On 1 January 2019, most of Australia’s Double Taxation Agreements were amended under the Multilateral Instrument. Which countries are affected and what should multinational businesses be aware of now?
This initiative arose under the OECD’s Base Erosion and Profit Shifting (BEPS) project and is likely to impact most international groups with activities in Australia. The nature of the impact will depend on your business activities and the countries you have a presence in, with the final application of specific Double Tax Agreements (DTAs) still to be clarified by the OECD.
Which countries are affected?
Currently, the following countries have Double Tax Agreements with Australia that will be affected by the changes:
- Europe: Belgium, the Czech Republic, Denmark, Finland, France, Hungary, Ireland, Italy, Malta, the Netherlands, Norway, Poland, Romania, the Slovak Republic, Spain, Turkey and the United Kingdom.
- Americas: Argentina, Canada, Chile, Mexico,
- Asia-Pacific: China, Fiji, India, Indonesia, Malaysia, New Zealand, Singapore.
- South Africa & Russia
While Germany ratified the multinational treaty, Australia decided to exclude the recently-revised DTA with Germany from further amendments at this point.
More countries could ratify the treaty and see their DTAs amended at a later time.
How are Australia’s Double Tax Agreement provisions changing?
Australia has opted in for many changes, with most articles of each DTA being considered (provided the same is agreed by the other country). However, existing provisions in Australia’s DTAs that do not offend the new rules will remain. This means that Australia’s DTAs have become more aligned with the BEPS-proofing OECD effort but remain very disparate.
Some provisions will not affect many treaties, as they already bear wording to the same effect. Some other provisions will be rewritten even in DTAs bearing similar wording, to ensure consistency. It is likely that the DTAs that will be the most affected will be Australia’s oldest ones, with some having not varied since the 1970s.
Special points to note for multi-nationals in Australia:
- The tiebreaker test for non-individuals is set as its place of effective management
- Treaty benefits will not be granted where a principal purposes of the dealing in question was to obtain the benefit, unless specifically intended as such by the DTA
- Non-portfolio dividend withholding rate caps will only apply to shares held at least 365 days
- Transfer pricing adjustments in one country will result in a reverse adjustment in the other jurisdiction, to avoid double-taxation.
How are the Double Tax Agreement changes being implemented?
The new rules appear as modifications or addendums to the existing DTA, depending on the content of each DTA. While some articles of the Instrument are compulsory, each country may select which changes they do not want to implement from the remaining articles.
What do the Double Tax Agreement changes mean for your business?
While some of the changes will affect Australia’s DTAs from 1 January 2019 and many countries have ratified the treaty and declared their elections and reservations, the OECD has only recently released their proposed synthesised text which shows how modified articles would read. It will probably be some time before we have further clarity of the final wording and application on a DTA-by-DTA basis.
However, for businesses with activities in two or more of the countries named above, it is still worth considering your exposure under the upcoming articles, which would involve an analysis of the Australian elections, the other country’s elections, and the resulting treatment under the OECD guidelines.
Accru’s Sydney office, Accru Felsers assists many multi-nationals, especially from Germany, Austria, UK, US and China, with their international tax arrangements.
Please contact us if you have specific concerns, or you would like us to review your circumstances in light of the changes to a Double Tax Agreement that could affect you.