Article 25 - Non-Discrimination

The taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she qualified as an Australian resident. A citizen and resident of Australia would have largely escaped income taxation on her modest income (mostly working as a waiter) due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of Pt. III of Sched. 7 of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.

The taxpayer, by virtue of her citizenship, was a UK rather than Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (Art. 25) provided:

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.

The Court found the contention of the Commissioner that “because s 29 of the Migration Act ensures that an Australian national cannot hold a working holiday visa, no comparison of the kind required by Art 25(1) is possible, and Art 25(1) is not engaged” and in finding that the higher rate of tax imposed on the taxpayer than that which would have been payable by an Australian citizen (and resident) who had earned the same income contravened Art. 25, the Court stated (at paras. 28, 30):

[C]onsistent with the text, context, object and purpose of Art 25(1), the relevant comparator is the hypothetical taxpayer in the same circumstances apart from the criterion on which the claim of discriminatory taxation is based. The phrase "in the same circumstances" means in the same circumstances apart from those circumstances attached to the prohibited basis for discriminatory taxation. Here, that is visa status, a characteristic which depends on nationality – a person not being an Australian national – the very attribute protected by Art 25(1). …

Discrimination jurisprudence establishes that the circumstances of the person alleged to have suffered discriminatory treatment and which are related to the prohibited ground are to be excluded from the circumstances of the comparator. In sum, the "same circumstances" that must be considered of the hypothetical comparator cannot include being or not being the holder of a working holiday visa just as they cannot include being or not being an Australian national.

This finding was noted (at para. 32) to be consistent with the OECD commentary, including that:

The expression 'in the same circumstances' refers to taxpayers (individuals ...) 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 taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she was found by the Court to be a deemed Australian resident (based on her satisfying a 183-day presence test). A citizen and resident of Australia would have largely escaped income taxation on her modest income working on a horse farm and as a waiter due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of Pt. III of Sched. 7 of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income. The taxpayer, by virtue of her citizenship, was a UK national and not an Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (in Art. 25) read:

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.

In finding that this 15% tax did not contravene Art. 25, Derrington J stated (at paras 230 and 231):

Art 25 is offended where the discrimination against the foreign national occurs solely by reason of having a different nationality. Whilst such discrimination may arise explicitly or covertly, it must nevertheless be discrimination which is singularly based on nationality. … Whilst it may be true that only foreign nationals can obtain and hold a “working holiday visa” there is no requirement to hold one because of their nationality. … [I]t was not suggested that Ms Addy was not entitled to apply for any of the other range of visas which may have been available.

In his concurring reasons, Steward J stated (at paras 343-347, 349):

First, it is no part of the discrimen for the application of the rates set out in Pt. III of Sch. 7 of the Rates Act that a person bear any particular nationality. The principal criterion is that the taxpayer earns a certain type of taxable income. …

Secondly, a British national who is a non-resident of Australia and who has earned income with a source in Australia (other than working holiday taxable income), or is otherwise liable to pay Australian income tax, would pay income tax on such income at the rates set out in Pt. II of Sch. 7 (dealing with non-residents). An Australian national, who is also a non-resident, would be liable to pay tax at those same rates if she or he had earned income from a source in Australia, or was otherwise liable to pay Australian income tax. Again, the nationality of the non-resident is neither here nor there.

Thirdly, a British national who is a resident of Australia would pay income tax at the rates set out in Pt. I of Sch. 7 (dealing with residents) other than in respect of the earning of working holiday taxable income. The same rates would apply to an Australian national that is a resident of Australia. Once again, the nationality of the foreign tax resident is neither here nor there.

The foregoing suggests that the Rates Act does not discriminate on the basis of nationality. …

…[T]he O.E.C.D. Commentary … warns against “unduly” extending the reach of Art. 24 of the Model Tax Convention (here Art. 25 of the Treaty) to “cover so-called “indirect” discrimination.” Secondly, care must be taken to ensure that it is a person’s nationality which is the reason for differential treatment. … [I]t was not the taxpayer’s nationality that caused her to be taxed in accordance with Pt. III of Sch. 7 of the Rates Act, but rather her derivation of working holiday taxable income. …

… Critically, both Australia and the United Kingdom are free to discriminate on the basis of tax residency. …

The taxpayer, who was a British citizen aged 23 and had been residing at her family home in Bexleyheath, Kent, came to Australia on a “working visa” on 20 August 2015, and returned on 1 May 2017. She was found by Logan J to be resident in Australia during this period.

A citizen and resident of Australia would have largely escaped income taxation on her modest income as a waiter due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.

“Nationals” of the UK were defined in Art. 3(1) of the Australia-U.K. Treaty to Include British citizens and companies deriving their status from domestic law, and similarly for Australian nationals, so that the taxpayer was the former and not the latter. Logan J found that the imposition of the 15% tax on the taxpayer’s earnings in Australia as a waiter contravened Art. 25(1) of the Treaty, which provided:

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.

Logan J observed (at para. 89):

There is just no doubt that an Australian national cannot hold a working holiday visa issued under the Migration Act … . Under that Act, visas may only be issued to non-citizens … .

