Tax Treaty Case Law around the Globe 2012

Australia: Attribution of Income

1.1. Introduction

The text of the OECD Model Convention does not directly deal with the problem of conflicts of attribution – that is, where one state views the income as properly taxable in the hands of A and the other state views the same income as properly taxable to B. A particular instance of this issue arises when the attribution rules in one state are formulated in a particular way to counter practices where are seen as tax avoidance. The problem of conflicts of classification is, however, more widespread, as the OECD’s 1999 Partnerships Report demonstrates.

In an avoidance context, the standard example of this dilemma is controlled foreign company (CFC) rules where the state in which the CFC is resident views the profits of the CFC as properly taxable in its state, and the state where the shareholder is resident views the profits of the CFC as properly taxable to the shareholder, resident in its state. Recent litigation challenging CFC rules on the basis that they are inconsistent with treaties has generally been unsuccessful. Those cases have largely supported the position taken in the Commentary: