The Double Taxation Agreement
70 Materially, Art 25 of the Double Tax Agreement states:
1 Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
71 The Double Taxation Agreement, as with other specified such agreements, is given force and effect as part of Australia's domestic law by the International Tax Agreements Act 1953 (Cth) (Agreements Act). It is the "United Kingdom convention" as defined by 3AAA and thus an "agreement", as defined by s 3 of the Agreements Act. Section 5(1) of the Agreements Act provides that, "Subject to this Act, on and after the date of entry into force of a provision of an agreement, the provision has the force of law according to its tenor". The "United Kingdom convention" is one of the agreements specified in s 5 of the Agreements Act.
72 Subject to a presently immaterial exception, a provision in an agreement thus given domestic force and effect prevails over a provision in an "Assessment Act" or a law imposing taxation, to the extent of any inconsistency. This paramountcy is the result of s 4 of the Agreements Act, which provides:
Incorporation of Assessment Act
(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.
Note: An effect of this provision is that people who acquire information under this Act are subject to the confidentiality obligations and exceptions in Division 355 in Schedule 1 to the Taxation Administration Act 1953.
(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.
By s 3 of the Agreements Act, "Assessment Act" is defined to mean the 1936 Act or the 1997 Act.
73 By Art 3(1)(l) of the Double Taxation Agreement, the term "national" is defined as follows:
(l) the term "national" means:
(i) in relation to the United Kingdom, any British citizen, or any British subject not possessing the citizenship of any other Commonwealth country or territory, provided that individual has the right of abode in the United Kingdom; and any company deriving its status as such from the law in force in the United Kingdom;
(ii) in relation to Australia, an Australian citizen or an individual not possessing citizenship who has been granted permanent residency status; and any company deriving its status as such from the law in force in Australia;
Ms Addy was, therefore, a "national" in relation to the UK but not a "national" in relation to Australia. Given her working holiday visas, she was also a "working holiday maker", subject to income tax on her "working holiday taxable income" at the rates specified in Pt III of Sch 7 to the Rates Act, unless, in terms of Art 25(1) of the Double Taxation Agreement, as afforded paramountcy by the Agreements Act, those rates were "more burdensome" than the rate of tax to which a "national" (as defined) in the same circumstances would be subject.
74 There is no Australian authority concerning the meaning and effect either of Art 25 of the Double Taxation Agreement or a similar provision in a double taxation agreement to which Australia and another country are parties, also given domestic force by the Agreements Act.
75 The general approach to the interpretation of double taxation agreements incorporated into domestic law via the Agreements Act is settled. The relevant principles were summarised by the Full Court by reference to pertinent authority, notably including Thiel v Commissioner of Taxation (1990) 171 CLR 338 (Thiel), in McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 (McDermott Industries), at 143 [38]:
The application of the Convention has been discussed by McHugh J in Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225 and in Thiel v Commissioner of Taxation (1990) 171 CLR 338, the latter case being concerned with the interpretation of the double taxation agreement between Australia and Switzerland. The leading authority in this Court on interpretation of double taxation agreements is Lamesa. It is unnecessary here, to set out again what is there said. The following principles can be said to be applicable:
• Regard should be had to the "four corners of the actual text". The text must be given primacy in the interpretation process. The ordinary meaning of the words used are presumed to be "the authentic representation of the parties' intentions": Applicant A at 252-253.
• The courts must, however, in addition to having regard to the text, have regard as well to the context, object and purpose of the treaty provisions. The approach to interpretation involves a holistic approach.
• International agreements should be interpreted "liberally".
• Treaties often fail to demonstrate the precision of domestic legislation and should thus not be applied with "taut logical precision".
76 The first two of these propositions accord with the general approach to the construction of treaties for which Art 31 of the Vienna Convention on the Law of Treaties, opened for signature on 23 May 1969, [1974] ATS 2 (entered into force on 27 January 1980) (the Vienna Convention) and in particular Art 31(1) of that Convention, "A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose." The second two recognise that the text of treaties often represents the language of compromise between State parties.
77 Also relevant in relation to the construction of a treaty is Art 32 of the Vienna Convention, which permits the use of certain extrinsic materials either to confirm the meaning apparent from the text or to address textual ambiguity or to avoid absurdity. It provides:
Article 32
Supplementary means of interpretation
Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable.
