Edited version of private ruling

Authorisation Number: 1011824546537

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Ruling

Subject: Permanent establishment

Question 1

Does the taxpayer, an Australian resident company, have a permanent establishment (PE) in Country X under the PE Article of the Country X Agreement, by virtue of the services the taxpayer provides to its Country X resident clients?

Answers

No.

Question 2

Does the taxpayer, an Australian resident company, have a permanent establishment in other Countries under subsection 6(1) of the Income Tax Assessment Act 1936 by virtue of the services the taxpayer provides to its other Countries resident clients, in circumstances where Australia does not have a tax treaty with those other Countries?

Answers

Yes.

This ruling applies for the following periods:

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2008

Relevant facts

The taxpayer is incorporated in Australia. Its head office is located in Australia.

The taxpayer is an Australian resident company for taxation purposes.

The taxpayer carries on a business of providing certain services (the services).

The taxpayer provides the services under a service agreement which is signed by the taxpayer and the entity which receives the services.

The taxpayer's clients are located in various countries.

In order to provide the services to its clients in Country X and other Countries the taxpayer entered into a contract with Company A for rental of equipment ('the Agreement').

Under the terms of the Agreement, Company A will charge the taxpayer an hourly rate, as specified in the rates schedule, for the provision of the equipment, and for the associated support as defined in the Agreement.

The taxpayer installs advanced instrumentation on the leased equipment which enables the taxpayer to carry out the services.

The taxpayer has one Australian resident employee who works in Country X and other Countries carrying out the taxpayer's business activities.

The taxpayer also has two full-time employees (Country X representatives) in Country X that work out of an office located in Country X. The employees are Country X nationals and their roles are to provide Country X representatives. The taxpayer does not have a place of management, factory or any other fixed place of business in Country X and other Countries in which the taxpayer provides its services.

All strategic decision making, financial management, board of director meetings and contractual negotiations are carried out in Australia.

The taxpayer has not previously performed and/or is unlikely to perform services in Country X for a period in excess of 183 days in any 12 month period.

The taxpayer has been present for short periods of time in other Countries on a regular basis.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 paragraph 6(1)(b)

International Tax Agreement Act 1953

Reasons for decision

Question 1

Summary

The taxpayer, an Australian resident company, does not have a permanent establishment in Country X under paragraph 4 of the PE Article of the Country X Agreement by virtue of the services the taxpayer provides to its Country X resident clients.

Detailed reasoning

Schedule Y to in the International Agreements Act 1953 ('the Agreements Act') contains the agreement between Australia and Country X ('the Country X Agreement'). The Country X Agreement operates to avoid the double taxation of income received by Australian and Country X residents.

Paragraph 4 of the PE Article of the Country X Agreement will deem the taxpayer to have a PE in Country X if it operates substantial equipment in Country X for a period or periods exceeding 183 days in any 12 month period. This includes equipment used in exploring for or exploiting natural resources, unless the activities are of a preparatory or auxiliary character.

Paragraph 6 of the PE Article provides that "permanent establishment" is deemed not to include the following activities, if they are of a preparatory or auxiliary nature in relation to the enterprise:

· the use of facilities solely for the purpose of storage, display or irregular delivery of goods or merchandise belonging to the enterprise;

· the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or irregular delivery;

· the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

· the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;

· the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

· the maintenance of a fixed place of business solely for any combination of activities mentioned in the above dot points.

The term "substantial equipment" is not defined. The Explanatory Memorandum discusses the PE Article of the Country X Agreement and states that:

· Australia's experience is that the permanent establishment provision in the OECD Model may be inadequate to deal with high value mobile activities involving the use of such equipment.

· The meaning of the term 'substantial' depends on the relevant facts and circumstances of each individual case. Factors such as size, quantity, or value of the equipment, or the role of the equipment in income producing activities are relevant in determining whether the equipment is substantial. However, some examples of substantial equipment would include:

o large industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction;

o manufacturing or processing equipment used in a factory; or

o grain harvesters and other large agricultural machinery.

