision is necessary. Similar provisions are included in Australia's DTAs with India and Singapore. [Paragraph 4]
4.77 By reason of the definition of Contracting State 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) for discharge at another place in or for return to that place in Australia, is to be treated as forming part of internal traffic. [Paragraph 5]
Example 4.2
Profits derived from a shipment of goods taken on board (during the course of an international voyage between Buenos Aires and Brisbane) at Melbourne for delivery to Sydney, would be profits from internal traffic. As such, 5% of the amount paid in respect of the internal traffic carriage would be deemed to be taxable income of the operator for Australian tax purposes pursuant to Division 12 of Part III of the ITAA1936.
4.78 Once the DTA enters into force, this article has effect from any year of income beginning on or after 27September1988 reflecting the date of signature of a Memorandum of Understanding concerning air services between Australia and Argentina see Article28(a)(iii) ( Entry into force ).
Article 9 - Associated enterprises
4.79 This article deals with associated enterprises (parent and subsidiary companies and companies under common control). It authorises the re-allocation of profits between related enterprises in Australia and Argentina 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.
4.80 The article would not generally authorise the rewriting of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms. [Paragraph 1]
4.81 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 of the ITAA 1936) to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, consistently with the principles of the article. [Paragraph 2]
4.82 Australia's domestic law provisions relating to international profit shifting arrangements were revised in 1981 in order to deal more comprehensively with arrangements under which profits are shifted out of Australia, whether by transfer pricing or other means. The broad scheme of the revised provisions is to impose arm's length standards in relation to international dealings, but where the Commissioner of Taxation (the Commissioner) cannot ascertain the arm's length consideration, it is deemed to be such amount as the Commissioner determines. Paragraph 2 is designed to preserve the application of those domestic law provisions.
4.83 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, the other country is required to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation.
4.84 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 other treaty partner country. If necessary, the competent authorities of Australia and Argentina will consult with each other to determine the appropriate adjustment. [Paragraph 3]
4.85 This article broadly allows both countries to tax dividends flowing between them but in general limits the rate of tax that the country of source may impose on dividends payable by companies that are residents of that country under its domestic law to beneficial owners resident in the other country. [Paragraphs 1 and 2]
4.86 Under paragraph 2,the rate of withholding tax which Australia may impose on franked dividends paid to an Argentine person which directly holds at least 10% of the voting power of the company paying the dividends is limited to 10% of the gross amount of the dividends. However, Australia's domestic law dividend withholding tax exemption for franked dividends paid by Australian companies to nonresident shareholders will continue to apply whilst this remains a feature of the domestic law.
4.87 The DTA further provides that Australia will reduce its rate of withholding tax on unfranked dividends from 30% to 15% of the gross amount of the dividends.
4.88 The rate of withholding tax which Argentina may impose on dividends paid to a person which directly holds at least 25% of capital of the company paying the dividends is limited to 10% of the gross amount of the dividends. In all other cases, the rate of withholding tax which Argentina may impose on dividends is limited to 15% of the gross amount of the dividends.
4.89 The proviso allows for flexibility if there is a change to either country's general approach to dividend withholding taxes, such as a change to domestic law arrangements for franked dividends flowing overseas. In such a case the 2 countries are obliged to consult to make appropriate amendments to this paragraph. [Paragraphs 2]
Most favoured nation rates of dividend withholding tax
4.90 If after signature of the DTA, Argentina signs a double tax treaty with another OECD member and the rate of source country taxation on dividends, or the level of participation in the capital of an Argentine subsidiary company is less than that specified in the DTA with Australia, Australia and Argentina will consult on lowering the tax rate or participation level. [Protocol Item5(a)]
4.91 The limitation on the tax of the country in which the dividend is sourced does not apply to dividends derived by a resident of the other country who has a `permanent establishment' or `fixed base' in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that `permanent establishment' or `fixed base'.