78 In relation to double taxation agreements which, like the present, follow an Organisation for Economic Co-operation and Development (OECD) model, commentaries issued by the OECD in relation to the model agreement have been regarded as an appropriate supplementary means of interpretation in terms of, and for the purposes set out in, Art 32 of the Vienna Convention: Thiel, at 349 per Dawson J; at 356-357 per McHugh J. Articles 31 and 32 of the Vienna Convention are declaratory of the position under customary international law in relation to the interpretation of treaties: Territorial Dispute (Libyan Arab Jamahiriya v Chad) (Judgment) [1994] ICJ Rep 6, at 19 [41].
79 It was submitted for Ms Addy that the imposed rate of tax for which Pt III of Sch 7 to the Rates Act provides and on the basis of which her tax liability was assessed in the further amended assessment are, in terms of Art 25 of the Double Taxation Agreement, "other or more burdensome" than the taxation and connected requirements to which Australian nationals of that other State in the same circumstances are or may be subjected. There being such an inconsistency, the further submission was that the effect of s 4 of the Agreements Act was that her tax should not have been assessed by reference to Pt III of Sch 7 to the Rates Act but, instead, she should have the benefit of the tax free threshold.
80 Ms Addy's submission was that the appropriate comparator was with an Australian national who undertook the same employment as she did, who derived the same income from that employment, who had the same personal history and who lived at the Earlwood house, but who did not hold a working holiday visa. Her submission was that the working holiday visa could not be included in the comparison because it is so "closely associated with nationality as to effectively be the same thing" and any other construction of Art 25(1) would make that article self-defeating.
81 One seeming, over-arching objection voiced by the Commissioner to this approach was that, having regard to the amount of income which Ms Addy derived in the 2017 income year, her income would be largely free from tax. This particular fiscal cri de coeur by a tax collector should be dismissed out of hand, for reasons given by Gleeson CJ in Carr v Western Australia (2007) 232 CLR 138, at 143 [6], in a passage cited with approval by Hayne, Heydon, Crennan and Kiefel JJ in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27, at 47 - 48 [51]:
Fixing upon the general legislative purpose of raising revenue carried with it the danger that the text did not receive the attention it deserves. This danger was adverted to by Gleeson CJ in Carr v Western Australia when he said:
"[I]t may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose. Ultimately, it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of the particular case, that is controlling."
[Footnote reference omitted; emphasis added]
82 If, truly, Ms Addy has been taxed in a way which is more burdensome than nationals in the same circumstances, it is no reason not to afford paramountcy to the Double Taxation agreement, as applied by the Agreements Act, that the consequence will be that she is largely free from tax. All it would mean is that she has been taxed according to law.
83 Another submission made by the Commissioner was that the comparison required by Art 25(1) could not be undertaken. He submitted that, under Art 25(1), the comparison should be with a notional Australian who holds a working holiday visa and has earned working holiday taxable income. That, he submitted, is the appropriate hypothetical comparator. However, the Commissioner submitted, the Migration Act 1958 (Cth) (Migration Act) ensures that such a comparator cannot exist: it is not possible for an Australian national to earn working holiday taxable income while holding a working holiday visa. For that reason, he submitted, no comparison is possible and Art 25(1) is not engaged.
84 The Commissioner submitted that this approach to the construction and application of Art 25(1) was supported by the approach of the New Zealand Court of Appeal in Commissioner of Inland Revenue v United Dominions Trust [1973] 2 NZLR 555 (United Dominions Trust) to an analogous non-discrimination clause in another double taxation agreement. An issue in that case was whether a United Kingdom (UK) company, which was incorporated and carried on business in that country but which had shares in a New Zealand (NZ) subsidiary, was subjected to more burdensome taxation than a company resident in NZ. It was not in dispute that the UK company would pay tax at a 5% higher rate than would a company resident in NZ; but the Commissioner of Inland Revenue (NZ Commissioner) submitted that under the NZ law, nationals of the UK not resident in NZ were treated in the same way as nationals of NZ not resident in the NZ. The UK company contended that, because under NZ law a NZ company could not be anything but a resident of NZ, this demonstrated that the difference in taxation was based on nationality.
