Edited version of your written advice

Authorisation Number: 1051234406819

Date of advice: 15 June 2017

Ruling

Subject: Permanent Establishment Question:

Question

Is income derived by Company X for consultancy services provided in Australia under an agreement with Company Y ('the Agreement’) assessable pursuant to subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No. No part of the income derived by Company X for consultancy services provided in Australia under the Agreement is assessable pursuant to subsection 6-5(3) of the ITAA 1997.

This is because the business activities of Company X under the Agreement are not considered to give rise to a permanent establishment (PE) of Company X in Australia under Article M of the tax treaty between Australia and Country X ('the Country X tax treaty’).

Relevant facts and circumstances:

Company X is registered in Country X and is a resident of Country X for income tax purposes.

Company X is not a resident of Australia for Australian income tax purposes.

Company X provides independent advice and support to its customers on management of complex programmes and projects.

Company Y is contracted by an Australian company ('the client’) to manage international contracts.

Company Y has entered into a subcontracting agreement ('the Agreement’) with Company X for the provision of consultancy services to the client.

The Agreement runs over a period of a few months. Under the terms of the Agreement:

● Company X will provide at its own cost, unless to be made available by the client, all necessary equipment for the adequate performance of the consultancy services and bear the cost of any training required by its staff

● Subject to receipt of Company X’s invoice, Company X will receive payment from Company Y for consultancy services provided as agreed

● Company X will be responsible for any PAYE Income Tax and other taxes payable in Country X.

● The Agreement is construed in accordance with the laws of Country X and is subject to the exclusive jurisdiction of the Courts of Country X

● Company X will make available the services of its employee and director, Z, a country X resident for income tax purposes.

● The consultancy services will be primarily performed in Country X in the business premises of Company X with required intermittent travel to Australia or other designated country/region.

The Agreement has been signed by Z for and on behalf of Company X.

During the term of the Agreement, it is anticipated that Z will make a maximum of a few trips to Australia. Z has already completed their first trip to Australia for a few days. If a second trip is required before the completion of the term of the Agreement, the maximum duration of their presence in Australia would be for a few more days. Z will spend a total of less than 20 days in Australia over the term of the Agreement.

Company X does not have other employees or a place of business such as an office, workshop etc. in Australia throughout the term of the Agreement. Company X has no other business arrangement in Australia other than the services provided by Z under the Agreement.

During their visits to Australia, Z will be working from the premises of an Australian entity with occasional visits elsewhere as required. All travel and temporary hotel accommodation will be arranged and paid for by the client.

Z’s work will include review and advice to the client regarding the client’s project.

Neither Z nor Company X has any equipment installed in the premises of the Australian entity from which Z provides their consultancy services. During Z’s very limited visits to Australia for provision of consultancy services, they typically attend meetings, makes site visits and works from a laptop.

There is no office made available for their use in the premises of the Australian entity during these visits.

Relevant Legislative Provisions:

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

The Country X Tax Treaty

ATO View documents:

ATO Interpretative Decision (ATO ID) 2005/360

Reasons for decision

Summary

For the purposes of the Country X tax treaty, Company X does not have a place of business such as a place of management, a branch, an office, a factory, a workshop etc. in Australia throughout the term of the Agreement

Although Z has authority to enter into contracts on behalf of Company X, they have not engaged Company X in business activities in Australia through habitual conclusion of contracts for the purposes of the Country X tax treaty.

Therefore, it is considered that company X does not have a PE in Australia for the purposes of Article M of the Country X tax treaty.

Accordingly, by virtue of the overriding effect of Article N of the Country X tax treaty, no part of the income received by Company X from the provision of consultancy services under the Agreement in respect of the 2017 and 2018 income years is assessable under subsection 6-5(3) of the ITAA 1997.

Detailed reasoning

Australian income tax

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.

The income derived by Company X, a company resident in Country X, from consultancy services provided by its employee in Australia is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

However, in determining liability to Australian tax on Australian sourced income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable tax treaties contained in the International Tax Agreements Act 1953 ('the Agreements Act’).

The Country X tax treaty operates to avoid the double taxation of income received by Australian and Country X residents.

Australia's right to tax income from business activities of Company X, a Country X enterprise for income tax purposes, is subject to the provisions of the Country X tax treaty.

Article N of the Country X tax treaty governs the taxation of business profits derived from Australia by an enterprise of Country X. Under Article N, the business profits of an enterprise of Country X shall be taxable only in Country X unless the enterprise carries on business in Australia through a permanent establishment ('PE’) situated in Australia.

The question of whether a non-resident enterprise has a PE in Australia is a question of fact and degree which must be determined by reference to the individual circumstances of each case with relevance to the provisions of the applicable treaty.

Taxation Ruling TR 2001/13 ('TR 2001/13’) sets out the Commissioner's views on interpreting tax treaties. Paragraph 104 of TR 2001/13 provides that the Commentaries on the OECD Model Tax Convention on Income and on Capital ('the Commentary’) provide important guidance on the interpretation and application of the OECD Model and will often need to be considered, as a matter of practice, in interpreting tax treaties.