4.92 Where the dividends are so effectively connected, they are to be treated as `business profits' or income from `independent personal services' and therefore subject to the full rate of tax applicable in the country in which the dividend is sourced (in accordance with the provisions of Article 7 or Article 14, as the case may be). In practice, however, under changes made to Australia's domestic law with the introduction from 1July 1987 of a full imputation system of company taxation, such dividends to the extent that they are franked dividends will remain exempt from Australian tax while unfranked dividends will be subject to withholding tax at the rate of 15% instead of being taxed by assessment. [Paragraph 4]
4.93 The extra-territorial application by either country of taxing rights over dividend income is precluded by providing, broadly, that one country (the first country) will not tax dividends paid by a company resident solely in the other country which has derived profits or income from the first country, unless:
- •
- the person deriving the dividends is a resident of the first country for the purposes of its tax; or
- •
- the holding giving rise to the dividends is effectively connected with a `permanent establishment' or `fixed base' in the first country.
4.94 However, paragraph 5 does not apply where the dividend paying company is a resident of both Australia and Argentina. This proviso ensures that Australia retains the right to tax dividends paid to a person resident outside of both countries by a company which is a resident of Australia under its domestic law notwithstanding the company is deemed to be a resident of Argentina for the purposes of the DTA pursuant to the tie breaker test contained in Article4.4. [Paragraph 5]
4.95 This article provides for interest income to be taxed by both countries but requires the country of source to generally limit its tax to 12% of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. This interest withholding tax rate limit is consistent with rates negotiated by Argentina in its tax treaties with other countries. [Paragraphs 1 and 2]
4.96 However, Australia's general 10% rate of interest withholding tax will continue to be imposed on interest paid to Argentine residents in accordance with Australia's domestic law.
Exemption for official reserve assets
4.97 Consistently with Australia's policy on taxation of foreign monetary authorities announced on 5November1986, it was agreed to exempt from source country taxation investment of official reserve assets by the governments, government monetary institutions or banks performing central banking functions. [Paragraph 3]
Most favoured nation rates of interest withholding tax
4.98 If after signature of the DTA, Argentina signs a double tax treaty with another OECD member country and the rate of source country taxation on interest is less than that specified in the DTA with Australia, the lower rate will apply from the entry into force of that other DTA. However, the rate will not reduce below Australia's treaty rate for interest, being 10%. [Protocol Item 6(b)]
4.99 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. This paragraph further provides that the term interest does not include income dealt with in Article 8 ( Ships and aircraft ) or Article 10 ( Dividends ). This specific relationship provision is consistent with Article 8.4 of the DTA and the OECD Model Commentary on Article 10. Similar provisions are included in Australia's DTAs with India and Ireland. [Paragraph 4]
Interest effectively treated as business profits
4.100 The limitation on the tax of the country in which the interest is sourced does not apply to interest derived by a resident of the other country who has a `permanent establishment' or `fixed base' in the country in which the interest arises, if the indebtedness in respect of which the interest arises is effectively connected with that `permanent establishment' or `fixed base'.
4.101 Where the indebtedness is so effectively connected, the interest is to be treated as `business profits' or income from `independent personal service' and therefore subject to the full rate of tax applicable in the country in which the interest is sourced (in accordance with the provisions of Article 7 or Article 14, as the case may be). [Paragraph 5]
4.102 Paragraph 6 establishes where interest arises for the purposes of paragraph 1. These rules deem interest to arise in a country and operate, for example, to allow Australia to tax interest to which a resident of Argentina is beneficially entitled where the interest is paid by Australia, or a political subdivision of Australia, or a resident of Australia. Australia may also tax interest paid by a resident of Argentina to which another Argentine 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'.
4.103 However, consistent with Australia's interest withholding tax provisions, an Australian source is not deemed in respect of interest that is an expense incurred by an Australian resident in carrying on a business through a `permanent establishment' outside Australia. [Paragraph 6]
4.104 Article 11 also contains a general safeguard against payments of excessive interest where a special relationship exists between the payer of the interest and the person beneficially entitled to the interest. The article restricts the 12% source country tax rate limitation in such cases to an amount of interest which might reasonably have been expected to have been agreed upon by persons dealing at arm's length . Any excess part of the interest remains taxable according to the domestic law of each country but subject to the other provisions of the DTA. [Paragraph 7]
4.105 Article 12 allows both countries to tax royalty flows but generally limits the amount of tax the country in which the royalty arises may impose on the royalty.
