Australia

Details

  • Service: Tax, Corporate Tax, International Corporate Tax, Global Transfer Pricing Services
  • Industry: Asia Business
  • Type: Regulatory update
  • Date: 23/05/2013

Tax Insights

KPMG's analysis of tax issues and developments.

Steven Economides

Steven Economides
Partner, International Corporate Tax

+61 2 9335 8876

seconomides@kpmg.com.au

Tax treaties in Asia Pacific 

by Steven Economides, Financial Services Specialist

Tax treaty analysis in Asia Pacific (ASPAC) requires an understanding of:

  1. the differences between the UN and Organisation for Economic Co-operation and Development (OECD) model treaties
  2. the treaty overrides
  3. the different interpretation of ‘beneficial ownership’ adopted by various countries; and
  4. indirect transfer rules.

Understanding the UN Convention is important in a number of ASPAC countries such as India and China. Most double tax agreements (DTAs) entered by India and China have terms consistent with the UN Convention. The UN Model treaty does not always require a fixed place of business to create a permanent establishment. This is a fundamental difference from the OECD model especially in the case of services. Article 5(3)(b) of the UN Convention includes in the definition of permanent establishment the provision of services for a period aggregating more than 6 months in any 12 month period.

 

A second problematic area is the difference is the definition of a dependant agent. Under the OECD model, a dependant agent must have the power to conclude contracts before creating a permanent establishment for its principal. Under the UN convention, the mere fact that an agent maintains stock from which he regularly delivers to customers on behalf of its principal is sufficient to create a permanent establishment for the principal.

 

A number of ASPAC countries including Australia have specific treaty overrides. China and Australia use a general anti avoidance rule (GAAR) to override treaty benefits. Other countries in the region are in the process of introducing a GAAR (India) or have a limited form of GAAR (Korea). Given the interpretation adopted of ‘beneficial ownership’ it is questionable whether the ASPAC region (apart from Australia) needs a GAAR to deal with treaty shopping.

 

The term ‘beneficial ownership’ has been interpreted in India, China, Indonesia and Korea to mean “in substance economic ownership and control”. It is clear from the guidance published by these countries that treaty benefits will only be provided if the holding company has business activities (other than the passive ownership of shares) and employees.

 

Unlike Australia, most ASPAC jurisdictions do not provide for a participation exemption on the sale of shares. As taxpayers have become more sophisticated, the tax authorities have sought to review the extent of their taxing rights by ensuring that indirect transfers are caught (e.g. India and China).

 

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