UNIVERSITY OF SYDNEY FACULTY OF LAW

MASTER OF LAWS MASTER OF TAXATION

TAX TREATIES

INTENSIVE COURSE 2001 SEMESTER 2 TAKE HOME EXAM

AVAILABLE 12.00 NOON FRIDAY 1 FEBRUARY 2002

DUE 5.00 PM MONDAY 4 FEBRUARY 2002 (by delivery to the Law School , Level 12, fax to Nancy Carrasco 02 9351 0290 or email nancyc@law.usyd.edu.au)

ANSWER ALL PARTS

YOUR ANSWER MUST BE YOUR OWN WORK AND MUST NOT EXCEED 10 PAGES (3,000 WORDS) IN LENGTH.
THERE IS NO NEED TO QUOTE EXTRACTS FROM TREATIES, THE OECD COMMENTARIES, CASES OR OTHER SOURCES IN YOUR ANSWERS.
SIMPLY GIVE THE RELEVANT REFERENCE.
DO NOT REPRODUCE THE EXAM QUESTIONS AS PART OF YOUR ANSWER.

IN YOUR ANSWER CONSIDER THE OECD MODEL TAX CONVENTION ON INCOME AND ON CAPITAL (INCLUDING THE PROPOSED 2002 UPDATE) AND AUSTRALIA'S TAX TREATIES WITH UNITED KINGDOM, UNITED STATES (INCLUDING THE RECENTLY SIGNED PROTOCOL) AND VIETNAM

1. Europa Pipelines (a company incorporated and managed in Europa) has recently won a contract with Utopia Oil Inc (a company incorporated and managed in Utopia) for the offshore installation of a gas pipeline in Australis.
The project involves digging a trench from an offshore oil well to an island based processing facility and laying pipe in that trench.
It is expected that the process of digging the trenches and laying the pipeline will take nine months to complete.
The overall project of Utopia Oil to develop the extraction and processing facilities will take 18-24 months. Europa Pipelines, however, are only involved in this one component of the overall project.

In digging the trenches and laying the pipe, Europa Pipelines will use a specialised vessel "Europa Endeavour".
Europa Pipelines parent company Europa Holdings Ltd, owns this vessel through its wholly owned subsidiary Europa Endeavour Holdings (another Europa company).
A bare boat charter arrangement exists between Europa Endeavour Holdings and Europa Pipelines.
It is expected that it will take approximately one month to mobilise the Europa Endeavour to the site in Australis waters and then one month to demobilise it after the project has been completed.

Prior to commencing the project in Australis, several Europa Pipelines' engineering personnel will commence preparing for the project.
This will involve determining all of the engineering specifications and requirements of the project.
A component of this work will by necessity be performed in Australis.

A wholly owned Australis subsidiary of Europa Holdings Ltd, Australis Shore Base Pty Ltd, will provide shore based services for Europa Pipelines during the term of the project.
The principle activity of Australis Shore Base Pty Ltd is to provide supplies to the Europa Endeavour whilst it is in Australis waters.
It may also provide some logistical support for the project during its term.

Finally, there will be a requirement for a certain number of expatriate personnel to operate the Europa Endeavour during the project.
These are being provided by another related company Asia Engineering Contractors Pte Ltd, which is based in Asia.
This entity regularly provides engineering expatriates for Europa Pipelines' various projects throughout the world. The provision of engineering contractors to Europa Pipelines for this project is the first activity Asia Engineering Contractors has had in connection with Australis.

It should be noted that none of the personnel of Australis Shore Base Pty Ltd, Europa Pipelines, or Asia Engineering Contractors have the power to conclude contracts on behalf of any of the non-Australis entities in Australis.

Do any of the foreign companies have a permanent establishment in Australis?

Will the outcome be different if the equipment is mobilised to Australis a couple of months earlier such that it is physically present in Australis for greater than 12 months? If an engineer from Asia Engineering Contractors was used for the design phase and then also remained through the installation phase, does this create any greater PE exposure?

What advice would you give as to ownership of the pipeline in relation to PE exposure?

2. Manufactures Ltd which is resident in Europa has a branch in Australia.
The branch pays an inter-company charge to head office covering the following:

- interest at 10% on a "loan" of part of the branch's capital by head office;
- a foreign exchange loss on profits of the branch repatriated to head office
- fee for accounting services provided by head office;
- prorated share of other head office expenses (including the salary of the CEO)
- $10 per item as cost of goods sold (the cost of manufacture on an absorption cost basis at head office being $7.50)

Manufactures pays a patent royalty of $100,000 to a related company in Ruritania in respect of manufacturing operations carried on by the branch which is deducted by the branch. Manufactures has total external interest costs of $5,000,000 and it allocates in its financial accounts in accordance with Europa tax law a pro rata share of $500,000 of this interest to the branch in Australia based on its worldwide operations.

To what extent is deduction of these expenses required, permitted or prohibited under tax treaties?
Manufacturers also wishes to know whether it is possible to be taxed on a profit in Australia when overall it makes a loss if the results in Europa and Australia in relation to products sold in Australia are combined.

3. Advise on the tax treaty consequences in the following situations involving payments of interest:

(a) a resident of Utopia receives a payment of interest from the permanent establishment in Australis of a bank resident in Europa;

(b) the permanent establishment in Australis of a bank resident in Europa receives a payment of interest from a resident of Utopia;

(c) a partnership created and managed in Utopia with partners resident in Europa receives interest from a resident of Australis (consider the various alternatives of the partnership being taxed on a transparent or non-transparent basis in the three countries).

4. Jakka is a pop star resident in Nusquam.
She owns a Nusquam company which contracts her services to promoters of concerts in which she is appearing.
For a concert in Australis the deal is that the promoter will pay $10 million to the company which in turn will pay $1 million to Jakka.

Can both of these payments be taxed in Australis? Would it make any difference if the company were resident in a tax haven which either has a tax treaty or has no tax treaty with Australis?
What if the company is not owned by Jakka but by third parties who are unrelated to Jakka?

Many of the specialised crew ("roadies") who accompany Jakka on the trip own companies resident in Utopia which employ the crew and hire out their services to the Nusquam company. How would payments to such companies and by the companies to the crew be treated under tax treaties?