4.106 Paragraph 1 establishes the field of operation of the article and provides that royalties may be taxed in the country of residence of the person beneficially entitled to the royalty. [Paragraph 1]
4.107 Paragraph 2 modifies the operation of paragraph 1 and reflects Australia's reservation to the OECD Model, that is, Australia's right to tax royalties that have a source in Australia under Australian law.
4.108 Under paragraph 2, the rate of withholding tax to be imposed by the country in which the royalty arises is limited to 10% or 15% of the gross amount of the royalties, depending on the nature of the royalty.
4.109 The withholding tax rate limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country in which they are sourced without limitation on the tax that may be imposed.
4.110 The following chart summarises the various rates of withholding tax agreed in the treaty:
| Type of Royalty | Article Reference | Rate (%) per Article Number | |
|---|---|---|---|
| News | Protocol Item 3(b) | 3 | Protocol Item 3(b) |
| Copyright on literary etc. works | 12.3(a) | 10 | 12.2(a) |
| Other copyright and patents, trademarks etc. | 12.3(a) | 15 | 12.2(c) |
| Industrial, scientific equipment | 12.3(b) | 10 | 12.2(a)(ii) |
| Industrial, scientific knowledge | 12.3(c) | 10 | 12.2(a)(ii) |
| Commercial equipment | 12.3(i) | 15 | 12.2(c) |
| Ancillary assistance | 12.3(d) | 10 | 12.2(a)(ii) |
| Other technical assistance | 12.3(e) | 10 of net | 12.2(b) |
| Satellite reception of visual images or sounds etc. | 12.3(f) | 15 | 12.2(c) |
| TV or radio broadcast of visual images or sounds etc. | 12.3(g) | 15 | 12.2(c) |
| Motion pictures videos etc. | 12.3(h) | 15 | 12.2(c) |
| Forbearance etc. | 12.3(a) | 10 or 15 | 12.2(a) & 12.2(c) |
4.111 Two types of technical services are dealt with under this article `ancillary services' and `other technical assistance services'.
4.112 `Ancillary services' are, broadly, services which are ancillary to other types of royalties (such as copyright and patents) defined in the paragraphs (a), (b) and (c) of the definition of royalty see Article 12.3(d).
4.113 Argentine domestic tax law currently taxes payments for technical, engineering or consulting services provided from abroad at an effective rate of at least 18% (sometimes up to 30%) of gross payments. These services are treated as royalties in this DTA and to the extent they are not `ancillary services' they are dealt with under Article 12.3(e).
4.114 In addition, technical services effectively connected to a permanent establishment or fixed base are also dealt with in Articles 7 and14.
4.115 Thus source country taxation rights over technical services are provided in the following ways. Items 4 and 5 in Table 4.1 represent the `royalty' elements of the technical services package.
| Threshold for source country taxation | Extent of source country taxing rights |
|---|---|
| 1. Profits attributable to a permanent establishment or fixed base (usual treaty rule). | Unlimited taxing rights over attributable profits. (Articles 7 and 14). |
| 2. Furnishing of services by an enterprise is deemed to constitute a permanent establishment where the services are performed in either country for more than 183 days in 12 months (Articles5.4(b) and 7). | Unlimited taxing rights over attributable profits (Article7). |
| 3. Similarly, where an individual performs professional or similar services in a country for more than 183 days in 12 months, that country may tax that service income (Article14.1(b)). | Unlimited taxing rights over attributable income (Article14). |
| 4. Ancillary or subsidiary technical services not described above, treated as a royalty (Article 12.3(d)). | 10% of gross payments (Article 12.2(a)(ii)). |
| 5. Other technical services not described above, treated as a royalty (Article12.3(e)). | 10% of net payments (Article 12.2(b)). |
Source of technical assistance
4.116 Under items 4 and 5 above income derived for technical assistance supplied by a resident of one country may be taxed by the other country as royalties even though the assistance may be supplied from the country of residence. The source rules in Article 23 will operate to deem the source of the income to be in the country in which the assistance may be taxed under this article.
