Edited version of private ruling

Authorisation Number: 1011511098475

Subject: supply of online advertising

Question:

Will the supply of online advertising by A Ltd to A Ltd's Australian customers be connected with Australia for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act)?

Answer:

No, the supply of online advertising by A Ltd to A Ltd's Australian customers will not be connected with Australia for the purposes of the GST Act.

Relevant facts and circumstances:

The Parties:

A Ltd is incorporated outside of Australia.

I Ltd is incorporated outside of Australia and registered for GST in Australia.

Aus Ltd is an Australian resident company with premises at Sydney and is registered for GST in Australia.

2007 ruling request:

I Ltd supplied online advertising services to its Australian customers through I Ltd's website which was located on a server which was outside Australia and through other business partner sites.

I Ltd offered its Australian customers a system for creating advertisements which allowed those customers to create their own advertisements. I Ltd entered into agreements with those customers to display those advertisements on the Internet. In return the Australian customer agreed to pay I Ltd a sum calculated on a 'pay per click' basis, i.e. an agreed amount each time a person clicked on the Australian customer's advertisement..

Pursuant to the agreement Aus Ltd agreed to supply to I Ltd the maximisation and support services which comprised marketing and demonstrating I Ltd's web services to I Ltd's Australian customers, market and strategic analysis (including analysis of potential Australian customers), and sales support assistance, including:

approaching I Ltd's Australian customers to recommend scaling up or altering their advertising campaigns;

responding to technical queries from I Ltd's Australian customers;

providing training to those customers to better utilize the word-based system and maximise results from advertising campaigns; and

making ongoing recommendations to improve performance, monitor customer satisfaction and, when a campaign ends, approaching customers with recommendations to extend advertising campaigns with I Ltd

However Aus Ltd did not have authority to contract on I Ltd's behalf or to act as I Ltd's agent. The services provided by Aus Ltd were referred to as 'maximisation and support services'.

In 2007 I Ltd sought a ruling that 'maximisation and support services' supplied by Aus Ltd were supplied to I Ltd and were not a supply made to I Ltd's Australian customers that would be connected with Australia. If the Tax Office considered that the maximisation and support services were a supply of services provided by I Ltd to its Australian customers, I Ltd sought a ruling that those services were ancillary and incidental to a supply of online advertising by I Ltd which was not connected with Australia.

2007 GST private ruling, review request, and further GST private ruling:

The Tax Office issued an unfavourable ruling. I Ltd requested an informal review.

In response to the review request the Tax Office issued a further GST private ruling in which the Tax Office ruled that I Ltd did not make supplies that are connected with Australia.

The Tax Office ruled that as I Ltd was non-resident and the online advertising services were provided from outside Australia the supply of online advertising services was not connected with Australia pursuant to paragraph 9-25(5)(a) of the GST Act (i.e. was not a thing done in Australia).

The Tax Office also ruled that Aus Ltd was not acting as I Ltd's agent. Consequently I Ltd's supplies of online advertising to its Australian customers were not connected with Australia under paragraph 9-25(5)(b) of the GST Act as being made through an enterprise that I Ltd carried on in Australia. The Tax Office applied the factors listed in Goods and Services Tax Ruling GSTR 2000/37 and noted that neither party described Aus Ltd as an agent, I Ltd gave Aus Ltd no authority to enter into legal relations with third parties on I Ltd's behalf, Aus Ltd did not bear any significant financial risk, and Aus Ltd and I Ltd each acted in their own names in Australia.

2010 ruling request:

In 2010 A Ltd lodged ruling request. A Ltd advised that all existing contracts for the supply of online advertising between I Ltd and I Ltd's Australian customers will be assigned to A Ltd, and that A Ltd will be the contracting party for all future contracts for the supply of online advertising to Australian customers.

A Ltd sought a GST private ruling confirming that the supply of online advertising by A Ltd to A Ltd's Australian customers is not connected with Australia.

A Ltd advised that A Ltd is not an Australian resident company and will supply the online advertising services via A Ltd's own server located outside Australia and other business partner sites. A Ltd will provide support and training to A Ltd's Australian customers through online tools and applications.

A Ltd and Aus Ltd will enter into a Marketing and Services Agreement on the same terms as the Marketing and Services Agreement originally entered into by Aus Ltd and I Ltd, i.e. Aus Ltd will have no authority to enter into any contractual relationship with A Ltd's Australian customers, either on Aus Ltd's own behalf or on behalf of A Ltd and Aus Ltd cannot act as an agent for A Ltd or represent that Aus Ltd is authorised to act as such an agent. An Australian customer will incur no charges for any maximisation and support services performed by Aus Ltd and the contract between A Ltd and the Australian customer for the supply of online advertising will not refer to the maximisation and support services.

Draft Marketing and Services Agreement:

A Ltd provided a copy of a draft of the Marketing and Services Agreement to be entered into between A Ltd and Aus Ltd.

