Gzell J

New South Wales Supreme Court


Judgment date: 4 December 2002

Gzell J

The plaintiff is a corporation organised under the laws of the State of Delaware in the United States of America (``US''). It received royalty payments made by a limited partnership called Unisys Licensing Partnership (``ULP''). It asserts that it is not liable for royalty withholding tax on those receipts under the Income Tax Assessment Act 1936 (Cth). On 31 August 2001 the defendant issued a notice claiming withholding tax, penalties and interest. The plaintiff seeks declarations that it is not liable to pay such imposts and an order setting aside or quashing the notice.

2. Unisys Software, Inc (``USI'') was the general partner of ULP. Unisys World Trade, Inc (``UWT'') was its limited partner. Both

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corporations were organised under the laws of the State of Delaware. A limited partnership agreement establishing ULP was executed on behalf of both parties in the US on 23 November 1994.

3. USI and UWT were registered in Australia as foreign companies. On 15 December 1994, ULP was registered under the New South Wales Partnership Act 1892, s 55. Section 53 provided that a limited partnership was formed on its registration under the Act. Section 60(1) provided that the liability of a limited partner to contribute to the debts or obligations of the limited partnership was not to exceed the amount shown in relation to the limited partner in the register. The liability of UWT was limited to $2000.

4. The Income Tax Assessment Act 1936 (Cth), s 94H provided that if a partnership was a corporate limited partnership, the income tax law had effect subject to the changes set out in Subdivison C of Division 5A of Part III. A ``limited partnership'' was defined in s 94B to mean a partnership where the liability of at least one of the partners was limited. A limited partnership formed after 18 August 1992 was a corporate limited partnership in terms of s 94D. ULP was thus a corporate limited partnership to which Subdivision C applied.

5. The Income Tax Assessment Act 1936 (Cth), s 94T provided that for the purposes of the income tax law a corporate limited partnership was a resident of Australia if, amongst other things, it was formed in Australia. ULP was thus an Australian resident. Section 94J provided that a reference in the income tax law to a company included a reference to a corporate limited partnership and s 94U provided that a corporate limited partnership was taken to have been incorporated in the place where it was formed under a law in force at that place. ULP was, therefore, deemed to be a company incorporated in New South Wales.

6. The liability to withholding tax in Australia was governed by the Income Tax Assessment Act 1936 (Cth), s 128B. Section 128B(1A) provided that a reference to a person to whom the section applied included a person who was a resident. ULP was such a person. Section 128B(5A) provided that a person who derived income to which the section applied that consisted of a royalty was liable to pay income tax upon that income at the rate declared by Parliament. That rate was declared at 30% by the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (Cth), s 7(c).

7. The Convention between Australia and the US for the avoidance of double taxation was given the force of law in Australia by s 6(1) of the International Tax Agreements Act 1953. Article 12 of that Convention limited the rate of withholding tax exigible in the country of source to 10%. That is the rate claimed by the defendant.

8. A royalty to which s 128B of the Income Tax Assessment Act 1936 (Cth) applied was defined in s 128B(2B). So far as is material, that provision was in the following terms:

``Subject to subsection (3), this section also applies to income that:

  • (a) is derived by a non-resident:
    • (i) during the 1993-94 year of income of the non-resident; or
    • (ii) during a later year of income of the non-resident; and
  • (b) consists of a royalty that:
    • (i) is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a foreign country at or through a permanent establishment of that person in that country;...''

9. The plaintiff was a ``non-resident''. That term was defined in s 6(1) of the Income Tax Assessment Act 1936 (Cth) to mean a person who was not a ``resident''. That term was defined in the same provision with respect to a company to mean one incorporated in Australia or which, not being incorporated in Australia, carried on business in Australia and had either its central management and control in Australia or its voting power controlled by shareholders who were residents of Australia. There is no suggestion in the evidence that the plaintiff had any connection with Australia that might bring it within that definition. The defendant does not assert that the plaintiff was a resident. If he did, he would have sought to subject the entire royalties to tax under s 25(1)(b) which rendered exigible the gross income of a non-resident from sources in Australia.

10. The plaintiff argues that the royalties paid to it were incurred by UPL in carrying on business in the US at or through a permanent

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establishment in that country and were not, therefore, royalties to which s 128B applied.

11. The agreement constituting ULP provided that it should be managed and represented by the general partner and, unless expressly provided otherwise, all decisions respecting any matter set forth in the agreement arising out of the conduct of the business of the partnership should be made by the general partner. The general partner had specific authority to execute documents of transfer and conveyance and other instruments, to execute licence or royalty agreements and to do anything else that the general partner might deem necessary to conduct the partnership business and to carry out its purpose.

