As covered in an earlier article, Australia signed last year a Multilateral Instrument that provides for a mass override of its Double Tax Treaties. One year after the ratification, how is this affecting your business?
While Australia agreed to the entry into force of this Agreement from 1 January 2019, changes only come into effect on a specific Double Tax Treaty once the other country has ratified, and then again only once the date of effect they specified has also passed. To add another layer of complexity, countries exercise their discretion on which articles they would like to override, and therefore only the overlap between two countries’ agreed scopes will be affected.
What progress has been made internationally?
We have prepared a table that summarises where every Double Tax Treaty of Australia is at, and the relevant dates that affect each Treaty.
What does this mean practically?
Let us take New Zealand, as an example.
According to the 2010 Double Tax Treaty, if a company is treated by both Australia and New Zealand as their tax resident, it would be found by the Treaty to only be a tax resident of the country where its effective management is situated. If this cannot be found in either country, this must be determined by agreement between the Australian and New Zealand authorities.
As Australia and New Zealand have both agreed to override the article on tax residency, the above primary test is now defunct. Instead, any company that triggers residency in both Australia and New Zealand must now seek for the two countries’ tax authorities to discuss and come to an agreement on which country should have the general taxing rights as the country of tax residence.
As you can surely imagine, seeking the agreement on tax affairs from two countries in concert is a challenging task, and can in some cases prove impossible. In those cases, this will mean the failure of the Treaty protection for the company, and each country will have full taxing rights in accordance with their local tax legislation.
If you are a company operating across borders, this could mean your tax residency has changed recently without your knowledge!
And this is only one of the many changes that can affect existing Tax Treaties.
What should you do?
There has been very limited press and ATO coverage on these changes, probably due to the slow uptake by some treaty partners. Further down the road, we are hoping for more ATO guidance on resolving specific issues that may arise from unforeseen consequences.
In the meantime however, we recommend that you approach us to revisit your current international taxation treatment, which may have been modified within the last few months. Better to find out now about some potential taxation issues, than risk an audit, amendment and penalties down the track.
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 Will Merdy 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 your business. We would be delighted to provide you with clarity and professional guidance.