Introductory Info
Date introduced: 19 September 2019
House: House of Representatives
Portfolio: Treasury
Commencement: Schedule 1 commences on the day after Royal Assent. Schedule 2 commences on the first 1 January, 1 April, 1 July or 1 October after Royal Assent. All other sections, on the day after Royal Assent. The amendments do not come into effect until entry into force of the Australia-Israel Convention.
The
Bills Digest at a glance
The Treasury
Laws Amendment (International Tax Agreements) Bill 2019 (the Bill) contains
two schedules.
Summary of the Bill
Schedule 1 of the Bill amends the International
Tax Agreements Act 1953 to give effect to the Convention
between the Government of Australia and the Government of the State of Israel
for the Elimination of Double Taxation with respect to Taxes on Income and the
Prevention of Tax Evasion and Avoidance (herein referred to as the A-I
Tax Convention).
Schedule 2 of the Bill amends the Income Tax
Assessment Act 1997 and the International Tax Agreements Act 1953 to
create a new deemed source rule in domestic law. The new rule has the effect of
deeming income, profits or gains of a non-resident, that are sourced in
Australia under the term of a tax agreement, as being taxable in Australia.
This rule will be automatically applied to future tax treaties rather than
needing to be individually negotiated, as is current practice.
In order for the A-I Tax Convention to become
effective, it will need to be legislated by both the Australian and Israeli
Parliaments. It is for this reason that the Bill is currently before Parliament.
Purpose of
the Bill
The purpose of the Treasury
Laws Amendment (International Tax Agreements) Bill 2019 (the Bill) is to make
necessary amendments to the International Tax
Agreements Act 1953 (ITAA 1953) to give effect to the A-I Tax
Convention.[1]
The Bill enables the Convention to be given force under Australian law before
ratification happens.
The Bill also incorporates a new ‘deemed source rule’ into
the Income Tax
Assessment Act 1997 (ITAA 1997).[2]
Structure of
the Bill
The Bill contains two schedules:
- Schedule 1 implements the A-I Tax Convention into
Australian law and
- Schedule 2 incorporates into the ITAA 1997 a new deemed
source rule.
Background
Australia currently has entered into 45 international tax
treaties[3]
(although the Australia-Greece Tax Convention only focusses on the
taxation of international air transport).[4]
However, given the Australia-Greece Tax Convention is not a full double
tax agreement, it is often stated that Australia has entered into 44 tax
treaties.[5]
Generally, tax conventions (also referred to as double tax
agreements) seek to achieve two main goals:
- the first is to clarify, standardise, and confirm the fiscal
situation of taxpayers who are engaged in commercial, industrial, financial, or
any other activities in other countries through the application by all
countries of common solutions to identical cases of double taxation[6]
- the second is to improve administrative co-operation in tax
matters, notably through exchange of information and assistance in collection
of taxes, for the purpose of preventing tax evasion and avoidance.[7]
To assist in achieving these goals, since 1955 the OECD has
published its Model
Tax Convention on Income and on Capital (the Model Tax Convention). Among
other things, the Model Tax Convention represents a consensus framework,[8]
which countries can use as the basis for concluding or revising bilateral tax conventions,[9]
ensuring a uniform approach to resolving the most common problems that arise in
international taxation.[10]
The OECD notes that the Model Tax Convention:
... plays a crucial role in
removing tax related barriers to cross border trade and investment. It is the
basis for negotiation and application of bilateral tax treaties between
countries, designed to assist business while helping to prevent tax evasion and
avoidance. The OECD Model also provides a means for settling on a uniform basis
the most common problems that arise in the field of international double
taxation.[11]
The Model Tax Convention contains 30 Articles and provides
explanation of and commentary on those articles to assist in their
interpretation. The Model Tax Convention also allows countries to ‘reserve’
their position on certain articles (i.e. it allows countries to state where
they do not agree, or will not incorporate, an Article into their domestic
law). The 2017 Model Tax Convention numbers over 2,600 pages and is directly
