## Exchange of notes
No [ ]
The Department of Foreign Affairs and Trade presents its compliments to the British High Commission to Australia and has the honour to refer to the convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains which has been signed today (the “Convention”).
The Department has the honour to make the following proposals on behalf of the Government of Australia:
1. With reference generally to the application of the convention (including these Notes), the Contracting States agree that:
(a) the term “income or gains” includes “profits”;
(b) the term “laws” includes the full body of law, and is not limited to statutory law;
(c) the terms “paid or credited” and “payments or credits” shall not include the recording of internal transactions between a permanent establishment and another part of the same enterprise;
(d) the expression “any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes” includes:
(i) measures designed to address thin capitalisation, dividend stripping and transfer pricing;
(ii) controlled foreign company, transferor trust and foreign investment fund rules;
(iii) measures designed to ensure that taxes can be effectively recovered (conservancy measures); and
(e) nothing in the convention shall be construed as restricting, in any manner, the application of any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes.
2. With reference to Article 5 (Permanent Establishment), the Contracting States agree that the term “permanent establishment” fully encompasses the concept of a “fixed base” used in other double tax treaties in the context of independent personal services.
3. With reference to Article 7 (Business profits), the Contracting States agree that:
(a) nothing in paragraph 3 of the Article shall permit the deduction of an expense which would not be deductible if the permanent establishment were an independent enterprise which incurred the expense; and
(b) where:
(i) a resident of a Contracting State is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated as a company for tax purposes; and
(ii) in relation to that enterprise, that trustee would, in accordance with the principles of Article 5, have a permanent establishment in that other State, the enterprise carried on by the trustee shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and that share of business profits shall be attributed to that permanent establishment.
4. With reference to Article 9 (Associated enterprises),
the Contracting States note that the expression “dealing wholly independently with one another” is included in paragraph 1 of the Article to conform to Australia’s consistent treaty practice and to address Australia’s concerns that the appropriate benchmark for determining the conditions operating between the associated enterprises should have regard to whether those dealings between the enterprises occurred on a truly independent basis.
5. With reference to Article 10 (Dividends),
the Contracting States agree that if the relevant law in either Contracting State at the date of signature of the convention is varied otherwise than in minor respects so as not to affect its general character, the Contracting States shall consult each other with a view to agreeing to any amendment of paragraph 2 and 3 of the Article as may be appropriate.
6. With reference to Article 11 (Interest), the Contracting States agree that:
(a) the term “financial institution” shall not include a corporate treasury or a member of a corporate group performing financing services for the group; and
(b) nothing in the convention shall have the effect of subjecting to tax in a Contracting State any interest paid by a resident of that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment.
7. With reference to Article 12 (Royalties), the Contracting States agree that
(a) the term “royalties” shall not include payments for the use of spectrum licences. The provisions of Article 7 of the convention shall apply to such payments; and
(b) nothing in the convention shall have the effect of subjecting to tax in a Contracting State any royalties paid by a resident of that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment.
8. With reference to Article 14 (Income from employment), the Contracting States agree that:
(a) income or gains derived by employees in relation to share option schemes shall be treated as “other similar remuneration” for the purposes of Article 14;
(b) unless the facts otherwise indicate, the period of employment to which the option relates shall be taken to be the period between the grant of the option and the date on which all the conditions for its exercise have been satisfied (the vesting of the option); and
(c) where a resident of a Contracting State derives such income or gains, and
(i) the period of employment to which the share option relates is the period between grant and vesting of the option;
(ii) the employee remains in that employment at the date of alienation or exercise of the option; and
(iii)that employment has been exercised by the employee in the other Contracting State during all or part of the period between grant and vesting of the option;
the proportion of the income or gain which shall be attributable to employment exercised in the other Contracting State shall be determined in accordance with the ratio of the number of days of employment exercised in that State between grant and vesting of the option to the total number of days of employment exercised between grant and vesting of the option.