Example 4.3
An Argentine resident provides engineering advice to an Australian company on the construction of plant in Australia. The engineer does not visit Australia and the advice is provided electronically. Payment for the advice is a royalty (see Article 12.3(d)). Because under this article the royalty payment may be taxed in Australia, Article 23.1 deems the source of the royalty to be Australia.
If an Australian engineer provided consultancy services to an Argentine company Article 23.2 deems the source of those services to be Argentina for the purposes of Article 24 and Australia's domestic foreign tax credit rules apply.
Argentine registration requirements
4.117 The reduction in source country taxation of royalties by Argentina is subject to the registration requirements of Argentine law. [Protocol Item 3(a)]
4.118 Reflecting Argentine tax treaty policy, payments derived from the transfer of news by an international news agency are treated as royalties by Argentina and may be subject to a 3% tax. [Protocol Item 3(b)]
Most favoured nation rates of royalty withholding tax
4.119 If after signature of the DTA, Argentina signs a double tax treaty with another OECD member country and the rate of source country taxation on royalties which under the proposed DTA may be taxed at a rate of 15% is less than 15%, the rate in that other DTA will apply from the entry into force of that DTA. However, the rate will not reduce below Australia's treaty rate for royalties, being 10%. [Protocol Item 5(c)]
4.120 Generally, the definition of royalties in the DTA reflects the definition in Australia's domestic income tax law. The substantial departure relates to technical assistance as discussed at paragraphs 4.111 to 4.115. [Paragraph 3]
4.121 Payments made for the right to copy or adapt the software in a manner which would, without the permission of the copyright owner, constitute an infringement of copyright, constitute royalty payments.
4.122 The reference to other intangible property is an Argentine specialty. Argentina intends it to cover property such as trademarks, industrial models, patents, copyrights (including software) and topography and surveying services. [Sub-paragraph 3(a)]
4.123 Reflecting Australia's reservation to the OECD Model and Argentine treaty practice, the definition of royalty extends to the use of or right to use industrial, commercial or scientific equipment. [Sub-paragraphs 3(b) and 3(i)]
4.124 Consistently with Australian tax treaty practice, sub-paragraph (j) expressly treats as royalties amounts paid or credited for forbearance to grant to third persons rights to use property covered by the
Royalties
article. This provision is designed to apply to arrangements along the lines of those contained in
Aktiebolaget Volvo v. Federal Commissioner of Taxation
(1978),
8 ATR 747
;
78 ATC 4316
, where instead of amounts being payable for the exclusive right to use the property, the amounts were made for the undertaking that the right to use the property would not be granted to anyone else. In the case, the amounts paid were held not to be subject to tax as a royalty payment under the terms of Article 12.
[Sub-paragraph 3(j)]
Other royalties treated as business profits
4.125 As in the case of interest income, the royalty withholding tax rate limitation will not apply to royalties where the underlying property or right is effectively connected with a `permanent establishment' or `fixed base' in the country in which the income is sourced. The Business profits article or the Independent personal services article will apply in such cases. [Paragraph 4]
4.126 Paragraph 5 establishes where royalties arise for the purposes of paragraph 1. The rules provided for in the DTA effectively correspond, in the case of Australia, with the source rule contained in section 6C (Source of royalty income derived by a nonresident) of the ITAA 1936 for royalties paid to nonresidents. It broadly mirrors the rules for interest income contained in paragraph 6 of Article 11 ( Interest ). [Paragraph 5]
4.127 If royalties flow between the payer and the person beneficially entitled to the royalties as the result of a special relationship between them, the source country royalty withholding tax rate limitation will apply only to the extent that the royalties are not excessive. Any excess part of the royalty remains taxable according to the domestic law of each country tax but subject to the other provisions of the DTA. [Paragraph 6]
Article 13 - Alienation of property
4.128 This article allocates between the respective countries taxing rights in relation to income, profits or gains arising from the alienation of real (immovable) property (as defined in Article 6) and other items of property.
