Edited version of private ruling

Authorisation Number: 1011596926918

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Ruling

Subject: Permanent Establishment

Question

If Organisation A registers for GST, and Organisation A and the Operator register the Joint Venture as a GST JV, will Organisation A be deemed to be carrying on a business at or through a permanent establishment (PE) for the purposes of PE article of the tax treaty between Australia and Country X contained in the International Tax Agreements Act 1953 (the Country X Convention)?

Answer

Yes, Organisation A is deemed to be carrying on a business through a PE for the purposes of the PE article of the Country X Convention.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2007

Relevant facts and circumstances

Organisation A is a non-profit corporation set up in Country X.

One of its main activities is to acquire options to participate in natural resources exploration joint venture projects with foreign companies and to transfer such options to Country X companies at cost by public tender.

Company A is an Australian public listed company and Company B is a wholly owned Australian subsidiary of Company A. Company A is the guarantor of obligations of Company B in respect of the Joint Venture Agreement (JVA).

The scheme that is the subject of the Ruling is described below. This description is based on the following documents. These documents, or the relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents incorporated into this scheme are:

Exploration Deed between the landowner and Company A for the Joint Venture Project (undated), including Annexures

JVA, including Exhibits

I. Exploration Deed

An Exploration Deed (the Deed) was entered between the landowner and Company A for the Joint Venture Project.

Prior to the signing of the JVA, Company A was granted exploration licences by an Australian state government within an area described as the Joint Venture Project area.

The parties entered into the Deed to record the terms and conditions upon which they have agreed that exploration activities shall proceed.

The Exploration Company (Company A) agreed to pay, at each anniversary of the grant of the exploration licences, the landowner an amount equal to a set percentage of the 'Inground Exploration Expenditure' for the preceding year.

The amount payable by Company A shall not exceed the set sum (indexed) in any one year.

Company A shall provide the landowner with written notice within the stipulated period of its intention to apply for a Mineral Lease at which time the parties will establish a Development Review Committee for the purpose of discussing, the terms and conditions under which the grant of the Mineral Lease will be subject.

II. Joint Venture Agreement (the JVA)

With effect from the income year ended 30 June 2008, Organisation A entered into a joint venture agreement, the JVA, with Company A and Company B.

The unincorporated exploration joint venture is formed for the exploration of certain properties within the Joint Venture Project area. Another unincorporated production joint venture, an incorporated joint venture company or some other entity (a PJV entity) will be formed for the commercial development of mining operations and the construction of mining facilities.

The JVA summarises the parties' intentions and the terms of the joint venture formed to govern their exploration activities within the Joint Venture Project area.

Company B is the nominated operator for the JVA and shall manage and conduct exploration activities during Period A in accordance with the decisions of the Operating Committee. Company B is entitled to charge the parties to the joint venture an allowance being an overheads fee representing a set percentage of the exploration expenditure with respect to its activities as operator.

An Operating Committee is formed by the parties to the JVA to oversee the exploration activities undertaken pursuant to the JVA.

The Operating Committee comprises an even number of members from Organisation A and Company B.

Decisions of the Operating Committee regarding exploration programs and other important matters arising under the JVA are to be made by a vote of the joint venture parties through their authorised representatives on the committee.

For the purpose of participating in the Operating Committee, during Period A, Organisation A shall exercise the voting rights attached to the percentage of equitable interest that it will earn and accrue by the conclusion of the subsequent period.

Subject to the possible termination or abandonment of the properties, Period A shall comprise not less than two nor more than three Period B and shall expire on either completion of the subsequent Period B or, if Organisation A gives written notice that it elects to proceed to a further Period B before the completion of the previous Period B, upon completion of the further Period B.

Decisions of the Operating Committee must be made unanimously regarding the following matters:

· the formulation of the Exploration Program and budget of exploration expenditure, which budget must include a genuine pre-estimate of the cash and in-kind contributions of each party to the agreement

· the commissioning of a feasibility study in respect of any property within the Joint Venture Project

· the purchase of the properties constituting the Joint Venture Project from the underlying owner(s) for the purpose of further exploring and developing those properties

· the abandonment of the properties constituting the Joint Venture Project, and

· the formation of a PJV Entity for the further development and exploitation of the Joint Venture Project including the approval of the relevant PJV Agreement.