85 The UK company succeeded in the original jurisdiction but not on the subsequent appeal by the NZ Commissioner to the Court of Appeal. On appeal in United Dominions Trust, it was held that the comparison for which the UK company contended was not possible. Referring to the submission made by counsel for the UK company (Mr Patterson), Richmond J stated, at 566:
Mr Patterson's argument in effect assumes that it will always be possible notionally to place a national of the taxing territory "in the same circumstances" as the national of the other territory who complains of discrimination. The present case illustrates that this is not necessarily so. In order to obtain a true comparison between the English company and a national of New Zealand it would be necessary to envisage a company which is both a national of New Zealand and a resident of the United Kingdom. This, of course, cannot be done and in my view Article XIX(l) accordingly has no application.
To like effect, White J stated, at 573:
[T]he taxpayer claiming relief must be able to find by way of comparison a notional national of the other territory "in the same circumstances". Once it is accepted that "same circumstances" includes "residence" the objector, in my opinion, cannot point to a national New Zealand company which is "in the same circumstances".
86 Inability on the part of an NZ company under the NZ law by which it was given "birth" to be resident other than in NZ also persuaded the presiding judge, McCarthy P, at 561-562, that the NZ company's postulated comparison was not possible.
87 Each judge in United Dominions Trust was agreed that the "same circumstances" meant "substantially identical" rather than "roughly the same".
88 By analogy and given that it is not possible for an Australian national to hold a "working holiday visa", the Commissioner submitted that the consequence was that there was no comparator in "the same circumstances".
89 There is just no doubt that an Australian national cannot hold a working holiday visa issued under the Migration Act, or any other class of visa for that matter. Under that Act, visas may only be issued to non-citizens: s 29. But it does not necessarily follow from this that the United Dominions Trust based corporate analogy upon which the Commissioner's submission is grounded should be accepted. As McCarthy P acknowledged in that case, at 561, nationality and residence are "treacherous words" when applied to companies. United Dominions Trust illustrates a difficulty which can arise from the assimilation of companies and individuals in an anti-discrimination provision in a double taxation agreement, and what was said in that case must be understood in that context. For present purposes, it is better to commence with the text of Art 25(1), in accordance with the principles for the interpretation of treaties set out above.
90 In relation to individuals, the definition of "national" in Art 3(1)(l) of the Double Taxation Agreement assimilates citizenship with, in the case of the UK, a right of abode and, in the case of Australia, a grant of permanent resident status. Either by mutual assumption or necessary implication, Art 25(1) envisages that a comparison is possible between, materially, a UK citizen in Australia who does not hold a permanent resident visa and not just an Australian citizen but also a UK or other non-Australian citizen who holds a permanent resident visa (who is also, by definition, a "national" of Australia) "in" Australia. Where his or her presence is lawful (and that is the case here) the "national" of the "Contracting State" will only ever be "in" the "other State" if he or she holds whatever the law of the "other State" requires to permit that individual to enter that "other State". It seems to me to follow from these features of the text of Art 25(1) that the inability of a national of the "other State" to hold a particular visa of that "other State" authorising him or her to be "in" that "other State" must be taken to have been regarded as nothing to the point in relation to what might constitute "the same circumstances" for comparative purposes. The Commissioner's submission based on an inability of an Australian citizen to hold a working holiday visa (or any other Australian visa) is, for this reason, flawed.
91 This analysis is also, in my view, a in keeping with a liberal construction of Art 25(1), which is the manner of construction counselled in McDermott Industries. In contrast, the Commissioner's construction ascribes to the State parties to the Double Taxation Agreement an intention that Art 25(1) will never yield an Australian comparator, because no Australian citizen needs or can be given a visa permitting them to live and to work in Australia.
92 This point was nicely and aptly made on behalf of Ms Addy in her counsel's reply submission:
If Catherine Addy had held an Australian permanent visa rather than a Working Holiday Visa she would have been an Australian national for the purpose of the treaty. The Applicant's visa type, as a defining aspect of nationality (which the Respondent agrees does not need to be a 'same circumstance'), does not need to be shared by an Australian comparator for relief to lie.