relevant to the interpretation of equivalent articles in the A-I Tax
Convention.[12]
History of the
Australia-Israel Tax Convention
On 17 September 2015, Treasurer Joe Hockey issued a press
release stating:
As part of the Government’s ongoing efforts to strengthen and
deepen our relationship with Israel, we are announcing our intention to
commence negotiations on a new Double Taxation Agreement between our two
countries.[13]
Treasurer Hockey also stated that the tax agreement would:
- reduce the incidence of double taxation between the two countries
- present opportunities for Australian businesses to take greater
advantage of Israel’s knowledge-based economy, particularly in the areas of
biotechnology, ICT, education and training and
- encourage Israeli companies to view Australia as a regional base
and supplier of sophisticated goods and services.[14]
On 23 February 2017, the Prime Ministers of Australia and
Israel announced their commitment to conclude a tax treaty in a joint
media statement:
Leaders committed to support the expansion of trade,
investment and commercial links between Australia and Israel, for their mutual
benefit and prosperity. Leaders welcomed the signature of a bilateral Air
Services Agreement facilitating enhanced air links between our countries. They
also welcomed the signing of an MOU between airline companies from both
countries, which will enhance connectivity between Australia and Israel,
expanding business and tourism links. They resolved to work towards concluding
a Double Taxation Agreement which would remove tax impediments to bilateral
economic activity and enhance the integrity of our respective tax
systems. They welcomed the success of the Working Holiday Visa arrangement
in promoting greater tourism flows.[15]
Following several years of negotiations, Australia and
Israel signed the A-I Tax Convention on 28 March 2019.[16]
What is the A-I
Tax Convention?
The A-I Tax Convention is based on the OECD Model
Tax Convention and sets out a number of agreed rules and procedures as to how Australia
and Israel will apply their tax rules in relation to:
- the payment of dividends, interest and royalty expenses from
Australia to Israel (and vice versa)[17]
- fringe benefits provided by an Israeli or Australian employer[18]
and
-
income or profits earned (or sourced) in Australia or Israel
(i.e. providing relief from double taxation).[19]
The A-I Tax Convention also seeks to, amongst other
things:
- create mutual agreement procedures for eliminating double
taxation and resolving conflicts of interpretation of the A-I Tax Convention[20]
- clarify residency rules so as to make it clearer as to when a
person or entity will be a tax resident of each country[21]
- implement exchange of information procedures for exchanging
taxpayer information between the tax administrations of both countries[22]
- outline agreed upon procedures to minimise the chance of fiscal
evasion or unreported income[23]
and
- detail procedural frameworks and processes for resolving tax
disputes.[24]
Why is
Australia entering a tax treaty with Israel?
The National
Interest Analysis of the A-I Tax Convention outlines a number of
reasons as to why Australia should enter into a tax treaty with Israel. These
are summarised below:
- reducing barriers to investment and trade: it is anticipated that
the A-I Tax Convention will remove barriers for Australian and Israeli
businesses undertaking business activities in both countries. In particular,
Australian business should be more easily able to access Israeli intellectual
property as a result of reduced royalty withholding tax rates
-
increased certainty and reduced compliance costs for taxpayers: it
is expected that removing the incidence of double taxation will reduce
uncertainty around tax outcomes as well as reduce compliance costs associated
with preparing and lodging tax returns in multiple jurisdictions and
-
establishing a more effective framework to prevent international
fiscal evasion and avoidance: the A-I Tax Convention directly
incorporates a number of Base Erosion and Profit Shifting (BEPS) recommendations,
including rules to prevent treaty shopping and to facilitate greater
co-operation between Australian and Israeli tax authorities and a formal
process for the exchange of taxpayer information between Australia and Israel.[25]
It should also be noted that Israel was the third most
popular destination for disclosures made under Project
DO-IT,[26]
totalling 231 disclosures.[27]
Why does the
A-I Tax Convention need to be legislated?