Where unanimous approval is not obtained in respect of a matter set out in the JVA the parties will attempt to resolve the matter within 30 days. If the parties fail to reach agreement within 30 days, the Operating Committee will reconvene to vote again on that matter and approval will be made by a simple majority of votes, with the parties voting in proportion to their then current deemed and actual equitable interests in the joint venture property.

During Period A, the Operator shall conduct the exploration activities and provided the JVA remains in effect, Organisation A will contribute to the exploration expenditure.

By contributing to the Exploration Expenditure, Organisation A will become entitled to earn and accrue a right to elect to acquire ownership rights in up to a set percentage of the Joint Venture Property.

At the date of execution of the JVA, Company B held 100% of the equitable interests in the Joint Venture Property.

At the commencement of the pro-rata funding period (the period immediately following completion of Period A) the Operator will make cash calls on all Parties in accordance with their then existing respective equitable interests in the Joint Venture Property for the purposes of funding any further exploration program as determined by the Operating Committee.

Subject to certain conditions, the equitable interests in the Joint Venture Property earned and accrued by Organisation A shall be freely converted into a holding of the same proportionate amount in any PJV entity formed in respect to the Joint Venture Project in accordance with the JVA or a PJV Agreement.

A party may give notice to the other party to establish a PJV entity and will contribute to the establishment and formation costs of the PJV entity in proportion to their then existing equitable interests in the Joint Venture Property.

Upon formation of a PJV entity the parties will do all things necessary to transfer or assign to that PJV entity, to the maximum extent permitted by law, the Joint Venture Property that relates to the properties which have been selected by the Operating Committee for further exploration and, if warranted in the opinion of the Operating Committee, development by the PJV entity.

Under the JVA, Organisation A shall have the right to sell, assign or transfer the whole of its rights and obligations under the JVA, its equitable interest in the Joint Venture Property or the whole of the shareholding in any PJV entity to its nominees.

Organisation A nominees means that Country X company or those Country X companies or consortium of Country X companies that Organisation A has taken all reasonable and commercially prudent steps to verify as possessing the necessary standards of technical expertise, the relevant mining industry commercial experience, and the financial capacity to undertake participation in the development and operation of a mine or mines within the Joint Venture Project and which Company B has approved.

Prior to the incorporation of a PJV entity, Organisation A may second or designate one geologist or other such personnel and Company B may second or designate its employees as reasonably needed to be involved in the field operations regarding the exploration activities concluded in respect of the Joint Venture Project. Remuneration and expenses paid in respect of such employees shall be deemed to compromise part of the Exploration Expenditure. The parties will negotiate on the terms and conditions for the seconding or designation of Organisation A's personnel to the Joint Venture Project.

Prior to the incorporation of a PJV entity, any production derived from the Joint Venture Project shall be taken in kind by each Party in proportion to its then current equitable interest in the Joint Venture Property. Organisation A further shall have the first right to offer to purchase at then current prevailing market price and terms any production taken in kind by Company B from the Joint Venture Project. Company B is obliged to honour Organisation A's right to make such offer, but is not obliged to accept such offer.

The JVA provides that nothing in the JVA shall be construed as creating a partnership between the Parties or as constituting either Party as being the partner or agent of the other Party.

Other relevant facts provided in the application for private ruling

Organisation A has advised that they will never exercise the ownership right but will instead, if the exploration activities detect the presence of minerals that can be mined in commercial quantities, transfer the right to a nominee. However if minerals in quantities that can be commercially mined are not detected, Organisation A will either allow its rights to lapse or alternatively will surrender those rights.

Organisation A has a representative office in Australia that carries on a small number of limited functions such as gathering information. The office performs no administrative functions in relation to Organisation A's participation in mineral exploration projects in Australia.

The Operator does not have authority to conclude contracts specifically on Organisation A's behalf;

There has been no change to the exploration program for the first Period B. This exploration program was concluded under budget;

They have not provided any geologist or other such personnel to be involved in the field operations regarding exploration activities. Also, there are no plans to provide a geologist or other such personnel at this time.

