FEDERAL COURT OF AUSTRALIA Deutsche Asia Pacific Finance Inc v Commissioner of Taxation [2008] FCA 837 State of Queensland v J L Holdings Pty Ltd (1996) 189 CLR 146 considered DEUTSCHE ASIA PACIFIC FINANCE INC. v COMMISSIONER OF TAXATION NSD 226 of 2007 NSD 227 of 2007 EDMONDS J 4 JUNE 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 226 of 2007 NSD 227 of 2007 BETWEEN: DEUTSCHE ASIA PACIFIC FINANCE INC. Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: EDMONDS J DATE OF ORDER: 4 JUNE 2008 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The respondent's motion be dismissed. 2. The respondent pay the applicant's costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 226 of 2007 NSD 227 of 2007 BETWEEN: DEUTSCHE ASIA PACIFIC FINANCE INC. Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: EDMONDS J DATE: 4 JUNE 2008 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is a motion by notice dated 28 May 2008 whereby the respondent ('the Commissioner') seeks, amongst a number of orders, an order that the hearing listed for 17 and 18 June 2008 be vacated. 2 The proceedings were listed for hearing by Allsop J on 13 November last year and it is only now, two weeks before the scheduled hearing, that an application is brought to vacate those dates. 3 The motion is opposed by the applicant ('the taxpayer') on the grounds that: (1) It is too late; and (2) the basis of the application is flawed. 4 The Commissioner concedes that the application for vacation of hearing dates is very late but submits that the taxpayer would suffer no prejudice which would not be compensated by an appropriate costs order: State of Queensland v J L Holdings Pty Ltd (1996) 189 CLR 146. 5 The taxpayer disputes this on the basis that the tax in dispute, in excess of $4 million, was paid to the Commissioner over 18 months ago and is retained by him pending the outcome of these proceedings. To vacate the hearing dates would only extend the time that the taxpayer has been out of pocket. 6 The lateness in bringing the application and the basis of the application are explained in an affidavit (sworn 27 May 2008) by an officer of the Australian Taxation Office ('the ATO') within the ATO's Legal Services Branch who has the carriage of the matter. He deposes: '9. The issues raised in these proceedings are difficult and complex, involving: 9.1. a complex financial transaction between a large Australian financial institution (the Commonwealth Bank) and a U.S. subsidiary of a large financial institution (Deutsche Bank) ("the Transaction"); and 9.2. the interpretation of articles of the Convention between the Government of Australia and the Government of the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, dated 6 August 1982, as amended by the Protocol signed on 27 September 2001 ("the Convention"). 10. On 11 March 2008, the Commissioner's counsel provided the Commissioner with written technical advice in relation to these proceedings. 11. In the course of considering that advice, my colleagues and I also gave consideration to an aspect of the Convention which had not previously been taken into account by the Commissioner nor the subject of counsel's advice, namely the specific US law purpose for which Article 11(9) of the Convention is addressed. 12. As a result, the Commissioner instructed the AGS to engage a lawyer with expertise in United States law. I am informed and verily believe that in response to the Commissioner's instructions, the AGS engaged Professor David Rosenbloom of the NYU School of Law on 15 May 2008. 13. On 23 May 2008 a conference was held between representatives of the Commissioner and Professor Rosenbloom. 14. The Commissioner now wishes to adduce evidence in these proceedings in relation to the meaning under United States law of the term "contingent interest", which is relevant to the interpretation of Article 11(9) of the Convention and the matters which a US Court would take into account in construing Article 11(9) of the Convention. 15. The specific new matter which the Commissioner now wishes to argue may briefly be summarised as follows. 15.1. Article 11(9) of the Convention is a clause peculiar to double tax treaties to which the USA is a party. It seeks to deny the 10% tax rate limit otherwise in Article 11 (the Interest Article) to certain payments which are – or which would otherwise be treated as – interest under the Convention. 