Tax Implications: Double Tax Agreements and International Taxation Law

This report provides a comprehensive analysis of double tax agreements and international taxation law, focusing on a case study involving three states: Manulla, Crodonia, and Salvatia. The report identifies taxpayers including Bobo News PL (BN), Bobo, and Violet, and explores their tax obligations under double tax agreements. It examines the tax implications of income from various sources such as advertising fees, director’s fees, salaries, interest on loans, and dividends, considering scenarios where Bobo operates from Manulla and later when he is detained in Crodonia. The analysis covers the concept of permanent establishment, residency, and the application of double tax agreements to determine tax liabilities in different jurisdictions. The report highlights the importance of these agreements in preventing double taxation and ensuring fair taxation of international income, covering articles related to interest and dividends.

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Name of Student
Name of Institution
Name of Instructor
Date
Double Tax Agreements and International Taxation Law

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Introduction
Governments normally raise revenue through taxation. Taxation is the term used to
describe the imposition or levying charged on income as well as capital gains received by
individuals and taxpayers. This is the means through which governments finances its expenditure
and projects. Its main aim is to get funds and finances so as to run the government operations and
to aid in the provision of essential services to the people.
Governments have entered into international and regional agreements to facilitate
remission of taxes by individuals and corporate bodies. These agreements ensure that foreigners
and international companies remit their taxes to their countries of origin. This is what is called
double Taxation Agreement. It apportions the amount of tax payable between the country of
origin and the current place of residence or business.
In this case scenario, there are three states; Manulla, Crodonia and Salvatia. There are
Double Tax Agreements existing between Manulla and Crodonia; and Manulla and Salvatia. In
advising the taxpayers on the several relevant tax issues arising from the case scenario; I will
first identify the taxpayers in this case.
Who are the taxpayers?
Income tax is levied on both individuals (whether residents or non-residents) and companies.
Residents are charged taxes on their worldwide income while non-residents are levied taxes on
their local sourced income. In this case, the taxpayers include;
1. Bobo News PL;
2. Bobo; and
3. Violet.

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The Double Tax Agreement applies to income tax. Taxation in this case scenario will therefore
apply to Income received by BN as advertising fees both locally in Manulla and from Salvatia;
director’s fee, editor’s salary and interest on loan received by Bobo; and interest paid and
received by violet on loan advanced to Bobo News PL (BN). BN also pays dividends to
shareholders which is considered as income to those shareholders and is subject to taxation. The
advice to the taxpayers will therefore cover different periods and timelines.
Tax Implications
1. The period when BN and Bobo operated from Manulla
(a). Bobo News PL (BN)
Bobo News PL is a company that has been incorporated and resident in Manulla. It publishes
controversial news on its website from which its draws viewership from all the three
countries. The website known as Bobo News is hosted in Manulla but viewed in all the three
countries. The main source of income for Bobo News PL emanates from the advertisements
from the three countries. Bobo News PL is a resident of Manulla where its management is
done1. This is according to DTA article 11(2). It is a permanent establishment with a place
of management in Manulla.
BN will therefore be liable to pay tax on the business profits derived from the
advertisements it displays on its website. This tax however is only payable to Manulla and
Salvatia governments2. Though the revenue from advertisement is derived from all the three
countries, BN has no permanent establishment situated in Crodonia3. In Salvatia however, there
1 DTA Article 4 (4)
2 De Beers Consolidated Mines Ltd v. Howe [1930-1911] 5 TC 198
3https://www.ato.gov.au/law/view/document?LocID=%22TXR%2FTR20185%2FNAT%2FATO
%22&PiT=99991231235958

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is Violet who acts as the agent for BN who has authority and negotiates for contracts of
advertisement from the residents of Salvatia.
(b). Bobo
Bobo is a resident of Manulla. He is considered a resident here because he has a
permanent home available to him. Manulla has the right to levy income tax from Bobo in this
instance. He is the sole director of BN and also doubles up as the editor. The tax obligations for
Bobo arise from the income received by him. The first tax obligation he pays is derived from the
income he receives from BN as director fees. Secondly, BN also pays salary Bobo for acting as
the editor. This is another income from which he is liable to pay income tax.
Bobo also advanced a loan to BN. BN pays monthly interest to Bobo for the loan
advanced and therefore Manulla has the right to levy income tax on such interest. Bobo is a sole
shareholder at BN. BN pays dividends to its shareholders after every six months period. Bobo
receives the dividends and is liable to pay taxes to Marulla on the income received in form of
dividends from BN4.
(c). Violet
The other party that has tax obligations during this period is Violet. Violet is a resident of
Salvatia. She has a 33% shareholding at BN. She is therefore paid dividends after every six
months which Bobo holds on her behalf in trust5. The dividend received by Bobo on behalf of
Violet is subject to taxation by the two countries of Marulla ansd Salvatia.
Violet is also said to have advanced a loan to BN. She is therefore paid interest on the
loan advanced on a monthly basis. Under article 11 of the ADT, interest arising in a Contracting
State and beneficially owned by a resident of the other Contracting State may be taxed in that
4 DTA Art 4(3)(a)
5 https://cdn.tspace.gov.au/uploads/sites/70/2018/02/BoardofTaxation-FINAL-Review-of-Bare-Trusts.pdf