In relation to any production derived from the project prior to the incorporation of a PJV entity:

Some minerals were expected to be derived but no specific quantities were estimated.

No production has been derived to date from the joint venture.

Less than 10 technical meetings have been held to date, these being informal with no minutes prepared;

No formal decisions are made at the technical meetings, rather the Operating Committee make decisions on the exploration program based on technical meeting discussions at the Operating Committee meetings.

Monthly technical reports submitted were provided for various periods;

The Organisation A representatives at the Operating Committee and the technical meetings have extensive qualifications, experience and expertise in mineral explorations;

From the date of the JVA to the later part of the income year ended 30 June 2010 the Operator has spent approximately 700 man days on the Joint Venture project, approximately 400 in the office and approximately 300 in the field.

Relevant legislative provisions

International Tax Agreements Act 1953

Income Tax Assessment Act 1997 Section 995-1

Acts Interpretation Act 1901 Section15AB

Reasons for decision

A PE has, for the purposes of the Country X Convention, the meaning set out in the Permanent Establishment Article of that tax treaty.

The PE article of the Country X Convention provides the general definition of a PE which is 'a fixed place of business through which the business of the enterprise is wholly or partly carried on'.

The article illustrates the general definition by providing listed facilities that are included in the definition including an office.

A building site or construction or installation project which lasts more than 12 months will constitute a PE under the article.

The PE article of the Country X Convention also provides that an enterprise of a Contracting State shall be deemed to be carrying on a business through a PE in the other Contracting State if it carries on activities in the other Contracting State in the exploration for or exploitation of natural resources situated in that other Contracting State in excess of 90 days.

The term 'enterprise of a Contracting State' is defined in the Country X Convention as:

the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

In Thiel v. Federal Commissioner of Taxation 90 ATC 4717; (1990) 21 ATR 531 (Thiel's case), McHugh J considered the defined term 'enterprise of a Contracting State' in Article 3(1)(f) of the tax treaty between Australia and Switzerland contained in Schedule 17 to the International Tax Agreements Act 1953 (the Swiss Convention). After discussing some of the cases referred to by the Federal Court, His Honour said at p. 4729; p. 544:

It follows from the foregoing discussion that the Art. 3(1)(f) definition of "enterprise of one of the Contracting States'' covers an isolated activity as well as a framework for making and carrying out decisions in relation to projects and activities. The definition in Art. 3(1)(f) applies, however, only when the context does not otherwise require.

(Note that Article 3(1)(f) of the Swiss Convention specifically stated that 'as the context requires' which is not used in the Country X Convention).

It follows that the 'framework for making and carrying out decisions in relation to projects and activities' needs to be included in interpreting the term 'enterprise of a Contracting State', which is used in the Country X Convention as it was in Thiel's case. Under the terms of the JVA, the Operating Committee has the authority to 'oversee the exploration of the Joint Venture Project and the conduct of the Joint Venture'.

The Operating Committee was authorised to:

· formulate an Exploration Program;

· formulate budget for the Exploration Expenditure;

· commission a Feasibility Study; and

· make decisions regarding Exploration Programs and other important matters arising under the Joint Venture.

The Operating Committee comprises an even number of members with Company B and Organisation A having an equal number of those members.

The JVA clearly states that the venture was formed for the purpose of exploration of certain properties and the joint venture agreement confirms and summarises the venturers 'intentions and the terms of the joint venture formed to govern their exploration activities to be conducted within the Joint Venture Project.

Taking all of this into account, we consider that the 'enterprise' in this case is Organisation A in its role as a venturer or participant in the Joint Venture. Organisation A's representatives on the Operating Committee have significant qualifications, experience and expertise relevant to mineral explorations which they use in making decisions on the exploration activities to be conducted by the Operator. This involvement cannot be described as 'passive' as has been contended by Organisation A.

To be deemed to have a PE under the Country X Convention Organisation A must carry on activities in Australia in the exploration for or exploitation of natural resources in Australia for a certain period.

