ATO ID 2013/29: Japanese Special Corporation Tax for Reconstruction and Article 2 of the Japanese Double Tax Convention
Date of decision: 7 May 2013
Year of income: Years ending 2012 to 2015
Business line: Public Groups and International

Issue
For the purposes of Article 2(2) of the Japanese convention (the Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [2008] ATS 21), is the Japanese Special Corporation Tax for Reconstruction 'substantially similar' to the 'existing taxes' referred to in Article 2(1)(a) of the Japanese convention?

Decision
Yes. The Special Corporation Tax for Reconstruction is 'substantially similar' to the Japanese Corporation Tax which, under Article 2(1)(a)(ii) of the Japanese Convention, is a tax to which the Japanese Convention applies.

Facts
The Special Corporation Tax for Reconstruction is a tax introduced by the Government of Japan through The Act on the Special Measures Concerning Securing Financial Resources Necessary for Implementing Measures for Reconstruction in Response to the Great East Japan Earthquake (the Act). Article 40 of the Act states that the Special Corporation Tax for Reconstruction is levied between 1 April 2012 and 31 March 2015. Article 42 of the Act states that corporations are required to pay Special Corporation Tax for Reconstruction. Article 43 of the Act states that the Special Corporation Tax for Reconstruction is levied on the Base Amount of Corporation Tax of each taxable fiscal year. Article 44 of the Act states: "Base Amount of Corporation Tax" means the amount as described below for the persons described below: (i) Corporation except Consolidated Parent Corporation: the amount of Corporation tax regarding the income of each fiscal year which is the tax base of Corporation Tax calculated by the laws regarding Corporation Tax (ii) Consolidated Parent Corporation: the amount of Corporation tax regarding the consolidated income of each fiscal year which is the tax base of Corporation Tax calculated by the laws regarding Corporation Tax Article 47 of the Act states: Article 48 of the Act sets the amount of Special Corporation Tax for Reconstruction as being a specified percentage rate of the Amount of Tax Base Corporation Tax for each fiscal year.

Reasons for decision
Summary: Article 2(1)(a) of the Japanese Convention states that the existing taxes to which the Japanese Convention applies in the case of Japan are: For present purposes, Article 2(2) of the Japanese Convention provides that the Japanese Convention also applies to any identical or substantially similar Japanese taxes imposed after the date the Japanese Convention was signed in addition to, or in place of, the existing taxes referred to in Article 2(1)(a). The term 'substantially similar' is not defined in the Japanese Convention. Article 3(2) of the Japanese Convention provides for present purposes that unless the context otherwise requires, any term not defined in the Convention shall have the meaning which it has at that time under Australian law (as Australia is applying the Japanese Convention) concerning the taxes to which the Convention applies. Also, any meaning under Australian tax law shall prevail over the meaning given to the term under other Australian law. As 'substantially similar' is not defined in Australian statute or common law, guidance may be drawn from the ordinary meaning of the term. In this regard, Article 31(1) of the Vienna Convention on the Law of Treaties (the Vienna Convention) as set out at paragraph 97 of Taxation Ruling TR 2001/13 provides 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 and in the light of its object and purpose. The Macquarie Dictionary defines the word 'similar' as: having likeness or resemblance, especially in a general way. The meanings in the Macquarie Dictionary of the adjective 'substantial' of which 'substantially' is the adverb include the following: 1. of a corporeal or material nature; real or actual. ... 4. being such with respect to essentials: two stories in substantial agreement. ... 7. relating to the substance, matter, or material of a thing. ... 8. of or relating to the essence of a thing, essential, material, or important. ... In the present context, the Commissioner considers the meaning of the term 'substantially similar' is that the relevant tax has a material likeness or resemblance to the taxes listed in Article 2 having regard to the essential elements of the taxes. The essence of the approach in Virgin Holdings SA v. Federal Commissioner of Taxation [2008] FCA 1503; 2008 ATC 20-051; (2008) 70 ATR 478 (Virgin Holdings SA) in establishing whether the capital gains tax introduced under Part IIIA of the Income Tax Assessment Act 1936 (ITAA 1936) after the signing of the Swiss agreement (Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income, and Protocol [1981] ATS 5) is a 'substantially similar' tax to the Australian income tax for the purposes of Article 2(2) of the Swiss Agreement was that Edmonds J: In considering the same issue in the context of Article 1(2) of the United Kingdom 1967 agreement (Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains [1968] ATS 9), Lindgren J in Undershaft No 1 v. Federal Commissioner of Taxation [2009] FCA 41; 2009 ATC 20-091 concluded: 131. In my view, the only assumption to be made for the purposes of Art 1(2) is that the Pt IIIA regime tax is not within the expressions "the Commonwealth income tax" and I am not to go further and make any assumptions as to the reason. The Pt IIIA regime tax can then be seen to be substantially similar to the remaining tax for which the ITAA 1936 provided, if for no other reason than because other kinds of capital gains remain included in a taxpayer's assessable income. Similar to Edmonds J in Virgin Holdings SA, Lindgren J considered that a taxpayer's assessable income included capital gains at points before and after the entry into force of the United Kingdom 1967 agreement. Also, the approach of Klaus Vogel in his book Klaus Vogel on Double Taxation Conventions 3rd ed., Kluwer law International, 1997 at page 157, paragraph 53 (also quoted with approval by Kelly J of the Irish High Court in Kinsella v Revenue Commissioners [2007] IEHC 250) is consistent with the approach used in the cases above: What is necessary is a comprehensive comparison of the tax laws' constituent elements. In such a comparison, the new tax under review, rather than being compared merely with a solitary older one (to which it will always be similar in some respects and different in others), should be considered with reference to all types of taxes historically developed within the State in question - and of States with related legal systems - in order to determine which of such traditional taxes comes closest to the new tax (Vogel/Walter, supra m.no. 1, Rdnr. 102-106). Whether a tax is 'substantially similar' to another can, consequently, not be decided otherwise than against the background of the entire tax system... From the approaches above, a comparison of the essential elements of the Special Corporation Tax for Reconstruction with the existing corporation tax regime show that the Special Corporation Tax for Reconstruction is a tax: Accordingly, the Commissioner considers that, as the Special Corporation Tax for Reconstruction imposed by the Government of Japan has a material likeness or resemblance to the existing Corporation Tax, it is a 'substantially similar' tax to the 'existing taxes' in Japan for the purposes of Article 2(2) of the Japanese Convention.

Case references: Virgin Holdings SA v. Federal Commissioner of Taxation [2008] FCA 1503 2008 ATC 20-051 (2008) 70 ATR 478
Related public rulings and determinations: Taxation Ruling TR 2001/13
Other references: Japanese Convention [2008] ATS 21 Swiss Agreement and Protocol [1981] ATS 5 United Kingdom Convention [2003] ATS 22 The Act on the Special Measures Concerning Securing Financial Resources necessary for Implementing Measures for Reconstruction in response to the Great East Japan Earthquake. The Macquarie Dictionary Online, 2009, 5th edition, Macquarie Dictionary Publishers Pty Ltd Klaus V 1997, Klaus Vogel on Double Taxation Conventions 3rd ed., Kluwer law International, p. 157.
Subject references: double tax agreements international tax tax treaties and other agreements Japan