2. Australia-Iceland double taxation

Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance and its Protocol

2.1The Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance and its Protocol (Tax Convention) is a double taxation agreement that would establish a framework for the taxation of cross-border transactions.[1] This would be the 46th double taxation agreement to which Australia is party. Like Australia’s other double taxation agreements, the Tax Convention is broadly modelled on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital (model convention).[2]

Background

Double taxation

2.2Broadly, there are two types of double taxation:

• juridical double taxation—where the same taxpayer is taxed in two jurisdictions on the same income, profits or gains
• economic double taxation—where two separate taxpayers are taxed on the same income, profits or gains in different jurisdictions.[3]
  3. Juridical double taxation may occur if two jurisdictions tax the taxpayer on their world-wide income; or if a resident in one jurisdiction derives income in the other jurisdiction and both jurisdictions tax that income. Economic double taxation may occur in instances where a resident taxpayer’s taxable income is adjusted using the arm’s length principle between the resident and an associated taxpayer in the other jurisdiction. In such a circumstance, the taxpayer whose taxable income is increased may be liable to pay tax in one jurisdiction on an amount of profit the associated taxpayer is also liable to pay in the other jurisdiction.[4]
  4. Double taxation agreements function primarily to allocate taxing rights between two parties whilst at the same time preventing tax avoidance and tax evasion. Parties accept the provisions that limit their ability to tax elements of income on the understanding such elements are taxable in the jurisdiction of the other party.[5]

Australia’s tax treaty network

2.5In September 2021, then Treasurer, the Hon Josh Frydenberg MP, announced the Australian Government would expand its tax treaty network to cover around 80 per cent of foreign investment in Australia and about $6.3 trillion of Australia’s two-way trade and investment.[6] The Tax Convention is the first new tax treaty to be negotiated as part the government’s plan to add an additional 12 tax treaties to Australia’s existing network of 45.[7]

Australia-Iceland two-way trade

2.6During the Committee’s inquiry, Treasury officials discussed the extent of Australia’s trading relationship with Iceland

… it's fair to say that the trade and investment relationship between Australia and Iceland is modest … In terms of the latest information that we have, trade in goods and services between Iceland and Australia was worth $95 million in 2021—exports to Iceland totalled $80.6 million, and imports amounted to $14.7 million.[8]

2.7Nevertheless, the Treasury expected the Tax Convention would create a more favourable investment environment that could help to increase two-way investment flows in the future.[9]

Differences between the model convention and the Australia-Iceland Tax Convention

2.8The OECD’s predecessor, the Organisation for European Economic Co-operation, began working on a model double taxation agreement in the mid–1950s, recognising the need to harmonise principles, definitions, rules, methods and interpretations. The first version of the OECD’s model convention was adopted in 1963. It has since been updated several times. In the early 1990s, ‘double taxation’ was removed from the title of the model convention to reflect the fact it no longer dealt exclusively with the elimination of double taxation but included measures to prevent tax evasion and avoidance, and the principle of non-discrimination.[10]

2.9In various places the Tax Convention goes beyond the provisions in the model convention. Where this occurs, it appears to provide greater certainty with regard to the applicability of some provisions, and generally follows recommendations in the OECD commentary on the model convention.[11]

2.10For instance, provisions related to the taxation of profits from the use, maintenance or rental of containers used in the transport of goods or merchandise are dealt with in the Tax Convention in much the same way the OECD suggests the relevant article should be interpreted.[12] Similarly, provisions beyond those in the model convention relating to the taxation of business profits closely follow those in Australia’s most recent double taxation agreement with Israel, and follow suggestions in the OECD commentary, in addition to reservations made by Australia to the article in the model convention.[13]

2.11Additional provisions related to collective investment vehicles: reflect a significant discussion in the OECD commentary on how such vehicles may be taxed; follow the suggestion that treaty negotiators address expressly the treatment of collective investment vehicles; and reflect largely the suggested model provisions.[14]

2.12The addition of a paragraph in article 20 dealing with other income removes a situation where some income may not be taxed by either state, a potential situation foreseen in the OECD commentary.[15] An additional paragraph dealing with confidentiality for arbitration proceedings follows a suggested paragraph in the OECD commentary.[16]

2.13Treasury officials advised the Committee ‘certain deviations’ from the model convention would also ‘protect Australia’s interests’:

… the treaty contains Australia's key provisions to preserve Australia's taxing right over the exploration and exploitation of Australia's natural resources as well as securing reciprocal withholding tax exemptions on dividend and interest payments received by eligible Australian superannuation funds from their investments in Iceland. This is particularly noteworthy as it represents only the third time, after Switzerland and Israel, that a treaty partner has agreed to exempt income earned by eligible Australian superannuation funds from taxation. This will help to increase the profits earned by Australian superannuation funds in Iceland and help to grow Australians' retirement income.[17]

Reasons cited by the Australian Government to ratify the Tax Convention

2.14According to the National Interest Analysis (NIA), the Tax Convention would promote closer economic cooperation between Australia and Iceland by reducing taxation barriers to investment and decreasing the cost of Australian businesses accessing Icelandic capital and technology.[18]

2.15The NIA highlighted the following reasons to ratify the Tax Convention:

• the expectation is it would reduce taxation barriers to bilateral trade and investment, primarily by reducing source country taxes on cross-border payments of dividends, interest and royalties[19]
• it would increase certainty and reduce compliance costs for taxpayers by: providing an agreed basis for determining the allocation of profits within a multinational enterprise; resolving issues associated with related party dealings; allocating taxing rights over fringe benefits; and establishing a dispute resolution mechanism[20]
• it would establish a more effective framework to prevent international fiscal evasion and avoidance through: provisions recommended by the OECD/G20 BEPS (Base Erosion and Profit Shifting) project; a definition of ‘permanent establishment’ for the taxation of business profits; provisions that allow revenue authorities to cooperate and exchange certain information; and provision of an agreed basis for determining the allocation of profits within multinational enterprises.[21]
  16. The Treasury also highlighted provisions in the Tax Convention that would exempt Australian superannuation funds from the application of withholding taxes on investments they make in Iceland.[22]

Key provisions in the Tax Convention

2.17The Convention contains six chapters dealing with:

• the scope of persons and taxes to which the Tax Convention applies
• definitions
• where various types of income would be taxed
• how relief from double taxation would be provided
• special provisions relating to non-discrimination, the mutual agreement procedure for dispute resolution, exchange of information, assistance in the collection of taxes, and the conditions under which the benefits of the Tax Convention might be refused
• entry into force and termination.
  18. The Convention also contains a Protocol that provides further detail on terminology in the Tax Convention, some of which reflects specific legislative and regulatory arrangements in Australia and Iceland.

Scope of the Tax Convention

2.19Chapter I of the Tax Convention establishes its scope—specifically the persons covered and the taxes covered.

Persons

2.20The Tax Convention applies to persons (individuals, companies or any other body of persons) who are residents of one or both of the Contracting States (Australia and Iceland—hereafter referred to as Parties).[23]

Effect on taxation

2.21The Convention would not affect the taxation by a Party of its residents, except where provided for in provisions dealing with: associated enterprises; alienation of property; pensions; government service; students; relief from double taxation; non-discrimination; the mutual agreement procedure; and the privileges of members of diplomatic missions and consular posts.[24]

Taxes

2.22The Convention applies to taxes on income imposed by a Party, including taxes on gains from the sale of property, on the total amounts of wages or salaries paid by enterprises (state payroll tax), and on capital appreciation. For Australia, it would also apply to resource rent taxes and fringe benefits tax.[25]

2.23The Convention would apply proactively to any identical or substantially similar taxes imposed after the date of signature—whether these are new taxes or take the place of existing taxes.[26]

General definitions

2.24Chapter II of the Tax Convention deals with a range of general definitions, and provides specific definitions for ‘resident’ and ‘permanent establishment’ that are necessary to determine which Party has the right to taxation.

Competent authority

2.25The term competent authority means:

• Australia—Commissioner for Taxation or authorised representative of the Commissioner
• Iceland—Minister of Finance or authorised representative of the Minister.[27]

Resident

2.26Article 4 establishes the rules for determining a person’s country of residence for the purpose of the Tax Convention. In general, a resident of a Party is a person who is considered a resident for tax purposes.[28]

2.27Where an individual is a resident of both Parties for tax purposes, a determination is made on the basis of various factors including the location of an individual’s permanent home, centre of vital interests, where the individual has an habitual abode, and where the individual is a national. If necessary, the Parties may resolve the question by mutual agreement.[29]

2.28Where a person, other than an individual, is a resident of both Parties, the competent authorities are to endeavour to determine resident status by mutual agreement based on place of effective management, place of incorporation or where otherwise constituted, and any other relevant matter. Where the competent authorities cannot agree, the person would not be considered a resident of either Party and would not be eligible for the benefits under the Tax Convention.[30]

2.29Other provisions relate to determining the residency of collective investment vehicles.[31] These provisions, according to the NIA, provide for administrative simplicity by allowing a collective investment vehicle to claim benefits under the Tax Convention for its investors.[32]

Permanent establishment

2.30The ‘permanent establishment’ definition is used to determine the right of a Party to tax the profits of an enterprise of the other Party.[33] These provisions determine when a business, which is a resident of one country, would have a taxable presence in the other country. It thus establishes the circumstances where Australia could tax the profits derived by Icelandic residents from various business activities in Australia, and vice versa.[34]

2.31Permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes, subject to a range of provisions: an office or branch; factory; workshop; mine, oil or gas well, quarry; agricultural property; and a construction site.[35] Some exceptions are provided where various activities are undertaken for logistical or administrative reasons.[36]

2.32Provisions deal with situations where a person is acting in a Party on behalf of an enterprise in the other Party.[37]

Taxation of income

2.33Chapter III of the Tax Convention deals with where certain types of income would be taxed, including income from immovable property, business profits, shipping and air transport, associated enterprises, dividends, interest, royalties, alienation (sale) of property, income from employment, directors’ fees, entertainers and sportspersons, pensions, government service, students.

Immovable property

2.34Immovable property includes a lease of land; livestock and equipment; and a right to explore for and extract natural resources. Any interest or right to immovable property is regarded as situated where the land or natural resources are located.[38]

2.35The Party in which the immovable property producing income is located has the right to tax that income, regardless of whether the person receiving the income is a resident of the other Party.[39]

Business profits

2.36The profits of an enterprise of a Party are to be taxable only in that Party unless the enterprise carries on business in the other Party through a permanent establishment. If this occurs, the profits of the enterprise may be taxed in the other Party to the extent the profit is attributable to that permanent establishment.[40] Various provisions clarify how profits are to be attributed and calculated, and how profits from a business carrying on insurance and trusts are to be taxed.[41]

2.37There is a time limit of seven years beyond which a Party cannot make any adjustment to the profits attributable to a permanent establishment of an enterprise, subject to exceptions for fraud, gross negligence, wilful deceit or where an audit has been initiated.[42]

