The Need for a New Australia-Korea Tax Treaty

Transcription

1 The Need for a New Australia-Korea Tax Treaty John Taylor Professor School of Taxation and Business Law Business School UNSW Hyejung Byun Associate Professor Graduate School of Science in Taxation University of Seoul

2 Australia-Korea Tax Treaty Was signed on 12 th July 1982, Came into force on 1 st January 1984 The forth oldest of Australian unchanged tax treaties The fifth oldest of 92 Korean tax treaties Substantial changes in the economies, the trade and investment relations, and tax treaty practices Need to be amended to align with current tax treaty practices, OECD Model, and BEPS Recommendations Provisionally signed to revise in October

3 Approach in paper Noted relevant changes in Australian and Korean law Compared 1982 Treaty with current OECD Model Reviewed ATO files on negotiation of 1982 Treaty Concluded that most variations from then OECD Model were at Australia s request Compared 1982 Treaty with more recent Australian & Korean tax treaties and with the MLI Identify items where agreement likely in a revised treaty 3

4 Outline of Presentation Sumarises selected variations from OECD Model in 1982 Treaty Looks at examples from Article 5 Article 10 Article 11 Article 12 Then notes Australia and Korea s actions on the MLI Then identifies items where Australia might be likely to agree to changes from the 1982 treaty 4

5 Permanent Establishment (1/2) OECD Model Convention Article 5 AUS-KOR Tax Treaty Article The term permanent establishment includes especially: (a) a place of management; 3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months The term "permanent establishment includes especially: (a) a place of management; (g) land used for agricultural, pastoral or forestry purposes. 3. A building site or a construction, installation or assembly project constitutes a permanent establishment only if it exists for more than six months. 5

6 Permanent Establishment (2/2) OECD Model Convention Article 5 AUS-KOR Tax Treaty Article 5 N/A 5. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if: (a) it carries on supervisory activities in that State for more than six months in connection with a building site, or a construction, installation or assembly project which is being undertaken in that State; or (b) substantial equipment is being used in that State for more than twelve months by, for or under contract with the enterprise in exploration for, or the exploitation of, natural resources, or in activities connected with such exploration or exploitation. 6

7 Dividends OECD Model Convetion Article 10 AUS-KOR Tax Treaty Article Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, dividends paid by a company which is a resident of a Contracting State may also be taxed in that State according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed: a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. 1. Dividends paid by a company which is a resident of a Contracting State, being dividends to which a resident or the other Contracting State is beneficially entitled, may be taxed in that other State. 2. Such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the dividends. 7

8 Interest (1/2) OECD Model Convention Article 11 AUS-KOR Tax Treaty Article Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, interest arising in a Contracting State may also be taxed in that State according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 1. Interest arising in a Contracting State, being interest to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. 2. Such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest. 8

9 Interest (2/2) OECD Model Convention Article 11 AUS-KOR Tax Treaty Article 11 N/A 3. Interest derived by the Government of a Contracting State or by any other body exercising governmental functions in or in a part of a Contracting State, or by a bank performing central banking functions in a Contracting State, shall be exempted from tax in the other Contracting State. 9

10 Royalties (1/2) OECD Model Convention Article 12 AUS-KOR Tax Treaty Article Royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State. N/A 1. Royalties arising in a Contracting State, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. 2. Such royalties may be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. 10

11 Royalties (2/2) OECD Model Convention Article 12 AUS-KOR Tax Treaty Article The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 3. The term "royalties" in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for: (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; (b) the use of, or the right to use, any industrial, commercial or scientific equipment; (c) the supply of scientific, technical, industrial or commercial knowledge or information; 11

12 Multilateral Agreement Both signed MLI on 7 th June AUS applied to all of its treaties except 2015 German treaty AUS chose to apply most with some reservations reservation on Art 10 and Art 12 AUS chose Art 6(6), Art 7(4) and Option A in Art 13(1) KOR chose to apply only the minimum standards, including Article 6, Article 7, Article 16 and Article 17. AUS-KOR Tax Treaty was not included in the list of tax treaties covered by MLI. 12

13 Prospects for a revised treaty No direct change through the MLI but scope on Arts 6, 7, 16 & Variations that Australia might depart from Article 5 omit preparatory & auxiliary examples but note Australia adopt ed option A in MLI Article 13 Article 5 follow 2015 German Treaty on substantial equipment Article 7 & Article 9 omit saving provision where information inadequate but cover transfer pricing rules via LOB principal purpose test Article 10 agree to 5% on non-portfolio but where 10% holding Article 12 agree to 5% on royalties Article 13 move closer to OECD Article 13 Article 24 have OECD Article 24 but protect Australian anti-avoidance provisions via LOB principal purpose test 13