The Marketing and Services Agreement provides that Aus Ltd agrees to provide 'Services' as directed by A Ltd. 'Services' is defined as all services, consulting, advice, and assistance required by A Ltd in connection with marketing and sales support activities for the Web Services provided in Australia. The draft Marketing and Services Agreement also provides that the Services shall include marketing and demonstration of A Ltd's Web Services and any other services that A Ltd may designate from time to time, plus market and strategic analysis, including analysis of potential customers to which Web Services may be sold and forecasts of sales of Web Services. 'Web Services' is defined as developing, licensing, marketing and selling certain internet search, advertising and information management technology services and related products.

The draft Marketing and Services Agreement also provides:

In providing sales support assistance [Aus Ltd] understands and agrees that it does not have authority to obligate or contract on behalf of [A Ltd], act as an agent or represent that it is authorised to act as an agent on behalf of [A Ltd], create or assume any obligation on behalf of or in the name of [A Ltd], or sign any contract or agreement on behalf of [A Ltd]. More specifically, [Aus Ltd] shall not negotiate contracts or licences on behalf of [A Ltd] or accept orders on behalf of [A Ltd] and shall so inform customers or potential customers on the limitation of the authority of [Aus Ltd].

The draft Marketing and Services Agreement provides that A Ltd shall pay Aus Ltd a Service Fee calculated as the higher of (a) of (b) calculated on an annual basis:

(a) Expenses incurred by [Aus Ltd] in the performance of Services specified in section 2 above, and any other expenses as agreed between the parties, except interest expenses, amortization expenses on goodwill and income taxes (in aggregate 'the Expenses') plus a mark up in an amount equal to [ ] percent of the total amount of the Expenses; or

(b) A fee equal to [ ] percent of Net Revenue received by [A Ltd] from customers within the Territory for orders which [Aus Ltd] assisted in obtaining. For the purposes of this article, the term 'Net Revenue' shall mean the amount invoiced and collected by [A Ltd] net of freight, insurance , value added or similar taxes, duties and similar charges and less all credits, discounts and amounts refunded to customers.

Terms:

The Terms currently used when I Ltd sells online advertising to an Australian customer (which the Australian customer agrees to electronically) make the Customer responsible for all ad targeting and keywords and make the Customer responsible for all charges up to the amount of each Insertion Order or as set out in an online account. A Ltd will use the same Terms when A Ltd sells online advertising to A Ltd's Australian customers.

Reasons for decision

Summary:

The supply of online advertising will not be connected with Australia pursuant to paragraph 9-25(5)(a) of the GST Act as it will not be a thing done in Australia.

The supply of online advertising will not be connected with Australia pursuant to paragraph 9-25(5)(b) of the GST Act as it will not be made through an enterprise that A Ltd carries on in Australia.

Detailed reasoning:

Thing done in Australia:

Paragraph 9-25(5)(a) of the GST Act provides that a supply of anything other than goods or property is connected with Australia if the thing is done in Australia. Section 195 of the GST Act defines 'thing' as anything that can be supplied or imported. Goods and Services Tax Ruling GSTR 2000/31 provides (Para 183):

If the supply is the supply of services, services are commonly performed. 'Done' in this context means performed and a service is connected with Australia if it is performed in Australia. Examples of such services include accounting services, legal services, repair services, maintenance services, preparation of, or developing, designs, models, plans, drawings or other like property for the recipient, as wells as, research, testing, experimental or other like services.

In our view the supply to be made by A Ltd to an Australian customer will be a supply of a service, i.e. displaying the Australian customer's advertisement in the Sponsored Links section of Internet search results web pages. Consequently the issue is where that service will be performed by A Ltd.

The material provided by A Ltd indicates that the supply of online advertising is linked to the keyword typed by a person who is searching the Internet. A Ltd advised that none of the servers involved in this process are located in Australia. On that basis we consider that the supply of online advertising by A Ltd will not be connected with Australia pursuant to paragraph 9-25(5)(a) of the GST Act as it is not a thing done in Australia.

Supply through an enterprise that A Ltd carries on in Australia:

Paragraph 9-25(5)(b) of the GST Act provides that a supply of anything other than goods or property is connected with Australia if the supplier makes the supply through an enterprise that the supplier carries on in Australia. GSTR 2000/31 provides (Para 76) that even if a supply is not a thing done in Australia, it can nevertheless be connected with Australia pursuant to section 9-25(5)(b) of the GST Act:

However, even if the agreement is made outside Australia the supply is connected with Australia under paragraph 9-25(5)(b) if the supplier makes the supply through an enterprise that the supplier carries on in Australia (refer paragraphs 78 to 89 below).

In relation to the requirement in section 9-25(5)(b) of the GST Act that the supply is made through an enterprise that the supplier carries on in Australia, subsection 9-25(6) of the GST Act provides that an enterprise is carried on in Australia if the enterprise is carried on through:

(a) a permanent establishment (as defined in subsection 6(1) of the Income Tax Assessment Act 1936); or

(b) a place that would be such a permanent establishment if paragraph (e), (f), or (g) of that definition did not apply,

GSTR 2000/31 provides (Paras 87 and 88):

The definition of permanent establishment for the purposes of subsection 9-25(6) is wider than the definition of permanent establishment found in subsection 6(1) of the Income Tax Assessment Act 1936. This is because the exclusions from a permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936 - paragraphs (e), (f) and (g) are not similarly excluded from the definition of permanent establishment for the purposes of subsection 9-25(6).