4.129 Income, profits or gains from the alienation of real property may be taxed by the country in which the property is situated. [Paragraph 1]
Shares and other interests in land-rich entities
4.130 Paragraph 2 extends the coverage of this article to situations involving the alienation of shares or other interests in companies, and other entities, whose assets consist principally of real property (as defined in Article6) which is situated in the other country (again, in the terms of Article 6). Such income or gains may thus be taxed by the country in which the real property is situated. This paragraph complements paragraph1 of this article and is designed to cover arrangements involving the effective alienation of incorporated real property, or like arrangements.
4.131 This is to be the case whether the real property is held directly or indirectly through a chain of interposed entities. While not limited to chains of companies, or even chains of entities only some of which are companies, the example of chains of companies is used to make clear that the corporate veil should be lifted in examining direct or indirect ownership.
4.132 This provision responds to the tax planning opportunities exposed by the decision of the Full Federal Court in the
Commissioner of Taxation v. Lamesa Holdings BV
(1997)
77 FCR 597
. It is designed to protect Australian taxing rights over income, profits or gains on the alienation or effective alienation of Australian real property (as defined) despite the presence of interposed bodies corporate or other entities.
4.133 On 29 May 1998 the Australian and Argentine delegations concluded a Memorandum in association with the negotiations which made the following comments in relation to this provision of the DTA:
The 2 delegations discussed the meaning of `shares or comparable interests' in a company and noted that the reference to `comparable interests' seeks to avoid the technicality inherent in the word `share' and will accommodate developments in equity instruments. It is intended to encompass other interests in a company which would enable the owner to effectively control the assets of the company. Examples would include share options, rights and warrants.
[Paragraph 2]
4.134 Paragraph 3 deals with income, profits 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' itself (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. [Paragraph 3]
4.129 Income, profits 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 resident of the operator of the ships or aircraft. This rule corresponds to the operation of Article 8 in relation to profits from the operation of ships or aircraft in international traffic.
4.136 Once the DTA enters into force this provision has effect from any year of income beginning on or after 27September1988, reflecting the date of signature of a Memorandum of Understanding concerning air services between Australia and Argentina see Article 28(a)(iii)( Entry into force ). [Paragraph 4]
Capital gains `sweep-up' provision
4.137 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 preserves the application of Australia's domestic law relating to the taxation of capital gains in relation to the alienation of such property. [Paragraph 5]
4.138 The term real property is to be defined for the purposes of this article as it is under Article 6. Where the property is situated is determined in accordance with paragraph3 of Article 6. [Paragraphs 6 and 7]
4.139 As indicated earlier, income, profits or gains from the alienation of property that fall within the scope of this article are not affected by the `business profits' provisions of Article 7. In the event that the operation of this article should result in an item of income or gain being subjected to tax in both countries, the country 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 ( Source of income ) and 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
4.140 Under this article income derived by an individual in respect of professional services or other independent activities will be subject to tax in the country in which the services or activities are performed if either:
- •
- the recipient has a `fixed base' regularly available in that other country for the purposes of performing his or her activities; or
- •
- the individual is present in that country for a period or periods exceeding in the aggregate 183 days in any 12month period commencing or ending in a fiscal period or year of income of the visited country.
4.141 If either of these conditions are met, the country in which the services or activities are performed will be able to tax so much of the income as is attributable to the activities performed during such period or periods or that are exercised from that fixed base. [Paragraph 1]
4.142 If the above tests are not met, the income will be taxed only in the country of residence of the recipient.
4.143 Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the DTA and are not covered by this article.
Article 15 - Dependent personal services
4.144 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 );
- •
- Article 19 ( Government service );
- •
- Article 20 ( Professors and Teachers ); and
- •
- Article 21 ( Students );
of the DTA.
4.145 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. [Paragraph1]
4.146 The conditions for this exemption are that:
- •
- the visit or visits do not exceed, in the aggregate, 183 days in any 12 month period commencing or ending in the fiscal period or year of income concerned of the visited country; and
- •
- the remuneration is paid by, or on behalf of, an employer who not is a resident of the country being visited; and
- •
- 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. [Paragraphs 1 and 2]
4.147 Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from employment in Argentina may be taxable in Argentina. However, the article does not allocate sole taxing rights to Argentina in that situation.
