New Australia- Germany Tax Treaty enters into force

Transcription

1 12 December 2016 Global Tax Alert New Australia- Germany Tax Treaty enters into force EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 7 December 2016, representatives of Australia and Germany exchanged their respective ratification instruments triggering the entry into force and application provisions of the Agreement between Australia and Germany for the Elimination of Double Taxation with Respect to Taxes on Income and Capital and the Prevention of Fiscal Evasion and Avoidance (the Revised Treaty). The Revised Treaty replaces the existing 1972 treaty and reflects much of the updated wording in the current Organisation for Economic Co-operation and Development (OECD) Model Convention as well as recommendations in the OECD final reports in its Action Plan on Base Erosion and Profit Shifting (2015 BEPS Reports). The application provisions specify the Revised Treaty commencement as (broadly): Dividend, royalty and interest withholding taxes 1 January 2017 For all other German taxes 1 January 2017 Australian fringe benefits tax measures on or after 1 April 2017 For other Australian taxes year of income beginning on or after 1 July 2017

2 2 Global Tax Alert The Revised Treaty follows the 24 November 2016 OECD release of the final Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MC). 1 The MC, developed and agreed by the ad hoc working group of more than 100 jurisdictions including Australia and Germany, provides governments with various options for meeting BEPS minimum standards on treaty abuse and dispute resolution, opt-out scope and provisions where there are multiple ways to address BEPS issues. This Revised Treaty reflects how Australia and Germany exercised the broad options under the MC approach. This Tax Alert summarizes the key provisions of the Revised Treaty and the Protocol. Significant provisions in the Revised Treaty include: Introduction of a defined fiscally transparent entity/ arrangement concept (Article 1) Tie-breaker rule for a treaty residency determination of non/individual dual resident persons (Article 4) Amended definition of permanent establishment (PE) and new integrity rules in line with the revised OECD standard language (Article 5) Amended withholding tax rates for dividends, interest and royalties (Articles 10, 11, 12) Alienation of property (Article 13) Methods of elimination of double taxation containing rules addressing hybrid mismatch arrangements including switch-over clauses (Article 22) Limitation of benefits (LOB) and principal purpose tests for the entitlement of benefits (Article 23) Mandatory arbitration in mutual agreement procedures (MAP) (Article 25) Detailed discussion Fiscally transparent entity/arrangement concept Paragraph 2 of Article 1 states that income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent (not taxed at entity level or arrangement) under the tax law of either Contracting State would be considered to be income of a resident of a Contracting State but only to the extent that the income is treated as the income of a resident of that Contracting State for purposes of taxation by that Contracting State. Tie-breaker rule for determining the treaty resident of dual resident persons other than individuals Article 4 provides that, in cases where a person other than an individual is a dual resident, the residence will be determined by reference to the place of effective management and if this cannot be determined the competent authorities of the two Contracting States will seek a determination by mutual agreement. Otherwise the person shall not be entitled to benefits under the Revised Treaty. The revised provision reflects the recommendation in the 2015 BEPS Final Report on Action 6, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances. Definition of PE Article 5 of the Revised Treaty implements amended PE measures in line with BEPS Action 7, Prevention of Artificial Avoidance of a Permanent Establishment. The Revised Treaty follows the traditional definition of PE, i.e., any fixed place of business through which the business of an enterprise is partially or wholly carried on. It also includes a non-comprehensive list of PE examples, such as a place of management, branch, office, factory, workshop, mine, oil or gas well, quarries or any other place of extraction of natural resources as well as agricultural, pastoral or forestry property. Broader dependent agent definition A PE is deemed to exist where a person (agent) acts on behalf of an enterprise and habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, or manufactures or processes goods or merchandise belonging to the enterprise, unless that agent is acting in a truly independent capacity. A PE will, however, not be triggered when activities are carried out through an independent agent acting in the ordinary course of its business activities. Other PE deeming provisions In addition the Revised Treaty provides that a PE is deemed to arise if: a. Supervisory or consultancy activities in the other State are carried on for more than 9 months an increase from 6 months in connection with a building site, or a construction or installation project being undertaken in that other state

