International transfer pricing - Attributing profits to a dependent agent permanent establishment

This guide explains how to apply Australia's permanent establishment (PE) attribution rules to a PE that arises for a taxpayer through the activities of a third party. Such a PE is commonly known, and is referred to in the guide as a 'dependent agent PE'.

Permanent establishment rules are contained in subsections 136AE(4) to (7) of Division 13 of Part III of the Income Tax Assessment Act 1936 and the Business Profits Article in Australia's double tax agreements.

The guide includes a summary of the principles and approaches the Australian Taxation Office (ATO) uses to attribute profits to dependent agent PEs and examples of how these principles and approaches are applied to sales agency and toll manufacturing patterns.

Threshold issues of whether a dependent agent PE exists in particular circumstances are not addressed in the guide.

When we refer to 'you' in the guide we are referring to you as a business with international dealings. The guide does not replace, alter or affect in any way the ATO interpretation of the relevant law as discussed in various taxation rulings.

Introduction

Both the Income Tax Assessment Act 1936 (ITAA 1936) and Australia's double tax agreements include in the definition of permanent establishment (PE) specific situations that give rise to a dependent agent PE. For example, an agent with power to contract is treated as a PE of the taxpayer enterprise in certain situations (refer to paragraph (a) of the definition in subsection 6(1) of the ITAA 1936 and, for example, paragraph 5(a) of Article 5 of the Vietnamese double tax agreement). Another instance is where one person processes goods on behalf of another (refer to paragraph (d) of the definition in subsection 6(1) of the ITAA 1936 and, for example, paragraph 5(b) of Article 5 of the Vietnamese double tax agreement). In addressing these situations, the guide focuses on a dependent agent PE arising for a taxpayer enterprise through the activities of an associated enterprise, where both are members of the same multinational enterprise.

Taxation Ruling TR 2001/11 sets out our views on how these rules operate. Paragraphs 5.37 to 5.42 of the ruling discuss in general terms the application of the rules to dependent agent PEs. This guide expands on that discussion and provides practical guidance on our approach to applying the rules to the most common types of dependent agent PEs.

In this guide we refer to the taxpayer non-resident enterprise as 'ForCo', and to the associated enterprise that is a resident of the host jurisdiction and whose activities give rise to the dependent agent PE of ForCo as 'SubCo'. Parts of ForCo other than its dependent agent PE are referred to as ForCo(HO).