4.148 Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the Income Tax Assessment Act 1997 (ITAA 1997) that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the DTA allows both countries to tax a category of income, Australia would be required in this situation (pursuant to Article24), as the country in which the income recipient is resident for tax purposes, to relieve the double taxation that would otherwise occur.
4.149 Although that article provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the Argentine tax paid, the exemption with progression method of providing double tax relief in relation to employment income derived in the situation described would normally be applicable in practice pursuant to the foreign service income provisions of section 23AG of the ITAA1936. This method takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.
Employment on a ship or aircraft
4.150 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]
4.151 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.
4.152 By this article, income derived by visiting entertainers and sportspersons from their personal activities as such may generally be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The words `income derived by entertainersfrom their personal activities as such' extend the application of this article to income generated from promotional and associated kinds of activities engaged in by the entertainer or sportsperson while present in the visited country. [Paragraph 1]
4.153 There is a safeguard provision included in this article which is designed to ensure that income in respect of personal activities exercised by an entertainer or sportsperson, whether received:
- •
- by the entertainer or sportsperson; or
- •
- by another person, for example, a separate enterprise which formally provides the entertainer's or sportsperson's services,
is taxed in the country in which the entertainer or sportsperson performs, whether or not that other person has a `permanent establishment' or `fixed base' in that country. [Paragraph 2]
4.154 A special rule is provided for entertainers whose visit to the other country is wholly or substantially funded from public funds. In such instances the country of residence will have the sole right of taxation over income derived by entertainers. Although this exemption is not usual, a number of Australia's DTAs provide exemptions for publicly funded entertainers. [Paragraph 3]
Article 18 - Pensions and annuities
4.155 Pensions and annuities (the term `annuity' as used in this article is defined in paragraph 2) are taxable only by the country in which the recipient is resident. The article extends to government pensions, and pension and annuity payments made to dependants, for example a widow, widower, or children, of the person in respect of whom the pension or annuity entitlement accrued where, upon that person's death, such entitlement has passed to that person's dependants. [Paragraphs 1 and 2]
Alimony and maintenance payments
4.156 The taxing right in respect of alimony and other maintenance payments is allocated solely to the country of residence of the payer, not the recipient. 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 Australia, those payments will generally be exempt from tax in the hands of the recipient and non-deductible to the payer. [Paragraph 3]
Article 19 - Government service
4.157 Salary and wage type income, other than government service pensions or annuities, 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; and
- •
- the recipient is a resident of that other country for the purposes of its tax, who is either:
- -
- a citizen of that country; or,
- -
- did not become a resident of that other country solely due to rendering the services.
[Paragraph 1]
4.158 Remuneration for services rendered in connection with a trade or business carried on by any governmental authority referred to in paragraph1 of the article is excluded from the scope of this article. Such remuneration will remain subject to the provisions of Article15 ( Dependent personal services ) or Article16 ( Directors' fees ) as the case may be, as with any other trade or business. [Paragraph 2]
Article 20 - Professors and teachers
Exemption from source country tax
4.159 Remuneration paid to a professor or teacher who is a resident of one country and visits the other country to teach, or undertake advanced study or research will be exempted from tax in the other country where:
- •
- the teaching, advanced study or research is carried out at an educational institution which is mainly supported by public funds in that other country;
- •
- the length of the visit does not exceed in total 2 years duration;
- •
- the remuneration must be subject to tax in the country in which the professor or teacher is normally resident; and
- •
- research is not undertaken primarily for the private benefit of a specific person or persons.
[Paragraphs 1 and 2]
4.160 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).
4.161 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.
4.162 Where however, a student from Argentina who is visiting Australia solely for educational purposes undertakes:
- •
- some part time work with a local employer; or
- •
- during a semester break undertakes work with a local employer,
the income earned by that student as a consequence of that employment may, as provided for in Article 15, be subject to tax in Australia. In this situation the payments received from abroad for the 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.
4.163 This article provides rules for the allocation between the 2 countries of taxing rights to items of income not dealt with in the preceding articles of the DTA. The scope of the article is not confined to such items of income arising in one of the countries it extends also to income from sources in a third country.