12. Decisions of USI as general partner of ULP were made by Stuart Carl Thiede, its Vice President and Treasurer, Jack Silverberg, Assistant Treasurer and Thomas Robert Howe, senior international tax Counsel for the plaintiff. Mr Thiede had his office in the offices of the plaintiff at 7700 West Camino Real, Boca Raton, Florida. The other two gentlemen had their offices at Unisys Way, Blue Bell, Pennsylvania. Decisions were made by email or telephone. Mr Thiede was authorised to execute documents on behalf of ULP. I find that he executed the limited partnership agreement at the offices of the plaintiff at 7700 West Camino Real.

13. A decision having being made to enter into a licensing agreement, Mr Thiede executed it at the plaintiff's premises in 7700 West Camino Real. That was the address of ULP given as its principal place of business in opening its bank account. It was also the business address given in the application for registration of the limited partnership in New South Wales.

14. Unisys Australia Ltd (``UAL'') is a corporation organised under the laws of the State of Michigan in the US. It is registered as a foreign company in Australia. It carries on business in this country. The plaintiff asserts that it is a resident for the purposes of the Income Tax Assessment Act 1936 (Cth). The defendant does not assert to the contrary.

15. The plaintiff and UAL entered into an intellectual property licence agreement on 1 January 1993 whereunder UAL was granted a non-exclusive licence with respect to the plaintiff's patents, copyrights, trade secrets, software, documentation and know-how to reproduce, translate, distribute and prepare derivative works of and use in its business the intellectual property in Australia and its territories. That agreement was varied. On 21 December 1994 it was terminated by agreement between the plaintiff and UAL.

16. On 21 December 1994, the plaintiff entered into an intellectual property licence agreement with ULP granting it a non-exclusive licence to reproduce, translate, distribute and prepare derivative works of and use in its business the plaintiff's intellectual property throughout the world. That agreement was executed by Mr Thiede on behalf of the general partner of ULP at the plaintiff's offices at 7700 West Camino Real, Boca Raton.

17. Also on that day Mr Thiede executed on behalf of the ULP at those offices a sub-licence from ULP to UAL to utilise the intellectual property in Australia and its territories. Royalty payments were set at 50% of UAL's software revenue subject to subsequent review by the parties. The royalties payable under the head licence agreement were 99.5% of the royalties received from UAL.

18. In 1995 the plaintiff would say that no royalty withholding tax was payable by ULP because it was not a non-resident.

19. Taxation Laws Amendment Act (No 2) 1997 introduced s 128B(2C) which subjected to withholding tax a royalty derived by a resident in carrying on business in a country outside Australia at or through a permanent establishment in that country where the royalty was paid by an Australian resident and was not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment in that country. In addition, the general anti-avoidance provisions in Part IVA were extended by the introduction of s 177CA which applied if a taxpayer was not liable to pay withholding tax where the taxpayer would have, or could reasonably be expected to have, been liable to pay that tax if a scheme had not been entered into or carried out. The amendments took effect on 20 August 1996. Shortly before trial, the defendant made determinations under Part IVA with respect to royalty payments received by the plaintiff after 19 August 1996. The parties were in agreement that I should not deal with the anti-avoidance aspects and I allowed an amendment to the pleadings to limit relief to royalty payments

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received between December 1994 and 19 August 1996.

20. In 1994, Mr Thiede was the finance director of the plaintiff's Latin American and Caribbean group. The plaintiff conducted a Latin American shared service centre (``LASSC'') at 2000 Glades Road, Boca Raton. On 1 January 1995 the plaintiff and ULP entered into a sub-lease agreement of a room of 138 square feet in the space occupied by LASSC at 2000 Glades Road. I find that Mr Thiede executed this agreement at 7700 West Camino Real.

21. In January 1995, the LASSC made a request for additional office space and in September its offices were relocated at 311 University Drive, Coral Springs, Florida. On 1 September 1995, Mr Thiede on behalf of ULP executed a sub-lease agreement with the plaintiff at 7700 West Camino Real for a room of approximately 120 square feet in the area occupied by LASSC at 311 University Drive. The decisions to take the sub-leases were made by email or telephone between Mr Thiede, Mr Howe and Mr Silverberg.

22. There was an exception in the licence agreements for diagnostic software listed in the plaintiff's price books. Mr Howe was unable to explain this exception. He said he believed that UAL had a full portfolio of intellectual property licensed to it by the plaintiff prior to 1994 and it was the intention that ULP should continue to have that full portfolio under the December 1994 agreements.

