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Taxation Determination

TD 2005/2

Income tax: does a resident of a country with which Australia has a Tax Treaty, have a permanent establishment solely from the sale of trading stock through an internet website hosted by an Australian resident internet service provider?

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FOI status:

may be released

Preamble

The number, subject heading, date of effect and paragraph 1 to paragraph 2 of this document are a 'public ruling' for the purposes of Part IVAAA of the Taxation Administration Act 1953 and are legally binding on the Commissioner.

1. No, where the internet service provider (ISP)[1] is acting as a mere conduit, the Business Profits Article of the relevant Tax Treaty will apply. The non-resident will not, by virtue of the website alone, have a permanent establishment (PE) in Australia. The answer in this determination is provided on the basis of the assumptions in paragraph 2. If those assumptions are not fulfilled, the determination will not apply.

2. The following assumptions are made in this determination:

(a)
that the taxpayer, as a resident of the country with which Australia has a tax treaty, is entitled to the benefits of the relevant treaty;[2]
(b)
that the ISP is carrying on a business as an ISP, is dealing at arm's length with the taxpayer and does not provide other services to the taxpayer in addition to the hosting[3] arrangement which may give rise to a PE of the taxpayer; and
(c)
that any income from the sale is covered by the business profits article of the tax treaty and not some other article.

Domestic law

3. Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident includes ordinary income derived directly or indirectly from all Australian sources as well as other ordinary income that a provision includes on a basis other than having an Australian source. In some circumstances, income derived by a non-resident from the sale of merchandise to Australian consumers through a website hosted by an Australian resident ISP may constitute assessable income of the non-resident under subsection 6-5(3). The income may also be assessable in Australia under sections 38 to 43 of the Income Tax Assessment Act 1936, in which case the amount of profit to be included in the non-resident's assessable income is calculated under those provisions and not subsection 6-5(3) of the ITAA 1997.

Application of Tax Treaties

4. Where the tax position involves a resident of a country with which Australia has a Tax Treaty it is necessary to consider the application of the relevant articles in the Tax Treaty. Where there is inconsistency, the terms of the Tax Treaty effectively override those of Australia's domestic tax law. Profits from the sale of trading stock would constitute the profits of an enterprise carried on by a resident of the treaty partner country and would fall under the Business Profits Article.[4] Under this article, Australia may not tax the business profits derived by an enterprise of the other contracting state unless those business profits are attributable to a permanent establishment situated in Australia through which the enterprise carries on business. Thus, the existence of a permanent establishment is central to the allocation of taxing rights under the Business Profits Article.

Definition of permanent establishment

5. The term 'permanent establishment' is defined in the Permanent Establishment Article[5] in Australia's Tax Treaties, generally contained in Article 5.[6] The term is defined in Article 5(1)[7] to mean a:

fixed place of business through which the business of an enterprise is wholly or partly carried on.

6. Guidance on the application of this article to websites can be found in paragraphs 42.1 to 42.10 of the Commentary on Article 5 of the OECD Model Tax Convention on Income and on Capital (the Commentary).[8] The Commentary discusses whether the use of computer equipment in electronic commerce operations in a country can constitute a permanent establishment under the Business Profits Article of the OECD Model.

7. A distinction is drawn between computer equipment and the data and software used by, or stored on, that equipment.[9] A website is considered to be a combination of computer software and electronic data. The distinction between the website and the server on which the website is stored is important when, as in the case under consideration, the enterprise that operates the server is different from the enterprise that carries on business through the website. The server on which a website is stored is a piece of equipment with a physical location and may constitute a 'fixed place of business' of an enterprise which has that server at its disposal.[10] However, the fact that an enterprise has a certain amount of space on the server of an ISP allocated for it to use to store software and data does not result in the server being at the disposal of the enterprise. The enterprise is not considered to have acquired a place of business by virtue of the hosting arrangements.[11]

8. Where an ISP is only in the business of providing access to the internet it operates as a mere conduit for the business activities of the non-resident enterprise. The agreement with the ISP would not typically specify which server the website will be hosted on and the ISP may change the server used at their discretion. The space used for a specific website on the server of the ISP is not at the disposal of the entity that owns the website. Thus, the enterprise does not have a fixed place of business in Australia.

9. Article 5(2)[12] of Australia's Tax Treaties contains a list of examples each of which can be regarded as constituting a permanent establishment such as a place of management, an office, a branch, a factory or a workshop, or agricultural, pastoral or forestry property, etc. The website being a combination of software and data does not, of itself, fall within the list generally contained in Article 5(2).[13]

10. Under Article 5(5)[14] of Australia's Tax Treaties, an enterprise is deemed to have a permanent establishment where a person, other than an agent of an independent status, acts on behalf of an enterprise and habitually exercises an authority to substantially negotiate or conclude contracts on behalf of the enterprise.[15] However, under Article 5(6)[16] an enterprise will not be deemed to have a permanent establishment in Australia merely because that enterprise carries on business in Australia through a broker, general commission agent or any other agent of independent status, where the agent is acting in the ordinary course of their business.[17]

11. In most cases, an ISP will not constitute a permanent establishment by virtue of it being a dependent agent, because the ISP is not an agent of the enterprise and would lack the authority to conclude, and would not regularly conclude contracts on behalf of the non-resident enterprise. The website itself does not constitute a dependent agent as it is not a 'person' as defined in Australia's tax treaties. Furthermore, the ISP could constitute an independent agent acting in the ordinary course of their business if, amongst other things, they host websites for a number of different enterprises.[18]

Conclusion

12. Where the sole presence of an enterprise in Australia is a website hosted by an Australian ISP, the enterprise does not have a permanent establishment in Australia, subject to the assumptions in paragraph 2.