Shipping and transport

2.38Profits of an enterprise of a Party from the operation of ships or aircraft in international traffic are to be taxable only in the Party in which the enterprise is resident, unless the enterprise operates within the other Party to transport passengers or cargo within that Party.[43]

Associated enterprises

2.39Article 9 deals with the taxation of profits where transactions have been entered into between associated enterprises (for instance, parent and subsidiary companies) on other than arm’s length terms (that is, not on normal open market commercial terms and as a consequence a profit that may have been expected to have accrued to one enterprise has not).[44]

2.40The article allows taxation authorities to adjust the amount of tax charged on profits to reflect the pricing that would be adopted by independent enterprises, and also requires the removal of any double taxation that might occur as a consequence of the reallocation of profits between enterprises.[45] No adjustment to the allocation of profits may be made beyond seven years, except in cases of fraud, gross negligence, wilful default or where an audit has been initiated.[46]

Dividends, interest and royalties

2.41The provisions relating to the taxation of dividends (income from shares or other rights), interest (income from debt claims) and royalties are similar. Where they arise in one Party and are paid to a resident of the other Party, they may be taxed in that other Party.[47]

2.42In certain circumstances, dividends, interest and royalties may be taxed by both Parties, subject to limits on the rate at which they can be taxed.[48] A range of provisions deal with complexities concerning the location and activities of beneficial owners.[49]

Alienation of property

2.43Article 13 deals with capital gains and while capital gains is not defined, it is intended to include, according to the OECD, capital gains resulting from the sale or exchange of property and also from partial alienation, the expropriation, the transfer to a company in exchange for stock, the sale of a right, and the gift and passing of property on death.[50]

2.44Table 2.1 below sets out, broadly, the taxation arrangements provided for in article 13 of the Tax Convention with respect to income derived from the alienation of property.

Source: Tax Convention, article 13; OECD Model Tax Convention, pages 291–304.

2.45Notwithstanding other provisions in this article, a Party can tax, in accordance with their domestic laws, the capital gains of former residents if they have been resident at any time during the year of alienation or the six years preceding that year.[56]

Income from employment

2.46Subject to provisions in articles 15, 17, and 18, in general salaries and wages and other similar remuneration[57] are taxable only in the Party where the person is resident. If the person exercises employment in the other Party, such remuneration as is derived therefrom may be taxed in that other Party, subject to conditions and limitations.[58] Provisions also prevent the double taxation of fringe benefits by allowing the Party that has the sole or primary taxing right with regard to the salary or wages to tax the fringe benefits.[59]

Directors’ fees

2.47Directors' fees and other similar payments derived by a resident of a Party where the company is a resident of the other Party may be taxed in that other Party.[60]

Entertainers and sportspersons

2.48Income derived by a resident of a Party as an entertainer or as a sportsperson, from that resident's personal activities in the other Party, may be taxed in that other Party.[61]

Pensions

2.49In general, pensions (and other similar remuneration) paid to a resident are taxable only in the Party where the recipient is resident.[62] However, pensions paid under the social security legislation of a Party or other public scheme, may be taxed in that Party, where the individual is a national of the Party.[63] In some cases, certain lump sum payments arising in a Party and paid to a resident of the other Party, may be taxed in the first Party.[64]

Government service

2.50Salaries, wages and other similar remuneration paid by a Party to an individual for services rendered to that Party, are only taxable in that Party. However, subject to some conditions, where such payments are made for services rendered in the other Party to a resident of the other Party, who is resident not solely for the purpose of rendering the services or is a national of that Party, they are taxable only in the other Party.[65]

2.51Where a government service pension is paid, it is taxable only in the Party that is paying the pension, unless the individual is a resident and national of the other Party, in which case it is to be taxed only in the other Party.[66]

Students

2.52Where payments for the purpose of maintenance, education or training are received by a student or business apprentice from a source outside the Party in which the student is temporarily staying for education or training purposes, and providing the student remains or immediately prior was a resident of the Party from where the payments are made, these are not to be taxed in the Party where the student is staying.[67]

Other income

2.53Article 20 deals with income not covered by preceding articles and generally requires that income of a resident of a Party, wherever arising, is taxable only in that Party.[68]

2.54This article contains an additional paragraph not in the OECD model convention. Under the model convention, if income arises in the other Party, that Party cannot impose a tax, even if the income is not taxed in the first-mentioned Party—the OECD suggests states may modify the provisions.[69] The Tax Convention adds paragraph 3 which specifies if the income (not dealt with in the foregoing articles of the Tax Convention) arises in the other Party, it can also be taxed in the other Party.[70]

Relief from double taxation

2.55Chapter IV of the Tax Convention contains one article that details how juridical double taxation is to be avoided. Two options are provided in the model convention: the principle of exemption (where the state of residence does not tax income that may be taxed by the state where the income is derived, or where the permanent establishment is located); or the principle of credit (the state of residence calculates tax on the total income then allows a deduction for taxes paid in the other state).[71]

2.56Article 21 deals with juridical double taxation through the principle of credit where, subject to the laws of each Party, a credit for tax paid in the other Party is recorded against tax payable on the income.[72]

Special provisions

2.57Chapter V deals with a range of issues including the principle of non-discrimination, the mutual agreement procedure, exchange of information, assistance in the collection of taxes, and entitlement to benefits under the Tax Convention.

