UNIVERSITY OF SYDNEY FACULTY OF LAW

MASTER OF LAWS MASTER OF TAXATION

AUSTRALIAN TAX TREATIES

NOVEMBER 2000

TIME ALLOWED: TWO HOURS
READING TIME: 20 MINUTES

ANSWER TWO QUESTIONS: EACH QUESTION IS OF EQUAL VALUE (35 MARKS).
THE MARKS FOR THE PARTS OF THE QUESTIONS ARE INDICATED IN EACH QUESTION

OPEN BOOK EXAMINATION

IN YOUR ANSWER CONSIDER THE OECD MODEL TAX CONVENTION ON INCOME AND ON CAPITAL AND, IF SIGNIFICANTLY DIFFERENT, AUSTRALIA'S TAX TREATIES WITH THE UNITED KINGDOM, THE UNITED STATES AND VIETNAM

Question 1 ANSWER BOTH PARTS

PART A (15 MARKS)

Alumina Inc, a Utopian company, has a special purpose subsidiary company Alsub, also a Utopian company, which owns a part of a bauxite mine in Australis.

Alsub owns one quarter of the shares in Refinery Ltd, an Australis company, which owns and operates a bauxite refinery in Australis.

The other shareholders in Refinery are also part-owners of the bauxite mine. Refinery processes the bauxite belonging to Alsub and the other mine owners into alumina.
Alsub's alumina is sold and shipped to Alumina which then further processes the alumina into aluminium outside Australis and sells it on the world market.
Alsub pays Refinery its pro rata share of the cost of processing its bauxite (which does not allow any profit to Refinery - a so called "cost toll" arrangement).

What profits (if any) may be taxed to Alsub, Refinery and Alumina in Australis under tax treaties?

PART B (20 MARKS)

Do you agree with the results in the following cases? Did they depend on any treaty peculiarities of the treaties in question or the way in which the case was argued? (a) Max Factor (Australia)
(b) Cudd Pressure (Canada);
(c) North West Life Assurance; (US)
(d) National Westminster Bank (US).

Question 2 ANSWER BOTH PARTS

PART A (20 MARKS)

Albert is working as a mining engineer for Conglomerate Inc in Utopia. Last year Conglomerate sent Albert to Australis to assist Consub Ltd, an Australis subsidiary of Conglomerate on a 180 day assignment.
This assignment was part of regular short term secondments of Conglomerate employees to Consub Ltd.
Conglomerate paid Albert's salary into a bank account in Utopia; it also paid the mortgage on his apartment in Utopia and private school fees for schooling of his children in Utopia.
Consub provided free accommodation and a vehicle for Albert during his stay.

To what extent would Albert be taxable under tax treaty in Australis?

Assume Albert received employee share options over shares in Conglomerate before going to Australis which required that he work for three more years for Conglomerate before they could be exercised.

Could Australis tax the benefit of the options or shares if they were exercised after he returned to Utopia?

Would it make any difference if the options were granted while Albert was in Australis or were exercised while he was there? What if, while in Australis, Albert sold shares received from exercise of the options?

PART B (15 MARKS)

Geologist is a resident of Europa. Her business is to conduct geological surveys to gain information to be used by clients in prospecting for minerals.
Under a contract with Oil Ltd., she has carried out a survey of potential oil bearing structures in Australis.
The contract provides for the payment of a sum of money on completion of the survey and for "royalties" at a rate per barrel of any oil produced by Oil Ltd for the area surveyed. Assume that oil has been discovered and is being produced.

Consider the Australis tax treaty implications for Geologist.

What difference would flow if Geologist were a company?

Question 3 ANSWER ALL PARTS

PART A (10 MARKS)

R is a resident of country R. She is a partner in partnership P which was created under the law of state of state P and has its head office there.
The partnership is regarded as a resident of country P under its law.
The partnership derives interest income from an account it has with Bank in country S. There are tax treaties between countries R, P and S in similar form to the OECD Model.

How may the interest be taxed in country S under the tax treaties? Consider the various possibilities that arise if the partnership is treated as a separate taxpayer and taxed like a company or is taxed on a look through basis in countries R, P and S.

PART B (10 MARKS)

R is a resident of country R. She is a partner in partnership P which was created under the law of state of country P and has its head office there.
Both country P and country R treat P, the partnership, as fiscally transparent.
R loans money to P, and P pays interest to R. Country P recognizes loans between partners and partnerships, and allows P a tax deduction for the interest.
Country R does not recognize loans between partners and partnerships, and does not characterize R's receipt of interest as income in its own right.
Country R treats the interest simply as part of R's share of the profit of the partnership. How is this case dealt with under the OECD Model?

What if the tax laws of countries P and R are reversed?

PART C (15 MARKS)

Al Inc is incorporated in the US. It owns all the shares in Ba Pty Ltd which is incorporated and managed in Australia. Ba in turns owns all the shares in Cee Pty Ltd which is also incorporated and managed in Australia. Al sells all the shares in Ba for a profit of $10m.

Can Australia tax the profit under its tax treaty with the US? In answering this question consider the possibilities if the assets of Cee are land or a business in Australia and if the profit would be treated as ordinary income or capital gain in Australia.