Convention between the Government of Australia and the Government of the State of Israel for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance
8.1
This chapter examines the Convention between the Government of Australia and the Government of the State of Israel for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (the Convention). The treaty action was signed in Canberra on 28 March 2019 and tabled in the Parliament on 9 September 2019.
8.2
The Joint Standing Committee on Treaties (JSCOT) has developed a practice where, in the event of a compelling national interest, the Committee will consider a request from the Australian Government that a treaty be considered urgently. In this case, the need for urgent consideration may not have been required if the referral had occurred in a more timely manner.
Double taxation treaties and international models
8.3
The Convention, which can also be referred to as a double taxation treaty, is a bilateral treaty that ‘establishes an internationally accepted framework for the taxation of cross-border financial transactions’.
8.4
The Convention adds to Australia’s pre-existing network of 44 tax treaties. Similar to Australia’s other tax treaties, the Convention is consistent with Australia’s established treaty practice and reflects the Organization for Economic Co-operation and Development’s (OECD) Model tax convention on income and on capital (model convention).
8.5
Both Australia and Israel are also parties to the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MIL), which provides an international framework to prevent double taxation treaties from being used for tax minimisation.
8.6
The Committee sought details on the interaction between the Convention and the OECD’s MIL. Treasury advised that the Convention ‘incorporates the key changes’ implemented by the OECD’s MIL, which introduced integrity provisions to address tax avoidance, base erosion and profit shifting.
8.7
The measures incorporated into the Convention from the OECD’s MIL are specifically designed to minimise opportunities for ‘double non-taxation or reduced taxation through tax avoidance’. For example, Treasury outlined that:
…the key benefits of the treaty would be denied if a person’s principle purpose is to take advantage of the treaty and avoid paying tax.
8.8
The Convention preserves each country’s right to apply its own domestic laws to prevent tax avoidance. In this case, Australia can continue to apply its ‘general anti-avoidance rules’.
8.9
Treasury noted however, that there was no ‘direct relationship’ between the Convention and the OECD’s MIL. The OECD’s MIL only applies to pre-existing treaties, not new treaties such as the Convention.
Overview and reasons to take proposed treaty action
8.10
According to the National Interest Analysis (NIA), the Convention will promote closer economic cooperation between Australia and Israel by reducing and clarifying the taxation obligations of businesses and residents of either country.
8.11
Commercial ties between Australia and Israel have grown over recent years. Two-way trade in merchandise amounted to approximately $1 billion in 2017–18 and in June 2019, Israel was the third-largest source of foreign company listings in Australia—with 20 Israeli companies listed on the Australian Stock Exchange.
8.12
The Treasury (Treasury) informed the Committee that the Convention will ‘support and continue to strengthen the economic trade and commercial relationship between the two countries’. Tax residents and companies in both Australia and Israel would be the major beneficiaries. More specifically, the Convention is expected to:
reduce tax barriers for individuals and businesses in both countries and encourage cross-border ‘dealings and investment’; and
improve the integrity of both countries’ tax systems through ‘anti-abuse rules’ that safeguard against taxpayers claiming benefits under the Convention.
Provisions to reduce barriers and improve tax integrity
8.13
Provisions targeted to reduce barriers in bilateral investment and trade and reduce compliance costs for taxpayers include:
reducing taxation of outbound dividends, interest payments and royalties;
providing an agreed basis for determining the allocation of taxable profits within multinational enterprises, assisting to remove the potential for double taxation of the same profits in each country;
preventing double taxation of salaries and wages;
allocating taxing rights over fringe benefits to the country that has primary taxing rights over the employment income to which the benefits relate; and
creating a dispute resolution system for taxpayers who believe they have not been taxed in accordance with the Convention.
8.14
The provisions designed to prevent tax evasion and avoidance focus on enhancing the integrity of the tax system through a cooperative framework, for example, by allowing the exchange of taxpayer information between Australia and Israel. Collectively, the integrity provisions aim to deny the benefits of the Convention to taxpayers using the Convention to avoid taxation.
