ATO Interpretative Decision

ATO ID 2004/602

Income Tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Is a non-resident company deemed to have a permanent establishment in Australia when services are provided to it by an Australian resident subsidiary company, which does not have the authority to conclude contracts in a manner binding on the non-resident company?

Decision

No. A non-resident company that receives services provided by an Australian resident subsidiary company is not deemed to have a permanent establishment in Australia, if the Australian company does not have the authority to conclude contracts in a manner binding on the non-resident company.

Facts

A non resident company enters a service arrangement with an Australian resident subsidiary company.

The services involve the Australian company providing prospective clients with advice on products available from the non-resident company. Clients are then referred to the non-resident company to purchase the product directly from overseas.

•

the non-resident company does not occupy premises or carry on activities in Australia

•

all the activities are conducted by the Australian company, for which it receives an 'arm's length' consideration, and

•

the Australian company does not have the authority to sell products on behalf of the non-resident company or to conclude any contracts in the non-resident company name.

Reasons for Decision

In general, Australia does not tax the profits of an enterprise resident in a country with which it has a double tax agreement unless the enterprise carries on business through a permanent establishment in Australia.

The question of whether a non-resident enterprise has a permanent establishment in Australia is a question of fact and degree, which must be determined by reference to the individual circumstances of each case.

A fixed place of business of an enterprise through which its business is wholly or partly carried on will generally constitute a permanent establishment.

However, if a non-resident enterprise does not conduct activities itself through a fixed place of business in Australia, it may still, in some circumstances, be 'deemed' to carry on business through a permanent establishment, either under the provisions in the domestic law or under specific articles of the relevant DTA (See Unisys Corp v. FC of T (2002) 2002 ATC 5146; (2002) 51 ATR 386 (Unisys Corp) and Case 23/93 93 ATC 288; AAT Case 8775 (1993) 26 ATR 1056).

For a non-resident enterprise to be deemed to have a permanent establishment in Australia, the 'Permanent Establishment' Article of a double tax agreement generally requires four conditions to be satisfied.

(a)

there is a person acting on behalf of the non-resident enterprise in Australia

(b)

that person is not an agent of independent status to whom a subsequent paragraph of the Article applies

(c)

the person has authority to conclude contracts on behalf of the non-resident enterprise, and

(d)

the authority is habitually exercised.

Therefore, for a non-resident enterprise to be deemed to have a permanent establishment in Australia, not only must the non-resident enterprise have a person acting for them in Australia, that person must have the authority to conclude contracts in a manner that is binding on the non-resident enterprise. Further, the mere possession of the requisite authority is not enough; it must also be exercised regularly or habitually. (See Unisys Corp).

The non-resident company does not have a permanent establishment in Australia because:

•

it does not occupy premises or carry on activities in Australia in connection with its business

•

the activities in Australia are carried on by an Australian resident subsidiary company, which receives an 'arm's length' consideration

•

the contemporaneous documentation indicates the responsibilities of the Australian company do not include the requisite 'authority to conclude contracts' on the non-resident company's behalf in Australia, and

•

even if it did have the authority, the Australian company was found not to have regularly or habitually exercised the authority during the period in question.

Accordingly, the non resident company does not have a permanent establishment within Australia for the purposes of the double tax agreement.

Year of income:  Year ended 30 June 2001

Legislative References:
International Tax Agreements Act 1953
   The Act

Case References:
Unisys Corp v. FC of T
   2002 ATC 5146
   (2002) 51 ATR 386

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Keywords
Amendment of assessments
Deductions & expenses
Double tax agreements
Income
International law
International tax
Permanent establishment
Tax administration
Tax assessments
Treaties

Siebel/TDMS Reference Number:  3970520

Business Line:  Public Groups and International

Date of publication:  23 July 2004

ISSN: 1445-2782