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other State6. However, such interest may also be taxed in the Contracting State in which it arises
and according to the law of that State, but the tax so charged shall not exceed 10 per cent of the
gross amount of the interest7. Violet therefore is liable to pay tax on the interest received on a
monthly basis to the two governments in Marulla and Salvatia.
The 13 month period when Bobo was detained in Crodonia
(a). BN
The tax obligations still apply even when Bobo is detained in Crodonia. BN continues to
carry on business in Marulla even in the absence of Bobo. The tax obligations as a company
resident in Marulla continue as before8. Bobo News PL is a company that has been incorporated
in Manulla. It publishes controversial news on its website from which its draws viewership from
all the three countries. The website known as Bobo News is hosted in Manulla but viewed in all
the three countries. The main source of income for Bobo News PL emanates from the
advertisements from the three countries. Bobo News PL is a resident of Manulla where its
management is done9. It is a permanent establishment with a place of management in Manulla.
BN will therefore be liable to pay tax on the business profits derived from the
advertisements it displays on its website. This tax however is only payable to Manulla and
Salvatia governments. Though the revenue from advertisement is derived from all the three
countries, BN has no permanent establishment situated in Crodonia in Salvatia however, there is
Violet who acts as the agent for BN who has authority and negotiates for contracts of
advertisement from the residents of Salvatia.
6 DTA Article 11(2)
7 https://www.ato.gov.au/law/view/document?docid=DTR/TR2004D25/NAT/ATO/00001
8 DTA Art 5
9 DTA Art 4 (4)

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Additionally, the residence of BN comes for determination in this instance bearing in
mind that the sole director, Bobo is detained in a foreign country but still carries out his director
and editorial duties. Under article 4(4), where by reason of the provisions of paragraph 1 a
person other than an individual is a resident of both Contracting States, and then it shall be
deemed to be a resident only of the State in which its place of effective management is situated.
Under article 5 however on permanent establishment, the term permanent establishment
is said to include a branch, office or a palace of management as a fixed place where the business
of the enterprise is wholly or partially carried on. From article 5, it is evident that though Bobo is
detained in a hotel in Crodonia but still carries his duties. BN therefore has a place from which
its business is carried on. Bobo is still able to act as an editor for Bobo news from detention. The
tax obligation from income derived from advertisement and online news is therefore subject to
taxation both in Marulla and Crodonia.
(b). Bobo
Bobo is a resident of Manulla. He is considered a resident here because he has a
permanent home available to him. Manulla has the right to levy income tax from Bobo in this
instance. He is the sole director of BN and also doubles up as the editor. The tax obligations for
Bobo arise from the income received by him. The first tax obligation he pays is derived from the
income he receives from BN as director fees. Secondly, BN also pays salary Bobo for acting as
the editor. This is another income from which he is liable to pay income tax10.
Bobo also advanced a loan to BN. BN pays monthly interest to Bobo for the loan
advanced and therefore Manulla has the right to levy income tax on such interest11. Bobo is a
sole shareholder at BN. BN pays dividends to its shareholders after every six months period.
10 https://law.unimelb.edu.au/data/assets/pdf_file/0007/1687246/Ireland-Piper.pdf
11 DTA Art (16)

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Bobo receives the dividends and is liable to pay taxes to Marulla on the income received in form
of dividends from BN.
When he is detained in Crodonia, he is in a position to continue with his duties as an
editor and director as before from which he is paid director’s fee and editor’s salary12. Bobo
therefore will be liable to pay tax to both Crodonia and Marulla for the income received by
acting as a director and a similar tax for salary received as an editor at BN.
On the issue of dividend, section 10 of the ADT provides that such dividend paid by a
company which is a resident of a Contracting State for the purposes of its tax, being dividends
beneficially owned by a resident of the other Contracting State, may be taxed in that other State.
However, those dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident for the purposes of its tax, and according to the law of that
State, but the tax so charged shall not exceed: (a) 5 per cent of the gross amount of the dividends
if the beneficial owner of those dividends is a company which holds directly at least 10 per cent
of the voting power in the company paying the dividends;
(b) 15 per cent of the gross amount of the dividends in all other cases.
The presence of Bobo in Crodonia makes BN a resident for tax purposes in Crodonia
since substantial work is carried by Bobo for the period of 13 months when he is detained
therein. Dividends paid by BN to Bobo are therefore subject to taxation both at Marulla and
Crodonia.
The other issue is on the interest paid monthly on the loan that Bobo advanced to BN. On
the issue of interest, section 11 states that Interest arising in a Contracting State and beneficially
owned by a resident of the other Contracting State may be taxed in that other State. However,
such interest may also be taxed in the Contracting State in which it arises and according to the
12 LEVENE V INLAND REVENUE COMMISSIONERS: HL 1928

