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Edited version of your written advice
Authorisation Number: 1012799916642
Date of advice: 29 April 2015
Ruling
Subject: Permanent establishment
Question and Answer
Do you (company A) have a permanent establishment in Australia?
No
Relevant facts and circumstances
The Scheme
Company A and company B have decided to start using a consignment arrangement.
Under the consignment arrangement, company A will import goods into Australia as consignor, with company B then taking delivery and control of the goods as consignee.
Company A will import the goods into Australia.
Company B will take delivery of the goods in Australia as consignee and will then store the goods in a warehouse owned or leased by company B.
Company A will not have any rights or entitlements in respect of the warehouse.
Company A will not have any employees in Australia, nor will it have a dependant agent in Australia acting on its behalf.
Company A does not have any other fixed place of business in Australia at its disposal, and does not have any substantial equipment in Australia.
Company A will not engage or materially deal with customers in Australia.
Company B as the sole distributor of the goods in Australia will acquire title to the goods from company A when a customer is found.
Company B will not act as agent for company A at any time, and this fact will be specifically stated and reflected in the consignment agreement.
The consignment agreement
The consignment agreement will include provisions to the following effect.
1. The power that the consignee has (in determining when title to the consigned goods passes from consignor) is exercisable only as purchaser;
2. The risk of loss from damage, destruction, theft or loss while in transit and prior to sale by the consignee is assumed by the consignee;
3. The consignee is entitled to move the good held on consignment from time to time to such locations as it desires without the consignor’s notice or consent;
4. The consignee is not liable to account to the consignor for the sales proceeds from third parties;
5. The consignee is under no obligation to purchase the consigned products; and
6. The consignor has the right to recall any consigned products prior to their purchase by the consignee
Relevant legislative provisions
Subsection 6-5(3) of the Income Tax Assessment Act 1997
Section 4 of the International Tax Agreements Act 1953
Schedule 2 of the International Tax Agreements Act 1953
Schedule 35 of the Agreements Act 1953
Reasons for decision
The Double Tax Agreement
Subsection 6-5(3) of the 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.
When determining your liability to tax on Australian sourced income received by you as 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).
The Agreements Act contains the bilateral convention between Australia and the other state.
Under Article X of the bilateral Convention, the business profits of the enterprise from the other state shall be taxable only in the other state unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.
The term 'permanent establishment' is defined in Article X of the bilateral Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
Article X of the bilateral Convention contains a list of examples, each of which can be regarded as constituting a permanent establishment, such as a place of management, an office, a branch, a factory or a workshop.
Article X of the bilateral Convention provides that an enterprise shall not be regarded as having a permanent establishment solely as a result of maintaining of fixed place of business for the purpose of the maintenance of a stock of goods or merchandise belonging to the enterprise for the purpose of processing by another enterprise.
When considering the nature of your activity, your goods will enter Australia under consignment; you will retain ownership of those goods in Australia until such a time as the receiving warehouse operator in Australia locates a purchaser for those goods from when the warehouse operator will then take legal ownership of the goods. The function of the warehouse in Australia is for the purpose of the maintaining merchandise belonging to your enterprise for the purpose of processing by another enterprise.
Article X of the bilateral Convention identifies circumstances where a permanent establishment will be deemed to exist. Article X of the bilateral Convention provides that an enterprise of the other country will be deemed to have a permanent establishment in Australia if the enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia. As company B is the Australian retailer of the goods, company B transfers legal ownership of the goods to company B under a consignment arrangement of goods supply and is therefore not carrying on business in Australia.
Article X of the bilateral Convention provides that control of one company by another does not of itself mean that either company is a permanent establishment of the other. The relationship between company B and company A does not give rise to a permanent establishment.
Consequently, Article Y of the bilateral Convention applies and the income is not taxable in Australia as the taxpayer is not carrying on its business through a permanent establishment in Australia. The income is therefore not assessable under subsection 6-5(3) of the ITAA 1997.
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