The 'exploration activities' conducted within the Joint Venture Project required the approval of Organisation A as a Party to the JVA and member of the Operating Committee. Organisation A has been involved in the 'making and carrying out decisions in relation to projects and activities' as it was represented in the Operating Committee which made the decisions regarding the exploration program and related activities.

It is clear from the minutes of the Operating Committee the Committee met several times and made decisions on the Exploration Program and Budget. The Committee also approved work to commence in certain locations including the type of work.

All of the exploration activities are carried out by the Operator in accordance with the decisions of the Operating Committee.

The Accounting Standard AASB 131 'Interest in Joint Ventures' states the role of the operator in a joint venture (paragraph 12) as given below:

The contractual arrangement may identify one venturer as the operator or manager of the joint venture. The operator does not control the joint venture but acts within the financial and operating policies that have been agreed by the venturers in accordance with the contractual arrangement and delegated to the operator.

The High Court in United Dominions Corp Ltd v. Brian Pty Ltd (1985) 157 CLR 1 considered the relationship between joint venture participants. Paragraph 8 of the judgment of Dawson J states:

Although the relationship between participants in a joint venture which is not a partnership will be governed by the particular contract rather than extrinsic principles of law, the relationship may nevertheless be a fiduciary one if the necessary confidence is reposed by the participants in one another…

The terms of the JVA require the Operator to make a cash call for Organisation A contributions for the amount budgeted for exploration expenditure in respect of the relevant exploration program as approved by the Operating Committee.

The JVA makes it clear that the Operator is required to carry out exploration activities in accordance with the decisions of the Operating Committee. Furthermore the Operator is required by the JVA to:

· Perform its roles and responsibilities in a professional and proper manner exercising due care, skill and attention;

· Pay all costs in respect of exploration expenditure properly incurred promptly as and when they fall due;

· Maintain proper full and complete books and accounting records relating to the exploration expenditure which may be inspected, reviewed and analysed by Organisation A.

These requirements provide that the 'necessary confidence is reposed' (as per the comments of Dawson J above) in the Operator by Organisation A, such that there is a fiduciary relationship.

The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01 (Macquarie Dictionary) defines 'fiduciary' as:

1. Law a person to whom property is entrusted to hold, control, or manage for another.

2. Law having to do with the relation between a fiduciary and his or her principal: a fiduciary capacity; a fiduciary duty.

3. depending on public confidence for value or currency.

In the context of the JVA, it is considered that this fiduciary relationship requires the Operator to conduct the exploration activities for and on behalf of the joint venture participants, including Organisation A. Accordingly, the exploration activities conducted by the Operator could be considered to be for and on behalf of the joint venturers which include Organisation A such that Organisation A would satisfy the PE article of the Country X Convention.

However, before concluding that this is the case, it is necessary to give further consideration to the context of the relevant PE article of the Country X Convention. That particular article of the Country X Convention is not based on the OECD Model Convention so the OECD Model Convention Commentaries do not provide any assistance in interpreting this Article.

Section 15AB of the Acts Interpretation Act 1901 provides that an Explanatory Memorandum (EM) relating to a Bill can be used to assist in the interpretation of a provision. Taxation Ruling TR 2001/13 confirms this and at paragraph 117 states:

…the Explanatory Memoranda should, as a matter of practice, be examined in the ATO consideration of novel issues involving recent DTAs….

The EM to the International Tax Agreements Amendment Act introducing the Country X Convention confirms the policy intent behind that particular article of the Country X Convention and states:

Where an enterprise carries on activities (including the operation of substantial equipment) in the exploration for, or exploitation of, natural resources within a country for a period or periods aggregating more than 90 days in any 12-month period, it will be deemed to have a permanent establishment in that country through which those activities are performed.

The terms 'activities', 'natural resources' and 'carries on' are not defined in the Country X Convention and the EM does not assist in interpreting these terms. Anrticle 3(2) of the Country X Convention provides that where a term (unless used in a context that requires otherwise) is not specifically defined within the Convention, that term is to be taken to have the same interpretative meaning as it has under the domestic taxation law of the country applying the Convention at the time of its application.