Non-discrimination

2.58The Tax Convention does not allow for taxation discrimination in a number of areas on the grounds of nationality.[73] With regard to the taxes covered by the Tax Convention, article 22 does not allow a Party to subject a person (individual or entity) of the other Party to taxes or other requirements more burdensome than those applied to its own persons, in the same circumstances.[74]

2.59The provisions in the article do not apply to Australia’s taxation of working holiday makers.[75]

Mutual agreement

2.60The provisions in article 23 establish a dispute resolution procedure for issues that arise from the application of the Tax Convention, specifically cases where double taxation is believed to occur.[76] The procedure works in stages which, subject to various conditions, are:

• within three years from the first notification of a taxation action, a person may present a case to the competent authority of either Party if they are of a view a taxation arrangement would not be in accordance with the provisions of the Tax Convention[77]
• the competent authority, if the objection appears to be justified, is to endeavour to arrive at a satisfactory solution[78]
• if the competent authority cannot arrive at a satisfactory solution itself, it is to endeavour to resolve the case by mutual agreement with the competent authority of the other Party[79]
• if the competent authorities cannot reach an agreement within two years, if the person requests in writing, the issue is to be submitted to arbitration with the view to reaching a mutual agreement between competent authorities, providing the issue has not already been resolved by a court or administrative tribunal of either Party[80]
• the decision of the arbitration is binding on both Parties, regardless of any time limits in domestic laws, unless the person does not accept the mutual agreement that implements the arbitration decision.[81]
  61. The details of the arbitration arrangements are to be settled by mutual agreement of the Parties.[82] Provisions deal with the information that may be made available to the arbitration panel and confidentiality requirements. If the information received during the course of the arbitration proceedings from either the competent authorities or the arbitration panel is disclosed by a person presenting the case or their advisors, the arbitration proceedings are to be terminated.[83]
  62. According to the Treasury, arbitration arrangements are contained in 16 of Australia’s double taxation agreements. However, the Australian Taxation Office (ATO) has not yet had a matter proceed to arbitration under one of these agreements.[84] As such, there is no model or example of how arbitration might occur under the Tax Convention.
  63. Competent authorities are permitted to communicate directly for the purposes of the mutual agreement procedure.[85] This means communication need not go through diplomatic channels.
  64. The competent authorities are also to endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Tax Convention, and may consult with regard to the elimination of double taxation in cases not covered in the Tax Convention.[86]

Interaction with provisions in the General Agreement on Trade in Services

2.65Under article XXII of the General Agreement on Trade in Services (GATS) a Party cannot invoke the consultation provisions under the GATS (that may lead to the involvement of the Council for Trade in Services or the Dispute Settlement Body), with respect to a measure of another Party that falls within the scope of a double taxation agreement. If there is a disagreement on whether the measures fall within the scope of a double taxation agreement, the GATS allows either Party to bring the matter before the Council for Trade in Services, which is to refer the matter to arbitration, which would be final and binding on Parties.[87]

2.66Article 23 of the Tax Convention specifies that where there is any dispute between the Parties as to whether a measures falls within the scope of the Tax Convention, it may be brought before the Council for Trade in Services only with the consent of both Parties.[88]

Exchange of information

2.67Article 24 deals with exchanges of information for the purpose of carrying out the provisions of the Tax Convention or for administering taxation laws (different arrangements apply under article 23 for the exchange of information for the purpose of mutual agreement, and article 25 for the purpose of assistance in tax collection).[89]

2.68The general principle with regard to the exchange of information between competent authorities is that the competent authorities are to exchange such information as is foreseeably relevant for carrying out the provisions of the Tax Convention or to the administration or enforcement of domestic tax laws, providing the taxation is not contrary to the Tax Convention.[90] The information that may be exchanged is not restricted by article 1 (relating to persons covered by the Tax Convention) or article 2 (taxes covered by the Tax Convention).[91]

2.69Any information exchanged is to be treated as secret in the same manner as information obtained under the domestic laws, and is to be disclosed only to persons dealing with assessment, collection, enforcement or prosecution of taxation issues. Information may be disclosed in public court proceedings or judicial decisions. Subject to certain conditions being met, and with the agreement of the competent authority of the supplying Party, the information may be used for other purposes.[92]

2.70A Party cannot be required to act contrary to or beyond the scope of its laws or administrative practices to provide information to the other Party, but neither can tax secrecy provisions be used to prevent the information being provided.[93] Providing the information is obtainable under its laws and administrative procedures, and regardless of whether the Party receiving the request for information may need the information for its own tax purposes, the Party receiving the request is to take measures to obtain the information.[94] A Party cannot decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity, or because it relates to ownership interests of a person.[95]

Assistance in the collection of taxes

2.71Article 25 is an optional article in the OECD model convention and is contained in only seven of Australia’s 45 existing double taxation agreements (Finland, France, Germany, India, New Zealand, Norway, and South Africa).[96]

2.72The OECD acknowledges in some member states national law or policy may prevent assistance in collecting taxes for other states, or limit it, and this is to be considered during negotiations.[97] The content of article 25 is near identical to the model convention, containing only an additional paragraph relating to a further reason for assistance to be declined, specifically where the taxes are imposed contrary to generally accepted taxation principles.[98]

2.73The Tax Convention obligates the Parties to assist each other in the collection of revenue claims, providing certain conditions have been met. The assistance is not restricted by article 1 (relating to persons covered by the Tax Convention) or article 2 (taxes covered by the Tax Convention).[99]

2.74The competent authorities may, by mutual agreement, settle the details for how the obligation in the article will be applied.[100]

2.75A revenue claim is an amount owed in respect of taxes of every kind and description imposed on behalf of the Parties, as well as interest, administrative penalties, and costs of collection or conservancy.[101]