The general position under Australian law is that treaties
which Australia has joined or signed are not directly and automatically
incorporated into Australian law. Signature and ratification do not, of
themselves, make treaties operative domestically. Treaty obligations need to be
incorporated into Australian law, thus enabling legislation is necessary to
implement and render those obligations operative and enforceable under
Australian law.
If new legislation is required to implement the treaty, the
normal practice is to require that it be passed before Australia brings the
treaty into force. This is because subsequent Parliamentary passage of the
necessary legislation cannot be presumed, entailing a risk that Australia could
find itself legally bound by an international obligation which it could not
fulfil.[28]
As noted by the Explanatory Memorandum to the Bill, the
effect of the amendments to the International Tax Agreements Act 1953 will
be to give the provisions of the A-I Tax Convention priority over
provisions of the Income Tax Assessment Acts 1936 and 1997, Fringe
Benefits Tax Act 1986, and any imposition Acts (except to the extent there
are anti-avoidance rules contained in these Acts).[29]
The new
deemed source rule
In Federal
Commissioner of Taxation v Mitchum[30]
the High Court held that, notwithstanding the text of a treaty, Australia was
not able to tax income unless that income was sourced in Australia. As such, it
has become preferred practice for Australia’s tax treaties to include a
specific Article that provides that where income, profits or gains are
allocated to Australia under the terms of the treaty, those profits, incomes or
gains will be deemed to be sourced in Australia.[31]
As such, this means that in each instance a tax treaty is entered into,
Australia must either individually negotiate the inclusion of this rule or
legislate an equivalent source rule for the treaty in the ITAA 1953.[32]
Schedule 2 of the Bill enshrines this position into
law for all treaties entered into on or after 28 March 2019.
As stated in the Explanatory Memorandum, this will not
affect existing treaties as the new rule will be prospective and in any event
existing tax conventions are already subject to a deemed source rule.[33]
Committee
consideration
Senate Standing Committee for the Selection of Bills
The Senate Standing Committee for the Selection of Bills recommended
that the Bill should not be referred to a committee for inquiry.[34]
Senate Standing
Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills had
no comment on the Bill.[35]
Joint Standing Committee on
Treaties
Report
187: Oil Stock Contracts—Hungary; MRA UK; Trade in Wine UK; MH17 Netherlands;
Air Services: Thailand, Timor–Leste, PNG; Work Diplomatic Families—Italy;
Double Taxation—Israel (Report 187) of the Joint Standing Committee on
Treaties (JSCOT) included its consideration on the A-I Tax Convention at
pages 57 to 66.
JSCOT supported the A-I Tax Convention between
Australia and Israel and in Recommendation 6 of Report 187 recommends that
binding treaty action be taken:
The Committee notes that the Convention adds to Australia’s
existing network of 44 tax treaties and is consistent with Australia’s
established treaty practice, including that it reflects multiple OECD model
conventions.
Specifically, the Committee acknowledges the benefits of the
Convention reducing tax barriers for Australian and Israeli individuals and
businesses, as well as enhancing the integrity of cross-border dealings by
preventing tax evasion and avoidance.
