Australia publishes synthesised text of double tax treaty with Malaysia

On May 20 2022, Australia published the synthesised text of the Malaysia-Australia DTA. Australia has issued several synthesised texts on the overlay and modification of specific DTAs, but the Malaysian DTA text reflects important aspects of Australian DTA policy.

Of particular note are aspects related to transparent entities, permanent establishment (PE), dispute resolution, and the practical application of the principal purpose test (PPT), also known as the integrity rule.

The Malaysian DTA text was prepared by the Australian Taxation Office (ATO) as a guide only. As such, it does not diminish the importance of the authentic legal texts of the DTA and the multilateral instrument (MLI), which have primacy in statutory interpretation.

The DTA was first signed on August 20 1980 with three subsequent amending protocols taking effect in 1999, 2002, and 2010. The implementation of the MLI was signed by both Australia and Malaysia and ratified on February 18 2021. The key MLI articles adopted by the two countries, as reflected in the DTA, are summarised below.

Australia has adopted the transparent entity article of the MLI (Article 3 of the MLI) addressing hybrid mismatch issues. The adoption of this MLI article means that treaty benefits will be provided to fiscally transparent entities only to the extent that one of the jurisdictions recognises the income of that entity under its domestic law.

Australia has adopted option A of Article 13 of the MLI. Broadly, the existing exclusions to the definitions of PE include a place used for storage and warehousing of goods or stock. These exclusions will continue to apply but the effect of the MLI makes the exclusions in Article 5(3)(a) to (e) of the DTA subject to the condition that the activity is of a preparatory or auxiliary character.

Further, Australia has adopted, without reservation, the ‘closely related enterprise’ provision of the MLI (Article 15). A closely related enterprise is to be test-based on the relevant facts and circumstances, and the provision applies where one entity controls the other or both are under the control of the same entity. It also applies where one entity has a 50% beneficial interest in the other entity (directly or indirectly), determined by aggregated voting rights and by value.

The introduction of the term ‘closely related enterprise’ effectively extends the definition of a PE and reduces instances of companies avoiding a PE where a closely related enterprise operates an activity that falls within the exceptions in Article 5(3) of the Malaysian DTA. In other words, where the same enterprise or a ‘closely related enterprise’ carries on business activities at the same place or another place in the same jurisdiction, that place will constitute a PE, even if one of the activities was preparatory or auxiliary in character.

Australia has also adopted Article 16 of the MLI, the mutual agreement procedure (MAP), without reservation. Article 16 of the MLI provides a new minimum standard to allow a taxpayer to present a case to the competent authorities of either jurisdiction where the taxation of the entity is not in accordance with the DTA. The adoption of this article means that a taxpayer may present the case within three years, rather than two years, from the first notification of the action.

The MLI further amends Article 24(2) of the Malaysian DTA by removing the six-year time limit to bring a claim. Any mutual agreement reached shall now be implemented regardless of any time limits imposed by domestic law of each jurisdiction.

Lastly, Article 24(3) of the DTA is further amended by the MLI to allow jurisdictions to consult together for the elimination of double taxation in cases not provided for in the DTA.

Article 7 of the MLI is a mandatory article that Australia has adopted. It relates to the prevention of treaty abuse, and Australia has adopted the PPT which satisfies the BEPS minimum standard.

Broadly, the PPT provides that the benefit of an article under the Malaysian DTA will not be granted to the taxpayer if obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted (directly or indirectly) in that benefit.

Whilst the terms of the treaty are not quite as modernised compared to, for instance, Australia’s tax treaty with Israel, the changes and synthesised text of the Malaysian DTA are in line with Australia’s stance to further prevent the avoidance of PEs and to allow for more flexible relief for taxpayers using the MAP.