23. On 21 December 1997 the licence agreement between the plaintiff and ULP was terminated by agreement between parties. On 31 December 1997 USI and UWT were dissolved in their place of origin.

24. A foreign partnership was required to lodge an income tax return in the US if it had either US source gross income or gross income from any source effectively connected with the conduct of a trade or business within the US under the Internal Revenue Code (US), s 6031. Mr Howe attended to the lodgement of income tax returns of ULP for the calendar years 1994 to 1997.

25. The day to day management and accounting procedures with respect to ULP were carried out by the staff of LASSC. Where necessary, documents were prepared for Mr Thiede's signature as, for example, authorities to ULP's bank for the transfer of funds to the plaintiff under the licence agreement.

26. Business, accounting and back-office administrative services were provided to subsidiaries of the plaintiff in Australia, New Zealand, Singapore, Thailand, Malaysia, Philippines, Korea, China, Hong Kong and Taiwan from the Unisys Asia Pacific shared service centre (``APSSC'') in North Sydney. It was modelled on LASSC. Each quarter, APSSC calculated the royalty payable to ULP under the sub-licence agreement and sent an email of that calculation to LASSC which raised an invoice on behalf of ULP addressed to UAL. On receipt of the invoice, APSSC arranged for the purchase of foreign exchange and the transfer of those funds from UAL's bank account to ULP's bank account in Boca Raton following which, a request for confirmation of receipt was sent by email and a response by email confirming receipt was received.

27. During 1995 and the first half of 1996, UAL had a volatile cash reserve. During this period UAL paid ULP as and when it could afford to do so.

28. Upon receipt of the email from UAL at LASSC, a handwritten journal entry was created by reference to which the invoice was raised and despatched to UAL. The handwritten journal entry was then entered into the ULP computerised general ledger. ULP's bankers subsequently sent by facsimile a confirmation of receipt of the funds. LASSC also created a handwritten journal entry to the value of 99.5% of the royalty received from UAL to be transferred to the plaintiff. An entry was then made in the ULP computerised general ledger. A written authority was then executed requesting the transfer of the requisite amount to the plaintiff's bank. ULP's bank then issued a facsimile confirmation of the transfer of the funds.

29. Once ULP was established and the above processes were put in place, USI and UWT decided it was unnecessary to hold meetings of partners or to have produced budgets, financial statements and projections except as required under Florida law. Thereafter, LASSC produced trial balances each month, it being decided that this was sufficient financial information for the partnership. LASSC oversaw the general ledger entries, recorded sales of software in respect of which royalty payments were derived, reviewed accounts

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receivable, attended to general back-office accounting requirements which involved the closing of monthly ledgers, submission of results to corporate headquarters, the annual rolling over of account balances to new year balance sheets and managing queries relating to tax returns or inter-company reconciliations. For these services, LASSC raised a charge by invoice at the end of each year.

30. ULP returned a profit from its operations in each of the calendar years 1994 to1997. In the 1994 year ULP received approximately US$9.5 million in royalties and earned a net income of approximately US$48,000. In 1995 royalties were approximately US$9.5 million and net income was approximately US$32,000. In 1996 receipts were approximately US$16.5 million and net profit approximately US$58,500. In its final year, royalties received were approximately US$9.8 million and net income was approximately US$628,000.

31. The rooms the subject of the sub-leases, contained office furniture, including a desk and filing cabinet where all ULP records were stored. The accounting procedures referred to above were carried out by LASSC staff at desks in its general working area. The only functions carried out in the rooms the subject of the sub- leases were the filing and retrieval of records. The rooms were not used by LASSC staff for any other purpose. The copy documents stored in the rooms numbered approximately 100 to 200 pages.

32. The defendant does not dispute that the plaintiff received royalties from ULP and that ULP was a resident of Australia. What is put in issue is whether ULP was conducting a business, whether it had a permanent establishment in the US and whether the business was carried on at or through that permanent establishment.

33. Mr Slater QC who with Mr Hamilton appeared for the defendant, raised an additional issue with which I can deal shortly. He submitted that upon the proper construction of the Income Tax Assessment Act 1936 (Cth), s 128B(2B)(b)(i), ULP's incurrence of the royalty obligation must have been at or through the permanent establishment. I reject that submission. What is required by the provision is the incurrence of a royalty liability in carrying on business at or through a permanent establishment. It is sufficient, in my view, that the business be carried on at or through the permanent establishment. If BHP Billiton had a permanent establishment for European operations in the United Kingdom and the resident executive officer in charge of European operations travelled to Brussels to execute a licence agreement obliging BHP Billiton to pay royalties, it could hardly be the intention of the legislation to exclude that incurrence from the purview of the exception.

