On a ‘case stated’, the Full Federal Court held that an Indian company, was taxable, on payments it received, from Australian customers, under the Australia – India Double Tax Agreement, because that DTA changed the Australian domestic tax law, to give these payments an Australian ‘source’.
This case is very important, as it was fought on the issue of whether a DTA can only be a shield (only prevent one nation or the other taxing) or whether it could act as a ‘sword’ (enabling the domestic law to tax, where it couldn’t otherwise).
The Case Stated was this:
Are payments received by the applicant from its Australian clients that are royalties for the purposes of Article 12 of the Australia-India DTA* (but are not otherwise royalties as defined by s 6(1) of theIncome Tax Assessment Act 1936 [ITAA36] taken to have an Australian source for the purposes of s 6-5 of the Income Tax Assessment Act 1997 [ITAA97] by reason of Article 23 of that Agreement and the International Tax Agreements Act 1953 [International Act] and therefore assessable income for the purposes of the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997?
*the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1991] ATS 49 (entered into force on 30 December 1991)
This was, effectively, a re-run of the Tech Mahindra Limited v CofT case, on essentially the same facts. There, both the Federal Court [2015] FCA 1082 and the Full Federal Court [2016] FCAFC 130, held that an Indian company was subject to Australian tax on payments it received from Australian clients, for work done by Indian workers in India. This was on the basis that the payments were were “royalties” as defined in Art 12(3)(g) of the Australia-India DTA and that Australia (as the paying country) was given the right to tax those payments, under Art 12(2) of that DTA. The basis for this conclusion is set out in the Tax Technical article about Tech Mahindra (particularly under ‘FJM Note’).
The Taxpayer, here, accepted that the characterisation as a ‘royalty’ was correct,
But it sought to challenge Australia’s right to tax this income, despite the DTA awarding Australia the right to do so.
- It maintained that Australian domestic law did not extend to taxing DTA ‘royalties’ that are not ‘royalties’ for the purposes of our domestic law (relevantly, under the definition in s6(1) of the ITAA36).
- Domestic ‘royalties’ were taxable in Australia, under our ‘withholding tax’ provisions, which apply when the payment is made out of Australia.
- But, non-domestic ‘royalties’ fall outside our withholding tax system and could only be taxed as ‘ordinary income’ under s6-5 of the ITAA97.
- And ordinary income, can only be assessed to a non-resident (viz: the Indian taxpayer), if it had an Australian ‘source’ (which, on ordinary principles, it would not, as the work had been done in India).
- The Australia-India DTA, however, purported to deem this income to have an Australian ‘source’ (Article 23(1) Income … derived by a resident of [India] which, under … [the ‘royalty’ Article] … may be taxed in [Australia], shall for the purposes of the law of [Australia] relating to its tax be deemed to be income from sources in [Australia]).
- The Commissioner said that this DTA provision had effect, in accordance with its terms, because of Australian law (the International Act), that gave that DTA force of law in Australia and, at the same time, the right to override domestic taxing law (which it plainly has to do, if it were to restrain one nation from taxing income, that would otherwise be double taxed).
- The Taxpayer disagreed, however, that the International Act had the effect of allowing a DTA to be used as a ‘sword not a shield’.
The basis for saying that a DTA provision prevailed, over domestic taxing law, was s4 of the International Act, which provided (and still provides):
4(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.
4(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.
The technical basis on which the Taxpayer put its case is set out in para 14 of the reasons for the judgement, as follows.
… It was submitted that whilst s 4(1) of the [International] Agreements Act operates to incorporate the provisions of the Assessment Acts into that Act, the reverse is not true and the Assessment Acts retain their own identity and are not amended by the [International] Agreements Act. …
However, the Full Court was having none of this [para 160]. It said that s4(1) of the International Act, got to the point where that Act and the Assessing Acts were to be ‘read as one’ and it was artifice to suggest that it only worked one way and not the other.
It has been the case that DTA’s (via the International Act) only worked as a ‘shield’ and not as a ‘sword’ but it does appear that this was only because the terms of the DTA’s were only to deprive States of the right to tax.
- They sometimes award the right to tax, to a country, when there is no domestic law to tax that income (so the awarded right is hollow).
- But, in cases like this, where the DTA expressly empowers Australia’s domestic law, to tax the income awarded to it, there is little that can be said about this express DTA provision, having been given the force of law, in Australia, and in terms that prevail over the domestic taxing law, to the extent of any inconsistency.
Accordingly, the Taxpayer lost and had to pay the Commissioner’s costs.
At the time of writing, I do not know if the Taxpayer will seek leave to appeal this decision to the High Court (much less, whether the High Court would give leave).
(Satyam Computer Services Limited v FCT [2018] FCAFC 172 (Full Federal Court, Robertson, Davies and Wigney JJ, 11 October 2018.)
FJM 19.10.18
[LTN 197, 12/10/18; Tax Month – October 2018]
CPD questions (answers available)
- Was this case very similar to Tech Mahindra, to the point where the Taxpayer accepted that the payments were ‘royalties’ under the DTA, which Australia was allowed to tax?
- Was this case limited to DTA royalties, that could only be taxed as ‘ordinary income’ because they were not ‘royalties’ for our domestic withholding tax law?
- Can a non-resident be taxed on non-Australian source ordinary income?
- Did the relevant DTA purport to deem this income to have an Australian source?
- Did the DTA have the force of law in Australia?
- Did the Taxpayer dispute this?
- Did the taxpayer argue that the DTA did not prevail over inconsistent domestic taxing law?
- Did the Taxpayer win?
