UNITED STATES TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF AUSTRALIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME（二） ARTICLE 8 Shipping and Air Transport 　Paragraph 1 provides that each of the Contracting States shall exempt from tax profits derived by an enterprise of the other Contracting State from the international operation of ships or aircraft, including: (a) profits from the rental on a full basis of ships and aircraft operated in international traffic by the lessee (provided that the lessor also engages in the international operation of ships or aircraft or in the regular leasing of ships or aircraft on a full basis), and (b) profits from the rental of ships and aircraft on a bareboat basis and of containers and related equipment operated or used in international traffic by the lessee, provided in each case that the leasing activity is incidental to the operation of ships or aircraft in international traffic by the lessor. Rental on a full or bareboat basis refers to whether the ships or aircraft are leased fully equipped, manned and supplied. For example, if a U.S. airline which operates internationally leases a plane on a bareboat basis to an Australian airline for use on its international routes, the rental income derived by the U.S. company is exempt from Australian tax under this Article. However, if the U.S. airline operates only within the United States, or if the leased plane is used only within Australia, the rental income is not exempt under this Article. Moreover, if a U.S. bank leases a plane on a bareboat basis to the Australian airline, either for use internationally or within Australia, that rental income is not exempt under this Article. Income from the rental of ships, aircraft or containers which is not exempt from tax under this Article is taxable in accordance with Article 12 (Royalties). Australian law imposes tax on the net income after deducting expenses, subject to a maximum tax under Article 12 of 10 percent of the gross rental. Paragraph 2 states that the provisions of this Article apply to the share of an enterprise of a Contracting State in the profits of a pool or joint venture, even though the other participants may be enterprises of third States not covered by this Convention. The profit shares of such third country participants are not affected by this Convention, but are taxable in accordance with internal law or under the provisions of another international agreement, if applicable. Paragraph 3 merely clarifies that profits from the transport of goods or passengers picked up and discharged within the same Contracting State are not within the definition of international traffic and may be taxed by that State. ARTICLE 9 Associated Enterprises This Article provides that, where related persons engage in transactions which are not at arm's length, the Contracting States may make appropriate adjustments to their taxable income and tax liability. Paragraph 1 states the general rule that where an enterprise of one Contracting State and an enterprise of the other Contracting State are related through management, control, or capital and their commercial or financial relations differ from those which would prevail between independent enterprises, the profits of the enterprises may be adjusted to reflect the profits which would have accrued if the two enterprises had been independent. Paragraph 2 provides that where one of the Contracting States has increased the profits of an enterprise of that State to reflect the amount that would have accrued to the enterprise had it been independent of an enterprise in the other Contracting State, the second State shall make an appropriate adjustment, decreasing the amount of tax which it has imposed on those profits. In determining such adjustments, due regard is to be had to the other provisions of the Convention. The competent authorities of the two States shall consult each other if necessary in implementing this provision. Paragraph 3 clarifies that each Contracting State may apply its internal law in determining liability for its tax. For example, although paragraphs 1 and 2 refer to allocations of "profits" and "taxes," it is understood that such terms also include the components of the tax base and of the tax liability, such as income, deductions, credits, and allowances. The United States will apply its rules and procedures under section 482 of the Internal Revenue Code. Australia will apply the provisions of its income tax legislation, particularly with respect to the determination of taxable income in cases where the information available is inadequate to measure net income under the ordinary rules. Such determinations must be consistent in each case with the principles of arm's length transactions. ARTICLE 10 Dividends This Article limits the rate of tax which may be imposed by a Contracting State on dividends paid by a company which is a resident of that State for purposes of its tax to a resident of the other Contracting State. A dual resident corporation is a resident of each Contracting State "for purposes of its tax," but is a resident of neither State for purposes of the Convention. Paragraph 1 states that such dividends may be taxed in the State of residence of the recipient. This provision, which is based on the OECD Model, confirms the provision of paragraph 3 of Article 1 (Personal Scope) that each Contracting State reserves the right to tax its residents. Paragraph 2 provides that such dividends may also be taxed in the Contracting