Exemption from Interest Withholding Tax: US resident - providing finance

Is the taxpayer, a United States (US) resident, 'providing finance' within the meaning of Article 11(3)(b) of Schedule 2 of the International Tax Agreements Act 1953 (Agreements Act) as amended by Schedule 2A of the US Protocol (the US Convention) (and thereby exempt from interest withholding tax on Australian-sourced interest) where its business activities involve the purchase of established loans or debt instruments (receivables) from an originating entity or other holder under a securitisation arrangement?

Yes. Where the entity purchases such receivables under a securitisation arrangement, the activity will be considered to be 'providing finance' within the meaning of Article 11(3)(b) of the US Convention.

The taxpayer is a resident of the US within the meaning of the US Convention.

The taxpayer is not a bank for the purposes of Article 11(3)(b) of the US Convention.

The taxpayer is carrying on a business.

The taxpayer substantially derives its profits by issuing commercial paper to investors in the financial markets and using those funds: (a) to purchase established loans or debt instruments (receivables) from an originating entity or other holder issued by either Australian resident or non-resident borrowers under a securitisation arrangement, and (b) to make loans or purchase debt instruments as a primary lender.

The taxpayer meets all other requirements for the application of Article 11(3)(b) of the US Convention and the interest arising in Australia is not effectively connected with a permanent establishment nor paid as part of a back to back loan arrangement.

The term 'providing finance', as it appears in Article 11(3)(b) of the US Convention, is not specifically defined in the treaty. As such, it takes on its domestic law meaning (see Article 3(2) of the US Convention).

The term 'providing finance' within the meaning of Article 11(3)(b) of the US Convention is considered in Taxation Ruling TR 2005/5 and is broadly defined at paragraph 22.

Having regard to the treaty context in which the term 'providing finance' appears, it is considered that the purchase of an established loan or debt instrument (receivable) from an originating entity or other holder under a typical securitisation arrangement falls within the meaning of 'providing finance' under Article 11(3)(b) of the US Convention.

Hence, the taxpayer substantially derives its profits by raising debt finance in the finance markets and using those funds to carry on a business of providing finance.

Given that the taxpayer meets all other conditions for the operation of Article 11(3)(b) of the US Convention and the interest arising in Australia is not effectively connected with a permanent establishment nor paid as part of an arrangement involving back to back loans, Australia has no taxing rights under Article 11(3) of the US Convention in respect of Australian-sourced interest paid to the taxpayer.

As there is an inconsistency between the effective exemption provided for under Article 11(3) of the US Convention and subsection 128B(2) of the Income Tax Assessment Act 1936 which prima facie subjects interest derived by a non-resident to withholding tax, the Agreements Act prevails.