Tax Insights
from India Tax & Regulatory Services
www.pwc.in
New tax treaty signed between
Australia and Germany – First tax treaty incorporating
recommendations of BEPS Action Plans
February 16, 2016
In brief
On 13 November, 2015, the Australian and German Finance Ministers, Mathias Cormann and Wolfgang Schauble, respectively, signed a new tax treaty in Berlin (“new tax treaty”). The new tax treaty represents the first tax treaty that has incorporated the recommendations in the reports of Base Erosion and Profit Shifting (BEPS) Action Plans released by the OECD in October 2015. The new tax treaty replaces the old tax treaty signed between the two countries (i.e. Australia and Germany) in 1972. Significant changes in the new tax treaty are as under:
Certain key recommendations of the OECD in the BEPS Action Plan reports have been
incorporated; e.g.: change in the preamble of the tax treaty, introduction of the “Principal Purpose Test” in the Limitation of Benefits clause, change in the definition of Permanent Establishment (PE), etc.
Detailed clauses on Exchange of Information, Assistance in Collection of Taxes and Protection of Personal Information have been incorporated.
In detail
Considering that the new tax treaty represents the first tax treaty incorporating the BEPS recommendations, we have highlighted the significant changes in the new tax treaty:
OECD recommendations in the BEPS Action Plan reports adopted
Preamble of the new tax treaty
The preamble has been modified to clarify the intention of the tax treaty in line with the
recommendations in BEPS Action Plan 6. Accordingly,
the preamble clarifies that the tax treaty does not intend to create opportunities for non- taxation or reduced taxation through tax evasion or avoidance. This was one of the anti-tax avoidance measures recommended by the BEPS Action Plans.
“Principal Purpose Test”
incorporated in the
“Limitation of Benefits”
clause
o The new tax treaty has introduced an Article on Limitation of Benefits, wherein the “principal
purpose test” as recommended in BEPS Action Plan 6 has been incorporated.
o As per the “principal purpose test,” the benefit of the new tax treaty shall not be granted if it is reasonable to conclude that one of the principal purposes of the
arrangement or transaction was to obtain the benefit of the new tax treaty.
o An exception to the above test would be in cases where granting the benefit would be in
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accordance with the object and purpose of the new tax treaty.
o Although the OECD, in BEPS Action Plan 6, had recommended a detailed limitation of benefits clause supplemented by a
“principal purpose test,”
the new tax treaty has only incorporated the “principal purpose test.”
Access to Mutual Agreement Procedure (MAP) if domestic tax law provisions override the tax treaty
As per the recommendation in BEPS Action Plan 14, if domestic anti-avoidance legislation results in double taxation, access to Mutual Agreement Procedure (MAP) has been provided to the taxpayers, wherein the competent authorities shall mutually consult for the elimination of double taxation.
PE clause modified in line with OECD recommendations o Splitting-up of contracts to
escape PE on account of building or construction site
For the purposes of determining whether the threshold for constitution of a construction PE or installation PE has been fulfilled, any connected activities during different periods, exceeding 30 days, by the foreign enterprise or closely related enterprise, shall be combined.
o Specific activity
exemptions provided under Article 5(6)
The clause for exemption from constitution of a PE in Article 5 has been diluted, i.e. exemption for activities is now available only if the activities are preparatory or auxiliary in nature.
o Fragmentation of activities between related enterprises
Anti-fragmentation rule has been introduced under Article 5. As per the rule, the exceptions for constitution of PE under Article 5(6) of the new tax treaty shall not apply to a fixed place of business that is used by a foreign enterprise, if such enterprise or its closely related enterprise carries on business activities at same or another place in the same Contracting State and either:
(i) that place or the other place
constitutes a PE for the enterprise or closely related enterprise under Article 5; or (ii) the overall activity
from combination of activities carried on by the enterprise or closely related enterprise at such places is not of a preparatory or auxiliary nature.
The above will only apply if the business activities being carried on at the two different places constitute complementary
functions that are part of a cohesive business operation.
o Clause on agency PE broadened
With respect to the clause on agency PE, the requirement of
“authority to conclude contracts” to constitute a PE has been replaced with the requirement that the agent
“habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.”
It is further provided that even if the agent concludes the contract in its own name, but it results in the transfer of ownership and rights relating to the products owned by the foreign enterprise, or provision of services by the foreign enterprise, it would constitute a PE.
Lastly, in line with the recommendation in BEPS Action Plan 7, an agent will not be considered as an
independent agent if the agent is acting
exclusively, or almost exclusively, on behalf of one or more enterprises to which he is closely related.
Arbitration mechanism introduced in case of non- resolution under MAP
o As per recommendations in BEPS Action Plan 14, it has been provided that in case of non-resolution of disputes under MAP within 2 years of the presentation of the case, the taxpayer would have the right to request for arbitration proceedings.
o The arbitration decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in domestic laws, unless the taxpayer seeking
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arbitration does not accept the decision.
o Arbitration is not permitted if the issue is already decided by a court or an administrative tribunal of either state.
Other significant changes
Notification to the other Contracting State
It has been provided in Article 2 of the new tax treaty that any significant changes to the domestic tax law of one Contracting State shall be notified to the competent authorities of the other Contracting State.
Detailed clauses on Exchange of Information, Assistance in Collection of Taxes and Protection of Personal Information
The new tax treaty has
introduced detailed clauses on the following: (i) allowing exchange of information between the Contracting States, (ii) assistance in collection of taxes and (iii) protection of personal
information exchanged under the exchange of information process.
Interpretation of terms The new tax treaty provides that for application of the tax treaty, any term not defined in the treaty shall have the same meaning that it has at that time under the law of the State concerning the taxes to which the tax treaty applies. Further, the meaning under the applicable tax laws of that State will prevail over the meaning given under other laws of the State.
The takeaways
Since the new tax treaty represents the first post- BEPS tax treaty between two major economies, it could provide a road map, or a basis for modification of existing tax treaties or signing of new tax treaties globally. Clearly, this is an example where countries have decided to implement BEPS through a bilateral mechanism, rather than incorporating unilateral change in its domestic laws.
The introduction of
arbitration mechanism, with the provision that the decision would be binding, provides certainty to the taxpayers who wish to obtain a decision under MAP.
Clause for notification of significant changes in domestic tax law to the other Contracting State is a best practice measure that can be adopted by other countries (especially as in this case, where ambulatory
interpretation of non-defined terms in the treaty has been specifically allowed for in the new treaty, which also provides distinction to clauses that support static interpretation).
The article related to liability in case of damages suffered by a taxpayer due to misuse of personal information would serve as a stringent measure to ensure appropriate use of information.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Tax & Regulatory Services – Direct Tax
Gautam Mehra, Mumbai +91-22 6689 1154
[email protected] Rahul Garg, Gurgaon +91-124 330 6515 [email protected]
Tax Insights
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