4.164 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. [Paragraphs 1 and 2]
4.165 This article does not apply to income (other than income from real property as defined in Article 6(2)) where the right or property in respect of which the income is paid is effectively connected with a `permanent establishment' or `fixed base' which a resident of one country has in the other country. In such a case, Article7 ( Business profits ) or Article14 ( Independent personal services ), as the case may be, will apply. [Paragraph3]
4.166 This article effectively contains sweep-up provisions in relation to items of income not dealt with in other articles of the DTA and paragraph 5 of Article 13 effectively sweeps-up gains of a capital nature not dealt with in the other paragraphs of that article.
4.167 This article effectively deems income, profits or gains derived by a resident of one country which, under the DTA, may be taxed in the other country to have a source in the latter country for the purposes of the DTA and the domestic income tax law of the respective countries. It therefore avoids any difficulties arising under domestic law source rules in respect of, for example, the exercise by Australia of the taxing rights allocated to Australia by the DTA over income derived by residents of Argentina. [Paragraph 1]
4.168 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 24) for tax levied by the other country as prescribed under the DTA. In this way, income derived by a resident of Australia, which is taxable by Argentina under the DTA, will be treated as being foreign income for the purposes of the ITAA 1936, including the foreign tax credit provisions of that Act. [Paragraph 2]
Article 24 - Methods of elimination of double taxation
4.169 Double taxation does not arise in respect of income flowing between the 2 countries where the terms of the DTA provide either:
- •
- for the income to be taxed only in one country; or
- •
- where the domestic taxation law of one of the countries frees the income from its tax.
4.170 It is necessary, however, to prescribe a method for relieving double taxation for other classes of income which, under the DTA, remain subject to tax in both countries. In accordance with international practice, Australia's DTAs provide for double tax relief to be provided by the country of residence of the taxpayer by way of a credit basis of relief against its tax for the tax of the country of source of the income. This article also reflects that approach.
4.171 Australia's general foreign tax credit system, together with the terms of this article and of the DTA generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in Argentina. As in the case of Australia's other DTAs, the source of income rules specified by Article 23 for the purposes of the DTA will also apply for those purposes.
4.172 Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraph 1 of this article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA 1936. This will include the allowance of underlying tax credit relief in respect of dividends paid by Argentine resident companies that are related to Australian resident companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA 1936.
4.173 Notwithstanding the credit basis of relief provided for by paragraph 1 of this article, the exemption with progression method of relief will be applicable, as appropriate, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of foreign service (as defined in subsection 23AG(7) of the ITAA1936) in Argentina. Other foreign source income exemptions in Australia's domestic law will also continue to be applicable in respect of relevant Argentine source income. [Paragraph 1]
4.174 Argentina is required to allow 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 Argentina. The deduction is of an amount equal to the Australian tax paid and is made against the Argentine tax payable on the income, subject to that deduction not exceeding an amount which bears to the total Argentine tax payable the same ratio as the income concerned bears to the total income. [Paragraph 2]
Treatment of income taxed on remittance basis
4.175 Double non taxation is avoided by ensuring that where a person's foreign source income (or any part thereof) is taxed on a remittance basis, then the relief allowed under the DTA will apply only to the amount remitted. [Paragraph 3]
4.176 This article provides for the possibility at a future date that Australia may agree to allow tax sparing relief under the terms of the DTA. Tax sparing refers to the granting by Australia of a foreign tax credit to Australian residents for the Argentine tax forgone (i.e. the tax that would normally have been paid to Argentina but for Argentine tax incentives).
4.177 This provision was negotiated on the basis that Argentina currently provides only limited concessional tax incentives for foreign investors and that the Australian Government announced in 1997 that tax sparing would generally not be granted in future.
4.178 Any future tax sparing would be limited to manufacturing activities or exploration or exploitation of natural resources in Argentina and under Protocol Item 4(b), such a concession would only be applicable for an initial 5 year period as agreed in an exchange of letters (although this period could be extended by a further exchange of letters).