34. It was submitted on behalf of the defendant that the activities carried out by ULP did not constitute a business. It was said that its retention of only 0.5% of the royalties payable by UAL meant that it was never intended to carry on any other activity and the mere taking on licence and sub-licensing of the plaintiff's intellectual property rights was an investment activity and not one of business. It was submitted that the concept of a business for the purposes of s 128B was different from the use of the term elsewhere in the Act.

35. In 1973, the Income Tax Assessment Act 1936 (Cth) provided that withholding tax was payable on interest derived by a non-resident that was paid by a resident and was not an outgoing wholly incurred by the resident in carrying on business in a country outside Australia at or through a permanent establishment. The Income Tax Assessment Act 1974 (Cth) introduced with respect to interest withholding tax a comparable provision to that in the later introduced s 128B(2C) with respect to royalties. Section 128B(2A) made subject to withholding tax interest paid by a resident to another resident conducting a business through a permanent establishment overseas, unless the payer of the interest also conducted business through a permanent establishment overseas. The Explanatory Memorandum which accompanied the introduction of that legislation described the exception which was to be limited by the new provision as applicable to an Australian resident carrying on business outside Australia through a branch situated in the overseas country.

36. Before 1992, royalties paid by an Australian resident to a non-resident, not being an outgoing wholly incurred by the resident in carrying on business in a country outside Australia at or through a permanent establishment was deemed to have an Australian source with the consequence that it was assessable to the non-resident in the ordinary course under the Income Tax

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Assessment Act
1936 (Cth), s 25(1)(b). Taxation Laws Amendment Act (No. 5) 1992 (Cth) substituted for this regime the current royalty withholding tax regime. Section 128B(2B) was introduced to the legislation. The Explanatory Memorandum which accompanied the introduction of this legislation described the exception in s 128B(2B)(b)(i) as applicable where the royalty was an expense incurred in carrying on business through a permanent establishment, for example, a branch off-shore.

37. It was submitted that what was in contemplation in the legislation was some sort of business activity conducted through a branch.

38. In interpreting a statute the context must be considered in the first instance and not merely at some later stage when an ambiguity might be thought to arise, the context including such things as the existing state of the law and the mischief intended to be remedied (
CIC Insurance Limited v Bankstown Football Club Limited (1997) 9 ANZ Insurance Cases ¶61-348 at 76,853; (1995-1997) 187 CLR 384 at 408). The portions of the Explanatory Memoranda relied upon by the defendant do not address the mischief to be remedied by the amendments. The passages describe the existing structure. No doubt carrying on business outside Australia through a branch is the most obvious example of carrying on business outside Australia at or through a permanent establishment. But the description in the Explanatory Memoranda cannot supplant the text of statute (
Re Bolton; Ex parte Beane (1987) 162 CLR 514 at 518).

39. The statute speaks of carrying on business in a foreign country at or through a permanent establishment. The term ``business'' was defined in the Income Tax Assessment Act 1936 (Cth), s 6(1) to include any profession, trade, employment, vocation or calling, but did not include occupation as an employee. In my view the description of the existing legislation in the Explanatory Memoranda does not lead to a departure from that general definition and require the term ``business'' to be confined to activities of business conducted through a branch for the purpose of s 128B(2B).

40. The language of s 128B(2B) of the Income Tax Assessment Act 1936 (Cth) is drawn from international tax law as the defendant acknowledges in Taxation Ruling TR 2002/5 at par 16 to par 24. Most of Australia's agreements for the avoidance of double taxation (``DTAs'') are based on the 1963 OECD draft Double Taxation Convention on Income and Capital and the 1977 model Double Taxation Convention on Income and Capital. The latest DTAs are based on the ambulatory OECD model Tax Convention on Income and on Capital published in loose-leaf format in 1992.

41. Each of these models seeks to avoid the taxation of income and capital in both countries by allocating taxing rights to one or the other. An underlying concept in the models is that the country of residence alone should tax income unless there is sufficient connection with the country of source to justify the allocation of taxing rights to that country. A key provision in the models is art 7, the business profits article, which provided that the profits of an enterprise of a Contracting State should be taxable only in that State unless the enterprise carried on business in the other Contracting State through a permanent establishment situated therein. This language first appeared in Australia's international tax law in the DTA with the United Kingdom in 1946.