2.76There is a range of conditions under which a request for assistance can be made. Providing a revenue claim is legal and is owed by a person who cannot prevent its collection under the laws of the issuing Party, when requested by the competent authority, it is to be accepted by the receiving Party for the purposes of collection. The revenue claim is to be collected by the receiving Party in accordance with its laws, as if it were a revenue claim arising from its own laws.[102]

2.77Any revenue claim accepted by a Party is not to be subject to any time limits or priority applicable to a revenue claim under the laws of that Party. Further, any priority that may apply under the laws of the issuing Party, for instance that government revenue claims have priority over the claims of other creditors, do not apply to the revenue claim in the receiving Party.[103]

2.78There is no recourse to the courts or administrative bodies in the receiving Party with respect to the existence, validity or amount of the revenue claim.[104] In effect, this requires the receiving Party to accept the revenue claim at face value. The main purpose of this provision, according to the OECD, is to prevent administrative or judicial bodies in the receiving Party from being asked to decide matters determined under the internal law of the requesting Party.[105]

2.79Where, after a request has been made but the revenue claim has not been collected and remitted, the conditions that gave rise to the revenue claim change, the competent authority that issued the request is to notify the receiving Party and either suspend or withdraw the request.[106]

2.80The article limits, to some extent, the obligations imposed on the Party receiving a request for assistance. The requirement to assist in the collection of taxes does not impose an obligation to carry out activities that are at variance with a receiving Party’s laws or public policy; to provide assistance if the requesting Party has not pursued all reasonable measures to collect the tax available under its laws; to provide assistance where the administrative burden is clearly disproportionate to the benefit to be derived; or provide assistance if the tax is imposed contrary to generally accepted taxation practice.[107]

2.81The Treasury stated that between 2014 and 13 February 2023, the ATO had accepted 181 requests for assistance in the collection of taxes from other jurisdictions.[108]

2.82The Treasury did not specify under which international agreements these requests had been made. In addition to the double taxation agreements containing the article 25 equivalent, Australia is also one of 146 parties to the OECD’s Convention on Mutual Administrative Assistance in Tax Matters.[109] Under article 11 of that convention, a party is obligated upon request, subject to certain conditions, to take the necessary steps to recover the requested tax claims as if they were its own tax claims.[110]

Constitutional authorisation for legislation implementing the article 25 obligation

2.83During the inquiry, the Committee heard from barrister Mr Tim Russell, who raised concerns about the constitutional authorisation for the legislation through which the article 25 obligation would be met.[111] The Convention itself would be ‘legislated’ through amendments to the International Tax Agreements Act 1953 (Cth).[112] Article 25 would be operationalised through Schedule 1 of the Taxation Administration Act 1953 (Cth) (foreign tax collection rules).[113]

2.84Mr Russell stated that to be within the power of the Parliament under the Constitution, a law passed must be authorised by a provision of the Constitution and not infringe any of the prohibitions contained within the Constitution. The majority of the Parliament’s legislative powers are established in section 51 of the Constitution.[114]

2.85Mr Russell’s argument, broadly, was as follows: the foreign tax collection rules are validly authorised by the external affairs power of section 51(xxix) of the Constitution. They are not authorised by:

• the express grant of taxation power conferred by section 51(ii) of the Constitution
• the implied incidental grant of taxation power conferred by section 51(ii) of the Constitution, or
• the express incidental power conferred by section 51(xxxix) of the Constitution.

As a consequence, the ‘just terms’ provision in section 51(xxxi) applies because the foreign tax collection rules would cause property to be acquired by the Commonwealth. The prohibition in section 51(xxxi) would be infringed because the acquisition under the foreign tax collection rules would not be on ‘just terms’.[115]

2.86During the hearing, Mr Russell stated this argument as such:

… it is perfectly within parliament's power to implement the treaty provision, because there's another head of power it can rely on, which is the external affairs power in paragraph 29 of section 51. However, that comes with a catch. If you fall within the external affairs power and not the taxation power, that power is subject to paragraph 31 of section 51, which requires property to be acquired on just terms. But this provision does not acquire property on just terms; it just takes it, which would be fine if it was a tax. The taxation power is an exception to the 'just terms' requirement, but the external affairs power does not benefit from that exception.[116]

2.87Mr Russell wrote:

The collection of tax by one government from persons within its jurisdiction owed to a foreign government as a quid pro quo for a mutual obligation to do the same is the essence of the bargain struck by the two governments. But where a law of the Parliament has been authorised by the external affairs power and not by the taxation power, this executive bargain remains subordinate to the constitutional guarantee of just terms. I apprehend the Foreign Tax Collection Rules, as presently drafted, breach the prohibition on the acquisition of property by the Commonwealth because they fail to provide for just terms.[117]

2.88Mr Russell was of the view the Australian Government would become obligated to fund recovery of the foreign taxes from its own pocket:

Should a foreign government, such as Iceland, now require enforcement of its taxation claims, regardless of the validity of the Foreign Tax Collection Rules, Australia will remain obliged under the new DTA [double taxation agreement] to seek collection from parties within jurisdiction; however the Commonwealth would suffer a concurrent obligation to pay those parties fair compensation in the amount of the taxes collected.[118]

Treasury views on constitutional authorisation

2.89When asked to respond to Mr Russell’s arguments, the Treasury stated its view the foreign tax collection rules are ‘validly authorised by the external affairs power of the Constitution’ because the foreign tax liability was treated as a debt owed to the Commonwealth:

… the assistance in collection scheme has been implemented in the way that it equates the foreign revenue liability to a foreign judgement or administrative order. That means the Commissioner of Taxation registers the foreign tax liability, which would convert it to a debt owed to the Commonwealth that can then be recovered by the commissioner, employing their normal tax collection and recovery powers. As such, Australia is not in this way imposing the taxes of a foreign country, which in our view overcomes some of the impediments that MrRussell has suggested could affect the constitutional validity of the treaty.[119]