93 A corollary of this textual analysis of Art 25(1), given that an element is subjection to "taxation or any requirement connected therewith", is that, in relation to income taxation, the national of the "Contracting State" will not just be in possession of an authority of the "other State" permitting him or her to be "in" that "other State" but will also possess an authority which permits the derivation there of income which is subject to taxation under the law of the "other State". Once again, to construe Art 25(1) on the basis that no comparison is possible, because a citizen of the "other State" needs no such authority to derive income in that "other State" and is, in any event, ineligible to be issued with such an authority, is a necessarily flawed approach.
94 Another consequence of the definition of "national" in Art 3(1)(l) of the Double Taxation Agreement, given that, in relation to each State party, it includes those having a right of abode or right of permanent residence, even if not citizenship, is that, necessarily, the discrimination by the "other State" prohibited by Art 25(1) need not extend to all nationals in order to be "based on nationality". For example and materially, that a British citizen might hold an Australian permanent resident visa and thus, by definition be a "national". would not prevent an Australian taxation measure directed to other non-Australian citizens, including some British citizens, holding a different class of visa from being based on nationality.
95 Reading the text of Art 25(1) in context, the evident purpose of Art 25 as a whole is the prevention of discrimination based solely on a difference that is prohibited by one of its paragraphs, of which nationality as found in Art 25(1) is one, but only when all factors are equal and the different tax treatment is based on the prohibition. This is the point made in Klaus Vogel on Double Taxation Conventions (3rd ed, 1997) (Vogel), at 1296 [37]:
Ascertainment of a case of discrimination requires a hypothetical comparison with a person who is a national. The comparison must be based on the actual circumstances which are decisive in connection with the taxation procedure.
[Emphasis in original]
96 I turn then to the OECD "Commentaries on the Articles of the Model Tax Convention" (OECD commentaries) for the purposes envisaged by Art 32 of the Vienna Convention. The relevant part is the commentary on Art 24 of the Model Convention, because Art 25 of the Double Taxation Agreement follows Art 24 of the Model Convention. By way of general remarks, it is stated in the OECD commentaries concerning this article, at 332 [1]:
This Article deals with the elimination of tax discrimination in certain precise circumstances. All tax systems incorporate legitimate distinctions based, for example, on differences in liability to tax or ability to pay. The non-discrimination provisions of the Article seek to balance the need to prevent unjustified discrimination with the need to take account of these legitimate distinctions. For that reason, the Article should not be unduly extended to cover so-called "indirect" discrimination. For example, whilst paragraph 1, which deals with discrimination on the basis of nationality, would prevent a different treatment that is really a disguised form of discrimination based on nationality such as a different treatment of individuals based on whether or not they hold, or are entitled to, a passport issued by the State, it could not be argued that non-residents of a given State include primarily persons who are not nationals of that State to conclude that a different treatment based on residence is indirectly a discrimination based on nationality for purposes of that paragraph.
[Emphasis added]
97 In relation to each of the prohibitions found in Art 25, including that in Art 25(1), it promotes rather than subverts the purpose of Art 25 to construe a prohibition as extending to disguised or covert burdensome tax discrimination based on a prohibited ground. As the emphasised part of the above excerpt from the OECD commentaries, at 332 [1], highlights, such a construction of the equivalent article in the Model Convention is envisaged by the OECD. Construing Art 25(1) so as to extend the prohibition to disguised discrimination also accords with the understanding evident in the judgement of the Court of Justice of the European Communities in respect of EEC Treaty freedoms and equality of treatment requirements. In R v Inland Revenue Commissioners, ex parte Commerzbank A G [1994] QB 219, at 240 [14], in concluding a particular British tax provision which denied a refund to a German company because it was not a UK resident was discriminatory, the court observed that "the rules regarding equality of treatment forbid not only overt discrimination by reason of nationality or, in the case of a company, its seat, but all covert forms of discrimination which, by the application of other criteria of discrimination, lead in fact to the same result." The same observation, in my view, might equally be made in relation to the nationality discrimination prohibition in Art 25(1). It follows that I do not accept a submission made by the Commissioner that the prohibition found in Art 25(1) is contravened only where the discrimination based on nationality is explicit.
