Edited version of private ruling

Authorisation Number: 1011732088604

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Permanent Establishment in Australia

Question 1

Does the entity have a permanent establishment in Australia?

Answer: Yes

This ruling applies for the following periods:

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a foreign company (Country A). You are in the business of developing and selling goods.

You have entered into a contract to export goods in Australia to an Australian entity and to provide technical support in relation to the goods supplied. You have provided a copy of the draft contract and draft statement of work to us which forms a part of these facts.

You advise the following:

· You are responsible for the assembly and installation of the goods and you will send your employees to Australia to perform the assembly and installation.

· You will send one or two employees to Australia who will provide technical support and assist in the administration relating to the product sold, initially for a period of one year upon the settlement of the contract.

· Your employees will work at the office of the Australian entity and provide services upon request in other areas in Australia.

· Your technicians or engineers will provide technical support in case of malfunction and/or repairs are required. Your technicians or engineers will provide the technical support so that the equipment can be properly operated.

The Australian entity will pay for the support you will provide (technical support and administrative assistance provided by your employees) and you will issue an invoice to them.

You are unable to estimate the value of your services to be performed in Australia.

You do not have a physical establishment such as office/plant and permanent employees in Australia.

As per clause 2.1.1 of the Draft statement of work, you will perform all activities necessary to manage, design, develop, construct, integrate, test, deliver, install and commission the supplies to the company in accordance with the contract.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Subsection 6-5(3)

International Agreements Act 1953 Section 4

International Agreements Act 1953 Schedule 22

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reason for Decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for limited provisions).

Schedule X of the Agreements Act contains the convention between Australia and Country A.

A general definition of 'permanent establishment' is found in Schedule X, Article Y of the Agreements Act and states:

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

This definition is based on the OECD Model Tax Convention on Income and Capital (OECD Model). Paragraph 104 of Taxation Ruling TR 2001/13 comments on the use of the OECD Model Taxation Convention's official Commentaries (the commentary) in interpreting Double Tax Agreements based on the OECD Model. It states that:

The Commentaries, with the various Observations and Reservations of OECD Member countries which they reproduce, therefore provide important guidance on interpretation and application of the OECD Model and as a matter of practice will often need to be considered in interpretation of DTAs, at least where the wording is ambiguous, which is inherently more likely in treaties than in general domestic legislation.

According to the commentary the general definition contains the following three conditions:

1. The existence of a "place of business", i.e. a facility such as premises.

The term "place of business" covers any premises used for carrying on the business of the enterprise. The location must be at the disposal of the enterprise but need not be a physical establishment established under formal legal rights. Paragraph 4.3 of the Commentary of Article 5 of the OECD Model provides the example of a place of business as the use of an office over a long period of time, by an employee of a company, in the headquarters of another company in order to ensure that the latter company complies with contractual obligations. In this case the office is at disposal of the enterprise and constitutes a place of business.

In your case, you have entered into a contract with an Australian entity. Included in this contract is an agreement to provide technical and administrative support in Australia. One or two employees will provide this support and will work from offices supplied by the entity in Australia. This is a place of business that satisfies the first condition.

2. This place of business must be fixed, i.e. it must be established at a distinct place with a certain degree of permanence.

For a place of business to be fixed it must have a degree of both geographical and temporal permanence.

Your place of business is fixed geographically in an office of the Australian entity. When requested you will provide services at other areas in Australia this does not affect the geographical permanence of the office at your disposal at the entity's premises.

According to Taxation Ruling TR 2002/5 at paragraph 33, in relation to the definition of "permanent establishment" in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936):

Whether temporal permanence exists is a matter of fact and degree. However, as a guide, if a business operates at or through a place continuously for six months or more that place will be temporally permanent.

This six month timeframe appears to be confirmed in Schedule X, Article Y of the Agreements Act, where an enterprise is deemed to have a permanent establishment if it carries on supervisory activities on a project for more than six months.

Paragraph 42 of TR 2002/5 offers the following example of a company having a permanent establishment in Australia:

HKco is a computer service provider and a resident of Hong Kong. It successfully tenders to train the employees of Ausco, a company resident in Australia, in a new computer system. To undertake the training, HKco sends four of its employees to Australia for six months. Ausco provides HKco employees with a room in one of its offices for that six months. Because HKco has at its disposal a room in Ausco's offices for six months and carries on its business at or through that room, HKco has a place at or through which it carries on its business in Australia.

You have indicated that you will initially have one or two employees based in the office of the Australian entity for a period of 12 months. There is an element of temporal permanence to this arrangement.

The place of business is therefore fixed.

3. The carrying on of the business of the enterprise through this fixed place of business.

The contract between you and the Australian entity requires you to supply technical and administrative support for the goods that you supply. This is a part of the business of your enterprise and you are carrying on this business through the office provided for you at the entity's premises.

All of the conditions that are required to satisfy the general definition of 'permanent establishment' in schedule X, article Y of the Agreements Act are present in your circumstances. You therefore have a permanent establishment in Australia.

Schedule X, Article Y of the Agreements Act

Alternatively, you may be deemed to have a permanent establishment in Australia under schedule X, article Y of the Agreements Act which states that:

An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if -

(b) it carries on supervisory activities in that State for more than six months in connection with a building site, or a construction, installation or assembly project which is being undertaken in that State.

This paragraph is not included in the OECD model but reflects the Australian and Country A reservation to OECD Model at paragraphs 58 and 59 in the commentary on Article 5.

"Supervisory activities" is not a defined term in the Agreements Act.

Paragraph 71 of TR 2001/13:

In determining what constitutes a term's meaning under the applicable domestic rules relating to tax, the normal domestic rules of interpretation are applied to that domestic law.

The term "supervise" is defined in The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01 as:

to oversee (a process, work, workers, etc.) during execution or performance; superintend; have the oversight and direction of.

Clause 2.1.1 of the Draft Scope of Works attached to the draft contract between you and the Australian entity states that:

The Contractor [you] shall perform all activities necessary to manage, design, develop, construct, integrate, test, deliver, install and commission the Supplies to the Australian entity in accordance with the Contract.

You will be responsible for managing all of the activities required to install the goods that you supply to the Australian entity under the contract. This indicates that you are carrying on supervisory activities. You anticipate that the activities that you will perform under the contract will take more than six months to complete. You will therefore be deemed to have a permanent establishment in Australia under schedule X, article Y of the Agreements Act.

Conclusion

Your enterprise satisfies the general definition of "permanent establishment" found in Schedule X, Article Y of the Agreements Act. Alternatively your enterprise is deemed to be a permanent establishment under Schedule X, Article Y of the Agreements Act.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).