Australia’s 1953 tax treaty with the United States was voided when both nations ratified a new treaty in 1983 and renewed in 2006 that reflected modern day developments. The purpose of a treaty is to prevent individuals and companies of third nations from inappropriately obtaining treaty benefits when they are not residents of either state. The second purpose is to allow modern day provisions to be defined and understood to allow the force of law of each nation and treaty obligations to be enforced by both parties. With 21 million residents and an export dependent nation that distributes its nations abundant natural resources such as coal, zinc, copper, gold, aluminum and iron, Australia protected this status within this highly technical treaty. Many of these protections will be addressed.
To begin. When is an incorporated United States company considered an Australian company. When that company is managed and controlled in Australia, conducts business in Australia and voting power is controlled by Australian resident shareholders. If a company declared dual residency status, failure of residency status would be declared and treaty benefits would be voided by both states.
Areas defined for treaty purposes is the continental shelf to protect the exploitation and exploration of natural resources. This is defined further in US section 638 of the Internal Revenue Code. For the United States, Puerto Rico, Guam and the Virgin Islands are not included. Australia covered Norfolk Island territories, Christmas Island, Cocos Islands, Ashmore and Cartier Islands and the Coral Sea Islands.
For treaty purposes, a state can’t tax higher or lower than the law allows. Domestic law overrides any treaty obligations. An example can be found in Article 4 and 1, Paragraph 3. If a US citizen relinquished citizenship for tax avoidance, 877 of IRS code says that person will be taxed 10 years following citizenship loss. Secondly, Article 18 Paragraph 2 and 6 says child support, social security and alimony is taxed by the respective state if domestic law taxes such revenue.
Australian companies incorporated in Australia are Australian for residency purposes. These include partnerships, estates and trusts. A trust is exempt from taxes if that trust is formed for charitable or scientific research. Residency is defined as the place where the home is located or where major economic relations are conducted. Disputes from this Article 4, Paragraph 1 provision can be found in the Mutual Agreement clause in Article 24.
A company is considered a permanent resident in Australia if management is conducted in Australia, a branch or office, building site or factory and establishment for extractions of natural resources.
For treaty purposes, Australia’s corporate tax was 46 percent since lowered to a flat rate of 30 percent while permanent establishments but non residents pay a 51 percent corporate tax. United States corporate tax rates vary depending on types of corporate formation.
Dividends paid to non residents can’t be taxed higher than a 15 percent gross amount. The prior rate was 30 percentf or both states, a leftover from the 1953 treaty. Undistributed profits are taxed at 15 percent for non resident companies based on Article 10 clauses. Suppose a non resident company has undistributed profits liable to tax. The 15 percent must be taxed on undistributed profits as well as payment of foreign corporation taxes.
If interest is derived from contracting state, no tax is paid if interest has a source in either state, the owner is a resident of either state or monies are derived from a permanent establishment. The US can tax interest paid by an Australian company if the interest has a source in the US. Australia and the US tax 10 percent on interest to non residents. If interest is derived from respective governments, tax is exempt.
Gains connected with permanent establishment are taxable where permanent establishment is located. Other gains may be taxed by the state of source of gains and state of residence of owner to avoid double taxation.
If a citizen resides in either state more than 183 days, that person may be taxed by the same state.
If a person resides in a third country but incorporates in Australia or the US, that person is granted treaty benefits.
Can’t skirt tax obligations for example where an Australian company who establishes a trust in the US to collect dividends from an Australian company to avoid taxes.
Under the Double Taxation clauses in Article 22, the US will give a foreign tax credit for income taxes paid to Australia subject to US Code. Australia agreed to allow Australian residents a credit against Australian income tax paid in the US other than solely by reason of US citizenship. If a US citizen is resident in Australia, both states tax worldwide income. This refers to income generated from outside treaty jurisdictions, a common denominator for all parties to treaties in the modern day. Yet this resident if paid Australian taxes will receive a credit from the US minus Australia’s foreign tax credit. The United States will not lower its normal taxable limits.
Further Double taxation provisions state Australia’s imposition of a 5 percent additional corporate tax on profits of Australian branches of foreign corporations taxes in lieu of a withholding tax on profit remits. Source income by a US resident in Australia is taxed by Australia. A resident of Australia whose source income is US is taxed by the US. Entertainers doing even one show in Australia, pays Australian taxes for the one show.
The difference between the two states is in the forms of taxation and recognition of various corporate formations. Australia doesn’t appear to recognize LLC’s, the United States does. The United States has a progressive tax policy, Australia does not. The United States has established tax codes, Australia is constantly updating theirs.
If any problems arise with treaty provisions, citizens can go to the state of resident or state of citizenship. Dispute provisions are three years which doesn’t necessarily mean settlement in three years.
Treaty provisions are supposed to be updated every year to reflect changes in domestic laws yet either party can terminate this treaty after five years with a six month notice.
October 2009 Brian Twomey
Brian Twomey is a currency trader and Adjunct Professor of Political Science at Gardner-Webb University