42. An international treaty is to be construed on broad principles of general acceptation (
Stag Line Ld v Foscolo Mango & Co [1932] AC 328 at 350,
James Buchanan & Co Ltd v Babco Forwarding & Shipping (UK) Ltd [1978] AC 141 at 152). When the Commonwealth Parliament chooses to implement a treaty by a statute which uses the same words as the treaty it is reasonable to assume that Parliament intended to import into municipal law a provision having the same effect as the corresponding provision in the treaty (
Shipping Corporation of India Ltd v Gamlen Chemical Co (Australasia) Pty Ltd (1980) 147 CLR 142 at 159,
Reg v Chief Immigration Officer; Ex parte Bibi [1976] 1 WLR 979 at 984). A statutory provision corresponding with a provision in a treaty which the statute is enacted to implement, should be construed by municipal courts in accordance with the meaning to be attributed to the treaty provision in international law (
Quazi v Quazi [1980] AC 744 at 808, 822).

43. The rules for the interpretation of international treaties were codified in the Vienna Convention on the Law of Treaties which, because it reflects the customary rules for interpretation of treaties, is applicable to treaties with countries which are not signatories to the Convention (
Fothergill v Monarch

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Airlines Ltd
[1981] AC 251 at 276, 282, 290,
The Commonwealth v Tasmania (The Tasmanian Dam Case) (1983) 158 CLR 1 at 222). Article 31 of the Vienna Convention provided that a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose. Article 32 provided that recourse might be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion in order to confirm the meaning resulting from the application of art 31 or to determine the meaning when the interpretation according to art 31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable.

44. When interpreting a DTA in international tax law, it has been held in a number of jurisdictions that recourse may be had to the Official Commentary to the OECD models as supplementary means of interpretation (
Thiel v FC of T 90 ATC 4717 at 4719-4720, 4722-4723, 4727; (1990) 171 CLR 338 at 344, 349, 357,
FC of T v Lamesa Holdings BV 97 ATC 4752 at 4758; (1997) 77 FCR 597 at 604,
Sun Life Assurance Co of Canada v Pearson (1986) 59 TC 250 at 331,
Commissioner of Inland Revenue v JFP Energy Inc (1990) 12 NZTC 7176 at 7179). In addition, courts have had regard to decisions in other jurisdictions in international comity in an attempt to achieve international uniformity.

45. Far from the OECD Official Commentaries and court decisions in Australia and elsewhere with respect to the business profits article suggesting the need for activities in the nature of the conduct of a branch, they are to the contrary, including within the business profits article investment type activities.

46. Paragraph 32 of the Official Commentary to art 7 of the 1992 OECD model suggested a wide interpretation of business profits. It stated:

``Although it has not been found necessary in the Convention to define the term `profits', it should nevertheless be understood that the term when used in this Article and elsewhere in the Convention has a broad meaning including all income derived in carrying on an enterprise. Such a broad meaning corresponds to the use of the term made in the tax laws of most OECD Member countries.''

47. In Thiel an adventure in the nature of trade was held to give rise to a business profit for the purpose of the business profits article in the DTA between Australia and Switzerland. The taxpayer acquired four units in a high technology trust for $50,000. Three months later he was offered a considerable profit for their redemption but instead acquired a further two units for $100,000. Preparatory to a public float six months later, he was allotted 600,000 shares in the float vehicle in place of his units. His broker sold down over 250,000 shares in over 40 separate sales three and four months later for a total in excess of $550,000 before the defendant intervened by raising an assessment.

48. In
Minister of National Revenue v Tara Exploration and Development Co Ltd (1972) 28 DLR (3d) 135 the Supreme Court of Canada held that a Canadian company controlled from Ireland with no permanent establishment in Canada which bought shares in three Canadian mining companies which it sold at a substantial profit within two years, had carried out an adventure in the nature of trade which brought it within the business profits article in the DTA between Canada and Ireland.

49. In
Commissioner of Taxes v Aktiebolaget Tetra Pak [1966] (4) 198 the Rhodesian Appellate Division of the High Court held that the receipt of rent from the lease of six machines which converted laminated paper board into containers for the packaging of milk and other liquids constituted industrial or commercial profits and for the purpose of the DTA between the United Kingdom and Sweden which applied to the Federation of Rhodesia.

50. In
Secretary for Inland Revenue v Downing (1975) (4) SA 518 the Appellate Division of the Supreme Court of South Africa held that a domiciliary of South Africa who went to live permanently in Switzerland and left a large portfolio of shares to be managed by a stockbroker, conducted a business through the broker for the purpose of the business profits article in the DTA between the Republic of South Africa and the Swiss Confederation.

51. In the instant circumstances, ULP acquired valuable intellectual property rights from the plaintiff and exploited those rights by sub-licence to UAL. Albeit that the turn between the relative royalties was minimal,

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ULP made profits after expenses in each of the years it was in existence.