98 Ms Addy made a submission that all that Art 25(1) required was that "a court … compare the tax treatment of a foreign taxpayer with the tax treatment of a national who is in the same circumstances as the foreign taxpayer" with the consequence that it was unnecessary to find discrimination, "based on the nationality of the foreign taxpayer". I do not accept that this has any textual support in Art 25(1). The comparison is between "Nationals of a Contracting State" and "nationals of that other State in the same circumstances" (emphasis added). That is a test based not just on persons "in the same circumstances" but on the nationality of such persons. Were there any doubt about this, and in my respectful view there is not, the OECD commentaries, set out above, confirm my textually derived construction. It is not, however, necessary that this submission made by Ms Addy be accepted in order for her to succeed in respect of the ground of objection based on Art 25(1) of the Double Taxation Agreement.
99 Another textual feature of Art 25(1), flowing from the express qualification of "the same circumstances" by the phrase "in particular with respect to residence" is that residents and non-residents are not regarded as being in "the same circumstances". Thus, even though it might be said that nationality will carry with it a right of residence, that type of indirect connection does not mean that a tax provision which burdens non-residents by comparison with residents offends the prohibition in Art 25(1) of discrimination based on nationality. This textually derived meaning is confirmed by reference to the OECD commentaries, at 333, [7]:
7. The expression "in the same circumstances" refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of the application of the ordinary taxation laws and regulations, in substantially similar circumstances both in law and in fact. The expression "in particular with respect to residence" makes clear that the residence of the taxpayer is one of the factors that are relevant in determining whether taxpayers are placed in similar circumstances. The expression "in the same circumstances" would be sufficient by itself to establish that a taxpayer who is a resident of a Contracting State and one who is not a resident of that State are not in the same circumstances.
[Emphasis added]
100 This excerpt from the OECD commentaries also discloses, in the reference to "substantially similar" an understanding of the meaning of "the same circumstances" which might be thought more liberal than the "substantially identical" understanding evident in the New Zealand Court of Appeal in United Dominions Trust. This difference has been noted by Dr John F Avery Jones CBE, who observes in "The non-discrimination article in tax treaties - Part 1", (1991) British Tax Review 359 (Jones), at 361:
In the absence of the explanation in the Commentary one would expect that, in order to determine whether there is any discrimination, an exact comparison is required to be made between a real State B national, compared to a (hypothetical) State A national who is in the same circumstances. We shall refer to this hypothetical State A national as the object of comparison. As was said in a New Zealand case: "The word 'same' carries the connotation of uniformity, of exactness in comparison. The phrase does not ordinarily mean in roughly similar circumstances: it means in substantially identical circumstances and in [the nationality non-discrimination provision] it means in substantially identical circumstances in all areas except nationality."
However, this is not the same as the commentary explains that in the same circumstances (dans la même situation) "refers to taxpayers placed, from the point of view of the application of the ordinary taxation laws and regulations, in substantially similar circumstances both in law and fact." The French text of the commentary, dans les circonstances de droit et de fait analogues (meaning, in analogous circumstances), seems to be even further from the meaning of the Model than the English version of the Commentary.
[Emphasis in original, footnote references omitted]
The New Zealand case referred to in this excerpt from Jones is United Dominions Trust.
101 One view, canvassed in Jones, at 363, which I find attractive, is that "the same circumstances" is, in any event, inherent in the concept of non-discrimination and redundant with the consequence that the "substantially similar" view expressed in the OECD commentaries "goes beyond a permissible interpretation of the text of the Model, and should therefore be left out of account". It may be that the explicit reference in Art 25(1) to "the same circumstances", like the phrase "in particular with respect to residence", was merely intended to make explicit what is in any event implicit in the concept of discrimination based on nationality. In the same way as differing tax consequences between different nationals based on residence are not discriminatory, neither are differing tax consequences between different nationals who are not in the same circumstances. It is not necessary in this case to determine whether "the same circumstances" extends as far as meaning "substantially similar". That is because, as will be seen, it is sufficient to assume that the narrower meaning favoured in United Dominions Trust is correct.