2.90The Treasury further noted the foreign tax collection rules had been implemented in a similar manner to the child support scheme under which the Child Support Registrar is able to use their powers to collect overseas maintenance liabilities.[120]

Members of diplomatic missions and consular posts

2.91The general rules of international law or provisions of special agreements continue to apply to the fiscal privileges of members of diplomatic missions or consular posts.[121]

Entitlement to benefits

2.92According to the OECD, provisions relating to entitlement to benefits clarify a number of issues that together reflect the intention of the Tax Convention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping. It is based on the OECD/G20 BEPS minimum standard.[122]

2.93The OECD defines treaty shopping as when a person (including a company), who is not a resident of a Party establishes an entity that would be a resident of the Party in order to reduce or eliminate taxation in the other Party through the benefits of the tax treaty. In effect, this would allow a person not directly entitled to treaty benefits (for instance, a reduction or elimination of withholding taxes on dividends, interest or royalties) obtaining these benefits indirectly.[123]

2.94Benefits under the Tax Convention are not to be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. This would apply unless it is established that granting that benefit in those circumstances would be in accordance with the object and purpose of the relevant provisions of the Tax Convention.[124]

2.95Provisions in article 27(2) recognise that there may be legitimate reasons for certain arrangements or transactions that have been determined as grounds to deny an entitlement to benefits under the Tax Convention. The paragraph provides a procedure where such cases may be considered at the request of the person, including a requirement for the competent authorities to consult before one Party rejects a request for the grant of benefit by a resident of the other Party.[125]

2.96Article 27(3) deals with situations where an individual is exempt from tax in a Party due to their status as a temporary resident. In such cases, the individual is to receive no relief or exemption from tax under the Tax Convention in the other Party with regard to that particular income.[126]

2.97The Convention would not prevent the application of laws designed to prevent tax evasion or avoidance. The relevant laws are further specified in the Protocol.[127] Where double taxation arises as a consequence of such laws, the competent authorities are to consult for the elimination of double taxation.[128]

Final provisions

Entry into force

2.98Parties are to notify each other of the completion of their domestic requirements for entry into force, and the Tax Convention would enter into force on the date of the last notification. Article 29 further specifies, in each country, when the Tax Convention would come into force for certain taxes. For instance, for Australia, the Tax Convention would come into force for withholding tax on or after 1 January, income tax on or after 1 July, and fringe benefits tax on or after 1 April, following the Tax Convention coming into force.[129]

Termination

2.99The Convention would continue in effect indefinitely. Either Party may terminate the Tax Convention by giving written notice of termination at least six months prior to the end of any calendar year, beginning five years from the date of entry into force. The article also specifies when the arrangements with regard to certain taxes would cease in the case of termination.[130]

Protocol

2.100The Protocol is an integral part of the Tax Convention.[131] It largely provides information on the interpretation or meaning of certain terms in the Tax Convention; either broadly (such as the definition of ‘income’), or in relation to specific provisions such as ‘government investment fund’ in articles 10(4) and 11(3), ‘retirement benefit scheme’ in article 17(3), or ‘moveable property’ in article 13(2).[132]

Implementation and amendment

2.101According to the NIA, amendments to the International Tax Agreements Act 1953 (Cth) would be made prior to the Tax Convention entering into force. No legislative changes would be required in the states or territories.[133]

2.102While the Tax Convention does not contain amendment procedures, the NIA stated under the Vienna Convention on the Law of Treaties, it may be amended by mutual consent of both Parties. Any such amendments would be subject to Australia’s treaty making requirements, including tabling in Parliament and consideration by the Committee.[134]

Costs

2.103As a consequence of the elimination of double taxation, the NIA stated both Parties would expect an impact on their respective tax revenue bases. However, the NIA did not identify the extent of this impact, beyond specifying the Treasury estimated this to be ‘negligible’ over the four years to 2025–26.[135]

Consultation

2.104The Treasury undertook a public consultation process on Australia’s tax treaty program in 2021, following the announcement by the then Treasurer of Australia’s intention to expand Australia’s tax treaty network. A ‘limited number’ of submissions to this process mentioned negotiations with Iceland.[136]

2.105The Treasury advised it also sought comments from the business community through the Tax Treaties Advisory Panel and no concerns were raised. Members of the Tax Treaties Advisory Panel include:

• Australian airline industry representatives
• Australian Banking Association
• Australian Financial Markets Association
• CPA Australia
• Corporate Tax Association
• Financial Services Council
• Institute of Chartered Accountants in Australia
• Law Council of Australia
• Minerals Council of Australia
• Property Council of Australia
• The Tax Institute.[137]

Committee view

2.106The Tax Convention would establish a framework for the taxation of cross-border transactions between Australia and Iceland. Based as it is on the OECD’s model convention, the Tax Convention draws on best practice principles to avoid double taxation whilst preventing base erosion and profit shifting, and treaty shopping.

2.107The provisions in the Tax Convention can be found in the majority of the 45 double taxation agreements to which Australia is already party. However, the Committee notes the provisions relating to assistance in the collection of taxes (the article 25 obligation) can be found in only seven of Australia’s existing double taxation agreements. This perhaps reflects the OECD’s view that the legal or policy arrangements in some jurisdictions may prevent parties from carrying out the particular obligations in article 25.

