Case: McDermott Industries (Aust) Pty Ltd v Federal Commissioner of Taxation [2005] FCAFC 67 ; (2005) 142 FCR 134 
Outcome: referred to
DAPFI referred to the authoritative exposition of the relevant principles in the judgment of McHugh J in Applicant A 190 CLR applied to the interpretation of double tax treaties in Federal Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597. In McDermott Industries (Aust) Pty Ltd v Federal Commissioner of Taxation [2005] FCAFC 67 ; (2005) 142 FCR 134 , a Full Court of Hill, Sundberg and Stone JJ (at [38]) summarised those principles in four sub-paragraphs: '. Regard should be had to the "four corners of the actual text". The text must be given primacy in the interpretation process. The ordinary meaning of the words used are presumed to be "the authentic representation of the parties' intentions": Applicant A [at 143] . . The courts must, however, in addition to having regard to the text, have regard as well to the context, object and purpose of the treaty provisions. The approach to interpretation involves a holistic approach. . International agreements should be interpreted "liberally". . Treaties often fail to demonstrate the precision of domestic legislation and should thus not be applied with "taut logical precision".' 71 DAPFI submitted that the Commissioner's submissions depart from an application of these principles in two material respects: (a) They seek to confine reference to the 'context, object and purpose' to that of the Treaty as a whole, and to avoid reference to those considerations in interpretation 'of the treaty provisions'. Considerations of context and purpose are equally relevant to the interpretation of the various articles of a treaty, the course followed in McDermott at [40] and following; and (b) they are a fine example of the application of 'taut logical precision' to construction of the Treaty, not merely giving its words 'primacy' but largely excluding context and purpose. 72 A consideration of the interrelationship of the provisions of the Treaty (and other treaties following the same basic model) shows a concern with the substantive nature of the amounts over which the treaties allocate taxing rights (see for example the preference for economic substance over legal form in the conceptions of 'permanent establishment', 'business profits' and 'real estate'). Business profits, which are allocated to the taxing power of the country to which they are most closely economically connected, do not include amounts which are in substance investment income, whether rent, interest, dividends or royalties (Art 7(6)), and investment income is categorised according to the substantive (rather than the formal) rules of the domestic law. Articles 10(4), (6) and (7), 11(5), (9) and (10) and 12(4) and (5) illustrate this concern. 73 It would be an odd outcome that Art 11(9)(a), a provision whose origin manifestly lies in a purpose of confining Art 11 to what in substance regardless of its form is interest on a loan, should be so construed as to exclude from the Article an amount which in substance though not in form is interest. Such a result would seem to be contrary to the 'context object and purpose' of the provision. 75 When regard is had (as properly it should, McDermott at [41]) to the history of the provisions, it is apparent that Art 11(9)(a) served the purpose of protecting US objectives, but no material purpose in the protection of Australian taxes. Amounts 'in the nature of interest' which were (or were deemed to be) distributions on shares were for treaty purposes allocated to Art 10, as 'income from shares' (Art 10(6)), which might be subjected to withholding tax at 15%, and were excluded from Art 1l by the concluding words of Art 11(5); but Australia in any event limited its withholding tax on such amounts to 10%, treating them as the yield on debt interests. Article 11(9)(a) thus had no relevant role to play in an Australian context, and while it was as the Commissioner says 'a power allocated to each Treaty country', its construction is more illuminated by the purpose which as a matter of agreement, inserted 'as the necessary price paid for international political comity' ( Applicant A at 256) it served in US tax policy than by reference to Australian tax provisions. 76 DAPFI submitted that the Commissioner also seeks support in the 'actual text' of the Treaty, but does so without regard to the whole of the text. In looking to the 'four corners of the actual text', one construes the text in the light of its purpose; as McHugh J said in Applicant A at 253, 'the ordinary meaning of the words are not to be determined in a vacuum removed from the context of the treaty or its object or purpose'. If the words are consistent with that purpose, the construction should serve to fulfill it, not to frustrate it. 77 So when reading Art 11(5), while it is accurate as a matter of taut logical precision to say (see the Commissioner's submissions at [47] above) that it applies to 'any payment which is treated as interest under domestic law, regardless of legal form': (a) To do so would not be consistent with the purpose of the provision, and (b) it would be inaccurate to say that the Treaty recognises no difference between what is in legal form interest and what is in substance interest: the words 'as well as', which for the purpose of the Treaty add to interest on 'securities bonds and debentures' what is 'subjected to the same taxation treatment' as interest, clearly acknowledge two categories of payments formal and substantive 'interest' as being within the operation of the Article. In this context, the role of Art 11(9)(a) is to exclude what substantively is not interest from its scope: that is, what in form is interest but in substance is profit share. The text of Article 11(9)(a) bears this out: it deals with payments 'determined with reference to profits', a qualifier appropriate to what in form is framed as interest rather than profit share.