Edited version of your written advice

Authorisation Number: 1012809916754

Ruling

Subject: GST and supply of marketing services

Question

Is the supply of the advertising services by A under the circumstances described a taxable supply?

Answer

Yes.

Relevant facts and circumstances

• C and D entered into a global agreement (the global agreement) on a specified date under which C places orders with D to acquire marketing services.

• C is a non-resident entity based overseas. C does not have an ABN and is not registered or required to be registered for GST in Australia.

• D is a non-resident based overseas.

• C sells goods both directly to Australian customers and through its subsidiaries in Australia.

• A is a resident of Australia, registered for GST and an affiliate of D.

• C orders marketing services which are to be carried out in Australia. The marketing strategies are performed/developed locally between A and a subsidiary of C, B.

• B is a resident of Australia and registered for GST in Australia.

• B is essentially a shared service entity that does not, itself, sell goods in Australia. B's involvement is necessary because C is not familiar with the Australian market as the Australian based employees, so C utilises B's service to help develop strategies that will work best for the Australian market.

• B is not acting in an agency capacity for C.

• C has no presence in Australia.

• C has entrusted B to work with A to flesh out strategies. B's marketing staff work closely with A, managing the relationship with A, planning strategies and reporting on the effectiveness of campaigns.

• There is no contract between C and B that specifically deals with B's acquisitions from A. Marketing costs incurred by B, which are essentially employee related costs, are billed back to C because they relate to brand advertising that benefits C.

• A's supply is for the purpose of C and C pays for the service.

• The global agreement is the over-arching agreement between D and C globally. There is a local agreement that A has with B for the supplies made by A to B which was signed by both parties on a specified date. This is the only agreement between A and B.

• A and B follow all the clauses in the local agreement in relation to A's supplies.

• The local agreement is relevant to the supplies made by A. This is because the global agreement provides that C or its related entity cannot bind an affiliate of D (affiliate) to the terms of the global agreement unless there is an express agreement between the relevant affiliate and C, or B.

• A does not communicate with C as all dealings are with B. A always liaises with B. B assists A with the development of a media strategy for C by giving responses to A's questions about C or providing information about C which may be of assistance to A. B gives detailed briefing on C's products to A.

• While C raises the purchase order, makes payment and decides the overarching goal or direction, all dealings are with B in terms of the strategy, recommendations and direction of a campaign, all meetings are held with B. Each campaign that A does for B is signed off and approved by B.

• A's goal is to increase the familiarity score of C in Australia. So its aim is to increase the awareness of C with local companies so that they use their products.

• The process of A's supply of marketing services is as follows:

• if C requires a service, B prepares a briefing setting out C's requirement and objectives for the proposed campaign in writing and forwards it to A

• A then sets out the proposed strategy and the fees calculated in accordance with the principles set out in the master agreement

• once B notifies A in writing that they accept B's proposal and C issues a purchase order number, A can commence the supply of its services.

• B influences and makes recommendations on what is done, how it is done and where it is done. This is then agreed and signed off by B.

• The campaign activities (which include submissions, reviews and approvals) are sent to B. B provides the reviews (feedback) and approvals (authority) on the activities.

• A deals with a project manager who is A's primary contact with respect to a brief, approvals, etc. The project manager is a staff member of B.

• A has been charging B GST on all invoices since the beginning of the relationship. This is because A views its dealings as being with the local office (B) and as such it views B as its client.

A provided some documents in relation to reviews done and approvals granted by B as evidence of the extent of B's involvement in the supply of A's services. :

Global agreement

The global agreement is for a specified period.

The global agreement outlines the scope of the services to be provided by D.

The global agreement provides that a related entity of C (related entity) may purchase services under the global agreement from an affiliate of D, to the extent that the parties agree to be bound by the master agreement through a local agreement. In this situation the services will be governed by the provisions of the global agreement in the same manner as if such affiliate had executed an identical agreement with the related entity.

The global agreement further provides that neither C nor the D can bind an affiliate or a related entity to the terms of the global agreement in the absence of an express agreement between the relevant affiliate and the related entity.

The global agreement further provides that where it appears necessary to accommodate specific regional or national circumstances, a related entity and affiliate shall enter into a separate local agreement.