3 Global Tax Alert 3 b. Activities are carried on (including the operation of substantial equipment) in the other State in the exploration for or exploitation of natural resources situated in that other State for a period exceeding in the aggregate 90 days in any 12 month period or c. Substantial equipment is operated in the other State (including the exploration/ exploitation of natural resources) for a period exceeding in the aggregate 183 days in any 12 month period Preparatory or auxiliary character of activities In line with the amended OECD Model Convention, Paragraph 6 of Article 5 restricts the specific activity exemptions to those of an overall preparatory or auxiliary character. Anti-fragmentation rule The specific activity exemptions do also not apply where the activities are split into several locations but these activities constitute complementary functions that are part of a cohesive business operation (anti-fragmentation rule). Associated enterprises Profits of associated enterprises may be adjusted by the Australian and German taxation authorities where transactions have been entered into on terms other than at arm s length (Article 9). The ability to make adjustments is generally limited to 10 years from the end of the taxable year in which the profits would have accrued to the enterprise. Dividends The definition of dividends in Article 10 has been amended and now also includes income from shares, or other rights, not being debt/claims, participating in profits and other amounts which are subject to the same taxation treatment as income from shares. Furthermore, the following reduced withholding tax rates apply: A full exemption on dividends, if the beneficial owner of the dividends is a company listed on a recognized stock exchange (or a company owned by one or more listed companies) and holds directly at least 80% of the voting power of the payee for at least 12 months A 5% rate, if the beneficial owner of the dividends is a company that holds directly at least 10% of the voting power of the payee for at least 6 months (including the day of payment) A 15% rate in all other cases Interest Under Article 11 interest derived by the Government, a body exercising governmental functions, a central bank or an unrelated financial institution is not subject to withholding tax; in all other cases (including back-to-back arrangements) a 10% rate applies. Royalties Article 12 applies a 5% rate on royalties. Alienation of property Article 13 introduces a rule missing in the earlier treaty in relation to the alienation of property which governs the allocation of taxation rights over income, profits or gains between Australia and Germany. Gains derived from the disposal of immovable property or shares in land rich entities may be taxed in the country where the immovable property/land is located. Methods of elimination of double taxation Australia eliminates double taxation of income which is taxed in Germany in accordance with the treaty by crediting the German tax against the Australian tax payable on that income. Germany eliminates double taxation of income which may be taxed in Australia by exempting it from German taxation. The credit method is applied for certain defined income categories. In addition, Article 22 includes a standard switch-over clause, which allows Germany to apply the credit method on income which remains untaxed in the other country because of a treaty qualification conflict ( mismatch ), i.e., the income is not taxed by Australia under Australian domestic provisions, or if Germany notifies Australia that it will apply the credit method. The anti-hybrid mismatch concept for dividends is adopted in paragraph (2)(a) of Article 22. Limitation of benefits Article 23 contains anti-treaty abuse rules which are largely consistent with BEPS Action 6, Preventing the Granting of Treaty Benefits in Inappropriate Circumstance. A benefit will be denied under the Revised Treaty if obtaining the benefit under the treaty is one of the principal purposes of any arrangement or transaction that would result directly or indirectly in that benefit.