102 The OECD commentaries, at 334 [8], confirm what a reading of the text of Art 25(1) would in any event suggest, which is that, "In applying paragraph 1, … the underlying question is whether two persons who are residents of the same State are being treated differently solely by reason of having a different nationality" (emphasis added). I respectfully agree with these observations made by Professor Carlo Garbarino, professor of taxation at Bocconi University in Milan, Italy in his work, Judicial Interpretation of Tax Treaties - The Use of the OECD Commentary, Edward Elgar Publishing Ltd, 2016 (Garbarino), at 500 [13.03], in respect of Article 24 in the OECD Model Convention:
13.03 The principle of non-discrimination of Art. 24 is not meant to have the far-reaching afforded by other clauses of equal treatment found in international law (MFN clause in the WTO) or in EU law (Art. 18 of the EU Treaty), so the essential feature of this clause is what it does not achieve, rather than what it could possibly achieve. In summary, Art 24 does not: provide a broad equal protection clause; provide a broad definition of discrimination; cover discrimination based on residence; prevent reverse discrimination; provide MFN treatment; eliminate differentiated treatment imposed by treaty; or prevent differentiated treatments for public bodies or non-profit organizations.
[Emphasis in original - "MFN" = Most Favoured Nation]
103 The Rates Act expressly envisages that, in respect of persons who are resident in Australia, a different rate of tax will apply in respect of income derived in Australia from the same source, depending on whether the individual deriving that income is or is not a "working holiday maker" (as defined). On examination, the definition of "working holiday maker" in s 3A(1) of the Rates Act necessarily extends only to particular individuals who are not nationals of Australia. Likewise by reference to s 3A(2) of the Rates Act, it is only such persons who may derive "working holiday taxable income". These are what Vogel terms the "actual circumstances which are decisive in connection with the taxation procedure". In my view, this means that the discrimination between resident derived income from the same source in Australia is based on nationality. It is disguised by the reference to "working holiday maker" but the definition of that term makes it plain that what the disguise covers is nationality. A resident "national" of Australia undertaking the same work as did Ms Addy, in other words "in the same circumstances", would not be taxed by reference to the rates specified in Pt III of Sch 7 to the Rates Act. Such a person would have the benefit of the tax free threshold.
104 In respect of each of her employments in Australia during the 2017 income year, Ms Addy, who was an Australian resident until 30 April 2017, was liable to a different rate of income tax than an Australian resident who was a "national" of Australia (as defined by the Double Taxation Agreement) solely because she was a "working holiday maker" (as defined by the Rates Act) and thus a non-"national" of Australia. As already mentioned, "national" of Australia (as defined by the Double Taxation Agreement) includes a non-citizen who is entitled to permanent residence, but it is not residence which is the relevant distinguishing feature here as between Ms Addy and Australian "nationals". Materially, so far as the applicable rate of tax is concerned, the Rates Act distinguishes between individuals on the basis of the type of visa which that individual holds. Only non-citizens can hold the types of visa that constitute a "working holiday visa" (as defined), of which those successively held by Ms Addy were one type. That is a disguised form of discrimination based on nationality. That is exactly the type of discrimination which is prohibited by Art 25(1) of the Double Taxation Agreement and, per force of s 4 of the Agreements Act, prohibited by that Act. It is but a more particular variant of the disguised discrimination example given in the OECD commentaries, at 332, [1], of different treatment of individuals based on whether or not they hold, or are entitled to, a passport issued by the State.
105 Having helpfully been taken in oral submissions to Garbarino, where a number of international taxation decisions are referenced by the learned author, I directed the parties to file supplementary submissions in relation to whether any of those cases offered assistance in relation to the construction of Art 25(1). The Commissioner did not put forward that any particular case was of assistance, although he did helpfully append from his research sources summaries of a number of them. Ms Addy went further, supplying, where possible, English translations of the judgement text of the cases mentioned in these judgement summaries. More particularly, Ms Addy submitted that two of the cases, a judgement of the German Bundesfinanzhof (Federal Fiscal Court) IR 20/87, 14 March 1989, Bundessteuerblatt, 1989, 14, II, 649 (German Case) and a judgement of the French Cour Administrative d'Appel Marseille (Administrative Court of Appeal Marseille), 98MA01682, 8 February 2000 (French Case) were of assistance and supported the upholding of her appeal on the Art 25(1) ground. I agree.
