AUSTRALIA: NEW TREATY WITH GERMANY REFLECTS BEPS RECOMMENDATIONS
The new tax treaty signed between Australia and Germany on 12 November 2015 is the first tax treaty Australia has signed that comprehensively incorporates the proposals in the OECD base erosion and profit shifting (BEPS) final recommendations.
Some notable BEPS-related changes in the new Australia and Germany treaty include:
- The title and the preamble of the treaty has been replaced by BEPS Action 6 recommended language, to clarify that tax treaties are not intended to be used to generate non-taxation or reduced taxation through tax evasion or avoidance.
- The residency article in treaty Article 3 includes an updated paragraph to deal with situations of dual residency. The paragraph reflects member countries’ views that “where a company is a dual resident it often involves tax avoidance arrangements.” Hence, the new clause offers a case-by-case solution.
- Recommended clauses address commissionaire arrangements, so that a foreign enterprise is able to sell its products in a country without having a permanent establishment (PE) to which the sales may be attributed. The new treaty Article 5 deems a PE to arise when: (1) entities that sell products in their own name, but on behalf of a foreign enterprise who owns the products; (2) arrangements that are substantially negotiated in a state but are not formally concluded in the state, but are finalised or authorised abroad; and (3) it manufactures or processes in a country, for the foreign enterprise, goods belonging to the enterprise.
- BEPS Action 6 recommended a minimum 365-day shareholding period be included in the OECD Model provision that prescribes a 5% rate limit on gross dividends when the beneficial owner of the dividends is a company that holds directly at least 25% of the capital of the company paying the dividends. The Australia-Germany income tax treaty provides a shorter six-month rule if the beneficial owner of the dividends is a company that holds directly at least 10% of the voting authority of the company paying the dividends.
- A new limitation of benefits (LOB) article provides a more general way to address treaty avoidance cases including treaty shopping. That is, no treaty benefits will be available if one of the principal purposes of certain transactions or arrangements is to secure a benefit under the tax treaty.
In addition, the new Australia-Germany income tax treaty provides: specific rules to deal with collective investment vehicles, to provide certainty concerning which entity is entitled to treaty benefits; new arbitration rules (three years to seek revenue agencies’ assistance and refer tax unresolved tax disputes after two years to independent and binding arbitration); and a 10-year time limit for making transfer pricing adjustments.
Read a November 2015 report prepared by the KPMG member firm in Australia: New Australia/Germany tax treaty in a BEPS environment