The term "substantial equipment" is considered in Taxation Ruling TR 2007/10 in relation to the provisions in the United States Convention and the United Kingdom Convention corresponding to Article 5(4)(b). In this regard, the principles expressed in TR2007/10 are relevant to the question at hand.

In this instance, having regards to the fact of the case, the guidance in the Explanatory Memorandum and TR 2007/10 it is considered that the leased equipment used by the taxpayer to conduct its business activities in Country X constitutes substantial equipment for the purposes of paragraph 4 of the PE Article of the County X Agreement.

The Explanatory Memorandum discusses the PE Article of the Country X Agreement in respect of the term "operation" and "operates" and states that:

· The terms 'operation' and 'operates' have been included to clarify that only active use of substantial equipment assets will be captured by paragraph 4 of the PE Article. This means an enterprise that merely leases substantial equipment to another person for that other person's own use in a country, would not be deemed to have a permanent establishment in that country under these provisions.

· 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.

In the present case, the taxpayer has leased the equipment from Company A to conduct its business activities in Country X. The taxpayer has used the leased equipment for the provision of its services to the clients in Country X. The taxpayer has its own employee present in Country X carrying out the taxpayer's business activities.

In view of the activities performed through the leased equipment in Country X by the taxpayer, it is considered that the taxpayer, as a lessee of the equipment, has actively used the equipment in the course of carrying out the business activities and therefore satisfies the term 'operates substantial equipment' for the purposes of paragraph 4 of the PE Article of the Country X Agreement.

However, as the period for which the business activities performed by the taxpayer in Country X has not been and is unlikely to be in excess of 183 days in any 12 month period, the requirement of operating substantial equipment in Country X for a period or periods exceeding 183 days in any 12 month period under paragraph 4 of the PE Article of the Country X Agreement has not been met and will not be met.

Accordingly, the taxpayer is not deemed to have a PE in Country X under paragraph 4 of the PE Article of the Country X Agreement by virtue of the services the taxpayer provides to its Country X clients.

Question 2

Summary

The taxpayer, an Australian resident company, has a permanent establishment in other Countries under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) by virtue of the services the taxpayer provides to its other Countries resident clients, in circumstances where Australia does not have a tax treaty with those other Countries.

Detailed reasoning

Subsection 6(1) of the ITAA 1936 defines a permanent establishment to mean:

"a place at or through which the person carries on any business and, without limiting the generality of the foregoing, includes:

(a)…….

(b) a place where the person has, is using or is installing substantial equipment or substantial machinery;

(c)……."

The meaning of the words 'using substantial equipment or substantial machinery' in paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936 has not been considered by Australian courts.

The Macquarie dictionary defines the term 'use' to mean amongst other things, 'to operate or put into effect'.

Paragraph 81 of TR 2007/11 explains the term 'a place where the person ... is using substantial equipment' as follows:

"….the reference to 'a place where the person ... is using substantial equipment' in paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936 does not require geographical permanence (or fixedness). Accordingly, the 'place' referred to in paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936 is where the sublessor uses substantial equipment in Australia, regardless of whether that equipment is mobile and is operated under the lease in various locations within Australia."

In the present case, the taxpayer has leased equipment and has used the leased equipment to conduct its business activities in the other Countries.

It is accepted that the leased equipment used by the taxpayer in conducting its business activities constitutes substantial equipment in view of TR 2007/10 as discussed in question 1 above.

As the taxpayer uses the leased equipment to perform business activities, it is considered that the taxpayer, as a lessee of the equipment, is using substantial equipment in the relevant other Countries for the purposes of paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936.

Accordingly, the taxpayer is considered to have a permanent establishment in the relevant other Countries where the business activities are conducted under subsection 6(1) of ITAA 1936.

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