52. The defendant submitted that ULP's reliance upon UAL to initiate documentation and payment and its failure to react when UAL delayed this procedure due to its cash flow problems, militated against its activities being characterised as a business. It was further submitted that the narrowness of the turn on royalties of 0.5% meant that no other activity could be undertaken or was intended to be undertaken. As to the latter argument, there was, nonetheless, an acquisition of valuable rights and their exploitation. As to the former, the nature of the investment and its exploitation meant that little activity was necessary to monitor performance and, unusual though it be to rely upon a sub-licensee to initiate payment and documentation, that did not detract from the fact that valuable rights were acquired and dedicated to the sub-licence.

53. In my view, in light of the attitude taken to what constitutes a business for the purposes of the business profits article, from which the language of s 128B(2B) of the Income Tax Assessment Act 1936 emanates, ULP carried on business in the US for the purposes of that provision.

54. It follows that the royalty payments made to the plaintiff were wholly incurred by ULP in carrying on business in the US for the purposes of s 128B(2B) of the Income Tax Assessment Act 1936.

55. I prefer to base my decision on international tax law considerations because there are conflicting decisions in our domestic tax law as to what constitutes a business profit when it comes to investment type activities.

56. On the one hand there is a line of authority confining taxability of investment profits to banks and insurance companies (
Colonial Mutual Life Assurance Society Ltd v FC of T (1946) 8 ATD 137; (1946) 73 CLR 604,
Producers' and Citizens' Co-operative Assurance Co Ltd v FC of T (1956) 11 ATD 86; (1956) 95 CLR 26;
Australian Catholic Assurance Co Ltd v FC of T (1959) 11 ATD 577; (1959) 100 CLR 502,
The Chamber of Manufacturers Insurance Ltd v FC of T 84 ATC 4315; (1984) 2 FCR 455,
CMI Services Pty Ltd v FC of T 90 ATC 4428; (1990) 94 ALR 153,
RAC Insurance Pty Ltd v FC of T 90 ATC 4737; (1990) 95 ALR 515,
Employers' Mutual Indemnity Association Ltd v FC of T 91 ATC 4850; (1991) 103 ALR 17,
GRE Insurance Ltd v FC of T 92 ATC 4089; (1992) 34 FCR 160,
AGC (Investments) Limited v FC of T 92 ATC 4239) unless the scale of operations was such as to constitute a business of investing (
London Australia Investment Co Ltd v FC of T 77 ATC 4398; (1976-1977) 138 CLR 106).

57. On the other hand, cases dealing with the source of profits derived from making contracts highlight the jurisdiction in which the contract was made as a significant element in determining whether a company is carrying on business in that jurisdiction (
Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (NSW) (1921) 29 CLR 225 at 232-233,
Premier Automatic Ticket Issuers Ltd v FC of T (1933) 2 ATD 383 at 384-385; (1933) 50 CLR 268 at 285-286,
Tariff Reinsurances Ltd v Commissioner of Taxes (Vic) (1938) 4 ATD 498 at 501-502; (1938) 59 CLR 194 at 205-206,
FC of T v United Aircraft Corporation (1943) 7 ATD 254 at 256-257, 321-322; (1943) 68 CLR 525 at 528-529, 533-535,
Firestand Tyre & Rubber Co Ltd v Lewellin (1956-1957) 37 TC 111 at 142,
Commissioner of Inland Revenue v Hang Seng Bank Ltd [1991] 1 AC 306 at 322-323).

58. There is support in domestic tax law for the proposition that limited activity by a company may constitute a business. In
American Leaf Blending Co SDN BHD v Director-General of Inland Revenue [1979] AC 676 the successive letting of premises after a tobacco business had been abandoned was held to give rise to rents receivable as income from a source consisting of a business. In
Esquire Nominees Ltd v FC of T 73 ATC 4114 at 4117-4118; (1971-1973) 129 CLR 177 at 212 Barwick CJ said that a company might make profits simply by investment and might do so though its investment consisted only of shares in one other company and Menzies J at ATC 4123; CLR 221 observed that the fact that a holding company held shares in an operating company from which it received dividends did not signify that it did not itself carry on a profit- making business. In
Brookton Co-operative Society Ltd v FC of T 81 ATC 4346 at 4363; (1980-1981) 147 CLR 441 at 469 Aickin J, citing American Leaf and Esquire Nominees, observed that it was easier to draw an inference that an income earning activity of a company was a business than to do so when the same activity was undertaken by an individual.