2.108During the course of the inquiry, the Committee examined Mr Russell’s evidence on the constitutional authorisation for the foreign tax collection rules that would implement the Tax Convention’s article 25 obligation. The Committee observes that the Treasury put a contrary view, and provided argument that supports its claim to constitutionality, albeit with limited detail.

2.109The Committee suggests further engagement by the Treasury with MrRussell as part of its own consultation processes may have resulted in a more productive discussion of these views. Nevertheless, the questions of constitutionality in relation to this issue, if formally disputed, can only be determined by the High Court.

2.110Though Australia’s two-way trade with Iceland is modest, the Committee suggests the elimination of double taxation would encourage expanded investment and other economic activity between the two countries. The provisions with regard to exempting Australian superannuation funds from the application of withholding taxes are particularly welcomed.

2.111The Committee is of the view ratification of the Tax Convention is in the national interest and recommends accordingly.

2.112The Committee supports the Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance and its Protocol and recommends that binding treaty action be taken.

Footnotes

[1]Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance and its Protocol (Reykjavík, 12 October 2022) [2022] ATNIF 20, hereafter Tax Convention.

[2]National Interest Analysis [2022] ATNIA 10 with attachment on consultation, Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance and its Protocol (Reykjavík, 12 October 2022) [2022] ATNIF 20, hereafter NIA, paragraph 7; Organisation for Economic Co-operation and Development (OECD), Model Tax Convention on Income and on Capital: Condensed Version, November 2017, hereafter OECD, Model Tax Convention.

[3]Australian Taxation Office (ATO), ‘Mutual agreement procedure’, www.ato.gov.au/business/

international-tax-for-business/in-detail/mutual-agreement-procedure/, viewed 16 January 2023.

[4]ATO, ‘Mutual agreement procedure’, www.ato.gov.au/business/

international-tax-for-business/in-detail/mutual-agreement-procedure/, viewed 16 January 2023.

[5]OECD, Model Tax Convention, pages 13–14.

[6]The Hon Josh Frydenberg, Treasurer, ‘Expanding Australia’s tax treaty network to cover 80 per cent of foreign investment’, Media Release, 15 September 2021.

[7]Mr Nicholas Dowie, Assistant Secretary, Tax Treaties Branch, Treasury, Committee Hansard, Canberra, 10February 2023, page 1.

[8]Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10 February 2023, page 2.

[9]Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10 February 2023, page 3.

[10]OECD, Model Tax Convention, pages 9–10.

[11]See: OECD, Model Tax Convention.

[12]See: Tax Convention, article 8(4); OECD, Model Tax Convention, page 221.

[13]See: Tax Convention, article 7; OECD, Model Tax Convention, pages 173–218; see page 196 for Australia’s reservations.

[14]See: Tax Convention, article 4; OECD, Model Tax Convention, pages 61–70.

[15]See: Tax Convention, article 20(3); OECD, Model Tax Convention, page 369.

[16]Tax Convention, article 23(6); OECD, Model Tax Convention, page 461.

[17]Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10 February 2023, page 1.

[18]NIA, paragraphs 6–8.

[19]NIA, paragraph 9.

[20]NIA, paragraphs 14–16.

[21]NIA, paragraphs 17–19, 21.

[22]Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10 February 2023, page 5.

[23]Tax Convention, articles 1(1), 3(1)(j).

[24]Tax Convention, article 1(3).

[25]Tax Convention, article 2(1)–(3).

[26]Tax Convention, article 2(4).

[27]Tax Convention, article 3(1)(e).

[28]Tax Convention, article 4(1).

[29]Tax Convention, article 4(2).

[30]Tax Convention, article 4(3).

[31]Tax Convention, article 4(4)–(5).

[32]NIA, paragraph 23.

[33]OECD, Model Tax Convention, page 116.

[34]NIA, paragraph 24.

[35]Tax Convention, article 5(1)–(5).

[36]Tax Convention, article 5(6)–(7).

[37]Tax Convention, article 5(8)–(9).

[38]Tax Convention, article 6(2)–(3).

[39]Tax Convention, article 6(1).

[40]Tax Convention, article 7(1).

[41]Tax Convention, article 7(2)–(7).

[42]Tax Convention, article 7(8).

[43]Tax Convention, article 8(1)–(2), (4).

[44]Tax Convention, article 9(1); OECD, Model Tax Convention, page 226.

[45]Tax Convention, article 9(1)-(2); OECD, Model Tax Convention, pages 226-27.

[46]Tax Convention, article 9(3).

[47]Tax Convention, articles 10(1), 10(5), 11(1), 11(5), 12(1).

[48]Tax Convention, articles 10(2), 11(2), 12(2).

[49]Tax Convention, articles 10, 11, 12.

[50]OECD, Model Tax Convention, page 292.

[51]Tax Convention, article 13(1).

[52]Tax Convention, article 13(2).

[53]Tax Convention, article 13(3).

[54]Tax Convention, article 13(4).

[55]Tax Convention, article 13(5).

[56]Tax Convention, article 13(7); NIA, paragraph 30.

[57]According to the OECD, this is generally understood to include benefits in kind received in respect of an employment, such as stock-options, use of a residence or vehicle, health or life insurance, and club memberships. OECD, Model Tax Convention, page 205.

[58]Tax Convention, article 14(1), (2).

[59]Tax Convention, article 14(4); OECD, Model Tax Convention, page 305.

[60]Tax Convention, article 15.

[61]Tax Convention, article 16.

[62]Tax Convention, article 17(1).

[63]Tax Convention, article 17(2).

[64]Tax Convention, article 17(3).

[65]Tax Convention, article 18(1).

[66]Tax Convention, article 18(2).