State of which the paying company is a resident for the purposes of its tax, but such tax may not exceed 15 percent of the gross amount of the dividends when the beneficial owner is a resident of the other State. This limitation applies to the tax imposed by either State on dividends paid by a dual resident company to a resident of the other Contracting State; but since a dual resident company is not a resident of either State under Article 4 (Residence), it does not apply to dividends received by such a company. In the absence of a Treaty, Australia, like the United States, imposes a tax of 30 percent on gross dividends paid to nonresidents. By Treaty, Australia is willing to reduce that the tax to, but not below, 15 percent. The reciprocal 15 percent limit of taxation at source provided in this paragraph also applied in the 1953 Convention. Paragraph 3 defines dividends as income from shares and income which under domestic law is assimilated to income from shares. Paragraph 4 provides that when dividends beneficially owned by a resident of one Contracting State are attributable to a permanent establishment or a fixed base which that resident maintains in the other State, of which the company paying the dividends is a resident, such dividends are not taxable in accordance with this Article, but in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services). Paragraph 5 provides that a Contracting State may not impose tax on dividends paid by a company which is a resident of the other State, with three exceptions: 　　(a) to the extent that the dividends are paid to a resident of the first State; 　　(b) to the extent that the dividends are attributable to a permanent establishment or fixed base of the beneficial owner in the first State; or 　　(c) to the extent that 50 percent or more of the gross income of the company paying the dividends is attributable to one or more of permanent establishments of that company in the first State and the dividends are paid out of the profits of such permanent establishment. Subparagraph (c) applies only if the taxing State does not impose branch profits tax of the kind described in paragraph 6. For this purpose, the U.S. accumulated earnings and personal holding company taxes are not taxes of the kind described in paragraph 6. If only subparagraph (c) applies, the tax is limited to 15 percent. The United States may also tax dividends received by U.S. citizens under paragraph 3 of Article 1 (Personal Scope). Paragraph 6 authorizes the imposition of a branch profits tax in addition to the ordinary corporate tax on profits of a permanent establishment of a resident of the other Contracting State. Australia's ordinary corporate income tax rate is 46 percent, but the rate of tax on permanent establishments of nonresident corporations is 51 percent. Dividends distributed by Australian corporations to a U.S. corporation are subject to a tax of 15 percent. Distributions by an Australian branch of a U.S. company are not subject to a further tax. Thus, the additional 5 percentage points of tax on the branch profits serves as a substitute for a withholding tax on distributed profits. Under paragraph 6, Australia's additional tax may not exceed the amount which would result if the 15 percent dividend withholding tax were to be applied to the profits of the permanent establishment net of the corporate tax at the rate applicable to domestic corporations. For example, if a permanent establishment has taxable income of 100 in Australia and the ordinary corporate income tax rate is 46 percent, the additional tax on the branch profits may not exceed 15 percent of 54, or 8.1; i.e., the total tax on the branch may not exceed 54.1 percent (46 plus 8.1). The Australian tax of 51 percent is within this limit. Paragraph 6 also provides that, if a nonresident company is liable to a tax on its undistributed profits, the amount of undistributed profits shall be calculated as if that company had paid the corporate income tax applicable to a domestic corporation and had distributed dividends of an amount such that the 15 percent tax on those dividends imposed in accordance with paragraph 2 of this Article would have equaled the additional tax. For example, with an Australian tax on domestic corporations of 46 percent and on permanent establishments of foreign corporations of 51 percent, a permanent establishment of a U.S. corporation would, for purposes of any Australian tax on undistributed profits, be deemed to have distributed profits of 33.33 and undistributed profits of 20.67 for each 100 of taxable income. (Profit of 100 after basic corporate tax of 46 leaves 54 available for distribution. Additional tax of 5 is equivalent to a 15 percent withholding tax on 33.33; 15% x 331/3 = 5. Therefore, distributed profits are deemed to be 33.33 and the remainder of the after-tax profit of 54, or 20.67 is deemed to be undistributed.) ARTICLE 11 Interest This Article limits the tax which may be imposed by either Contracting State on interest derived and beneficially owned by a resident of the other Contracting State. There is no corresponding provision in the 1953 Convention. Paragraph 1 states that such interest may be taxed in the State of residence of the beneficial owner. This provision, which comes from the OECD Model, confirms the provision of paragraph 3 of Article 1 (Personal Scope) that each Contracting State reserves the right to tax its residents. Paragraph 2 provides that such interest may also be taxed by the State in which it has its