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59. The question remains whether the business conducted by ULP was carried on at or through a permanent establishment in the US. The Income Tax Assessment Act 1936 (Cth), s 6(1) contains the following definition:

```permanent establishment' , in relation to a person (including the Commonwealth, a State or an authority of the Commonwealth or a State), means a place at or through which the person carries on any business and, without limiting the generality of the foregoing, includes:

  • (a) a place where the person is carrying on business through an agent;
  • (b) a place where the person has, is using or is installing substantial equipment or substantial machinery;
  • (c) a place where the person is engaged in a construction project; and
  • (d) where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control or capital of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed;

but does not include;

  • (e) a place where the person is engaged in business dealings through a bona fide commission agent or broker who, in relation to those dealings, acts in the ordinary course of its business as a commission agent or broker and does not receive remuneration otherwise than at a rate customary in relation to dealings of that kind, not being a place where the person otherwise carries on business;
  • (f) a place where the person is carrying on business through an agent:
    • (i) who does not have, or does not habitually exercise, a general authority to negotiate and conclude contracts on behalf of the person; or
    • (ii) whose authority extends to filling orders on behalf of the person from a stock of goods or merchandise situated in the country where the place is located, but who does not regularly exercise that authority;

    not being a place where the person otherwise carries on business; or

  • (g) a place of business maintained by the person solely for the purpose of purchasing goods or merchandise;''

60. While each leased room constituted a place which was at the exclusive disposal of ULP, the defendant contends, correctly in my opinion, that it was not a place at or through which ULP carried on its business within the meaning of s 128B(2B)(b)(i) of the Income Tax Assessment Act 1936 (Cth). The storage and retrieval of documents could hardly constitute the carrying on of ULP's business. For the same reason, the rented rooms were not permanent establishments.

61. Mr Edmonds SC who with Mr Harper appeared for the plaintiff, submitted that ULP's business was carried on by USI as its agent and it had its place of business at 7700 West Camino Real as did Mr Thiede and ULP's business was conducted at or through USI's place of business, Mr Thiede's office therein and from the rented premises at 2000 Glades Road and subsequently at 3111 University Drive.

62. The above-quoted definition derives from the OECD models. With respect to the concept of the dependent agent, the OECD models are different from the definition in the Income Tax Assessment Act 1936 (Cth), s 6(1). In the OECD models the person of the dependent agent constitutes the permanent establishment. The current formulation in art 5(5) of the 1992 OECD model which, for present purposes, is not materially different from the formulation in the earlier models, is as follows:

``Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in

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paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.''

63. Under the Income Tax Assessment Act 1936, it is the place where the person carries on business through an agent that constitutes the permanent establishment.

64. Under the OECD formulation, it is not every dependent agent who constitutes a permanent establishment. The provision is limited to an agent with authority to conclude contracts in the name of the enterprise who habitually exercises that power. Paragraph (f)(i) of the definition in s 6(1) of the Income Tax Assessment Act 1936 excludes a dependent agent who does not have or does not habitually exercise a general authority to negotiate and conclude contracts.

65. In international tax law, there is authority for the proposition that a general partner of a limited partnership can constitute a permanent establishment (
Donroy v US 301 F 2d 200 (1962),
No. 630 v Minister of National Revenue (1959) 59 DTC 300). Translating those decisions into the Australian context, where USI carries on its business could constitute a permanent establishment.

66. The problem facing the plaintiff, however, is whether the requirement of habitual exercise of a power to conclude contracts excludes a permanent establishment. The limitation is explained in par 32 of the Official Commentary to art 5 of the 1992 OECD model as follows:

``Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents ie persons, whether employees or not, who are not independent agents falling under paragraph 6. Such persons may be either individuals or companies. It would not have been in the interest of international economic relations to provide that the maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned. Therefore, paragraph 5 proceeds on the basis that only persons having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them. In such a case the person has sufficient authority to bind the enterprise's participation in the business activity in the State concerned. The use of the term `permanent establishment' in this context presupposes, of course, that the person makes use of this authority repeatedly and not merely in isolated cases...''

67. Klaus Vogel on Double Taxation Conventions, 3rd ed, Kluwer, London, 1997 at 332-333, points out that the mere existence of an authority to conclude contracts does not signify that the person so authorised is actually engaged in business in a way that would justify the agent being taxed. An additional requirement is that his activities have a certain permanence that is why, Professor Vogel says, there is the additional requirement in the OECD models that the authority to conclude contracts must be exercised habitually. The frequency with which the agent concludes contracts will be sufficient if it corresponds to what is normal in the actual line of business concerned. Professor Vogel says that in cases of doubt, the continuity of such a person's exercise of authority should be measured by application of the same criteria as those applied under the general permanent establishment concept laid down in art 5(1). The decisive factor in this case is whether the activity was, from the outset, devised for a lengthy period or only as a temporary expedient. He points to a decision of the Norwegian Høyesterett in which an agent who merely extended a contract on three successive occasions, was held not to have habitually exercised that authority.

