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Australia: ATO outlines key principles for interpreting income tax treaties

Australia: Key principles for interpreting tax treaties

The Australian Taxation Office (ATO) has reviewed the principles it uses to interpret a tax treaty following a number of cases which have put treaty interpretation in the spotlight.

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The ATO’s latest episode in its “interpretation Now!” series aims to increase awareness about the tax agency’s view of statutory interpretation and follows recent Federal Court decisions.

The ATO makes eight key points that broadly put emphasis on the overarching objectives of income tax treaties—the avoidance of double taxation (on specified types of income) and addressing fiscal evasion.

  • Start with the domestic law, not the treaty: Treaties do not become part of Australia’s domestic law until legislated by Parliament. The International Tax Agreements Act 1953 (Agreements Act) gives income tax treaties the force of law and requires the Assessment Acts to be read as one with the Agreements Act. Once legislated, the income tax treaty becomes part of the legislative framework and takes priority over the Assessment Acts.
  • Text, context, text: The ATO reiterated the principle found in Article 31 of the Vienna Convention of the Law of Treaties that a treaty “shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context.” A holistic approach is to be taken, and the text is to be given primacy in the interpretation process.
  • Object and purpose: Article 31 requires an income tax treaty to be interpreted in light of its object and purpose including the sharing of taxing rights, the avoidance of double taxation, and prevention of fiscal evasion. They are also not limited to conferring benefits on taxpayers (i.e., they are not a shield).
  • Liberal approach: Income tax treaties need to be interpreted in a “more liberal manner” than domestic legislation because tax treaties are negotiated texts and often fail to demonstrate the precision of drafting seen in domestic legislation.
  • Other languages: Income tax treaties are often written in multiple languages, and each authenticated version generally is equally valid and can be relied on by taxpayers. The terms are presumed to have the same meaning, but when there are differences, Article 33(4) states that the version that best reconciles the texts, having regard to the object and purpose, will be adopted.
  • Supplementary means of interpretation: Under Article 32, supplementary materials can be used when an Article 31 interpretation produces an “ambiguous or obscene” meaning or “a result which is manifestly absurd or unreasonable.” According to the ATO, it is safer to construe the words of the tax treaty in their context than to use commentary which cannot override the treaty text.
  • Version of commentary: Based on what the OECD has stated, later commentaries can be used for interpreting earlier treaties except when the OECD model has changed in substance. However, Division 815 stipulates the relevant version of OECD commentary to be used in transfer pricing cases.
  • Foreign case law: Decisions of foreign courts are not binding in Australia and therefore are not to be relied upon too heavily. 

Read more from the KPMG member firm in Australia on the KPMG Tax Now website

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