Question

QUESTION 7

Flying Kangaroo Ltd is an Australian resident company that provides air services between Australia and Canada. It has also reached an agreement with the Canadian government that allows it to fly a short haul domestic flight in Canada. The profits of the company are as follows:

• Flights between Australia and Canada           - $15,000,000
• Domestic Flights within Canada                    - $700,000

Article 8 of the DTA between Australia and Canada relevantly provides:

1. Profits from the operation of ships or aircraft derived by a resident of one of the Contracting States shall be taxable only in that State.

2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State where they are profits from operations of ships or aircraft confined solely to places in that other State.
3. …. [not relevant]
4. …. [not relevant]

REQUIRED

1. How do Double Tax Agreements (DTAs) interact with domestic tax laws?
2. What profits of Flying Kangaroo Ltd would be taxed in Australia?

Make sure you explain your answer.

Answer 1

a) Tax treaties are international agreements between sovereign states and create rights and obligations only on the states themselves. Tax treaties and domestic laws are theoretically designed to work in harmony. After all, the treaties are negotiated by sovereign governments to protect their own interests and are based on generally accepted and time-tested models. However, as frequently visible, domestic implementation and compliance issues arise on a regular basis in relation to tax treaty harmonization with domestic law and the states then forced to take decisions sometimes against the DTA.

b) As per the taxation provisions provided in the question itself, the profit from flights run between the two countries shall be taxed in the country in which the assessee is a resident. In the given case, profits of $15,000,000 arising from flights between Australia and Canada shall be taxable in Australia. However, profits of $700,000 from domestic flights within Canada shall be taxable in the state of Canada itself.

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