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law of that State, but the tax so charged shall not exceed 10 per cent of the gross amount of the
interest. It therefore means that Bobo will be subjected to taxation on the interest on loan
received by the two countries of Marulla and Crodania.
(c). Violet
Violet is a resident of Salvatia. She has a 33% shareholding at BN. She is therefore paid
dividends after every six months which Bobo holds on her behalf in trust. The dividend received
by Bobo on behalf of Violet is subject to taxation by the two countries of Marulla and Salvatia.
Violet is also said to have advanced a loan to BN. She is therefore paid interest on the
loan advanced on a monthly basis. Under article 11 of the ADT, interest arising in a Contracting
State and beneficially owned by a resident of the other Contracting State may be taxed in that
other State. However, such interest may also be taxed in the Contracting State in which it arises
and according to the law of that State, but the tax so charged shall not exceed 10 per cent of the
gross amount of the interest. Violet therefore is liable to pay tax on the interest received on a
monthly basis to the two governments in Marulla and Salvatia.
There is no Double Taxation Agreement between Salvatian and Crodonia. Therefore, the
detention of Bobo in Crodonia does not alter or affect the tax obligations that Violet had prior to
the detention. Her tax obligations do not change as discussed above. She has no obligation to pay
any tax to Crodonia due to no DTA between the two countries.
The 19 month period in Salvatian Embassy
Bobo, through Violet he manages to enter the Salvatian embassy in Crodonia. He remains
in the embassy for 19 months. He is secure in the embassy as the Salvatian embassy has full
extraterritorial status in Crodonia13. While in the embassy he is able to carry on his director’s
13 DTA Art 4 (a)

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duties and many editorial duties. BN continues to thrive and it continues paying dividends,
wages, fees and interest to relevant persons.
(a). BN
Under article 4(4), where by reason of the provisions of paragraph 1 a person other than
an individual is a resident of both Contracting States, and then it shall be deemed to be a resident
only of the State in which its place of effective management is situated. Under article 5 however
on permanent establishment, the term permanent establishment is said to include a branch, office
or a palace of management as a fixed place where the business of the enterprise is wholly or
partially carried on. From article 5, it is evident that though Bobo has sought refuge in Salvatian
embassy but still carries on his duties. BN therefore has a place from which its business is carried
on.
BN is liable to pay tax on revenue and profits derived from business. The issue of residence
comes into play again. BN has presence in Salvatian where Bobo carries substantial duties on
behalf of BN. BN is therefore liable to pay tax on income from business both to Marulla
government as well as Salvatian government.
(b). Bobo
Bobo is a resident of Manulla because he has a permanent home available to him.
Manulla has the right to levy income tax from Bobo in this instance. He is the sole director of
BN and also doubles up as the editor. The tax obligations for Bobo arise from the income
received by him. The first tax obligation he pays is derived from the income he receives from BN
as director fees. Secondly, BN also pays salary to Bobo for acting as the editor14. This is another
income from which he is liable to pay income tax.
14https://www.oecd.org/tax/transferpricing/36221030.pdf?
fbclid=IwAR3vjhlU7fBqRgL3LQvdKHt4oRybijXDuP3MlGdDhnZ8cJidNdvdsGAH5SM

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Bobo also advanced a loan to BN. BN pays monthly interest to Bobo for the loan
advanced and therefore Manulla has the right to levy income tax on such interest. Bobo is a sole
shareholder at BN. BN pays dividends to its shareholders after every six months period. Bobo
receives the dividends and is liable to pay taxes to Marulla on the income received in form of
dividends from BN.
When he is detained in refuge in Salvatian Embassy, he is in a position to continue with
his duties as an editor and director as before from which he is paid director’s fee and editor’s
salary. Bobo therefore will be liable to pay tax to both Crodonia and Salvatian for the income
received by acting as a dierector and a similar tax for salary received as an editor at BN.
(c). Violet
Violet is paid dividends after every six months which Bobo holds on her behalf in trust.
The dividend received by Bobo on behalf of Violet is subject to taxation by the two countries of
Marulla and Salvatia. Violet had also advanced a loan to BN. She is therefore paid interest on the
loan advanced on a monthly basis. Violet therefore is liable to pay tax on the interest received on
a monthly basis to the two governments in Marulla and Salvatia.
The 1 year period at Crodonia
After 19 months there is change of government through revolution in Crodonia. Bobo is
welcomed by the new government as a Friend of the Revolution. He leaves the Salvatian
embassy and moves into a luxury apartment provided by the new government. He enjoys living
like this in Crodonia for a further year. At all times his work for BN continues and BN continues
its operations.

