Hybrid Entities in Australia: Resource Capital Fund III LP Case

Abstract

The RCF case raises a number of issues in relation to the principles in the OECD Partnership Report on the application of tax treaties to hybrid entities. The judgments do not finally settle the status of those principles in Australia but they point more to approval of the principles than rejection of them. The treaty concerned in fact had a specific provision dealing with partnerships which did not apply to the LP in question and the judgments seem to accept that Partnership Report principles could still apply even in the presence of a treaty provision. With the OECD now proposing the adoption of a fiscally transparent treaty provision in the OECD Model, the judgments are interesting for their comments on potential problems in existing variants found in tax treaties. Procedural questions are raised about how partners in an LP which is regarded as fiscally transparent by their residence country can assert their treaty rights under Partnership Report principles when the source country regards the LP as a foreign resident company and as the taxpayer. The only concrete solution discussed in the RCF proceedings is the mutual agreement procedure, which is hardly satisfactory since tax treaties are designed to give taxpayers enforceable rights under domestic law.

Keywords: Tax treaties, hybrid entities, Australia

JEL Classification: K10, K33, K34