The term 'activities' is defined in the Macquarie Dictionary as:

the state of action; doing.
2. the quality of acting promptly; energy.
3. a specific deed or action; sphere of action: social activities.
4. an exercise of energy or force; an active movement or operation.

Section 995-1 of the ITAA 1997 defines 'natural resource' to mean 'minerals or any other non-living resources of the land, sea-bed or sea'.

The terms 'carries on' and 'carried on' were considered by the High Court in Thiel's case in the context of the Swiss Convention. Mason CJ, Brennan and Gaudron JJ said at p. 4719; p. 533:

Outside of Art. 3(1)(f), the expressions "carried on'' and "carries on'' are used only in association with the word "business'', which bears its own connotations and is not used in Art. 3(1)(f). In Art. 3(1)(f), the word "enterprise'' is associated with the words "carried on''. The expressions "enterprise'' on the one hand and "carried on'' on the other hand are each "terms'' for the purposes of Art. 3(2), though they must be read together in order to achieve the correct interpretation of Art. 3(1)(f) and 7.

In one sense, the words "carried on'' have a particular meaning in Australian income tax law, as the Full Court of the Federal Court held, signifying repetitive or recurrent, rather than isolated, activity. Indeed, that particular meaning of "carried on'' in Australian income tax law was critical to the Federal Court decision that Art. 7 had no application to the present case.

If Australian income tax law does not ascribe a particular meaning to "carry on'' otherwise than by reference to its association with "carry out'', then it provides no assistance in ascertaining the meaning of "carry on'' in the context of the Agreement, because those words are not used in association with "carry out'' in the Agreement (cf. the expression "the carrying out of international conventions'' in Art. 22(3)). ………………

In these circumstances, it is safer to look to the context of the Agreement itself. In that context, the term "carried on'' in Art. 3(1)(f) is no more than a linking expression used to explain the connection between an enterprise and a Contracting State which the expression "enterprise of one of the Contracting States'' imports.

Accordingly, it is necessary to look at the context of the Country X Convention itself rather than examining the meaning of the term 'carries on' in the domestic law. The Country X Convention requires us to consider whether the enterprise (in this case Organisation A) 'carries on activities' in Australia 'in the exploration for or exploitation of natural resources'. The term 'carries on' is a linking expression between an enterprise of a Contracting State and activities in the exploration for or exploitation of natural resources.

The definition of 'activities' provided above includes 'operation'. It is also noted that PE article of the Country X Convention includes the operation of substantial equipment in the meaning of 'carries on activities'. This suggests that in the context of interpreting that article of the Country X Convention the phrase 'carries on activities' is taken to include 'operation of substantial equipment' or 'operates substantial equipment'.

As such, while the issue at hand does not involve substantial equipment, comments in the EM on these terms may be of assistance in interpreting the meaning of the phrase 'carries on activities' including whether those activities can be carried on for on behalf of the enterprise.

The EM states the following about operation and operates:

The terms 'operation' and 'operates' have been included to clarify that only active use of substantial equipment assets will be captured by subparagraphs 4(b) and (c)….

The EM goes on to state (emphasis added):

For example, if a Country X enterprise itself operates a mobile crane at an Australian port for more than 183 days in a 12-month period, the Country X enterprise would be deemed to have a permanent establishment in Australia under the subparagraph of the article. If, however, that Country X enterprise merely leases the mobile crane to another person and that other person operates the crane at an Australian port for its own purposes, the Country X enterprise would not be deemed to have a permanent establishment in Australia under the subparagraph of the article. However, if that other person operates the substantial equipment for or on behalf of the enterprise, the enterprise would be considered to operate the equipment in the country.

These paragraphs of the EM add further support to the view that Organisation A is deemed to have a PE where the Operator conducts the exploration activities on behalf of Organisation A.

Clearly the activities of the Operator relate to the exploration of natural resources in Australia and they carried on those activities for the required period.

Therefore, it is concluded that Organisation A has a deemed PE in Australia pursuant to the PE article of the Country X Convention as the activities of the Operator are conducted on behalf of Organisation A as a venturer or participant in the joint venture under the terms of the JVA.

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