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(a). BN
BN has a continuing obligation to pay taxation on income receive and earned from profits
and the business of advertisement. Bobo resides in Crodonia and this gives BN a presence in
Crodonia as well. The tax obligations on business profits and income derived from advertisement
will therefore be subject to taxation both in Marulla and Crodonia15. Both Marulla and Crodonia
have a Double Tax Agreement16 and therefore, article 4 and 5 of the DTA applies in this instance
making BN to be taxed by both countries.
(b). Bobo
He is the sole director of BN and also doubles up as the editor. The first tax obligation he
pays is derived from the income he receives from BN as director fees. Secondly, BN also pays
salary to Bobo for acting as the editor. This is another income from which he is liable to pay
income tax.
Bobo also advanced a loan to BN. BN pays monthly interest to Bobo for the loan
advanced and therefore Manulla has the right to levy income tax on such interest. Bobo is a sole
shareholder at BN. BN pays dividends to its shareholders after every six months period17. Bobo
receives the dividends and is liable to pay taxes to Marulla on the income received in form of
dividends from BN.
When he is welcomed in Crodonian, he is in a position to continue with his duties as an
editor and director as before from which he is paid director’s fee and editor’s salary. Bobo
therefore will be liable to pay tax to both Crodonia and Marulla for the income received by
acting as a director and a similar tax for salary received as an editor at BN18.
15 DTA Art 5
16 DTA Art 4
17 DTA Art 10(2)(b)
18 Interest: DTA Art 11(2)

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(c). Violet
Violet is paid dividends after every six months which Bobo holds on her behalf in trust.
The dividend received by Bobo on behalf of Violet is subject to taxation by the two countries of
Marulla and Salvatia. Violet had also advanced a loan to BN. She is therefore paid interest on the
loan advanced on a monthly basis. Violet therefore is liable to pay tax on the interest received on
a monthly basis to the two governments in Marulla and Salvatia.
There is no Double Taxation Agreement between Salvatian and Crodonia. Therefore, the
presence of Bobo in Crodonia does not alter or affect the tax obligations that Violet had. Her tax
obligations do not change as discussed above. She has no obligation to pay any tax to Crodonia
due to no DTA between the two countries.
The period when Bobo returns to Marulla
On return to Marulla, Bobo continues to carry on his duties at BN as before. BN also continues
to conduct business and egages in advertisement19. There is no alteration in tax obligations that
existed before Bobo got detained in Crodonia.
In conclusion therefore, ADT provides for double taxation on income received by tax
payers depending on their residence and existence of a double tax agreement. The main aim of
double Tax Agreements is to provide for a mechanism of levying taxes on individuals and
corporate bodies that have presence or carries on business in different countries in order to avoid
over taxation by having a mechanism whereby each country levies reasonable amount of tax to
support its development agenda from its citizens as well as residents who works for gain or
carries on business within its territory.
19 Woellner, Robin, et al. Australian Taxation Law 2018 ebook 28e, OUPANZ, 2018. ProQuest Ebook Central
(http://ebookcentral.proquest.com/lib/uwa/detail.action?docID=5199532)

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Bibliography
Woellner, Robin, et al. Australian Taxation Law 2018 ebook 28e, OUPANZ, 2018. ProQuest
Ebook Central (http://ebookcentral.proquest.com/lib/uwa/detail.action?docID=5199532)
https://www.oecd.org/tax/transferpricing/36221030.pdf?
fbclid=IwAR3vjhlU7fBqRgL3LQvdKHt4oRybijXDuP3MlGdDhnZ8cJidNdvdsGAH5S
M
https://law.unimelb.edu.au/__data/assets/pdf_file/0007/1687246/Ireland-Piper.pdf
https://www.ato.gov.au/law/view/document?LocID=%22TXR%2FTR20185%2FNAT%2FATO
%22&PiT=99991231235958
https://www.ato.gov.au/law/view/document?docid=DTR/TR2004D25/NAT/ATO/00001
https://cdn.tspace.gov.au/uploads/sites/70/2018/02/BoardofTaxation-FINAL-Review-of-Bare-
Trusts.pdf
Case law
De Beers Consolidated Mines Ltd v. Howe [1930-1911] 5 TC 198
LEVENE V INLAND REVENUE COMMISSIONERS: HL 1928
International Agreement
Double Tax Agreement (DTA)