4 4 Global Tax Alert Mutual agreement procedure In accordance with BEPS Action 14, Make Dispute Resolution Mechanisms More Effective, Article 25 explicitly provides for mandatory arbitration proceedings, in which cases not being resolved between the tax authorities of the Contracting States will be resolved pursuant to decisions made by third party arbitrators upon the taxpayer s request. If the matter is not resolved within three years from the first notification mandatory arbitration proceedings are triggered. Claiming treaty benefits Article 28 grants Contracting States the right to withhold tax at source and provides treaty protected taxpayers with a refund procedure. The statute of limitations period for a refund claim under Article 28 is two years from the date of payment for the withholding tax. Australia s unilateral tax measures modifying treaty provisions Australia has recently introduced a number of additional unilateral domestic tax measures which, being implemented as domestic general anti-avoidance rules, have the effect of overriding outcomes or approaches that might otherwise arise under the Revised Treaty. The Revised Treaty respects these domestic override outcomes. Australian anti-avoidance rules were already very broad but were recently complemented by specific rules addressing: Schemes designed to avoid the existence of a PE, operative from 1 January 2016 (known as the Multinational Anti- Avoidance Law or MAAL) Schemes with a principal purpose to gain a tax benefit by diverting profits from Australia. The proposed Australian Diverted Profits Tax (DPT) is to operate in this area 2 Introduction of a DPT Bill into Parliament is anticipated in early The DPT is to apply in respect of income years commencing on or after 1 July The DPT will broaden the Part IVA anti-avoidance law to allow the Australian Taxation Office (ATO) to impose DPT on multinational businesses which transfer profits to offshore associates. The ATO, through the Commissioner, will be able to impose DPT at a penalty tax rate of 40% on diverted profits, broadly, where: An Australian entity or permanent establishment is a member of a significant global entity with annual global income of AU$1 billion or more and has total Australian turnover of more than AU$25 million A scheme involves foreign associated entities in lower tax jurisdictions or jurisdictions in which they receive tax concessions such that the foreign tax is less than 80% of the reduction in the Australian tax liability The relevant taxpayer obtains a tax benefit in connection with the scheme, using existing Part IVA concepts The scheme has a principal purpose of obtaining an Australian tax benefit or both obtaining and Australian tax benefit and reducing a foreign tax liability, using existing Part IVA concepts The foreign entities do not have sufficient economic substance for their income Affected companies will need to consider their positions, to prepare for an even closer interaction with the ATO to head off potential DPT risks. Multilateral Convention (MC) On 24 November 2016 the OECD released the text of the MC. 3 The MC has been developed and agreed by the ad hoc working group of more than 100 jurisdictions including Australia, Germany, New Zealand, China, the United Kingdom and the United States. A first high-level signing ceremony is expected to take place in early June 2017, leading to negotiations for adoption in particular bilateral and multilateral tax treaties. The MC can potentially apply to over 2,000 existing tax treaties. Countries will be able to specify the tax treaties to which the MC applies. The MC will enter into force for a specific tax treaty after all parties to that treaty have ratified the instrument; and a certain period has passed to ensure clarity and legal certainty. So, countries will need to make decisions about which options to select and reservations to be made. That process will take some time. The Revised Treaty contains much of the modern OECD standard language. Therefore the impact of the MC is likely to be minimal in relation to the Revised Treaty, as Australia and Germany will focus on other treaties.

5 Global Tax Alert 5 Next steps In light of the Revised Treaty and the Protocol, taxpayers should: Adjust withholding tax rates and procedures for payments of interest, dividends or royalties on or after 1 January Test structures and arrangements against the new bilateral framework to validate whether outcomes change or adjustments are required. Consider Australia s broad reaching unilateral treaty overrides that create another layer of complexity. Endnotes 1. See EY Global Tax Alert, OECD releases multilateral instrument to modify bilateral tax treaties under BEPS Action 15, dated 25 November Ibid. 3. See EY Global Tax Alert, OECD releases multilateral instrument to implement treaty related BEPS measures on hybrid mismatch arrangements, treaty abuse, permanent establishment status and dispute resolution, dated 2 December 2016.

6 6 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young (Australia), Sydney Jesper Solgaard, Transfer Pricing Sean Monahan, International Tax Ernst & Young LLP, Australian Tax Desk, New York Andrew Nelson Ernst & Young LLP, German Tax Desk, New York Joerg Brodersen Thomas Eckhardt Friederike Ries Wolfgang Deininger Beatrice Hüsken Hannah HiIdebrand

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