15.2. Article 11(9), together with corresponding articles in the USA's other tax treaties, derives from the notion of "contingent interest" under US domestic law. The expression "contingent interest" is used in the U.S. "Technical Explanation" relating to Article 11(9). That material has a status similar to extrinsic material under Australian law. 15.3. The Commissioner wishes to contend that 15.3.1.Article 11(9) should be construed by reference to relevant extrinsic material and consistently with US domestic law about the treatment of "contingent interest"; and 15.3.2.The income derived by the applicant from its interest in the Industrie Limited Partnership would be considered to be "contingent interest" under US domestic law. 16. The Commissioner further wishes to review the evidence and his position in relation to Article 11(3)(b). 17. Following the conference held with Professor Rosenbloom, on 23 May 2008 I gave instructions to the AGS to apply to this Honourable Court to have the hearing in these proceedings vacated. In giving these instructions I took into consideration the Taxation List Directions issued by the Federal Court on 4 April 2008. The Commissioner is concerned that an application to vacate the hearing will result in delay in the proceedings. On the other hand, the Commissioner is also concerned to ensure that this Honourable Court has before it evidence, including expert evidence, that will be relevant and of assistance to the Court in determining the difficult and complex issues that have arisen in these proceedings. 18. I am also instructed that our counsel put the applicant on notice of the application to have the hearing vacated. I am informed and verily believe that this occurred around 11am on Friday 23 May 2008.' 7 Dealing first with the lateness of the application, I do not think the explanation that has been given for that lateness justifies vacation of the hearing dates. There does not appear to have been any impediment to consideration being given, at an earlier point in time, to the matter on which the Commissioner now wishes to adduce expert evidence; the fact that it had not crossed the minds of the deponent and his colleagues until they considered counsel's 'written technical advice' was certainly no impediment. Indeed, on the deponent's own admission, the matter was not even the subject of counsel's advice. 8 That aside, there are two other considerations which are relevant to my conclusion that the explanation of the lateness of the application does not justify the vacation of the hearing dates. First, if I vacate the hearing dates to allow the Commissioner to put on expert evidence, it will be necessary to allow the taxpayer to put on expert evidence going to the same matter, and then, perhaps, evidence in reply. The consequence will be that proceedings which have already been set down for hearing for over seven months will not be heard until the first half of next year. Second, it is not as if the Commissioner is 'locked out' so to speak because of an inability to plead a ground of defence not already pleaded, cf., J L Holdings Pty Ltd. It will be open to the Commissioner to frame and put submissions with respect to this particular matter supported by authority (if it exists), extrinsic material such as US Treasury explanations of the purpose underlying Article 11(9) of the Convention and, insofar as that provision is predicated on a US model tax treaty, Treasury explanations of that model. Of course, this assumes the relevance of such material to the issue in contest between the parties. It is to that matter I now turn. 9 I am not presently persuaded that the matter on which the Commissioner wishes to adduce expert evidence, namely, that a US Court would construe Article 11(9) of the Convention as applying to interest which qualifies within the notion of 'contingent interest', as that phrase is understood under US domestic tax law, has any relevance to the tasks of construction and application which this Court must undertake to resolve the dispute between the parties. There was more than a hint in the submissions of counsel for the Commissioner that the relevance of such evidence resided in the desirability for a uniform construction of Article 11(9) by the courts of each country. However desirable that outcome may be, a US domestic law concept or notion of 'contingent interest' cannot control the construction of a provision of the Convention, the text of which does not use this phrase; and even if it did, in the absence of it having a meaning under Australia's domestic tax law, its meaning under US domestic tax law would not control the application of the provision by Australia: see Article 3(2) of the Convention. 10 For these reasons, the motion, including the order to vacate the hearing dates is dismissed, with costs. I certify that the preceding ten (10) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 4 June 2008 Counsel for the Applicant: Mr A Slater QC with Mr M Richmond Solicitor for the Applicant: Allens Arthur Robinson Counsel for the Respondent: Mr J Hmelnitsky Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 3 June 2008 Date of Judgment: 4 June 2008