ATO Interpretative Decision

ATO ID 2002/850

Income Tax

Permanent Establishment
FOI status: may be released

This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Whether a foreign company has a Permanent Establishment in Australia.

Decision

The foreign company does have a permanent establishment in Australia under Australian income tax laws.

Facts

1.: A foreign company is incorporated in a country other than Australia.
2.: The foreign company enters into a head contract with an unrelated company in Australia for a supply, construction and installation project in Australia. The foreign company entered into two further contracts for the expansion of the project and for the operation and maintenance of the project. All the contracts existed for more than twelve months.
3.: Risk and title to all equipment and software comprising the project remain with the foreign company until the final acceptance certificate is issued in respect of the project.
4.: Under the head contract, the foreign company is required to provide a dedicated project manager, resident in Australia, with authority to make day to day decisions during progress of the project. This role has been consigned to the managing directors of an Australian resident subsidiary company of the foreign company, who are also employees of the subsidiary company.
5.: All fees under the various agreements have been invoiced to the Australian supply company directly from the foreign company.
6.: The subsidiary company entered into two contracts with the foreign company to fulfil the foreign company's obligations under the head contract.
7.: In turn, the subsidiary company further subcontracted a large portion of the work to an independent third party contractor to undertake the construction of the project. A number of other subcontractors were also engaged in the construction of the project.
8.: In effect, this left the subsidiary company to undertake a lead project management role. Also employees of the subsidiary company undertook the operation and maintenance of the project as required under the operations and maintenance agreement.
9.: All payments (in $A) to unrelated subcontractors are borne by the subsidiary company, which receives payments (also in $A) on a monthly basis from the foreign company pursuant to the service agreement with the foreign company.
10.: During all stages of the project, no foreign company employees were ever present in Australia to work on the project in their capacity as an employee of the foreign company. All personnel from the foreign company became employees of the subsidiary company upon entering Australia. The employees of the subsidiary are thus made up of personnel from the foreign company and local staff with those from the foreign company taking up a greater proportion.
11.: The project is managed from Australian premises leased by the subsidiary company from the unrelated contractor. The warehouse which stores the imported equipment used in the project is leased by the subsidiary company from a third party warehouse provider.

Reasons for Decision

In order for the foreign company, to be required to pay income tax in Australia under the provisions of subsection 3-5(1) of the Income Tax Assessment Act 1997, the Commissioner must consider the provisions of the International Agreements Act 1953 and in particular the Article concerning Business Profits of the relevant Double Tax Agreement (the Treaty).

Under the provisions of the Business Profits Article, any profits arising shall not be taxable in Australia unless the enterprise carries on business through a permanent establishment (PE) situated in Australia. A threshold issue for the Commissioner to consider, therefore, is whether or not the foreign company, in fulfilling its terms of the contracts, entered into with a third party, is operating through a PE in Australia. For the purposes of the Treaty the term permanent establishment has been defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term has been given a wide meaning and would include a place of management, a branch, an office, a factory, a workshop, etc and would also include a building site or a construction, installation or assembly project, only if it exists for more than twelve months.

In light of the facts provided by the foreign company in respect of the contracts for the project, it is considered by the Commissioner that the foreign company has a PE in Australia. As the head contractor for the project, the foreign company bears the ultimate legal obligation and risk regarding performance of the project work in Australia, ie the foreign company has undertaken the performance of a comprehensive project that has a construction and installation period greatly in excess of twelve months.

It is considered by the Commissioner that it is irrelevant whether or not the foreign company itself performs any activities in Australia in connection with the project or undertakes the project work or subcontracts the work to others, either wholly or partly. The commentary to the 1977 OECD Model Convention states that: 'If an enterprise (general contractor) which has undertaken the performance of a comprehensive project, subcontracts parts of such a project to other enterprises (subcontractors), the period spent by a subcontractor working on a building site must be considered as time spent by the general contractor on the building project.' It is therefore considered that there is no requirement that the construction or installation project be directly carried out by the foreign company.

Date of decision: 2 July 2002

Year of income: Year ended 30 June 1999 Year ended 30 June 2000 Year ended 30 June 2001 Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
subsection 3-5(1)

International Tax Agreements Act 1953
1

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

Other References:
1977 OECD Model Convention Introductory Commentary

Keywords
Permanent establishment

Siebel/TDMS Reference Number: DW438768

Business Line: Public Groups and International

Date of publication: 23 August 2002

ISSN: 1445-2782

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