Background information
Part 2 contains the tax representations. In respect of each party there are two representations set out. Paragraph (a) relates to when the party is making a payment. Paragraph (b) relates to when the party is receiving a payment.
There is an interrelationship between the Payer Representations which one party makes and the Payee Representations which the other party makes.
If a party is not familiar with Australian withholding tax laws or if they or the other party is incorporated in or is to make payments from another jurisdiction, it is prudent to obtain a legal opinion concerning liability to pay withholding tax in respect of payments to be made under the agreement.
It is emphasised that withholding tax obligations in other jurisdictions are not commented on in this Guide.
Offshore Banking Units have not been considered in preparing the following comments.
** The comments in this 2.1.4.30 "Part 2 - Tax representations" 4.2 "Tax/Stamp duty" have not been prepared with any specific situation in mind. Participants must always carefully consider the facts of their particular case when deciding on tax representations **
Both parties resident in Australia
Here is a summary of the material in this section 2.1.4.30 "Part 2 - Tax representations" which will be relevant if both parties are residents of Australia and do not derive payments through a permanent establishment outside Australia. In these circumstances:
- both parties should be able to make the Payer Representation in paragraph (a); and
- neither party need make any of the Payee Representations in paragraph (b) except that it is suggested that the following additional Payee Representation be included in paragraph (2)(b)(vii):
- "It is an Australian resident and does not derive the payments under this Agreement in part or whole in carrying on business in a country outside Australia at or through a permanent establishment of itself in that other country."
The Payer Representation in the ISDA Master Agreement (paragraph (a)) is based on the payer forming the view that the transaction is not one to which withholding tax applies. The inclusion of the suggested Payee Representation gives the payer an additional basis for the representation in paragraph (a) that payments are not subject to a withholding tax. The reason is that a payment to a person of this type (that is, the type described in the new paragraph 2(b)(vii)) cannot be subject to withholding tax.
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Payer Representations
Essentially, the representation is that the party is not required to withhold any part of a payment. Here is some background behind the Payer Representation:
Broadly, there are two situations when a payer may be required to deduct tax under Australian law:
- when payments are in the nature of interest and they are made to a person outside Australia. In this case a deduction of interest withholding tax generally would be required. (An exemption may apply in very limited circumstances if the payee is a government body or a financial institution.) However, payments under a 'bona fide' swap generally should not constitute payments in the nature of interest. (A swap which in substance represents an investment, or the provision of finance by one party to another, would not be a "bona fide" swap.)
- when the swap payments are not in the nature of interest but represent Australian source income of a non-resident - and as such are subject to ordinary income tax. Under s 255 of the Income Tax Assessment Act 1936 it is possible for the payer to be required to deduct tax from amounts owed to the payee.
Where the payments are not in the nature of interest, the key issue is the source of the income. If the income does not have an Australian source, then it will not be subject to Australian tax.
However, if it does have an Australian source, then the fact that the payee is entitled to an exemption under a double tax agreement into which Australia has entered becomes critical to the accuracy of the Payer Representation.
There are no hard and fast rules which permit a party to determine the source of a payee's swap income. Provided the payee did not have any branch or representative office in Australia through which the agreement was negotiated, generally it would be considered that the fact that the agreement was signed by the payee outside Australia and the business of the payee with which the swap is connected is a business carried on outside Australia would provide the income with a non-Australian source.
The Payee Representation is intended to protect the payer both from the possibility of this view being incorrect and also from the possibility of unusual factual situations arising which depart from the general position.
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Payee Representations
If the payee is an Australian resident
If the payee is a resident of Australia and does not derive payments through a permanent establishment outside Australia, then the payee need not make any of the Payee Representations except that it is suggested that the additional Payee Representation suggested in the commentary where both parties are resident in Australia above) be required from the payee.
If the payee is a resident of Australia and does derive payments through a permanent establishment outside Australia, then the payee should represent:
"It is an Australian resident and wholly derives the payments under this Agreement in carrying on business in a country outside Australia at or through a permanent establishment of itself in that other country."
Obtaining this payee representation assists the payer in making the Payer Representation because s 255 (as referred to above) does not apply when the payee is a resident.
If the payer makes payments to the payee from an office outside Australia (say, country A), the payer may seek a representation that the payee is protected by the double tax treaty, if any, entered into between Australia and country A.
If the payee is not an Australian resident
If payments are being made from Australia by a non-resident of Australia, it is prudent to obtain a legal opinion concerning liability to pay withholding tax in respect of payments to be made by that party. However, here are some comments on the Payee Representations in the ISDA Master Agreement.
Representation 2(b)(i). The most important Payee Representation is that which states that the counterparty is eligible for protection under the double taxation agreement which exists between Australia and the payee's country of tax residence. The place where the payee has a branch operation generally is not relevant - it is the country in which it has its tax residence which usually governs its eligibility for treaty protection.
The representation is contained in (2)(b)(i) of the standard tax representations. The specified treaty would be that between Australia and the country of residence of the payee, and the specified jurisdiction would be the Commonwealth of Australia.
As an example, if Party A is a USA resident and derives payments through a permanent establishment outside Australia, then:
Representation 2(b)(i) should specify that it "will apply to Party A"
"Specified Treaty" means with respect to Party A the double tax agreement between Australia and United States of America
"Specified Jurisdiction" means with respect to Party A the Commonwealth of Australia
At June 2006 Australia had comprehensive double tax agreements with Argentina, Austria, Belgium, Canada, China, the Czech Republic, Denmark, Fiji, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, Korea, Malta, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Papua New Guinea, the Philippines, Poland, Romania, Russia, Singapore, Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taipei, Thailand, United Kingdom, United States and Vietnam.
Note in particular that Australia does not have a double taxation agreement with Hong Kong (nor does the agreement with China automatically extend to Hong Kong now that is has reverted to China).
Representation 2(b)(ii). This representation would be helpful if the payee was carrying on business through a branch in Australia. It can be used to give added protection against the possibility that Australian withholding tax could be imposed on the category of payments due under Transactions. If the payee is in fact carrying on business through a permanent establishment in Australia, then the requirement to withhold would not apply to that payee.
If this representation is used to protect against this possibility, then the Specified Jurisdiction should be stated as "Commonwealth of Australia".
Representations 2(b)(iii), (iv) and (v). These representations relate specifically to the US. Participants should take US legal advice if it is potentially relevant.
Last Update Date 07 Jul 2011