source, but the tax is limited to 10 percent of the gross amount of the interest. Australia's statutory rate of tax on interest paid to nonresidents is generally 10 percent. Paragraph 3 provides that, when interest beneficially owned by a resident of one Contracting State is attributable to a permanent establishment or fixed base which that resident maintains in the other State, that interest is not taxable in accordance with this Article but in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services). Paragraph 4 states that the provisions of this Article shall not apply to interest payments between related persons in excess of the amount which would have been agreed upon at arm's length. Such excess amount shall be taxed according to the laws of each Contracting State, with regard also to the other provisions of this Convention. Paragraph 5 defines interest as income assimilated to income from money lent under the tax law of the Contracting State where the income arises. Paragraph 6 provides that a Contracting State may not tax interest paid by a resident of the other State, with three exceptions: (1) to the extent that the interest has its source in that State; (2) to the extent that the beneficial owner of the interest is a resident of that State; or (3) to the extent that the interest is attributable to a permanent establishment or fixed base of the owner in that State. Under these rules the United States may tax interest paid by an Australian company if the interest has its source in the United States in accordance with paragraph 7 of this Article, and in accordance with the Internal Revenue Code. Where such interest is beneficially owned by a resident of Australia, the U.S. tax will be reduced to 10 percent, in accordance with paragraph 2 of this Article. The United States may also tax interest received by U.S. citizens, pursuant to paragraph 3 of Article 1 (Personal Scope). Paragraph 7 defines the source of interest. Interest has its source in a Contracting State if paid by that State, a political subdivision or local authority thereof, or a person who is a resident of that State for purposes of its tax, including a corporation which under the respective internal laws is a resident of both States. (Thus, interest paid by such a dual resident company may be eligible for the reduced rate provided in paragraph 2, although interest beneficially owned by such a company is not.) An exception to this general rule, which looks to the payer of the interest, provides that when the indebtedness is incurred in connection with and the interest is borne (deducted in computing taxable income) by a permanent establishment or fixed base which the payer has in a Contracting State, the interest has its source in that State. The Convention does not provide for exemption at a source of interest derived and beneficially owned by the Government of the other State or by a government instrumentality. Under Australian law, such interest, e.g., interest derived by the U.S. Government or the Export- Import Bank, is currently exempt from tax in Australia. Similarly, under U.S. law (I.R.C. section 892) interest derived by the Australian government would generally be exempt from U.S. tax. ARTICLE 12 Royalties This Article limits the tax which may be imposed by either Contracting State on royalties derived and beneficially owned by a resident of the other Contracting State. Paragraph 1 states that such royalties may be taxed in the State of residence of the beneficial owner. This provision, which comes from the OECD Model, confirms the provision of paragraph 2 of Article 1 (Personal Scope) that each Contracting State reserves the right to tax its residents. Paragraph 2 provides that such royalties may also be taxed by the State in which they have their source, but the tax is limited to 10 percent of the gross amount of the royalties. Under the 1953 Convention, copyright royalties (other than those related to films) are exempt from tax at source, but other royalties are taxable at the statutory rates. Australia's statutory tax on royalties paid to nonresidents, other than for films or video tapes, is withheld by the payer at the full corporate or individual tax rate on the gross amount less allowable expenses necessarily incurred in deriving the royalty. The Convention preserves the net basis of taxation by Australia, except that the amount of tax liability may not exceed 10 percent of the gross amount of the royalty paid. Payments for the use of films and video tapes are taxed by Australia at 10 percent of the gross amount. This practice is confirmed by this Article. On the U.S. side the statutory rate of 10 percent will be reduced to 10 percent. Paragraph 3 provides that when royalties beneficially owned by a resident of one Contracting State are attributable to a permanent establishment or fixed base maintained by that resident in the other State, the royalties will not be taxed in accordance with the provisions of this Article but in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services). Paragraph 4 contains a definition of the term "royalties." The definition is broader than the one in the U.S. Model. For purposes of this Convention, payments for the use of, or right to use, industrial, commercial or scientific equipment are treated as royalties, except when such equipment is leased under a "hire-purchase" agreement. Payments for the use of, or right to use, motion picture films and certain tapes are also taxed as royalties. And royalties, for purposes of this Article, include payments or credits for scientific, technical, industrial or commercial knowledge or information owned by any person, and payments or credits for ancillary assistance furnished to enable the application of any property or right to which this Article applies. The reference to knowledge or information "owned" is meant to indicate that the term "royalties" implies a property right as distinguished from personal services. An engineer or architect who prepares a design for a customer is considered to perform personal services, the remuneration for which is covered under Article 14 (Independent Personal Services) or 15 (Dependent Personal Services). An engineer or architect who supplies a preexisting design or blueprint is considered to be furnishing knowledge or information, the payment for which constitutes a royalty governed by this Article. The supply of ancillary services does not give rise to a royalty when supplied in connection with the sale of property, but does give rise to a royalty when supplied in connection with the leasing of any of the property or rights covered by this Article. In some cases, income covered by this Article gives rise to a permanent establishment if the income-producing activity continues long enough. For example, payments for the leasing of industrial, scientific or commercial equipment (other than under a "hire-purchase" agreement) are taxable as royalties, but if the enterprise deriving the royalties maintains the equipment for rental in the other State for longer than 12 months, it is considered to have a permanent establishment in that other State under paragraph 4(b) of Article 5 (Permanent Establishment). In such a case the income is taxable from the beginning in accordance with Article 7 (Business Profits), as provided in paragraph 3 of this Article. Similarly, payments for the supply of supervisory services could in some cases constitute royalties; but if the services are furnished for more than 9 months in a 24-month period, the enterprise has a permanent establishment under paragraph 4(c) of Article 5 (Permanent Establishment), and the income is taxable in accordance with Article 7 (Business Profits), as provided in paragraph 3 of this Article. Subparagraph (b)(iii) of paragraph 4 provides a special rule to deal with the situation of a disguised lease of a property right of the type covered by this paragraph. If, for example, an Australian company were to use in Australia a copyright or patent held by a U.S. company without paying a royalty to the U.S. company and the U.S. company were to forebear from selling the protected products in Australia in return for payment, the U.S. company would be treated as having received a royalty from the Australian company. Subparagraph (c) of paragraph 4 provides that, to the extent that income from the disposition of any property or right described in this paragraph is contingent on the productivity or use or further disposition of such property or right, it is a royalty. Paragraph 5 states that the provisions of this Article shall not apply to royalty payments between related persons in excess of the amount which would have been agreed upon at arm's length. Such excess amount shall be taxed according to the laws of each Contracting State, with regard also to the other provisions of this Convention. Paragraph 6 defines the source of royalties. In general, a royalty is considered to have its source in a Contracting State if paid by the Government or a resident of that State or by a company which under internal law is a resident of that State. (Thus, a royalty paid by a dual resident company may be eligible for the reduced rate provided in paragraph 2, although a royalty beneficially owned by such a company is not.) However, if a permanent establishment or fixed base in one of the Contracting States or in a third State incurs the liability to pay the royalties and bear the payment (deducts it in computing taxable income), the royalty is considered to have its source in the State where the permanent establishment or fixed base is located. Moreover, if under these rules a royalty is not considered to have a source in either State but it relates to the use of property or the right to use property in one of them, the royalty is considered to have its source where the property is used or where there is a right to use it. Thus, for example, if an Australian resident were to license a patent to a third country company, which in turn sublicenses the patent for use in the United States, the United States would tax the sub-license payment by the U.S. user to the third country company in accordance with U.S. law, or with the provisions of a U.S. Treaty with that country, if applicable, and would also tax the license payment by the third country company to the Australian resident, subject to the limitation in paragraph 2. Third country residents cannot obtain the rate reduction provided in paragraph 2, since this Article applies only to royalties derived by residents of a Contracting State. ARTICLE 13 Alienation of Property This Article provides rules for the taxation of certain gains derived by a resident of a Contracting State. In general, it provides that: (1) gains from the alienation of real property may be taxed where the real property is located; (2) gains derived from the alienation of ships or aircraft or related property may be taxed only by the State of which the enterprise is a resident, except to the extent that the enterprise has been allowed