9. With reference to Article 25 (Non-discrimination), the Contracting States agree
a) in relation to paragraph 4 and subparagraph 6(c) of the Article, the reference to capital being owned or controlled “directly or indirectly” includes cases where the capital is held through a chain of companies or other entities; and
(b) nothing in the Article shall be construed as obliging a Contracting State to allow tax rebates and credits in relation to dividends received by a person who is a resident of the other Contracting State.
10. With reference to Article 26 (Mutual agreement procedure) and Article 27 (Exchange of information),
The Contracting States agree that the provisions of the Articles shall have effect from the date of entry into force of the convention, without regard to the date of the relevant transactions or the taxable or chargeable period to which the matter relates.
11. With reference to Article 26 (Mutual agreement procedure), the Contracting States agree that in relation to paragraph 1 of the Article, the applicable time limits in the domestic laws bearing on the time available for presenting a case to the relevant competent authority shall apply, whether or not those applicable time limits specifically refer to the competent authority process.
12. Miscellaneous
The Contracting States agree that the two Governments shall consult each other at intervals of not more than five years regarding the terms, operation and application of the convention with a view to ensuring that it continues to serve the purposes of avoiding double taxation and preventing fiscal evasion. The first such consultation shall take place no later than the end of the fifth year after the entry into force of the convention.
If the foregoing proposals are acceptable to the Government of the United Kingdom of Great Britain and Northern Ireland, the Department has the honour to propose that the present Note and the High Commission’s confirmatory Note in reply shall constitute an Agreement on certain matters between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, which shall enter into force at the same time as the entry into force of the convention.
The Department of Foreign Affairs and Trade avails itself of this opportunity to renew to the British High Commission to Australia the assurances of its highest consideration.
CANBERRA
21 August 2003
The British High Commission to Australia presents its compliments to the Department of Foreign Affairs and Trade and has the honour to refer to the Department’s Note No [ ] of [date] which reads as follows:
” The Department of Foreign Affairs and Trade presents its compliments to the British High Commission to Australia and has the honour to refer to the convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains which has been signed today (the “Convention”)
The Department has the honour to make the following proposals on behalf of the Government of Australia:
13. With reference generally to the application of the convention (including these Notes), the Contracting States agree that:
(a) the term “income or gains” includes “profits”;
(b) the term “laws” includes the full body of law, and is not limited to statutory law;
(c) the terms “paid or credited” and “payments or credits” shall not include the recording of internal transactions between a permanent establishment and another part of the same enterprise;
(d) the expression “any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes” includes:
(iv)measures designed to address thin capitalisation, dividend stripping and transfer pricing;
(v) controlled foreign company, transferor trust and foreign investment fund rules;
(vi)measures designed to ensure that taxes can be effectively recovered (conservancy measures); and
(e) nothing in the convention shall be construed as restricting, in any manner, the application of any provision of the laws of a Contracting State which is designed to prevent the avoidance or evasion of taxes.
14. With reference to Article 5 (Permanent establishment),
the Contracting States agree that the term “permanent establishment” fully encompasses the concept of a “fixed base” used in other double tax treaties in the context of independent personal services.
15. With reference to Article 7 (Business profits),
the Contracting States agree that:
(a) nothing in paragraph 3 of the Article shall permit the deduction of an expense which would not be deductible if the permanent establishment were an independent enterprise which incurred the expense; and
(b) where:
(i) a resident of a Contracting State is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated as a company for tax purposes; and
(ii) in relation to that enterprise, that trustee would, in accordance with the principles of Article 5, have a permanent establishment in that other State, the enterprise carried on by the trustee shall be deemed to be a business carried on in the other State by that resident through a permanent establishment situated in that other State and that share of business profits shall be attributed to that permanent establishment.
16. With reference to Article 9 (Associated enterprises),
the Contracting States note that the expression “dealing wholly independently with one another” is included in paragraph 1 of the Article to conform to Australia’s consistent treaty practice and to address Australia’s concerns that the appropriate benchmark for determining the conditions operating between the associated enterprises should have regard to whether those dealings between the enterprises occurred on a truly independent basis.
