The Timor Sea Treaty provides a framework for taxation of activities in the JPDA. Under the Treaty, Timor Leste is allocated 90 percent taxing rights and Australia is allocated 10 percent taxing rights (the framework percentage) in relation to business profits derived from the JPDA. Both Timor Leste and Australia are entitled to impose taxes based on the framework percentage in accordance with their domestic laws.
The Treaty also has rules for the taxation of specific types of income by Australia and Timor Leste, such as air transportation, capital gains, dividends and employee remuneration.
The Timor Leste tax implications of JPDA activities vary depending on numerous factors. These include the Production Sharing Contract (PSC) area where the entity is operating, whether the entity is a PSC Contractor or subcontractor, whether the entity has a JPDA permanent establishment from a Timor Leste tax perspective and the type of JPDA activities undertaken.
Particular Timor Leste factors that should be considered by entities with JPDA activities include whether they have a Timor Leste tax registration requirement, whether they have a tax return lodgement obligation or are subject to a final withholding tax, whether they are required to make tax instalments, withholding taxes on payments to subcontractors and employees, transfer pricing rules and whether other taxes, such as Value Added Tax, Additional Profit Tax and the Supplemental Petroleum Tax apply.
Given the complexities of the Timor Leste tax rules and potential Timor Leste penalties that can be imposed for non-compliance, entities with JPDA activities should ensure they understand their Timor Leste, as well as Australian, tax obligations.