4.179 In the event that Argentina should introduce tax incentives in the specified industries and Australia declines to grant tax sparing credits, Protocol Item 4(a) recognises Argentina's right to withhold from an Australian resident the benefit of a development incentive for which Australia declines to provide tax sparing. [Paragraph 4 and Protocol item 4]
Article 25 - Mutual agreement procedure
4.180 One of the purposes of this article is to provide for consultation between the `competent authorities' of the 2 countries with a view to reaching a satisfactory solution where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the DTA.
4.181 A person wishing to use this procedure must present a case to the competent authority of the country of which the person is a resident within 3 years of the first notification of the action which the taxpayer considers gives rise to taxation not in accordance with the DTA. [Paragraph 1]
4.182 If, on consideration by the competent authorities, a solution is reached, it may be implemented irrespective of any time limits imposed by domestic tax law of the relevant country. [Paragraph 2]
4.183 The article also authorises consultation between the competent authorities of the 2 countries for the purpose of resolving any difficulties regarding the interpretation or application of the DTA and to give effect to it. [Paragraphs 3 and 4]
Article 26 - Exchange of information
4.184 This article authorises and limits the exchange of information by the 2 competent authorities to information necessary for the carrying out of the DTA or for the administration of domestic laws concerning the taxes to which the DTA applies. [Paragraph 1]
4.185 The limitation placed on the kind of information authorised to be exchanged means that information access requests relating to taxes not within the coverage provided by Article2 ( Taxes covered ), for example, sales tax, are not within the scope of the article.
4.186 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted consistently with Australia's other DTAs. Any information received by a country shall be treated as secret in the same manner as information obtained under the domestic law of that country. [Paragraph 1]
4.187 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 27 - Members of diplomatic missions and consular posts
4.188 The purpose of this article is to ensure that the provisions of the DTA 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 conventions. Such persons are entitled, for example, to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act 1967 and the Consular (Privileges and Immunities) Act 1972 which reflect Australia's international diplomatic and consular obligations.
4.189 This article provides for the entry into force of the DTA. This will be on the last date on which notes are exchanged notifying that the last of the domestic processes to give the DTA the force of law in the respective countries has been completed. In Australia, enactment of the legislation giving the force of law in Australia to the DTA along with tabling the treaty in Parliament are prerequisites to the exchange of diplomatic notes.
4.190 The DTA will have effect in Australia for withholding tax, imposed on income derived on or after 1 January in the calendar year next following that in which the DTA enters into force.
4.191 For other Australian taxes covered by the DTA, in respect of 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 DTA enters into force.
4.192 The DTA will have effect in Argentina for all taxes withheld at source on income derived on or after 1 January in the calendar year next following that in which the DTA enters into force.
4.193 For other Argentine taxes covered by the DTA, in respect of tax chargeable for any tax year beginning on or after 1 January in the calendar year next following that in which the DTA enters into force.
4.194 For income, profits or gains from the operation of aircraft, in respect of tax on such income, profits or gains of any year of income beginning on or after 27 September 1988.
4.195 By this article the DTA is to continue in effect indefinitely. However, either country may give through the diplomatic channel written notice of termination of the DTA on or before 30 June in any calendar year beginning after the expiration of 5 years from the date of its entry into force.
4.196 In that event, the DTA would cease to be effective in Australia for purposes of withholding tax in respect of income derived on or after 1January in the calendar year next following that in which the notice of termination is given.
4.197 For other Australian tax, it would cease to be effective in relation to income, profits or gains of any year of income beginning on or after 1July in the calendar year next following that in which the notice of termination is given.
4.198 It would correspondingly cease to be effective in Argentina in respect of taxes withheld at source, for amounts paid or credited after 1January in the calendar year next following that in which the notice of termination is given; and in relation to other Argentine tax, the termination would first apply in relation to tax chargeable for the taxable year beginning 1 January in the calendar year next following that in which the notice of termination is given.
Protocol to the DTA
4.199 The Protocol deals with a number of matters. The Protocol is expressed to be integral to the DTA and by implication commences and terminates in accordance with the DTA.
4.200 Where a Protocol item affects the application of Articles in the DTA, this impact has been included in the discussion on the relevant articles.
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