In finding for the taxpayer, he stated (at paras. 103-104):

[T]he 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 … would have the benefit of the tax free threshold.

… 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) … . 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.

In 2014, an Irish resident earned $32,728.52 in employment income from working for a few weeks in Fort McMurray, and also received $23,002.37 from the Irish government, mostly as means-tested assistance. C Miller J found that these assistance payments qualified under s. 56(1)(u) as income from social assistance. Accordingly, the taxpayer could not claim full Canadian credits of $28,717, as he did not satisfy the condition in s. 118.94 that “substantially all” of his income for the year was included in computing his taxable income earned in Canada for the year.

Counsel submitted that this result violated Art. 24(1) of the Canada-Ireland Treaty, which provided:

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 are or may be subjected.

In rejecting this submission, C Miller J stated (at para. 8):

I read this provision as applying to nationals, not residents, to ensure that a Canadian citizen residing in Ireland and receiving the same payments (employment from Canada and social assistance from Ireland) as Mr. Kenny would not be treated any differently. I do not find subsection 24(1) of the Treaty assists Mr. Kenny in this regard.

The taxpayer, which was an Indian subsidiary of a U.S. corporation (“HII”), paid fees for administrative services to a U.S. affiliate (“HIAI”), which were found in the ITAT not to be subject to Indian income tax as HIAI did not have a permanent establishment in India. The Indian income tax authority (“AO”) denied the deduction by the taxpayer of the fees in the computation of its income by applying s. 40(1)(a)(i) of the Income Tax Act, 1961 (India), which denied a deduction where there was a failure to withhold tax (tax deducted at source or “TDS”) on payments of fees for technical services made to a non-resident.

Article 26(3) of the U.S.-India Double Taxation Avoidance Agreement provided:

Except where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest), or paragraph 8 of Article 12 (Royalties and Fees for included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.

After first noting the AO’s argument (at para. 25) that s. 40(a)(i) “did not create any classification between resident payments and non-resident payment” and merely “deals with disallowance of expenditures where TDS has not be deducted” and that the TDS, and its enforcement through the denial of a deduction, was a reasonable measure for dealing with difficulties of collection from non-residents, and before concluding that the disallowance of the deduction of the fees was prohibited by Art. 26(3), Muralidhar J stated (at paras. 40, 56):

In the context of which the expression “other disbursement” occurs in Article 26 (3), it connotes something other than “interest and royalties”. If the intention was that “other disbursements” should also be in the nature of interest and royalties then the word 'other' should have been followed by “such” or “such like”. …

…[T]he condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. Under Section 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required deduction of TDS at the time of payment. On the other hand, payments to residents were neither subject to the condition of deduction of TDS nor, naturally, to the further consequence of disallowance of the payment as deduction. The expression “under the same conditions” in Article 26 (3) of the DTAA clarifies the nature of the receipt and conditions of its deductibility. It is relatable not merely to the compliance requirement of deduction of TDS. The lack of parity in the allowing of the payment as deduction is what brings about the discrimination.

One of the challenges brought by the appellant to the Canadian FATCA legislation (i.e., the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act (enacting the "IGA") and ss. 263 to 269 of the Income Tax Act) was that "the collection and disclosure of the taxpayer information contemplated by the IGA subjects US nationals resident in Canada to taxation and requirements connected therewith that are more burdensome than the taxation and requirements connected therewith to which Canadian citizens resident in Canada are subjected" contrary to Art. XXV of the Canada-U.S. Income Tax Convention (para. 62). In rejecting this argument (as well as rejecting other Treaty-based arguments), Martineau J stated (at para. 73):

[T]he burden of disclosing banking information is imposed by Part XVIII on financial institutions…and to the extent that the IGA and Part XVIII of the ITA impose burdensome requirements connected to taxation of US nationals resident in Canada, such burden is equally imposed on Canadian nationals in similar circumstances.

See summary under Treaties – Art. 27.

The taxpayer was a non-resident UK corporation operating in Canada through a permanent establishment. It claimed capital losses of a related non-resident corporation that was wound up into the taxpayer under s. 88(1.1). The Minister disallowed the deductions on the basis that s. 88(1.1) is only available to Canadian corporations, and the taxpayer was not a "Canadian corporation" under s. 89(1). The taxpayer argued that the definition of "Canadian corporation" discriminated on the basis of nationality, contrary to Article 22 of the Canada-UK tax treaty.

Angers J. found that the definition was not discriminatory in the circumstances, because it excluded non-resident corporations of any nationality. He remarked at para. 44 that "discrimination on the basis of residence does not amount to discrimination on the basis of nationality" for tax treaty purposes. Moreover, he held at paras. 49-50 that the definition was not discriminatory on its face because, under paragraph (b) of the definition, corporations incorporated outside of Canada could qualify as Canadian corporations if they had been resident in Canada since June 18, 1971.

The 1983 amendments to s. 18(4) of the Act were merely intended to tighten the original provisions, and not to fundamentally alter or change the general nature thereof for purposes of Article XXV.8 of the Canada-U.S. Convention.