The Committee supports the Convention and recommends that
binding treaty action be taken.[36]
Position of
major interest groups
The A-I Tax Convention appears to be supported by Australian
and Israeli business groups, with a general theme being that it will better
facilitate Australia-Israel business ties and open up further bilateral trade
and investment. For example, the Australia-Israel Chamber of
Commerce (AICC) is supportive of the A-I Tax Convention, with
national chairman Leon Kempler stating there is ‘tremendous excitement’ within
Israel and Australian industry about the prospect of a tax treaty[37]
and that the A-I Tax Convention will:
... strengthen economic and financial links between Australia
and Israel, provide greater investment certainty and reduce the cost of doing
business. There are now 20 Israeli companies listed on the ASX and we expect
more to list in the coming months. [38]
The Israeli embassy also expects the A-I Tax Convention
will lead to more Israeli companies listing on the ASX, with Israeli Embassy
spokesperson Eman Amasha reported as stating:
Overall, this agreement represents the strengthening trade
ties between Israel and Australia and provides a platform for the further
growth of business operations and investment cooperation in both markets.[39]
These views are also shared by Executive Council of
Australian Jewry president Robert Goot who
was reported as stating that the treaty would improve trade and investment
by removing tax barriers.[40]
Australian law firm Arnold
Bloch Leibler also supports the A-I Tax Convention, contending:
Existing trade between the countries is worth over $1 billion
in addition to cross-border investment. In recent years, many Israeli based
companies have chosen to list on the ASX in order to diversify their access to
capital and take advantage of the superior liquidity offered by the Australian
market. At present there are 20 Israeli companies listed on the ASX, rivalling
the United Kingdom’s 29 (the UK currently being the dominant destination for
Israeli investment in Europe). We expect this number to rise.
The new treaty will promote further trade and investment
between the two countries, and gives Australia a position alongside other Asian
trading partners such as China, India and Japan with whom Israel already has
double taxation agreements.[41]
Ben
Butler writing in the Weekend Australian also considered that the A-I Tax
Convention could benefit Australian businesses looking to expand into
Israel:
A treaty that
eliminated the double taxation of profits between the two countries would be
good news for Australian companies and individuals seeking to invest in Israel
such as Seek co-founder Paul Bassat’s tech fund, Square Peg Capital, and James
Packer of Crown Resorts, who now lives amid speculation the [Israeli] government
will legalise casinos.[42]
Financial
implications
The Explanatory Memorandum to the Bill states that the
Bill is ‘expected to have an unquantifiable cost to revenue over the forward
estimates’.[43]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[44]
Parliamentary
Joint Committee on Human Rights
At the time of writing, the Parliamentary Joint Committee
on Human Rights has not reported on the Bill.
Key issues
and provisions
Schedule 1:
Australia-Israel Tax Convention
Section 3AAA of the ITAA 1953 lists the current tax
agreements covered by that Act. Item 1 amends section 3AAA(1) to include
the ‘Israeli Convention’ so as to implement the treaty, thus giving it the
force of law.
As discussed above and noted in the Explanatory
Memorandum, the A-I Tax Convention broadly follows the OECD’s Model
Tax Convention on Income and on Capital,[45]
and incorporates over 2,000 pages of technical and complex supporting
materials. The Explanatory Memorandum provides a good high level explanation of
the A-I Tax Convention and each of the articles, as does the National
Interest Analysis document prepared by the Treasury.[46]
It should also be noted that the A-I Tax Convention has been subject to
significant consultation and review, including a Treasury consultation process[47]
and review by JSCOT.[48]
In light of this, the Digest does not examine each of the
Articles in detail. Rather the Digest draws attention to some of the key
features of the A-I Tax Convention, specifically:
- the scope of the treaty, including taxes covered, taxpayers
subject to the A-I Tax Convention and the definitions of Australia and
Israel
- the modifications to withholding tax rates on dividends, interest
and royalty payments
-
a summary of the OECD’s BEPS measures adopted in the A-I Tax
Convention
- new exchange of information rules and
- specific rules relating to anti-discrimination and arbitration.
Each of these are discussed in more detail below.
Scope of the
A-I Tax Convention
Articles 1, 2 and 3 of the A-I Tax Convention
outline its scope. Specifically, Article 1 details the persons covered, Article
2 the taxes covered and Article 3 contains a definition of Australia
and Israel for the purposes of the A-I Tax Convention.
Person covered
Article 1 provides that the A-I Tax Convention
applies to persons who are residents of Australia and/or Israel (referred to in
the A-I Tax Convention as the Contracting States). Article 3
states that the term person includes an individual, company and any
other body of persons.
