Key News Summary – Australia and Israel have signed their first ‘Double Tax Agreement’ (DTA) which includes OECD/G20 base erosion and profit shifting (BEPS) recommendations. It will come into effect after being ratified in both countries.
Australia and Israel have signed a new tax treaty which, following its entry into force, will represent the first tax treaty between the two countries.
The new tax treaty, 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 its associated Protocol was signed on 28 March 2019 in Canberra by the Assistant Treasurer, the Hon Stuart Robert MP.
The ‘main features’ of the Treaty are set out below.
Importantly, the new treaty also includes OECD/G20 base erosion and profit shifting (BEPS) recommendations, demonstrating the Morrison Government’s continued commitment to tackling international tax avoidance practices.
The new treaty will enter into force after both countries have completed their domestic requirements and instruments of ratification have been exchanged. Legislation will be introduced into the Australian Parliament as soon as practicable to give the treaty the force of law in Australia.
Main features of the new treaty
Anti-abuse and prevention of non-taxation rules
The preamble clarifies that the express purpose of the treaty is to eliminate double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
Treaty benefits will be available for income derived by or through fiscally transparent entities or arrangements (such as partnerships and trusts) but only to the extent that the income is treated as the income of one of the country’s residents under that country’s domestic law.
The taxes covered by the treaty will include income tax, fringe benefits tax and resource rent taxes.
The definition of ‘permanent establishment’ includes important integrity provisions, which covers a range of circumstances in which both countries can tax business profits.
Income from immovable property
The definition of ‘immovable property’ will enhance both countries’ ability to tax income derived from the use of immovable property, including mining rights.
Business profits will be attributed to permanent establishments on the basis of the ‘relevant business activity’ approach.
Shipping and air transport
Profits from international shipping and air transport operations 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.
Transfer pricing adjustments
A seven year time limit will generally apply for making transfer pricing adjustments, with a correlative adjustment to be made to the profits of an associated enterprise so that the transfer pricing adjustment does not result in double taxation of the same profits in the hands of two associated enterprises.
Dividends may be taxed in the source (of the dividend) country up to the following limits:
- Zero: for dividends derived by governments (including government investment funds), central banks, tax exempt pension funds or Australian residents carrying out complying superannuation activities on direct holdings of no more than 10 per cent;
- 5%: of the gross amount of the dividend for intercorporate dividends paid to companies that hold 10 per cent or more of the paying company throughout a 365 day period;
- 15%: for all other dividends.
In practice, Australia only imposes dividend withholding tax on payments of unfranked dividends.
Interest may be taxed in the source (of the interest) country up to the following limits:
- Zero: for interest derived by government bodies (including government investment funds) and central banks;
- 5%: for interest derived by recognised pension funds, Australian residents carrying out complying superannuation activities and unrelated financial institutions; and
- 10%: for all other interest.
Royalties may be taxed in the source (of the royalty) country up to a limit of 5 per cent of the gross royalty.
Alienation of property
Comprehensive rules will govern the allocation of taxing rights between Australia and Israel over income, profits or gains from the alienation of different categories of property.
Income, profits or gains from the disposal of immovable property (such as land) or of shares or comparable interests in land-rich entities may be taxed in the country where the immovable property is situated.
Pensions are generally taxable only in the country of residence of the recipient. However, the source (paying) country may also tax the payment if they are lump sum payments from certain pension funds, retirement benefit schemes or in certain life events (e.g. disability or death). In addition, Government service pensions will be taxable only in the source country unless the person is both a resident and a national of the other country, in which case the pension will be taxable only in the residence country.
Professors, teachers and researchers
Remuneration derived by teachers, professors and researchers who are residents of one country and visiting the other country for up to 2 years for the purposes of study, research or teaching is exempt in the visited country. No exemption is provided if research is not in the public interest and is for private benefit.
Income not expressly dealt with elsewhere in the treaty may be taxed by both countries.
Limitation on benefits
The treaty will include a rule denying treaty benefits, in certain circumstances, if a principle purpose of a person is to take advantage of the treaty.
Relief from double taxation
The treaty provides rules on how double taxation will be relieved by Australia and Israel.
Non-discrimination rules will prevent Australia and Israel from treating each other’s nationals and businesses less favourably – for tax purposes – than they would treat their own nationals and businesses in similar circumstances.
Mutual agreement procedure
The treaty provides mechanisms for taxpayers to present a case if they believe they are not or will not be taxed in accordance with the treaty, subject to certain criteria, and requires Australia and Israel to endeavour to resolve the case by mutual agreement.
Exchange of information
The treaty will provide a legal basis for the exchange of taxpayer information between tax officials in respect of taxes covered by the treaty.