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Treaty between Australia and United States – US tax debts not enforceable in — Orbitax Tax News & Alerts

The New South Wales Supreme Court on 18 April 2007 handed down a decision in Jamieson v Commissioner for Internal Revenue [2007] NSWSC 324, in which the court decided that orders of the United States Tax Court are not enforceable in Australia.

Relevant to the case, the Commissioner of Internal Revenue of the Internal Revenue Service of the United States obtained a judgement from the United States Tax Court against the estate of the plaintiff, who is the executrix of the estate.

The Court accepted that Article 27 of the OECD Model Tax Convention allows claims on behalf of a foreign state to recover taxes due under the laws of the foreign state. Australia has not included Article 27 in its tax treaty with the United States. However, Article 27 is included in its treaties with France (not yet in force), New Zealand, and Norway (not yet in force).

Australian tax administration provisions allow foreign revenue claims of a foreign country with which there is in force a treaty that contains an article relating to assistance in collection of foreign tax debts. Again, since the treaty with the United States does not contain such article, the domestic tax administration provisions will not apply.

Further, a judgement of the United States Tax Court cannot be enforced in Australia as judgements related to amounts payable in respect of taxes are specifically excluded from foreign enforceable judgements.

Tax treaty between Australia and United States – Australia's Federal Court rejects tax treaty override

The Federal Court of Australia on 19 April 2007 handed down its decision in GE Capital Finance Pty Ltd v Commissioner of Taxation [2007] FCA 558 rejecting the Commissioner's contentions that a tax treaty may be overridden by the Act which enacts that treaty.

The case involved a unit trust, resident in Australia by virtue of the trustee being resident in Australia, deriving interest income from sources in Australia as well as carrying on a business in Australia. Under the trust deed, a sole beneficiary, resident in the USA, was entitled to all income of the trust.

Australian interest withholding tax provisions impose tax on interest paid by residents to non-residents, unless the non-residents derive interest in carrying on a business in Australia through a permanent establishment.

The provisions of the tax treaty between  Australia and the United States similarly require interest income to be taxed under Article 11 of the treaty, unless interest is derived though a permanent establishment, in which case it would be taxed under Article 7.

As the US beneficiary did not have a permanent establishment in Australia under either the treaty or domestic definition of permanent establishment, interest derived by the beneficiary should be taxed in Australia under Article 11. In accordance with interest withholding tax rules, the trustee was collecting and paying to the Australian Taxation Office withholding tax on interest income the non-resident beneficiary was entitled to.

However, in Australia, tax treaties are implemented by incorporating the treaties into the International Tax Agreements Act 1953. Section 4 of the Act provides that the Act takes precedence over Income Tax Assessment Acts, which impose income tax.

Section 3(11) of the International Tax Agreements Act 1953 deems that a beneficiary of a trust is deemed to operate in Australia through a permanent establishment in respect to the business carried on in Australia by the trustee of the trust.

This Section was introduced in 1984 to combat tax avoidance via distribution of business income to beneficiaries resident in countries with which Australia had concluded tax treaties. Upon introduction of this Section, the Treasurer said that the Government decided not to change the individual tax agreements as this process would absorb considerable time and resources while, in the interim, revenue losses could be substantial.

The Commissioner argued that by the combined operation of Sections 3(11) and 4 of the International Tax Agreements Act 1953, the foreign beneficiary is deemed to carry on a business in Australia through a permanent establishment and therefore should be taxed under Article 7, in which case interest withholding tax provisions would have no application and the Australian tax would be payable at a higher rate.

The Court rejected the Commissioner's arguments on the basis that Section 3(11) is neither a charging nor definition provision and merely facilitates the operation of the business profits article. The trustee was correctly withholding tax under interest withholding provisions.

The Commissioner may decide to appeal this decision to the Full Federal Court.