Article 1, paragraph 2 contains a specific rule
relating to the recognition of income derived through a fiscally transparent
arrangement or entity (for example income derived from a partnership or trust
distribution).[49]
In this situation, Article 1, paragraph 2 provides that for the purposes
of the A-I Tax Convention, that income will be deemed to be income of the
person to the extent that tax laws of Israel or Australia recognise that income
as being derived by that person.
Article 4 contains specific rules as to when a
person will be a resident of Australia or Israel for the purposes of the A-I
Tax Convention. These rules do not substantively differ from the OECD
model,[50]
and are well explained at pages 12 to 14 of the Explanatory Memorandum to the
Bill.
Taxes covered
Article 2 of the A-I Tax Convention stipulates
that the following taxes are covered:
- Israel taxes covered include:
- income
and company tax (including capital gains tax)
- taxes
on gains from the alienation of property according to Israel’s Real Estate
Taxation Law and
- taxes
imposed under Israel’s Petroleum Profits Taxation Law.
- Australian taxes covered include the following taxes imposed
under the federal law of Australia:
- Australian
income tax
- resource
rent taxes and
- fringe
benefits tax.
As such, Australian state taxes such as payroll tax and
stamp duties, as well as state-based mining royalties are not covered under the
A-I Tax Convention.
Definition of Australia and Israel
Article 3 of the A-I Tax Convention contains
a definition of what is meant by the terms ‘Australia’ and ‘Israel’. This is an
important element of the treaty, as the treaty amongst other things applies to
persons of Australia and Israel.
Article 3, sub-paragraph (1)(a) defines Israel as
meaning:
... the State of Israel and when used in a geographical sense
includes its territorial sea, as well as those maritime areas adjacent to the
outer limit of the territorial sea, including seabed and subsoil thereof over
which the State of Israel, under the laws of the State of Israel and in
accordance with international law, exercises its sovereign or other rights and
jurisdiction.
As noted at paragraph 1.38 of the Explanatory Memorandum:
Australia’s implementation of the Convention is without
prejudice to Australia’s support for a two-state solution to the conflict
between Israel and the Palestinians, including the resolution of final status issues.
For the purposes of the Convention, Australia interprets references to ‘the
State of Israel’ in accordance with Australia’s obligations under international
law and UN Security Council resolutions. Nothing in Australia’s implementation implies
recognition by Australia of any claims to disputed territories.
Article 3, sub-paragraph (1)(b) adopts the
following definition of Australia:
... the term "Australia", when used in a geographical
sense, excludes all external territories other than:
- the Territory of Norfolk Island;
-
the Territory of Christmas Island;
- the Territory of Cocos (Keeling) Islands;
-
the Territory of Ashmore and Cartier Islands;
-
the Territory of Heard Island and McDonald Islands; and
- the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of
Australia (including the Territories specified in this subparagraph) in respect
of which there is for the time being in force, consistently with international
law, a law of Australia dealing with the exploration for or exploitation of any
of the natural resources of the exclusive economic zone or the seabed and
subsoil of the continental shelf.
New
withholding tax rates
Generally, where an Australian resident makes a payment of
a dividend, interest or royalty to a non-resident, withholding tax will be
imposed on that transaction. The withholding tax is payable by the entity or
person making that payment and will be imposed at a rate of ten per cent on
interest payments and 30 per cent on dividend or royalty payments unless varied
by Australia’s DTA’s.[51]
Articles 10, 11 and 12 have the effect of modifying
the rates of withholding taxes imposed on payments of dividends, interest and
royalties between residents of Australia and Israel. The effect of these
Articles is summarised by Deloitte and replicated in Table 1.
Table 1: summary of withholding tax rates under the A-I Tax Convention
Source: Deloitte Australia, Tax
insights – Australia and Israel: double tax treaty, 11 April 2019.
OECD BEPS Recommendations
As part of Australia’s commitment to addressing
multinational tax avoidance, the A-I Tax Convention adopts a number of
the OECD’s recommendations for addressing BEPS. The specific Articles giving
effect to, or incorporating the OECD’s BEPS recommendations are captured at
paragraph 1.11 of the Explanatory Memorandum of the Bill, and replicated below in
Table 2.