8.15
The Committee was also informed that a number of the integrity provisions included in the Convention were consistent with both the OECD’s MIL and the OECD’s Base Erosion and Profit Shifting (BEPS) project. Treasury advised that such provisions include:
preventing related parties from circumventing a ‘permanent establishment’ in Australia to avoid tax in Australia;
preventing taxpayers from avoiding a taxable presence when using dependant agents to conclude contracts;
integrity rules for fiscally transparent entities, to reduce the risk of double non-taxation; and
introducing a new tie-breaker test for companies that reside in both Australia and Israel.
Timing of the treaty
8.16
The proposed Convention is to take effect in three stages in Australia. The first stage, which covers the key benefits of the Convention—including provisions for withholding rates for dividends, interest and royalties—is planned to take effect from the first day of January that follows the Convention’s full entry into force.
8.17
Following the Convention’s entry into force, the second stage involves fringe benefits tax on fringe benefits provided on or after 1 April, while the third stage is for all other taxes on income earned on or after 1 July.
Obligations
8.18
As noted at para 8.4, Australia is already a party to 44 tax treaties. The following summary of the obligations under the Agreement are taken from the NIA.
8.19
The scope of the proposed Convention is set out in Articles 1 and 2. Article 1 notes which person shall be covered by the proposed Convention, that is, persons who are residents of one or both of the Contracting States. Article 2 describes the taxes to which the proposed Convention shall apply.
8.20
Article 4 (Resident) sets out how and the factors on the basis of which a person’s country of residence shall be determined for the purpose of the proposed Convention.
8.21
Article 5 (Permanent Establishment) defines the term ‘permanent establishment’ (PE), which is relevant to determining when a business, which is a resident of one country, will have a taxable presence in the other country.
8.22
Article 6 (Income from Immovable Property) provides that income derived by a resident of one of the parties to the proposed Convention from immovable property located in the other party may be taxed by the party where the property is located.
8.23
Article 7 (Business Profits) clarifies that an enterprise of a party to the proposed Convention (including beneficiaries of trusts) that derives business profits in the other party will be taxable in that other party only to the extent that the profits are attributable to a PE located in that other party.
8.24
Article 8 (Shipping and Air Transport) provides that profits from international shipping or air transport activities, will be taxable only in the country of residence of the operator, but may also be taxed in the other country where the transport is between places in that other country.
8.25
Article 9 (Associated Enterprises) requires the revenue authorities to make appropriate adjustments to the amount of tax charged on profits from transactions between related enterprises in certain circumstances, to remove double taxation.
8.26
Article 10 (Dividends), 11 (Interest) and 12 (Royalties) provide that dividends, interest and royalties that arise in one country and are paid to a resident of the other country may be taxed in the other country.
8.27
Article 13 (Alienation of Property) enables a country to tax income or gains derived by a resident of the other country from the alienation of immovable property located within its jurisdiction, including from the disposal of interests in land-rich entities.
8.28
Article 14 (Income from Employment) prevents the double taxation of salaries, wages and similar remuneration.
8.29
Article 15 (Directors’ Fees) provides that directors’ fees and other similar payments derived by a resident of one country as a member of the board of directors of a company that is a resident of the other country may be taxed in that other country.
8.30
Article 16 (Artistes and Sportspersons) provides that income derived by an entertainer or sportsperson from their personal activities may be taxed in the country where the activities take place.
8.31
Article 17 (Pensions) provides for pensions and similar periodic remuneration to be taxed only in the recipient’s country of residence.
8.32
Article 18 (Government Service) provides that government service (salaries, wages and other similar remuneration) will be taxable only in the country that paid the remuneration.
8.33
Article 19 (Professors, Teachers and Researchers) provides for the exemption from taxation in the country visited for remuneration derived by visiting teachers, professors, and researchers for up to two years, to the extent that the remuneration is subject to tax in the other country (Article 19(1)).
