For further information:
Gary Martin
National Tax Technical Director

• income, profits or gains from the alienation of real property can be taxed in full in the country where the property is situated. This also applies to income derived from real property; 
• business profits (including professional services and other independent activities) will generally be taxed in the country in which the taxpayer is a resident unless business is carried on in the other country through a permanent establishment; 
• dividends paid can only be taxed on a withholding basis. A 10% withholding tax will apply unless the recipient is a company which holds directly at least 10% of the voting power of the paying company. In this case, the withholding rate is 5% unless the recipient company has at least an 80% interest (in which case there is no withholding tax required to be deducted); 
• royalties paid can only be taxed on a withholding basis. The rate of withholding tax is 5%; 
• interest paid can only be taxed on a withholding basis. The rate of withholding tax is 10%. There are exemptions for interest derived by certain Government bodies and financial institutions; 
• distributions by Australian real estate investment trusts can be taxed at a maximum of 15% of the gross distribution; 
• income from employment will generally be taxable in the country where the services are performed. There is an exception for short term visits to one country by a resident of the other country; 
• directors remuneration can be taxed in the country in which the company is resident for tax purposes; 
• income derived by entertainers and sportspersons can be taxed in the country in which the activities are performed; and 
• pensions and annuities will only be taxed in the country of residence of the recipient unless paid in a lump sum (in which case both countries can tax the payment but the country of residence will provide double tax relief).

The treaty will also introduce some new definitions including a revised meaning of ‘permanent establishment’ and will introduce new tiebreaker rules for determining the residence of individuals and corporations.

The treaty will also limit the time for tax authorities to initiate transfer pricing adjustments to seven years, except in instances of fraud or wilful default (where there is no time limit).

The date of application of the new treaty will be determined by when the Bill receives Royal Assent. However, it is likely to be from 1 January 2009 for withholding taxes and from 1 July 2009 for the balance of the treaty articles.

BDO comment
The existing tax treaty between Australia and Japan has been in place since 1969 so it was timely for the treaty to be updated to reflect modern commercial practices and to be brought into line with the more recent tax treaties entered into by Australia (reflecting recent OECD developments).

Some of the more important changes to note in the new treaty include the removal of the unlimited time limit for tax authorities to make transfer pricing adjustments and the reduction in dividend and royalty withholding tax from the previous 15% and 10% rates respectively.