Table 2: summary
of BEPS recommendations incorporated into the A-I Tax Convention
| Australia-Israel
Tax Convention provisions |
BEPS
Project 2015
Final Reports |
| Title |
Action 6 |
| Preamble |
Action 6 |
| Article 1 (Persons covered),
paragraph 2 |
Action 2 |
| Article 5 (Permanent
establishment), paragraphs 5, 6, 7, 9, 10 and subparagraph 8(a) |
Action 7 |
| Article 7 (Business profits),
paragraph 9 |
Action 14 |
| Article 9 (Associated
enterprises), paragraph 4 |
Action 14 |
| Article 10 (Dividends),
subparagraph 2(a) |
Action 6 |
| Article 13 (Alienation of
property), paragraph 2 |
Action 6 |
| Article 22 (Limitation on
Benefits) |
Action 6 |
| Article 25 (Mutual agreement
procedures), paragraphs 1, 2 and 3 |
Action 14 |
Source: Explanatory
Memorandum, Treasury Laws Amendment (International Tax Agreements) Bill
2019, p. 6.
In response to a question on notice, the Treasury provided
JSCOT with a table outlining how the A‑I Tax Convention
incorporates the OECD BEPS Action Items. For completeness, this has been
replicated below in Table 3.
Table 3: summary
of specific BEPS recommendations incorporated into the A-I Tax Convention
|
Relevant
Article of the Australia-Israel tax treaty
|
OECD Action
Item
|
|
Title and Preamble
The express purpose of the treaty is to eliminate double
taxation with respect to taxes on income without creating opportunities for
non-taxation or reduced taxation through tax evasion or avoidance (including
through treaty-shopping arrangements).
|
This gives effect to an OECD/G20 Base Erosion and
Profiting Shifting (BEPS) Action 6 recommendation (Preventing
the Granting of Treaty Benefits in Inappropriate Circumstances).
It clarifies the object and purpose of the treaty also
includes avoiding opportunities for non-taxation or reduced taxation through
tax evasion or avoidance
|
|
Persons covered (Article 1)
Treaty benefits will be available for income derived by
or through fiscally transparent entities or arrangements (such as
partnerships and trusts) but only to the extent that the income is treated as
the income of one of the country’s residents under that country’s domestic
law.
|
This gives effect to a BEPS Action 2 recommendation
(Neutralising the Effects of Hybrid Mismatch Arrangements). It will
ensure that such income is not subject to double taxation, without granting
treaty benefits in inappropriate circumstances (such as where neither country
treats the income as belonging to one of its residents under its domestic
law).
|
|
Permanent
establishment (PE) (Article 5)
A PE will be deemed to exist in respect of the following
activities:
- A building site or construction project, that lasts for more
than 9 months; or carrying out of the related supervisory or consultancy
activities that exceeds 183 days or more in any 12 month period.
- Natural resource activities (including the operation of
substantial equipment) that exceeds 90 days or more in any 12 month period.
- Certain preparatory or auxiliary activities, such as
warehousing or purchasing goods, are excluded from the definition of PE.
- Integrity provisions will be included to prevent related
parties from circumventing the above PE time thresholds by splitting
contracts, or from fragmenting their preparatory or auxiliary activities to
avoid having a PE.
A PE will also be deemed to exist where a person (agent)
acts on behalf an enterprise, unless that agent is acting in a truly
independent capacity. This will ensure that the activities of dependent
agents of foreign enterprises fall within the definition of a PE.
|
Collectively, these integrity rules give effect to BEPS
Action 7 recommendations (Preventing the Artificial Avoidance of PE
Status) and will help guard against abusive arrangements intended to
circumvent the PE definition. The existence of a PE in a country enables that
country to tax local business profits derived by that PE.
|
|
Business profits (Article 7)
Transfer pricing adjustments are generally limited to
seven years. This time limit does not apply on a finding of fraud, gross
negligence or wilful default, or where an audit has commenced in relation to
the profits of the enterprise within a period of 10 years
|
This gives effect to an OECD BEPS Action 14
recommendation (Making Dispute Resolution Mechanisms More Effective).
It will help prevent late adjustments to provide greater taxpayer certainty.
|
|
Associated enterprises (Article 9)
Where one country adjusts the taxable income of a
resident enterprise to reflect the arm’s-length conditions of a transaction
with an associated enterprise, the other country will be required to make a
correlative adjustment. Time limits apply for the commencement of transfer
pricing adjustments
|
This gives effect to an OECD BEPS Action 14
recommendation (Making Dispute Resolution Mechanisms More Effective).
It will help prevent late adjustments to provide greater taxpayer certainty.
|
|
Dividends (Article 10)
The source (of the dividend) country may tax outbound
dividends up to the following limits:
- Zero - for dividends derived by governments (including
government investment funds), central banks, tax exempt pension funds or
Australian residents carrying out complying superannuation activities on
direct holdings of no more than 10 per cent;
- 5% - of the gross amount of the dividend for intercorporate
dividends paid to companies that hold 10 per cent or more of the paying
company throughout a 365 day period;
- 15% - in all other cases.
|
The 365-day holding period requirement for dividends
attracting the 5 per cent rate gives effect to an OECD BEPS Action 6
recommendation (Preventing the Granting of Treaty Benefits in
Inappropriate Circumstances).
It will help guard against potential abuse cases where a
company with a holding of less than the specified holding percentage
increases its holding shortly before the dividends are paid for the purpose
of securing the benefits of the provision.
|
|
Alienation of property (Article 13)
Income, profits or gains from the disposal of immovable
property (such as land) or of shares or comparable interests in land-rich
entities may be taxed in the country where the property is situated (as a
primary taxing right), and a secondary taxing right is provided to the
alienator’s country of residence.
An integrity rule will ensure that the rule for
land-rich entities will apply if the relevant conditions are met at any time
during the 365 days preceding the disposal. Income, profits or gains from the
disposal of PE assets may be taxed in the country where the PE is located, as
well as in the country where the enterprise is resident.
Income, profits or gains from the disposal of ships or
aircraft operated in international traffic, as well as from the disposal of
other assets pertaining to those operations, will be taxable only in the
country of residence of the operator.
Residual capital gains may be taxed in the country the
country where the alienator is a resident, as well as in the country where the
property is located (if the alienator is not the beneficial owner).
|
The 365-day integrity rule gives effect to an OECD BEPS
Action 6 recommendation (Preventing the Granting of Treaty Benefits in
Inappropriate Circumstances).
It will help guard against potential abuse cases where
a company alters its asset mix prior to disposal to ensure it is not land
rich on the date of disposal.
|
|
Limitation on benefits (Article 22)
The treaty includes a rule denying treaty benefits, in
certain circumstances, if a principle purpose of an arrangement or
transaction is to a treaty benefit.
|
This gives effect to an OECD BEPS Action 6
recommendation (Preventing the Granting of Treaty Benefits in
Inappropriate Circumstances).
This ensures that the treaty should apply in accordance
with the purposes for which it was entered into, that is, to provide benefits
in respect of bona fide exchanges of goods and services and movements of
capital and persons, as opposed to arrangements whose principal objective is
to secure a more favourable tax treatment.
|
|
Mutual agreement procedure (MAP) (Article 25)
Taxpayers will have three years in which to seek the
revenue authorities’ assistance in the resolution of tax disputes arising
from the application of the treaty. Protocol paragraph 12 establishes a
competent authority notification process, to ensure that the competent
authorities of Australia and Israel are made aware of MAP requests that are
submitted and, therefore, are able to give their views on whether the request
is accepted or rejected, and whether the person’s objection is considered to
be justified.
|
This gives effect to an OECD BEPS Action 14
recommendation (Making Dispute Resolution Mechanisms More Effective)
and ensures the efficient operation of the MAP dispute resolution mechanism
for taxpayers.
|
Source: Treasury, Submission
to JSCOT, Inquiry into the Convention between the Government of Australia
and the Government of the State of Israel for the Elimination of Double
Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and
Avoidance, [Submission no. 1], 19 September 2019.