8.34
Article 20 (Students) deals with certain payments received by students or business apprentices.
8.35
Article 21 (Other Income) provides that any income derived by a resident of a country that is not expressly dealt with elsewhere in the proposed Convention may be taxed only in that country, unless the income arises in the other country.
8.36
Article 22 (Limitation on Benefits) includes a rule—based on an OECD/G20 BEPS recommendation—denying benefits under the proposed Convention if it is reasonable to conclude having regard to all relevant facts and circumstances that one of the principal purposes of any arrangement or transaction resulting in that benefit is to take advantage of the treaty, unless it is established that granting the benefit is in accordance with the object and purpose of the treaty.
8.37
Article 23 (Relief from Double Taxation) includes rules allowing a credit for tax paid in Israel against Australian tax payable on that income, and vice-versa.
8.38
Article 24 (Non-discrimination) contains rules requiring each country to treat nationals (including entities) of the other country no less favourably for tax purposes than it treats its own nationals in the same circumstances.
8.39
Article 25 (Mutual Agreement Procedure) provides a dispute resolution procedure for taxpayers where they consider that they have not been taxed in accordance with the proposed Convention.
8.40
Article 26 (Exchange of Information) obliges the exchange of taxpayer information between the Australian and Israeli competent authorities that is foreseeably relevant for carrying out the provisions of the proposed Convention or for the administration or enforcement of domestic laws concerning taxes.
8.41
Article 27 (Members of Diplomatic Missions and Consular Posts) provides that nothing in the proposed Convention will change the fiscal privileges under general rules of international law or special international agreements of members of diplomatic missions and consular posts.
8.42
Article 28 (Protocol) provides that the Protocol to the proposed Convention is an integral part of the treaty.
Implementation
8.43
Implementing the Convention will require the amendment of the International Tax Agreements Act 1953. The amending legislation Treasury Laws Amendment (International Tax Agreements) Bill 2019 was introduced in the Parliament on 19 September 2019. At the time of this report being prepared, the Bill had not yet been debated.
Costs
8.44
Due to the reciprocal nature of tax treaties, both Australia and Israel can expect direct costs and direct benefits to their revenue bases. However, the NIA outlines that Treasury’s estimates on the financial impact of the Convention’s first stage effects show an ‘unquantifiable cost to revenue over the forward estimates’.
8.45
The Committee requested further clarification from Government representatives on whether the benefits and scope of the problems the Convention aims to address—both double taxation and tax evasion—can be measured.
8.46
Treasury reiterated that the costing of the Convention was ‘unquantifiable’ as it involves the treaty’s entire reach. Alongside the objective of alleviating double taxation, the treaty contains provisions that aim to increase transparency to assist with addressing tax evasion, which is a ‘difficult thing to quantify’.
8.47
Further, it was drawn to the Committee’s attention that the Convention establishes a framework that is also preventing possible future double taxation. While both countries have existing domestic laws to limit double taxation:
… what the treaty does is actually fixes it in international law, which creates a lot more certainty for taxpayers.
8.48
Notwithstanding responses to questions on the Convention’s costs/benefits, the Committee requested Treasury provide more detail on the extent the Convention addresses the OECD’s BEPS project. Treasury provided a table outlining how Articles 1, 5, 7, 9 10, 13, 22 and 25, incorporate a number of OECD Action Items.
Conclusion
8.49
The Committee notes that the Convention adds to Australia’s existing network of 44 tax treaties and is consistent with Australia’s established treaty practice, including that it reflects multiple OECD model conventions.
8.50
Specifically, the Committee acknowledges the benefits of the Convention reducing tax barriers for Australian and Israeli individuals and businesses, as well as enhancing the integrity of cross-border dealings by preventing tax evasion and avoidance.
8.51
The Committee supports the Convention and recommends that binding treaty action be taken.
8.52
The Committee supports the Convention between the Government of Australia and the Government of the State of Israel for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance and recommends that binding treaty action be taken.