Private ruling: Double Tax Agreement
Date of advice: 19 January 2017
Published: June 2017
Ruling period: Year ended 30 June 20BB | Year ended 30 June 20CC | Year ended 30 June 20DD | Year ended 30 June 20EE | Year ended 30 June 20FF
Date scheme commenced: 1 July 20AA

Ruling: Q1: Is Foreign Co entitled to an exemption from liability to interest withholding tax under Article 11 of a double tax agreement in respect of interest derived from debt instruments? | A1: Yes.

Relevant facts and circumstances: 1. Foreign Co is a limited liability company established by the government. It is wholly owned by the government. 2. Foreign Co's mandate and main business activity is to provide loans on behalf of the government. Interest income is derived from those loans. 3. Foreign Co supports export industries by providing stable long term financing to borrowers operating worldwide in industries. 4. The loans are government supported loans with fixed interest rates. 5. Foreign Co is responsible for the entire process associated with the sale and promotion, applications, granting, disbursing and maintenance of loans. 6. The loans are recorded on the government balance sheet and the government takes responsibility for all risk associated with the lending activities. 7. Government-funded export credits are regulated by the arrangement. The arrangement is a 'gentleman's agreement' between Australia and a number of other countries. The purpose is to provide a framework for export credits and encourage competition between countries based on price and quality and not subsidies. 8. The relevant rules that apply under the arrangement to loans and guarantees are: ● Officially supported export financing may generally be provided for up to 85% of the value of the export contract ● Maximum credit period is usually X years, exception up to XX years subject to notification ● Absolute minimum premiums have been defined, and ● Maximum of 30% of the contract value may be granted financing for deliveries from the purchasing country (local cost). 9. Foreign Co manages the state export financing scheme on behalf of the government. This is implemented by entering into agreements in the name of Foreign Co at the expense of the government. 10. Foreign Co is authorised to draw on the government's account at the Bank and loans are dispersed via the consolidated accounts scheme of the government. 11. All lending activities are financed by fiscal budget allocations from the government. 12. Funds for operation of Foreign Co are provided by the government from the annual government budget. 13. Foreign Co cannot raise a loan or furnish security without the consent of Parliament. 14. All loans are guaranteed either by state export guarantee institutions or by financial institution, pursuant to established rules. The government will bear any loss resulting from failure of guarantors to meet their obligations and the inability to realise sufficient value from any securities that may have been furnished. 15. Loan repayments are made directly to the government via the Bank. 16. There is no relationship between the person beneficially entitled to the interest, being the government, and the payers, which are commercial entities. 17. Administration of Foreign Co is the responsibility of the Foreign Co Board. 18. The relevant Office of the State audits the loan accounts.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1 | International Tax Agreements Act 1953 section 3AAA | International Tax Agreements Act 1953 section 4 Double Tax Agreement

Reasons for decision: Summary: Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the Income Tax Assessment Act 1997 ('ITAA 1997') or withholding tax under section 128B of the Income Tax Assessment Act 1936 ('ITAA 1936') on Australian-sourced income, unless an exemption or exclusion applies. In determining liability to tax on Australian income derived by a foreign resident, it is necessary to also consider the 'Norwegian Convention' as defined in section 3AAA of the International Tax Agreements Act 1953 ('the Agreements Act'). Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those Acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act, provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). | Detailed Reasoning - Tax Agreement: Australia and the country with which Foreign Co reside are both parties to the double tax agreement. Article 11 of the double tax agreement provides that interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State may not be taxed in the first-mentioned State. Foreign Co manages the government's export financing scheme on behalf of the government. It provides finance to a wide range of borrowers operating worldwide in industries and derives interest income from these loans. To be eligible for the exemption from tax for interest income, the resident must be a part of the government of a Contracting State, its monetary institutions or a central bank. The interest must also be derived from the investment of the official reserve assets of a Contracting State. Foreign Co is considered a part of the government for the following reasons: ● Foreign Co is wholly owned by the government ● Foreign Co manages the state export financing scheme on behalf of the government ● The government allocates part of the State's annual budget each year to cover Foreign Co's operating costs ● The loans are recorded on the government's balance sheet ● The government is responsible for all risk associated with the lending activities. It bears any loss resulting from the failure of guarantors to meet their obligations and the inability to realise sufficient value from any securities that may have been furnished ● All loans made by Foreign Co are guaranteed either by state export guarantee institutions or by a state financial institution, and ● Although Foreign Co is an independent limited liability company and has considerable operational autonomy, it is still ultimately accountable to the government. The lending activities in their entirety are financed by fiscal budget allocations and the company cannot raise a loan or furnish security without the consent of the Parliament. Foreign CO is also subject to audit by the relevant Office of the State. Though not specified to be official reserve assets, it can be concluded that the loan monies from which Foreign Co derives its interest income are government monies and therefore the government's reserve assets for the following reasons: ● The loans made by Foreign Co are recorded on the government's balance sheet ● Loan repayments are made directly to the government via Foreign Co, and ● The lending activities in their entirety are financed by fiscal budget allocations from the government. There is no relationship between the person beneficially entitled to the interest, being the government, and the payers, which are commercial entities. Therefore, Foreign Co is exempt from liability to withholding tax on any interest income it derives due to the application of Article 11 of the Convention.