[67]Tax Convention, article 19.

[68]Tax Convention, article 20(1).

[69]OECD, Model Tax Convention, page 369.

[70]Tax Convention, article 20(3).

[71]OECD, Model Tax Convention, pages 376-83.

[72]Tax Convention, article 21.

[73]This principle is further explained in the OECD commentary on the model convention. See, OECD, Model Tax Convention, pages 408, 414, 424–25.

[74]Tax Convention, article 22.

[75]Tax Convention, article 22(5).

[76]OECD, Model Tax Convention, page 431–32.

[77]Tax Convention, article 23(1).

[78]Tax Convention, article 23(2).

[79]Tax Convention, article 23(2).

[80]Tax Convention, article 23(5).

[81]Tax Convention, article 23(5).

[82]Tax Convention, article 23(5).

[83]Tax Convention, article 23(6).

[84]Treasury, Submission 2, page [2].

[85]Tax Convention, article 23(4).

[86]Tax Convention, article 23(3).

[87]Agreement Establishing the Word Trade Organization, Annex 1B – General Agreement on Trade in Services (Marrakesh, 15 April 1994) [1995] ATS 8, article XXII.

[88]Tax Convention, article 23(7).

[89]Tax Convention, article 24.

[90]Tax Convention, article 24(1).

[91]Tax Convention, article 24(1).

[92]Tax Convention, article 24(2).

[93]Tax Convention, article 24(3); OECD, Model Tax Convention, page 499.

[94]Tax Convention, article 24(3), (4).

[95]Tax Convention, article 24(5).

[96]OECD, Model Tax Convention, page 508; Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10February 2023, page 4; Mr Tim Russell, Submission to Treasury consultation: Expanding Australia’s tax treaty network, hereafter Mr Tim Russell, Treasury Submission, page 17; Treasury, ‘Income Tax Treaties’, treasury.gov.au/tax-treaties/income-tax-treaties, viewed 13 January 2023.

[97]OECD, Model Tax Convention, page 508.

[98]Tax Convention, article 25(8)(e).

[99]Tax Convention, article 25(1).

[100]Tax Convention, article 25(1).

[101]Tax Convention, article 25(2).

[102]Tax Convention, article 25(3). Similar provisions also apply to matters of conservancy where the revenue claim is not yet enforceable or the person still has a right to prevent collection. See: Tax Convention, article 25(4).

[103]Tax Convention, article 25(5); OECD, Model Tax Convention, page 514.

[104]Tax Convention, article 25(6).

[105]OECD, Model Tax Convention, page 514.

[106]Tax Convention, article 25(7).

[107]Tax Convention, article 25(8).

[108]Treasury, Submission 2, page [1].

[109]OECD, ‘Convention on Mutual Administrative Assistance in Tax Matters’, www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm, viewed 21 February 2023.

[110]Convention on Mutual Administrative Assistance in Tax Matters (text amended by the provisions of the Protocol amending the Convention on Mutual Administrative Assistance in Tax Matters, which entered into force on 1 June 2011) (Strasbourg, 25 January 1988) [2012] ATS 38, article 11. See also: Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10 February 2023, page 4; Joint Standing Committee on Treaties, Report 127: Treaties tabled on 20 March and 8 May 2012, August 2012, pages 23–32.

[111]This section draws upon two documents—the submission Mr Tim Russell made to this inquiry, and the submission Mr Russell made to the Treasury consultation process on expanding Australia’s tax treaty network (Treasury Submission). Mr Tim Russell, Submission 1, page 3.

[112]NIA, paragraph 47.

[113]Mr Russell referred to this section as the ‘foreign tax collection rules’. Its full title is Schedule 1: Collection and recovery of income tax and other liabilities, Chapter 4: Generic assessment, collection and recovery rules, Part 4-15: Collection and recovery of tax-related liabilities and other amounts, Division 263: Mutual assistance in the administration of foreign tax laws.

[114]Mr Tim Russell, Treasury Submission, page 20.

[115]Mr Tim Russell, Submission 1, page 3.

[116]Mr Tim Russell, Committee Hansard, Canberra, 10 February 2023, page 8.

[117]Mr Tim Russell, Treasury Submission, pages 30-31.

[118]Mr Tim Russell, Submission 1, page 4.

[119]Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10 February 2023, page 4.

[120]Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10 February 2023, page 4.

[121]Tax Convention, article 26.

[122]OECD, Model Tax Convention, page 519.

[123]The provisions in the Tax Convention are significantly less prescriptive than those contained in the OECD model convention, which contains provisions relating to specific entities and circumstances. This appears to be because the Tax Convention adopts a ‘general rule’ approach, rather than an ‘automatic rule’ approach that prevents specific transactions known to cause treaty-shopping concerns. For a discussion, see: OECD, Model Tax Convention, pages 519-20.

[124]Tax Convention, article 27(1).

[125]Tax Convention, article 27(2); OECD, Model Tax Convention, page 520.

[126]Tax Convention, article 27(3).

[127]Protocol to the Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance, hereafter Protocol to the Tax Convention, paragraph 1.

[128]Tax Convention, article 27(4).

[129]Tax Convention, article 29.

[130]Tax Convention, article 30.

[131]Tax Convention, article 28.

[132]See: Protocol to the Tax Convention, paragraphs 2–7.

[133]NIA, paragraph 47.

[134]NIA, paragraph 53.

[135]NIA, paragraphs 48–49. See also: Mr Nicholas Dowie, Treasury, Committee Hansard, Canberra, 10February 2023, page 2.

[136]NIA, paragraph 56.

[137]NIA, paragraph 57.