depreciation of the property in computing taxable income in the other State; and (3) gains from the alienation of property referred to in paragraph 4 (c) of Article 12 (Royalties) are taxable under Article 12. Gains with respect to any other property are covered by Article 21 (Income Not Expressly Mentioned), which provides that gains effectively connected with a permanent establishment are taxable where the permanent establishment is located, in accordance with Article 7 (Business Profits), and that other gains may be taxed by both the State of source of the gain and the State of residence of the owner. Double taxation is avoided under the provisions of Article 22 (Relief from Double Taxation). Paragraph 1 of Article 13 states the rule that gains derived from the alienation of real property situated in a Contracting State may be taxed by that State. Paragraph 2 defines real property in each of the Contracting States. In the case of the United States, paragraph 2(a) explains that the term "real property situated in the other Contracting State" includes a United States real property interest as defined under the Foreign Investment in Real Property Tax Act, as amended. Thus, the United States retains its full taxing right under the law. In the case of Australia, paragraph 2(b) provides that real property has the meaning it has under Australian law and includes an interest in a company, partnership, trust or estate, the assets of which consist wholly or principally of real property situated in Australia. Paragraph 3 provides that when an enterprise of a Contracting State derives gains with respect to the alienation of ships, aircraft, or containers operated or used by it in international traffic, the gain shall be taxable only in the State of residence of the enterprise, except to the extent that the enterprise has been allowed depreciation on that property in the other Contracting State. To the extent that depreciation deductions have reduced the tax on income from the operation of such ships, aircraft, or containers in the other State, that other State may recapture those depreciation deductions (but not in excess of the gain realized) when the property is disposed of. This paragraph also provides a cross-reference to paragraph 4(c) of Article 12 (Royalties) and states that gain on royalties described in that paragraph (royalties which are contingent on the use or productivity of the right or property) are taxable in accordance with that Article. Paragraph 4 clarifies that real property consisting of shares in a company or interests in a partnership, estate or trust referred to in paragraph 2(b) is deemed to be situated in Australia. ARTICLE 14 Independent Personal Services This Article concerns the taxation of income derived by a resident of one of the Contracting States from independent personal services. The rule established in this Article is that, if an individual who is a resident of one Contracting State performs independent personal services in the other Contracting State, the income from those services may be taxed by that other State if the individual either is present in that other State for an aggregate of more than 183 days in the taxable year (or income year) or has a fixed base regularly available to him in that other State for the purpose of performing his activities. In the latter case, the other State may tax the income for services performed in that other State which is attributable to that fixed base. It is understood that the term "fixed base" is analogous to the term "permanent establishment." Independent personal services include all personal services performed by an individual for his own account, including services performed as a partner in a partnership, where he receives the income and bears the losses arising from such services, except that services performed as a director of a company are covered by Article 15 (Dependent Personal Services). ARTICLE 15 Dependent Personal Services This Article concerns the taxation of remuneration derived by a resident of one of the Contracting States as an employee or as a director of a company. Pensions, annuities and remuneration of government employees are covered by Articles 18 and 19. Other remuneration of a resident of one of the Contracting States for employee services or for services performed as a director of a company may be taxed only in the State of residence unless the employment is exercised or the services are performed in the other State, in which case that other State may tax the remuneration for the services performed there, subject to the conditions set forth in paragraph 2. Paragraph 2 provides that, even where a resident of one Contracting State performs services in the other State, that other State may not tax the income for such services if three conditions are met: (a) the recipient is present in that State for not more than 183 days in the taxable year (or income year); (b) the remuneration is paid by or on behalf of an employer, or, in the case of remuneration of directors, a company, that is not a resident of that State; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment, fixed base, or a trade or business of the employer or company in that State. If any one of these conditions is not met, e.g., if the employer is a resident of the State where the services are performed, the income may be taxed by that State. The insertion of the reference to a trade or business means that if, for example, an Australian resident is employed in the United States by a