17. With reference to Article 10 (Dividends),
the Contracting States agree that if the relevant law in either Contracting State at the date of signature of the convention is varied otherwise than in minor respects so as not to affect its general character, the Contracting States shall consult each other with a view to agreeing to any amendment of paragraph 2 and 3 of the Article as may be appropriate.
18. With reference to Article 11 (Interest), the Contracting States agree that:
(a) the term “financial institution” shall not include a corporate treasury or a member of a corporate group performing financing services for the group; and
(b) nothing in the convention shall have the effect of subjecting to tax in a Contracting State any interest paid by a resident of that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and that interest is borne by that permanent establishment.
19. With reference to Article 12 (Royalties),
the Contracting States agree that
(a) the term “royalties” shall not include payments for the use of spectrum licences. The provisions of Article 7 of the convention shall apply to such payments; and
(b) nothing in the convention shall have the effect of subjecting to tax in a Contracting State any royalties paid by a resident of that State to a resident of the other State where the payer has outside both Contracting States a permanent establishment in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment.
20. With reference to Article 14 (Income from employment),
the Contracting States agree that:
(a) income or gains derived by employees in relation to share option schemes shall be treated as “other similar remuneration” for the purposes of Article 14;
(b) unless the facts otherwise indicate, the period of employment to which the option relates shall be taken to be the period between the grant of the option and the date on which all the conditions for its exercise have been satisfied (the vesting of the option); and
(c) where a resident of a Contracting State derives such income or gains, and
(i) the period of employment to which the share option relates is the period between grant and vesting of the option;
(ii) the employee remains in that employment at the date of alienation or exercise of the option; and
(iii) that employment has been exercised by the employee in the other Contracting State during all or part of the period between grant and vesting of the option;
the proportion of the income or gain which shall be attributable to employment exercised in the other Contracting State shall be determined in accordance with the ratio of the number of days of employment exercised in that State between grant and vesting of the option to the total number of days of employment exercised between grant and vesting of the option. 9.
With reference to Article 25 (Non-discrimination),
the Contracting States that:
(a) in relation to paragraph 4 and subparagraph 6(c) of the Article, the reference to capital being owned or controlled “directly or indirectly” includes cases where the capital is held through a chain of companies or other entities; and
(b) nothing in the Article shall be construed as obliging a Contracting State to allow tax rebates and credits in relation to dividends received by a person who is a resident of the other Contracting State.
21. With reference to Article 26 (Mutual agreement procedure) and Article 27 (Exchange of information),
the Contracting States agree that the provisions of the Articles shall have effect from the date of entry into force of the convention, without regard to the date of the relevant transactions or the taxable or chargeable period to which the matter relates.
22. With reference to Article 26 (Mutual agreement procedure),
the Contracting States agree that in relation to paragraph 1 of the Article, the applicable time limits in the domestic laws bearing on the time available for presenting a case to the relevant competent authority shall apply, whether or not those applicable time limits specifically refer to the competent authority process.
23. Miscellaneous
The Contracting States agree that the two Governments shall consult each other at intervals of not more than five years regarding the terms, operation and application of the convention with a view to ensuring that it continues to serve the purposes of avoiding double taxation and preventing fiscal evasion. The first such consultation shall take place no later than the end of the fifth year after the entry into force of the convention.
If the foregoing proposals are acceptable to the Government of the United Kingdom of Great Britain and Northern Ireland, the Department has the honour to propose that the present Note and the High Commission’s confirmatory Note in reply shall constitute an Agreement on certain matters between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, which shall enter into force at the same time as the entry into force of the convention.”
The High Commission has the honour to advise that the Department’s proposals are acceptable to the Government of the United Kingdom of Great Britain and Northern Ireland and that the Department’s Note and this confirmatory Note in reply shall constitute an Agreement on certain matters between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, which shall enter into force at the same time as the entry into force of the convention.
The British High Commission to Australia avails itself of this opportunity to renew to the Department of Foreign Affairs and Trade the assurances of its highest consideration.
CANBERRA
21 August 2003