Charles Dickens’s fecund imagination allowed Pip’s benefactor Magwitch to return to England from transportation to an Australian penal colony, albeit at risk of judicial execution. By all accounts, thanks to the triple-knot of location, location, location, escape for real-life transportees wasn’t all that simple. What the desperate convicts of the nineteenth century needed was the solution of the twentieth – air travel. And, in a twist of fate, the first person to pilot a controlled flight in Australia (back in 1910) was none other than history’s greatest master of escape, Harry Houdini.
Well, by now, the world’s tax advisors are becoming used to the locks, double locks and padlocks being used to prevent international tax planners from thinking out of the box. But, the tax treaty signed (though not yet ratified) last month between Israel and Australia plonked a kangaroo, with a 10 ton weight in its pouch, on the box’s lid.
The treaty itself is not very exciting. It contains much of the usual – just about comprehensible – gobbledygook, together with a fair share of the totally ludicrous. An example of the latter: SHIPS AND AIRCRAFT SHALL NOT BE REGARDED AS IMMOVEABLE PROPERTY. Thanks for that.
There is also an unhealthy obsession with the amount of time that needs to elapse before work on a construction site or installation project by a resident of one country becomes taxable in the other – too many numbers and too many conditions (and given the nature of trade between the two countries – not too many instances).
At the end of the day – as with all treaties – it is withholding taxes that are the real bread, butter and Vegemite of the agreement. These fit within the ‘new normal’ of international double taxation treaties: 5% – 15% for dividends, 5% – 10% for interest, and 5% for royalties. It is the Australians who benefit from this much more than the Israelis. While, in the absence of a treaty, dividends from Israel can rack up upwards of 30% tax, as long as Australian corporate income is franked (ie the company paid tax in Australia), there is no Australian withholding tax. Similarly, Australia’s withholding tax on interest is 10% as opposed to Israel’s mainly 25%. Only when it comes to royalties are the tables turned.
Among the sparse points of genuine interest is the question of whether the exemption on pensions from Australia to Israel applies to immigrants to Israel in their first 10 years of residence.That one will have the experts opining vigorously.
What makes this treaty ‘different’ is the (what I believe to be unique) ‘Article 28, Protocol’. Now, many treaties have protocols which are agreed explanations and adjustments to those carefully negotiated agreements. The recent protocol (not yet in force) to Israel’s treaty with the UK (Tax Break 27/1/19) is effectively a new treaty. But, to have a section in the treaty that simply refers to an attached protocol as part of the treaty is – at first sight – circular and balmy.
However, closer inspection reveals all. Article 28 is to tax advisors what Room 101 was to Winston Smith in Orwell’s 1984 – the fulfillment of their greatest fear. Among all the normal explanations and clarifications, just in case anyone had any ideas about favourable interpretation of the treaty, is a section that lists most of the goodies of the BEPS project, stating that nothing in the treaty can stop a country clobbering anybody who tries it on, whatever the wording. Game, set and match.
The Great Houdini’s most famous escape was from a water-filled tank in which he was inserted upside down, heavily manacled. Antipodean tax planners will soon be standing upside down working out what to do next, together with their right-way-up Israeli counterparts.