Bermuda company and his salary is deducted in determining the profits of the U.S. trade or business of that company, the salary is taxable in the United States even if the Bermuda company does not have a permanent establishment in the United States. Paragraph 3 provides that remuneration derived for employment aboard a ship or aircraft operated in international traffic by a resident of a Contracting State may be taxed by that State. Under this provision, Australia may tax the remuneration of employees for services aboard ships or aircraft operated internationally by Australian residents. Similarly, the United States may tax such remuneration when the operator is a U.S. resident. However, under U.S. law, the United States taxes such income of a nonresident alien only to the extent it is derived from U.S. sources (i.e., within U.S. territorial waters). This paragraph does not confer an exclusive taxing right. Both Contracting States retain the right to tax their residents and citizens under paragraph 3 of Article 1 (Personal Scope). ARTICLE 16 Limitation on Benefits This Article limits the benefits of the Convention to bona fide residents of the Contracting States. It is intended to prevent residents of third countries from inappropriately using a company which is a resident of one of the Contracting States as a conduit or similar vehicle to obtain Treaty benefits. Specifically, a person (other than an individual) which is a resident of one of the Contracting States is entitled to relief from taxation from the other Contracting State only if any of three alternative tests is met. The first two tests are objective tests relating to the entity in question. If more than 75 percent of the beneficial interest in the person receiving the income is owned, directly or indirectly, by any combination of individuals who are residents of the Contracting States, citizens of the United States, the Contracting States themselves, or publicly traded companies which are residents of the Contracting States, the first test is met. Under the second test a publicly traded company that is a resident of Australia or the United States is considered to have a sufficient nexus with Australia or the United States, respectively, so as to entitle it to Treaty benefits. Under this test, Treaty benefits are not denied if there is substantial and regular trading of the principal class of shares of such a company on a recognized stock exchange in one of the Contracting States. A recognized stock exchange includes the NASDAQ system in the United States. The third test recognizes that ownership of an entity that is a resident of the United States or Australia by persons resident in third countries is not uncommon. In view of the factors discussed below, granting Treaty benefits to such an entity often is consistent with the goals of the Treaty. Accordingly, under the third test, Treaty benefits are allowed if the establishment, acquisition and maintenance of the person and the conduct of its operations did not have as a principal purpose the purpose of obtaining Treaty benefits. This test would be met, for example, if an Australian company owned by third country residents conducts business operations in Australia and its U.S. investments are related or incidental to those business activities, or if the Australian tax burden equals or exceeds the tax reduction claimed under the Convention. It could also be met in other situations. Paragraph 3, inserted at the request of Australia, provides a special rule concerning certain trust situations. The benefits of the Treaty do not apply to income derived by a trustee which under the Convention is treated as income of a resident of one of the Contracting States if a principal purpose of the use of the trust was to obtain a benefit under the Convention. For example, if an Australian resident establishes one or more U.S. accumulation trusts with Australian beneficiaries to receive dividends from Australian corporations in order to reduce the Australian tax on those dividends, the reduced rate provided in paragraph 2 of Article 10 (Dividends) will not apply. This Article is not meant to impose any added burden on withholding agents, and withholding agents will not be required to verify a person's ownership or purposes. In applying this Article the normal burden of proof rules apply. For example, under present U.S. procedures an entity that is a resident of Australia and that believes it is entitled, under one of the alternative tests of this Article, to the 10 percent U.S. tax rate on interest provided by Article 11 (Interest) would merely file a U.S. Form 1001 with the appropriate withholding agent to claim the benefit. Of course, the Internal Revenue Service could, on audit, examine the transaction. In view of a combination of factors - the tax burden imposed by both the United States and Australia; the fact that, even under treaties, Australia imposes source taxation on income of nonresidents of Australia at a level that is not insignificant; the fact that the Treaty's rate reductions on source taxation of passive income are not as great as those accorded by the United States in many other treaties; and the concerns of both countries about tax avoidance and evasion - this Convention is not expected to be the subject of abuse. It is, therefore, anticipated that residents of the Contracting States will typically satisfy at least one of the three exceptions. Consequently, it should rarely be necessary to deny Treaty's benefits under this Article.