Date of effect

13. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Commissioner of Taxation
9 March 2005

Footnotes

1 The Macquarie Dictionary (revised 3rd edition) defines Internet Service Provider as a company which provides connection to the Internet, usually for a fee.

2 Thus the determination will not apply, for example, if the taxpayer does not qualify under a limitation of benefits article in a treaty or if the taxpayer is a dual resident and dual residents are excluded from the benefits of a treaty.

3 A host is a computer or network running a particular application or service, as defined in Botto, F 2003, Dictionary of e-business: a definitive guide to technology and business terms, John Wiley & Sons Ltd, London, p.148

4 Subject to modifications, the business profits/permanent establishment principle is common to all of Australia's Tax Treaties and is found in the OECD Model Tax Convention on Income and on Capital (the OECD Model).

5 Although there are differences in this article between tax treaties, these are not relevant where the only service provided by the ISP to the non-resident is hosting the website of the enterprise.

6 See Article 4 of the Singapore and French Agreement, Schedule 5 and 11 of the International Tax Agreements Act 1953 (Agreements Act); Article 3 of the Japanese Agreement at Schedule 6 of the Agreements Act.

7 Article 4(1) of the Singapore and French Agreement, Schedule 5 and 11 of the Agreements Act; Article 3(1) of the Japanese Agreement, Schedule 6 of the Agreements Act.

8 As to the relevance of using the Commentary, see paragraphs 101 to 105 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements.

9 Paragraph 42.2 of the Commentary.

10 Paragraph 42.2 of the Commentary.

11 Paragraph 42.3 of the Commentary.

12 Article 4(2) of the Singapore and French Agreement, Schedule 5 and 11 of the Agreements Act; Article 3(2) of the Japanese Agreement, Schedule 6 of the Agreements Act.

13 Article 4(2)(d) of the Singapore Agreement, Schedule 5 of the Agreements Act, has a substantive departure from other Tax Treaties and specifically includes 'a store or other sales outlet' as constituting a permanent establishment for the purposes of the treaty. A website through which goods are sold could be described as a stall in a market for goods. However, the website, being non-physical, lacks the requirement of being tangible and thus does not constitute a 'fixed place of business', see paragraph 5.2 of the OECD Model Commentary on Article 5.

14 Article 5(6) of the United Kingdom Agreement, Schedule 1 of the Agreements Act; Article 5(4) of the United States Agreement, Schedule 2 of the Agreements Act; Article 5(7) of the New Zealand Agreement, Schedule 4 of the Agreements Act; Article 4(5) of the Singapore Agreement, Schedule 5 of the Agreements Act; Article 3(5) of the Japanese Agreement, Schedule 6 of the Agreements Act; Article 5(4) of the German Agreement, Schedule 9 of the Agreement Act; Article 4(5) of the French Agreement, Schedule 11 of the Agreements Act; Article 5(6) of the Korean Agreement, Schedule 22 of the Agreements Act; Article 5(4) of the Austrian Agreement, Schedule 27 of the Agreements Act; Article 5(4) of the Indonesian Agreement, Schedule 37 of the Agreements Act and Article 5(6) of the Mexican Agreement, Schedule 47 of the Agreements Act.

15 Although there are substantive differences in this article between Tax Treaties, these are not relevant where the only service provided by the ISP to the non-resident is hosting the website of the enterprise.

16 Article 5(7) of the United Kingdom Agreement, Schedule 1 of the Agreements Act; Article 5(5) of United States Agreement, Schedule 2 of the Agreements Act; Article 5(8) of the New Zealand Agreement, Schedule 4 of the Agreements Act; Article 4(6) of the Singapore Agreement, Schedule 5 of the Agreements Act; Article 3(6) of the Japanese Agreement, Schedule 6 of the Agreements Act; Article 5(5) of the German Agreement, Schedule 9 of the Agreements Act; Article 4(6) of French Agreement, Schedule 11 of the Agreements Act; Article 5(7) of the Korean Agreement, Schedule 22 of the Agreements Act; Article 5(5) of the Austrian Agreement, Schedule 27 of the Agreements Act; Article 5(7) of the Sri Lankan Agreement, Schedule 31 of the Agreements Act; Article 5(5) of the Indonesian Agreement, Schedule 37 of the Agreements Act and Article 5(7) of the Mexican Agreement, Schedule 47 of the Agreements Act.

17 In a number of the Tax Treaties an agent will not be an independent agent if its activities are devoted 'wholly or almost wholly' on behalf of the enterprise (Tax Treaty with China) or the activities are carried on 'wholly or principally' on behalf of the enterprise (Tax Treaties with India and Indonesia). This provision is not applicable as the ISP does not in the first instance constitute a dependent agent. In addition, it would not be relevant where the ISP hosts websites for a number of clients to the extent that the ISP is legally and economically independent of the non-resident.

18 Paragraph 42.10 of the Commentary.


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