Thus, permanent establishment for the purposes of subsection 9-25(6) means a place at or through which a 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 of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed.

A place where A Ltd carries on business through an agent:

Paragraph (b) of the 'permanent establishment' definition provides that it includes:

A place where the person is carrying on business through an agent.

The discussion in the 2000 OECD Commentaries about Paragraph 5 of Article 5 of the OECD Model Convention (which deems a person, other than an agent of independent status, who acts on behalf of an enterprise and has and habitually exercises authority to conclude contracts in the name of an enterprise to be a permanent establishment of that enterprise) states that the activities of a dependent agent may create a permanent establishment for the principal (Paras 31 and 32):

It is a generally accepted principle that an enterprise should be treated as having a permanent establishment in a State if there is under certain conditions a person acting for it, even though the enterprise may not have a fixed place of business within that state within the meaning of paragraphs 1 and 2….

Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents, i.e. persons, whether employees or not, who are not independent agents falling under paragraph 6. Such persons may be either individuals or companies.

We consider that the fact that Aus Ltd is not described as A Ltd's agent in the draft Marketing and Services Agreement and cannot represent that it is A Ltd's agent indicates that Aus Ltd is not acting as such.

On the other hand, the fact that Aus Ltd is remunerated by the greater of either a fee based on Aus Ltd's actual expenses or a percentage of net revenue from orders which Aus Ltd assists in obtaining means that Aus Ltd does not bear significant commercial risk, which indicates that Aus Ltd is acting as an agent. In addition, one of the methods used to calculate Aus Ltd's remuneration (i.e. a percentage of net revenue from orders) suggests that Aus Ltd is remunerated by way of commission, which also indicates that Aus Ltd is acting as an agent.

However the provision in the draft Marketing and Services Agreement which denies Aus Ltd any authority to act as A Ltd's agent or to negotiate contracts or accept orders on A Ltd's behalf is a factor of great importance in establishing that Aus Ltd is not A Ltd's agent. Goods and Services Tax Ruling GSTR 2004/7 states (Paras 282-3):

If the business of a non-resident company involves the making of contracts for sales, leases or similar, the authority of the agent to conclude contracts in Australia on behalf of the non-resident is an important factor in establishing whether the non-resident is carrying on business in Australia.

If an agent has the power to make contracts on behalf of the non-resident company without seeking the company's approval before binding the non-resident to contractual obligations, this is a factor of great importance in establishing that the agent is carrying on the non-resident company's business. While it is not the sole determinative factor, when coupled with other factors such as the agent displaying the name of the non-resident company on the agent's premises, or the non-resident company reimbursing the rent and staff costs of the agent, there will be little difficulty in establishing that the agent is carrying on in Australia the business of the non-resident. In these circumstances, the non-resident company has, in effect, adopted the agent's place of business as its own, and the non-resident company is in Australia.

GSTR 2004/7 also lists a number of factors (Para 281) as relevant in determining whether a non-resident company carries on business in Australia through an agent:

Was the fixed place of business from which the agent operates originally acquired for the purposes of enabling the agent to carry on the business of the non-resident company?

·  Does the non-resident company directly reimburse the agent for the cost of accommodation or staff at the fixed place of business?

·   Does the non-resident company make other contributions to the financing of the business carried on by the agent?

·  Is the agent remunerated by reference to transactions, for example, by commission, or by fixed regular payments or in some other way? Commission can be an indicator that the agent is carrying on its own business and not that of the non-resident. However, it is not determinative.

·  What degree of control does the non-resident company exercise over the running of the business conducted by the agent?

·  Does the agent reserve part of the agent's staff or accommodation for the conducting of business related to the non-resident company?

·  Does the agent display the name of the non-resident company at the agent's premises or on stationery and, if so, does it indicate that the agent is an agent of the non-resident company?

·   What business, if any, does the agent transact as principal exclusively on the agent's own behalf?

·   Does the agent make contracts with customers or other third parties in the name of the non-resident company or otherwise in such a manner so as to bind it?

·  If the agent does make contracts so as to bind the non-resident company, does the agent require specific authority in advance before binding that foreign company to contractual obligations?

Although we do not have sufficient information to address all of these factors, we note that the draft Marketing and Services Agreement does not suggest that A Ltd will have a high degree of control over the running of Aus Ltd's business. The Services which Aus Ltd is required to provide are not described in great detail and the draft Marketing and Services Agreement provides that Aus Ltd is an independent contractor and that A Ltd cannot control Aus Ltd. In relation to the last two factors, we understand that A Ltd will contract directly with an Australian customer when the Australian customer agrees to the Terms electronically.

We consider that, on balance, the application of the factors listed in GSTR 2000/31 (Para 28) and GSTR 2004/7 (Para 281) indicate that A Ltd will not be carrying on business or activities in Australia through Aus Ltd as A Ltd's agent.

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