106 The background to the German Case was as follows. A German resident Dutch national worked five days in 1983 in Italy on behalf of a German employer. If the Dutch national would have been a German national he or she would have been entitled to an exemption from German income tax with respect to the employment income earned in Italy. Article 24(1) of the tax treaty between the Netherlands and the Federal Republic of Germany of 1959, as amended by the Protocol of 1980, stated:
The nationals of one of the States shall not be subjected in the other State to any taxation which is other or higher than the taxation to which the nationals of that other State in similar circumstances are subjected. The same provision shall apply as regards the extent of any tax allowances, reliefs and reductions granted on the basis of marital status or family circumstances.
107 Article 24(1) of this Dutch-German tax treaty, as do some other double taxation agreements, uses "similar circumstances", rather than "the same circumstances" but for present purposes that distinction is immaterial, because the agreement nonetheless prohibits discrimination based on nationality and it is as an exemplification as to how such discrimination occurs that the German case is of present assistance. One of the issues in the German Case was whether the Dutch national who was a resident of Germany was entitled to an exemption from German income tax with respect to the employment income earned during these five days under Art 24(1) of the Dutch-German tax treaty. The German Fiscal Court held that, in the circumstances, the effect of Art 24(1) was that the Dutch national was entitled to an exemption from German income tax with respect to employment income earned from activities performed in Italy during the five days in 1983. According to the English translation of its judgement with which I was provided, that court stated, inter alia:
The plaintiffs are liable to tax without restriction in Germany. According to Article 24 of the Germany/ Netherlands Double Taxation Agreement they are entitled to be taxed in the same way as every other party with German nationality liable to taxation without restriction, if the actual circumstances definitive for taxation are comparable. Article 11 No. 1 letter d in conjunction with Article 7 Section 1 Clause 1 of the Germany/ Italy Double Taxation Convention grants objective exemption from tax in favour of German nationals for revenues earned for worked performed in Italy not on a self-employed basis. In the year in dispute of 1983 the plaintiff performed his work not on a self-employed basis for five days in Italy. He earned revenues from performing this work. These revenues must be considered to be tax-free in the Federal Republic of Germany, because a German national liable to tax without restriction, likewise practising his profession for five days in Italy, not on a self-employed basis and receives revenues for this would have a corresponding claim.
108 Finding the further amended assessment to be excessive by upholding the Art 25(1) ground of objection is consistent with the outcome in the German Case. Ms Addy, a British national resident in Australia was, by virtue of the Rates Act, subjected to a higher rate of tax than would have been an Australian national performing the same work in Australia as did she.
109 The background to the French Case is more complicated but the result does offer another illustration of why Ms Addy's Art 25(1) ground of objection is a good one.
110 Article 164C of the French Tax Code (FTC) provided that non-residents who owned real property in France were liable to income tax on three times the rental value of this property, unless (i) their French source income exceeded this amount, or (ii) their tax in their country of residence exceeded two thirds of the income tax they would have paid in France on the same income. The France-Monaco tax treaty of 18 May 1963 provided for a special tax regime for French nationals who transferred their residence to Monaco. The treaty made a distinction between French nationals who may claim residence in Monaco and those who may not. Under Art 7(1) of the treaty, French nationals who were resident in Monaco should, in principle, be considered as French tax residents, and were therefore liable to French income tax, unless they belonged to one of the following categories:
they have been continuously resident in Monaco since 13 October 1957;
they are part of his Serene highness's Household;
they were born in the Principality and have lived there continuously since; or
they are officials, officers or employees of the public services of the Principality who established their habitual residence in Monaco before 13 October 1962.
111 According to the summary, contrary to most treaties signed by France, the France-Monaco treaty provided for a specific definition of the residence of French nationals that did not rely on objective criteria (habitual abode, centre of interest, nationality, competent authorities). It relied instead on a mere conventional rule according to which French nationals remained French tax residents, despite the transfer of their domicile to Monaco, except in very limited cases. The second unusual aspect of the treaty was that its aim was not to avoid double taxation but to prevent situations of double non-taxation. Monacan residents were thus, in principle, within the scope of Art 164C of the FTC and could benefit from the exemption applicable to residents of co-contracting states.