68. In Huston J and Williams L, Permanent Establishments a planning primer Kluwer, Boston, 1993 at 90 the authors state that the mere possession of the requisite authority is not sufficient. It must be exercised regularly or habitually. Even a general power of attorney is not sufficient if not regularly exercised. The relevant authority is that which is exercised, not that which is given.

69. In Arvid A Skaar, Permanent Establishment Erosion of a Tax Treaty Principle, Kluwer, Boston, 1991 at 525 the author states that the basic rule of the OECD models requires a special connection between the business activity and the place of business. The business activity must be carried out

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``through'' the place of business. While the dependent agent provision does not explicitly provide for a business connection test, authorisation to perform a business activity on behalf of the principal does not of itself suffice for the constitution of a permanent establishment. The business of the principal has to be actually performed by the agent and, more specifically, the agent must exercise the authority habitually.

70. At 526-527 Skaar cites the example of a decision of the Stavanger byrett, the Norwegian lower court, in Pegrum which concerned a United Kingdom geologist who was employed by a United Kingdom corporation controlled by himself. The principal activity of the company was to provide geological and geophysical interpretation services for a Norwegian oil company. This activity lasted for several years. The geologist concluded a contract on behalf of the company with the Norwegian client and this contract was renewed each year. The contract was based on standard terms elaborated by the Norwegian client in addition to an agreement on salary. The negotiations lasted for 30 minutes the first time and 15 minutes for each renewal. The issue in the case was whether the activity was enough to comply with the habitual exercise test. The court concluded that renewal of a standard contract, once a year, did not meet the treaty requirement. As Professor Skaar says at 527:

``In general, the agency clause is designed to deal with agents who engage their principals in foreign business activities through the use of their authority to conclude contracts, typically sales contracts. The agency clause is therefore inadequate for consultancy services, because it is the services of the consultant, not the conclusion of a contract, which involve the principal in business activities in the other country...

The conclusion of one contract in the course of two years cannot be considered a habitually exercised authority, even if the business in question does not require more than one contract for this period of time. Thus an employee who concludes one contract on behalf of a consultancy firm or a construction enterprise is not an agent of the company in terms of the agency clause. To constitute a PE, this enterprise has to meet the conditions under the basic rule or the construction clause...''

71. It might be said that all that is required by the formulation in par (f)(i) of the definition in the Income Tax Assessment Act 1936 (Cth), s 6(1) to constitute a permanent establishment is the existence of a general authority to conclude contracts because that requirement is expressed in the alternative to the requirement of habitual exercise.

72. Two things can be said of that proposition. First, it would render nugatory the reference to habitual exercise of the general authority. If all that is required is the existence of a general authority, there is no point in speaking about its habitual exercise. Secondly, the OECD models are based upon the habitual exercise of the authority rather than its existence. It should not be presumed that in enacting the negative formulation in par (f)(i), Parliament meant to alter the dual requirement in the OECD models. The definition was introduced by Income Tax Assessment Act 1968 in conjunction with Income Tax (International Agreements) Act 1968. The Explanatory Memorandum which accompanied both Acts gives no indication of a departure from OECD models. This is one of those occasions when the word ``or'' means ``and''.

73. In the instant circumstances, Mr Thiede on behalf of USI, the general partner of ULP, executed a licence agreement and a sub-licence agreement. They were the only contracts constituting the business activity. Incidental contracts with respect to the leases of the two rooms, the opening of a bank account and any arrangement with LASSC did not involve USI engaging a third party in the business of ULP in the sense of extending its profit-making purpose.

74. In my view there was not a sufficient repetition of contractual activity to constitute the habitual exercise of a general authority to negotiate and conclude contracts and ULP is thrown back on establishing that it had a place at or through which it carried on business in the US.

75. I have rejected the rooms as falling within this concept. ULP's business activities were not carried out ``through'' those rooms.

76. With respect to the premises of USI, the plaintiff and the offices of LASSC, there was no evidence that any portion of these premises was placed at the disposal of ULP. As Professor Vogel points out at 286 a place of business must be more than merely temporarily at the

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enterprise's disposal (see also Skaar at 111-112). The plaintiff has failed to establish that ULP had at its disposal in the US a place at or through which it carried on its business.

77. I dismiss the amended summons. I order the plaintiff to pay the defendant's costs of the proceedings.

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