The global agreement provides that each related entity will be liable for its obligations under each local agreement that it enters into and will be bound by and solely responsible for performance of all of the obligations, including, payment obligations, under such local agreement.

Local agreement

The terms of the local agreement are governed by the terms of the master agreement.

The scope of the services that A is required to supply is set out in the local agreement.

The local agreement provides that B and A execute the local agreement for all the services that are to be provided in Australia.

The local agreement outlines the procedures that govern the provision of services by A as follows:

1. Whenever B requires A to provide any service, it will prepare a brief setting out its requirements and objectives for the proposed campaign and forward the brief to A for its response. This brief will be in the form as set out in a specified attachment to the local agreement.

2. A must submit a proposal in response to that brief within the time frame requested by B setting out the proposed strategy and fees and other remuneration payable calculated in accordance with the principles set out in the agreement. Services under a particular proposal must not be commenced unless and until B notifies A in writing that it accepts the proposal and issues A with a purchase number order.

Under the local agreement, A acknowledges that the rights and interests of B under that agreement extend to all other related entities of C operating in Australia and such a related entity may enforce the local agreement in in its own name, but only in connection with any service provided for its benefit.

The fees to be paid by B for the services provided by A under the local agreement will be calculated in accordance with the agreement. Where the agreement does not contemplate any service provided by A, then the fee or other remuneration for that service will be calculated in accordance with an attachment to the local agreement.

Under the local agreement A must:

• ensure that the resources identified in the local agreement will at all times support the provision of the services to B

• provide reports in the manner and at the times contemplated in the local agreement

• provide on-the ground support in a specified place in Australia…

• keep full and true timesheets, books and records in respect of the services provided in order that B may audit or review the records …

B is a resident of Australia and registered for GST in Australia.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-25

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(1)

Reasons for decision

Summary

Based on the information provided, A supplies its advertising services to B (that is B is the recipient of the supply). Further, the advertising services are 'provided' to B in order for B to perform its supply of marketing services to GE. Therefore, B is the providee entity. Since B is in Australia when A performs its advertising services the use or enjoyment of the supply takes place in Australia.

Consequently, the supply of the advertising services by A to B is a taxable supply as it meets all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Under section 9-40 of the GST Act, an entity is liable to pay GST on all the taxable supplies that it makes.

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is *GST-free or *input taxed.

(* denotes a defined term in section 195-1 of the GST Act)

Based on the information provided, A's supply of advertising services meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because A supplies its services for consideration, in the course of its business, the supply is connected with Australia and A is registered for GST.

Further, the supply of A's advertising services are not input taxed under a provision of the GST Act or a provision of another Act. Therefore, what remains to be determined is whether the supply is GST-free.

GST-free

Under section 38-190 of the GST Act, certain supplies of things other than goods or real property, for consumption outside of Australia, are GST-free.

As A's supply of the advertising services is neither a supply of goods nor a supply of real property, item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) and item 3 in the table in subsection 38-190(1) of the GST Act (Item 3) are relevant for consideration.

Application of Item 2

Item 2 provides that a supply that is made to a non-resident is GST-free if the non-resident is not in Australia when the thing supplied is done, and:

(a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia, or

(b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST.

The first requirement of Item 2 is that the supply is made to a non-resident. That is, the recipient of the supply must be a non-resident.

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of the Income Tax Assessment Act 1936.

The global agreement provides that a related entity may purchase services under the global agreement from an affiliate to the extent that the parties agree to be bound by the global agreement through an applicable local agreement. In this situation the services will be governed by the provisions of the global agreement in the same manner as if such affiliate had executed an identical agreement with the related entity.

The global agreement further provides that neither C nor the D can bind an affiliate or a related entity to the terms of the global agreement in the absence of an express agreement between the relevant affiliate and the related entity.

The global agreement provides that where it appears necessary to accommodate specific regional or national circumstances, a related entity and an affiliate shall enter into a separate local agreement.

The local agreement is the only agreement between A and B. There is no agreement between A and C.

Based on the information provided, we consider that the contract for the supply of A's advertising services is between A and B and not between A and C. Therefore the recipient of the supply is B who is a resident of Australia for income tax purposes. As the supply is not made to a non-resident entity, the supply is not covered by Item 2.

