ATO Interpretative Decision
ATO ID 2006/306
Income tax
Deemed permanent establishment: natural resource processing plant - substantial equipment - Article 5(4)(b) of the Swiss AgreementFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.
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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does the use of substantial equipment in Australia by an Australian resident company, to process and then supply natural resources exclusively to a Swiss enterprise, constitute a deemed permanent establishment in Australia under Article 5(4)(b) of Schedule 15 of the International Tax Agreements Act 1953 (the Swiss Agreement)?
Decision
Yes. The taxpayer, a Swiss enterprise, has a deemed permanent establishment in Australia under Article 5(4)(b) of the Swiss Agreement.
Facts
The taxpayer is a resident enterprise of Switzerland for the purposes of the Swiss Agreement.
A non-resident company [related to the taxpayer] entered into a contractual arrangement with an Australian company under which the Australian company acknowledged they were constructing a natural resource processing plant and were obliged to supply all the natural resources processed at the plant to the non-resident company.
The non-resident company's rights under this contract were ultimately assigned to the Swiss enterprise.
The processing plant is located in Australia and constitutes 'substantial equipment' for the purposes of Article 5(4)(b) of the Swiss Agreement.
The Australian resident owns the processing plant (the 'substantial equipment') and has used the substantial equipment in Australia for a period of more than twelve months for the purpose of processing the natural resource.
Reasons for Decision
The Swiss Agreement operates to avoid the double taxation of income received by Australian and Swiss residents.
Article 15(4)(b) of the Swiss Agreement deems a Swiss enterprise to have a permanent establishment in Australia if substantial equipment is being used in Australia for more than twelve months by, for or under contract with the enterprise in exploration for, or extraction of natural resource, or in activities connected with such exploration or exploitation.
In accordance with the Full Federal Court decision in McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation (2005) 142 FCR 134; [2005] FCAFC 67 (the McDermott decision), the taxpayer will have a deemed permanent establishment in Australia if the substantial equipment is being used in Australia to process natural resources by:
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- the taxpayer itself
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- the Australian company, 'for' the taxpayer; or
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- the Australian company, 'under contract with' the taxpayer.
The taxpayer is not using the substantial equipment 'itself' in the sense referred to in the McDermott decision, because it is not physically using the equipment, nor is it deriving rental income from the equipment as owner or lessor of the equipment.
Paragraph 63 of the McDermott decision states:
...It is difficult to conclude that the "for" part of the expression was intended to be limited to cover use under supervision, whether or not such use might be comprehended within it. The most obvious set of facts falling within the second alternative would be where the other person referred to uses the equipment for the benefit of the enterprise. The person using the equipment could, although need not, be a subcontractor.
The arrangement in place between the taxpayer [being the assignee of the rights under the contract] and the Australian company, involves the Australian company acknowledging that it was constructing the substantial equipment in Australia, and being contractually obliged to supply the entire quantity of the natural resources processed by the substantial equipment, to the taxpayer. The only reason the equipment exists and is used in Australia is to meet the requirements and purposes of the taxpayer and, as such, the Australian company is considered to be using the substantial equipment 'for' the benefit of the taxpayer.
Substantial equipment is therefore being used in Australia for more than 12 months by the Australian company 'for' the taxpayer in the exploitation of natural resources. As a result, the taxpayer is deemed to have a permanent establishment in Australia under Article 5(4)(b) of the Swiss Agreement.
Date of decision: 17 October 2006Year of income: Year ended 30 June 2006
Legislative References:
International Tax Agreements Act 1953
Schedule 15-Article 5(3)
Schedule 15-Article 5(4)(b)
Case References:
McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation
(2005) 142 FCR 134
[2005] FCAFC 67
2005 ATC 4398
(2005) 59 ATR 358
Related Public Rulings (including Determinations)
Taxation Ruling TR 2006/D8
Other References:
OECD Committee on Fiscal Affairs for the Organisation for Economic Co-operation and Development, Model Tax Convention on Income and Capital, Paris, Condensed Version 15 July 2005.
Keywords
Double tax agreements
International tax
Non resident companies
Permanent establishment
Switzerland
Treaties
ISSN: 1445-2782