Exchange of
information
Article 26 of the A-I Tax Convention sets
out rules and procedures for the exchange of information between the Australian
Taxation Office (ATO) and Israeli Ministry of Finance. Article 26, paragraph
1 stipulates that information may be exchanged to the extent that it is
foreseeably relevant for carrying out the provision of the A-I Tax Convention
or enforcement of domestic laws covered by the A-I Tax Convention. This
is a departure from the OECD Model Tax Convention, which allows information
relating to any taxes to be exchanged.[52]
Other points to note include:
- the exchange of information is not limited to residents of
Australia or Israel – that is, information about non-residents can be exchanged[53]
- any information exchanged under the Article will be afforded the
same level of secrecy as if that information was obtained in the other country
– that is, Australia’s taxpayer secrecy provisions will apply to information obtained
from Israel under Article 26[54]
- information cannot be exchanged where the relevant tax authority
would not be able to obtain that information under their domestic laws.
Similarly, information cannot be exchanged where its supply would disclose any
trade, business, industrial, commercial or professional secret or trade
process, or the disclosure would be contrary to public policy. [55]
Anti-discrimination
and arbitration rules
Articles 24 and 25 of the A-I Tax Convention
contain non-discrimination rules and mutual agreement procedures. Broadly:
- Article 24 provides that under the A-I Tax Convention
nationals of Australia and Israel cannot be treated less favourably than
nationals of the other country in the same circumstances. This
non-discrimination rule is also extended to permanent establishments.[56]
However, unlike the OECD Model Tax Convention, Article 24 does not
extend these non-discrimination rules to residents of third countries.[57]
- Article 25 provides a mechanism for resolving taxpayer
disputes or resolving difficulties arising from the application of the A-I Tax
Convention. This is achieved through a mutual agreement procedure (MAP)
whereby Australian and Israeli tax authorities are required to endeavour to
resolve the dispute. Importantly, taxpayers will have three years in which to
bring a complaint under a MAP process. More information about MAP can be found
on the
ATO website.[58]
What rules
or laws are not impacted by the A-I Tax Convention?
As noted in the Article 1 of the Protocol to the A-I Tax
Convention, the following domestic rules are outside the scope of the A-I
Tax Convention:
- measures
designed to address thin capitalisation and dividend stripping
- measures
designed to address transfer pricing
- controlled
foreign company and transferor trust rules
- measures to ensure that taxes can be effectively collected and
recovered, including conservancy measures
- foreign
occupational company rules and
- general
anti-avoidance rules.
Further, the A-I Tax Convention does not include an
Article requiring the other country to provide assistance in collecting taxes.
As noted by Deloitte, only six of Australia’s 45 treaties include such a
provision, and it is not usual practice for Israel to include such an Article.[59]
Schedule 2:
The new deemed source rule
Schedule 2 of the Bill inserts a new Division 764
into the ITAA 1997. Specifically, proposed subsection
764-5(1) of the ITAA 1997 provides that income, profits or gains
will have a source in Australia if, for the purpose of an international tax
agreement, the income, profits or gains of a foreign resident are taxable in
Australia under the terms of that tax agreement.
Therefore, the effect of this is that the new deemed
source rule will treat income, gains or profits as being sourced in Australia
where an international tax agreement allocates Australia a right to tax that
income, gain or profit in respect of a resident of a foreign country or
territory for the purposes of that international tax agreement.[60]
Proposed subsection 764-5(2) of the ITAA 1997
stipulates that proposed subsection 764-5(1) of the ITAA 1997 will
apply to international tax agreements made on or after 28 March 2019.