112 The taxpayers were an Italian and British national and both were residents in Monaco. Since they had a real property in France, the tax authorities applied Art 164 C of the FTC and imposed an income tax on three times the rental value of this property. The taxpayers challenged the decision of the tax authorities before the Lower Administrative Court (Tribunal Administratif) of Nice on the ground of non-discrimination provisions of France-UK and France-Italy treaties. The issue in the case was whether the imposition of income tax on three times the rental value of a property in France based on Art 164C of the FTC to a British national and Italian national who resided in Monaco, while the same was not imposed to a French national who resided in Monaco constituted a violation against Art 25 (1) of France-UK treaty and France-Italy treaty regarding non-discrimination.
113 The taxpayers succeeded before the Lower Administrative Court. The tax authorities challenged this judgment before the Marseilles Court of Appeals. According to the summary, they argued that (i) as Italian and British nationals and residents of Monaco, the taxpayers were not in the same situation as French residents of Monaco, as they were not liable to personal income tax in their country of residence (whereas French national residents of Monaco are treated as French residents) and (ii) the taxpayers were in a different situation from French national residents of Monaco since they were not treated as French tax residents.
114 According to the summary of the French Case:
The Administrative Court of Appeals of Marseille confirmed the decision of the Administrative Court. The Court first determined whether the taxpayers could benefit from the non-discrimination provision of the treaties, i.e. Article 25 of the France-Italy and France-UK treaties. Following the Benmiloud case (Case No. 128611 decided by Conseil d'Etat on 30 December 1996), the Court of Appeals applied the non-discrimination provision to the British national who was resident in Monaco. As far as the Italian national was concerned the Court of Appeals observed that, notwithstanding Article 1 of the treaty, the non-discrimination provision applies to non-residents. Article 25 of the France-Italy treaty provides:
"Nationals of a Contracting State, whether resident or not of either Contracting State, shall not be subject to any taxation, or any requirement connected therewith, in the other contracting State, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subject to."
Two further issues were raised:
1. Is the fact that the discrimination results from the France-Monaco treaty itself an obstacle to the application of the principle?
2. Is an Italian or a British national resident in Monaco in the same situation as a French national resident in Monaco?
The first issue is exceptional as treaties usually refer to the residence criterion and do not therefore discriminate based on nationality. It is not a question of hierarchy of one treaty over the other, but it raises the question of the combination of the two treaties and the non-applicability of a French domestic provision to foreigners protected by a non-discrimination provision, to the extent that the French tax only applies to foreigners in the France-Monaco context. The Court of Appeals ruled that the fact that the discrimination resulted from a treaty was irrelevant and that it should be prohibited.
With respect to the second issue, whether French nationals and foreigners are in similar circumstances, the tax authorities took the view that, according to Article 7(1) of the France-Monaco treaty, French nationals have their "tax residence" in France under the treaty, whereas British and Italian nationals do not. The tax authorities asserted that the different treatment was due to the taxpayers' tax residence rather than to their nationalities.
The Court of Appeals rejected this argument and held that "in this particular case, it was only because of their nationality that the tax residence of the taxpayers was different from the residence of French nationals living in Monaco". The Court of Appeals held that the application of Article 164 C of the FTC to the taxpayer was in violation of non discrimination provisions of France- UK and France-Italy treaties.
115 The French Case offers an example of a disguised form of nationality discrimination, in that instance one superficially based on residence.
116 For these reasons, Ms Addy's tax ought not to have been assessed by reference to the rate of tax specified in Pt III of Sch 7 to the Rates Act. That is because the effect of Art 25(1) of the Double Taxation Agreement, as applied by the Agreements Act, was to prohibit her being taxed at that rate of tax. During the 2017 income year, she was a "resident" until 1 May 2017 and until then a resident taxpayer to the income of whom the applicable rates of tax were those in Pt I of Sch 7 to the Rates Act. Her appeal must be allowed and the matter remitted to the Commissioner for the making of a consequential amended assessment.
I certify that the preceding one hundred and sixteen (116) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.