Global Tax Alert | 31 July 2013

Australia and Switzerland sign revised income tax treaty

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On 30 July 2013, Australia and Switzerland signed a revised tax treaty which will replace the existing treaty signed in 1980.

Highlights include reduced dividend and interest withholding rates in certain circumstances and a general reduction to the royalty withholding rate, as outlined below.

In the context of the OECD Action Plan on Base Erosion and Profit Shifting, Australia’s new tax treaty with Switzerland gives a good indication of the direction treaty policy is taking to review the role of double tax treaties to limit abuse. Along these lines, significant updates include:

  • The revised treaty will include rules denying treaty benefits, in certain circumstances, if a person’s principal purpose is to take advantage of the treaty.
  • Integrity provisions to help prevent related parties from circumventing the permanent establishment time thresholds by splitting contracts across related parties.
  • A revised definition of “immovable property” will enhance both countries’ ability to tax income derived from the use of immovable property, including mining rights.
  • The non-discrimination article shall not apply to any provision of the laws of a Contracting State which are intended to prevent tax abuse, address thin capitalization or to ensure that taxes can be effectively collected or recovered.
  • To improve information exchange the revised treaty will provide a legal basis for the exchange of taxpayer information between tax officials, including for detecting and preventing tax avoidance and evasion. These rules will apply to information held by banks and other financial institutions.

The key features of the revised treaty are summarized below.

Taxes covered

The taxes covered by the revised treaty will include the fringe benefits tax, the petroleum resource rent tax and the minerals resource rent tax.

Permanent establishment

A revised definition of ”permanent establishment” will broaden the range of circumstances in which both countries can tax at source business profits derived from construction and mining activities, and the operation of substantial equipment. In addition, integrity provisions will help prevent related parties from circumventing the permanent establishment time thresholds by splitting contracts.

Income from immovable property

A revised definition of “immovable property” will enhance both countries’ ability to tax income derived from the use of immovable property, including mining rights.

Business profits

Taxing rights over business profits derived through a permanent establishment will apply to profits derived through interposed trusts.

Shipping and air transport

Profits from shipping or air transport activities undertaken between two ports within a country will be taxable in that country.

Associated enterprises

Where the revenue authority of one country adjusts the taxable income of a resident of the other country, to reflect its assessment of the arm’s-length price of goods or services provided to an associated enterprise, the revenue authority of the other country will be required to make a correlative adjustment.

Dividends

Dividends may be taxed in the source (of the dividend) country up to the following limits:

  • Zero - for dividends paid to publicly listed companies, or subsidiaries thereof, or to unlisted companies in certain circumstances, that hold 80% or more of the paying company;
  • Zero - for dividends paid to complying Australian superannuation funds and tax exempt Swiss pension schemes that hold no more than 10% direct voting power or capital in the company respectively for a period of at least 12 months prior;
  • 5% - for dividends paid to companies that hold 10% or more of the paying company; and
  • 15% - in all other cases.

Interest

Interest may be taxed in the source (of the interest) country up to the following limits:

  • Zero - for interest paid to bodies exercising governmental functions and to banks performing central banking functions;
  • Zero - for interest paid to banks that are unrelated to, and dealing independently with, the payer;

  • Zero - for complying Australian superannuation funds and tax exempt Swiss pension schemes; and
  • 10% - in all other cases.

Royalties

Royalties may be taxed in the source (of the royalty) country at up to 5%.

A revised definition of “royalties,” to exclude the right to use industrial, commercial or scientific equipment from the definition, will lower costs for firms that lease such equipment.

Alienation of property

Gains from the disposal of shares or comparable interests in land-rich entities will be taxable in the country where the land is situated.

Australia may tax certain gains derived by individuals who were Australian residents during the relevant income year or during any of the preceding four years.

Fringe benefits tax

Taxing rights over fringe benefits provided to employees will be allocated to the country that has the primary taxing right over the underlying employment income. This will prevent the double taxation of fringe benefits.

Pensions and annuities

Pensions and similar payments will be taxable in the recipient’s country of residence, provided the recipient is taxable on those payments in that country. If not, the source (of the pension or similar payment) country may also tax the payments.

Lump sum payments in respect of retirement, invalidity, disability, death or injury may be taxed in the country of source of the payment.

Non-discrimination

Non-discrimination rules will generally prevent Australia and Switzerland from treating each other’s nationals any less favorably – for tax purposes – than they would treat their own nationals in similar circumstances.

Mutual agreement procedure

Taxpayers will have three years in which to seek the revenue authorities’ assistance in the resolution of tax disputes arising from the application of the treaty.

Taxpayers will also be able to refer tax disputes that remain unresolved after three years to independent arbitration.

Exchange of information

The revised treaty will provide a legal basis for the exchange of taxpayer information between tax officials, including for detecting and preventing tax avoidance and evasion. These rules will apply to information held by banks and other financial institutions.

Anti-abuse rules

The revised treaty will include rules denying treaty benefits, in certain circumstances, if a person’s principle purpose is to take advantage of the treaty.

Temporary residents of Australia

Switzerland will not be required to provide treaty benefits in relation to income derived by Australian temporary residents if Australia exempts that income.

Superannuation funds and pension schemes

New rules will clarify the treaty treatment of superannuation funds and pension schemes, thereby creating greater certainty for those entities.

Australian discretionary trusts

New rules will clarify the treatment of income derived by or through Australian discretionary trusts.

The revised treaty will enter into force after both countries have completed their respective domestic requirements. Legislation will be introduced into the Australian Parliament as soon as practicable to give the revised treaty the force of law in Australia.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Sydney
  • Daryn Moore
    +61 2 9248 5538
    daryn.moore@au.ey.com
Ernst & Young (Australia), Melbourne
  • Peter Janetzki
    +61 3 8650 7525
    peter.janetzki@au.ey.com
Ernst & Young (Australia), Brisbane
  • Paul Laxon
    +61 7 3243 3735
    paul.laxon@au.ey.com
Ernst & Young (Australia), Adelaide
  • Sean van der Linden
    +61 8 8417 1688
    sean.van.der.linden@au.ey.com
Ernst & Young (Australia), Perth
  • Mathew Chamberlain
    +61 8 9429 2368
    mathew.chamberlain@au.ey.com
Ernst & Young LLP, Australian Tax Desk, New York
  • Michael Anderson
    +1 212 773 5280
    michael.anderson@ey.com

EYG no. CM3693