Application of Item 3

Item 3 applies irrespective of the residency status of the recipient of the supply.

Item 3 provides that a supply, other than a supply of work physically performed on goods situated in Australia when the thing supplied is done or a supply directly connected with real property situated in Australia, is GST-free if:

(a) the recipient is not in Australia when the thing supplied is done, and

(b) the effective use or enjoyment of the supply takes place outside Australia.

In this case, the requirement of paragraph (a) of Item 3 is not satisfied as B, the recipient of the supply, is in Australia when A provides its advertising services.

Subsection 38-190(4) of the GST Act applies to extend the application of paragraph (a) of Item 3 by treating a supply that is made to a recipient who is in Australia in relation to the supply as being made to a recipient who is not in Australia if:

(a) the supply is made under an agreement entered into, whether directly or indirectly, with an Australian resident, and

(b) the supply is provided, or the agreement requires it to be provided, to another entity outside Australia.

If the requirements of subsection 38-190(4) are met the supply is taken to be made to a recipient who is not in Australia and therefore satisfies paragraph (a) of Item 3.

Whether the supply that is 'made' to B is 'provided' to C

Goods and Services Tax Ruling GSTR 2005/6 explains, for the purposes of subsection 38-190(3) of the GST Act, when a supply is made to one entity but 'provided to another entity'. Goods and Services Tax Ruling GSTR 2007/2 provides that the explanation in GSTR 2005/6 as to when a supply is provided to another entity is equally applicable to subsection 38-190(4) of the GST Act.

As explained in GSTR 2005/6, a supply, which is made to an entity (the recipient) is provided to another entity if, and to the extent that, in the performance of a service (or in the doing of some other thing), the actual flow of the supply is to that other entity. That is, the contractual flow of the supply is to one entity (the recipient) but the actual flow of the supply is to another entity (the providee), (see paragraphs 59 to 62, 66 to 88, 220 to 225 and 258 to 322).

Paragraphs 40 and 41 of GSTR 2007/2 provide that the requirement in paragraph (a) of Item 3 refers to the recipient of the supply. The recipient of the supply is the entity to which the supply is made. A supply that is made to a recipient entity may be provided to another entity. If the supply is made to a recipient and provided to another entity, the entity that actually uses or enjoys the supply is that other entity (providee). That is, while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity.

Paragraph 49 of GSTR 2007/2 states:

49. Thus to work out whether effective use or enjoyment of a supply takes place outside Australia we take a two-step approach. First, we determine the entity to which the supply is provided - the providee entity (we explain how to determine this at paragraphs 52 to 81). We then determine whether provision of the supply to the providee entity is outside Australia (we explain how to determine this at paragraphs 82 to 136). Effective use or enjoyment of the supply takes place outside Australia if there is provision of the supply to the providee entity outside Australia. This two-step approach is summarised in flowchart form at pages 33 to 36.

Whether a supply is provided to another entity depends on the facts and circumstances in any given case.

In this case, A provides advertising services under the local agreement with B. When B requires advertising services for C, it prepares a brief, setting out its media requirements and objectives for the proposed campaign and forwards it to A for its response. A submits a proposal in response to that brief setting out the proposed strategy and the fees and other remuneration payable calculated in accordance with the agreement between the two parties. A can only commence providing its services once B notifies A in writing that it accepts the proposal.

Further A advised that B influences and makes recommendations on what is advertised, how it is advertised and where it is advertised. B reviews the activities and provides feedback, approval and sign off in respect of all A's advertising services relating to C's advertising campaigns.

There is no agreement between A and C. A does not have any involvement or interaction with C. All the communications and interactions are with B in Australia.

Whilst the advertising campaigns benefit C and are paid for by C, the actual services of advertising are provided to B in Australia in order for B to perform its marketing functions to C.

As A's advertising services are made and provided to B in Australia, subsection 38-190(4) of the GST Act is not satisfied. Therefore, subsection 38-190(4) of the GST Act will not operate to widen the scope of Item 3.

There are no other provisions in the GST Act or another Act under which the supply of A's advertising services under the circumstances described would be GST-free.

Consequently, the supply of the advertising services supplied by A to B is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

GSTR 2005/6 and GSTR 2007/2 are available on our website at www.ato.gov.au

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