The term permanent establishment is defined in Article M(1) of the Country X tax treaty as a 'fixed place of business’ through which the business of an enterprise is wholly or partly carried on.

Article M(2) provides that the term 'permanent establishment’ (PE) includes a place of management, a branch, an office, a factory, a workshop etc.

The Commentary on Article X concerning the definition of a PE in the Model Tax Convention on Income and on Capital 2014 provides further guidance as to what constitutes a 'fixed place of business’.

The term 'fixed place of business' is defined in paragraph 2 to contain the following conditions, namely:

● the existence of a “place of business”, i.e. a facility such as premises;

● this place of business is 'fixed”, i.e., it must be established at a distinct place with a certain degree of permanence; and

● the business of the enterprise is carried on through this fixed place of business. This means usually that, persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

Company X does not have a place of business such as a place of management, a branch, an office, a factory, a workshop etc. in Australia throughout the term of the Agreement.

However, the Commentary on Article X provides that a non-resident enterprise will be considered to have a 'place of business’, in Australia, even though such a place of business is situated in the business facilities of another enterprise and is therefore not exclusively used to carry on the business of the non-resident. The mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal or legal right to use that place is therefore required (see paragraph 4 and 4.1).

During Z’s very short visits to Australia, as part of Company X’s provision of consultancy services in under the Agreement, they typically attends meetings, makes site visits and works from a laptop. There is no office made available for their use during these visits.

Further, neither Z nor Company X has any equipment installed in the premises of the Australian entity from which Z provides their services.

Accordingly, Company X does not have a 'place of business’ in Australia so that for the purposes of Article M(1) of the Country X tax treaty, Company X is not considered to conduct its business through a PE in Australia.

If a non-resident enterprise does not conduct activities itself through a PE in Australia, it may still, in some circumstances, be 'deemed' to carry on business through a PE under specific provisions of Article X of the relevant tax treaty.

Article M(6) of the Country X tax treaty provides that, notwithstanding the provisions of paragraphs 1 and 2 of Article M, where a so called 'dependent agent’ (whether or not employees but not independent agents) is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State, an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a PE in that State ('dependent agent PE’). This is in respect of any activities which the dependent agent undertakes for the enterprise, unless the activities are limited to preparatory or auxiliary activities (in relation to the business proper of the enterprise) (emphasis added).

The Commentary on Article X clarifies that, only dependent agents having the authority to conclude contracts can lead to a PE for the enterprise maintaining them. In such a case, the agent has sufficient authority to bind the enterprise's participation in its business activity in the State concerned. The use of the term PE in this context presupposes, of course, that the person makes use of this authority habitually ('repeatedly’) and not merely in isolated cases (paragraph 32).

As to what constitutes the habitual exercise of an authority to negotiate and conclude contracts was considered by the Supreme Court in Unisys Corporation Inc. v FC of T 2002 51 ATR 386; 2002 ATC 5146 ('the Unisys case'). In that regard Gzell J makes reference to Klaus Vogel on Double Taxation Conventions, 3rd edition, Kluwer, London, 1997 at 332-333 and Arvid A Skaar, Permanent Establishment Erosion of a Tax Treaty Principle, Kluwer, Boston, 1991 at 525 (paragraphs 67 to 70 2002 ATC 5156 and 5157 of the Unisys case).

In summary, Professor Vogel says that, for the habitual exercise of an authority to conclude contracts, the activities of a dependent agent must have a certain permanence, i.e., the continuity of a person's exercise of authority should be measured by application of the same criteria as those applied under the general permanent establishment concept laid down in art 5(1). The decisive factor in this case is whether the activities were, from the outset, devised for a lengthy period or only as a temporary expedient.

Professor Skaar says that the basic rule of the OECD models requires a special connection between the business activity and the place of business. The business activity must be carried out 'through’ the 'place of business’. While the dependent agent provision does not explicitly provide for a business connection test, authorisation to perform a business activity on behalf of the principal does not of itself suffice for the constitution of a PE. The business of the principal has to be actually performed by the agent and, more specifically, the agent must exercise the authority habitually.

Professor Skaar continues at 527:

'In general, the agency clause is designed to deal with agents who engage their principals in foreign business activities through the use of their authority to conclude contracts, typically sales contracts. The agency clause is therefore inadequate for consultancy services, because it is the services of the consultant, not the conclusion of a contract, which involve the principal in business activities in the other country...’

In the present circumstances, Z provides consultancy services to the client on behalf of Company X under the Agreement concluded in Country X between Company X and Company Y. The services are primarily performed in Country X with relatively very short periods of performance in Australia over the term of the Agreement.

In light of the earlier discussion in relation to the factors contributing to the existence of a dependent agent PE, it is considered that Z’s performance of consultancy services in Australia under the Agreement does not give rise to a dependent agent PE of Company X in Australia under the Country X tax treaty for the following reasons:

● Company X does not have a 'place of business’ in Australia through which Z conducts the company’s business of providing consultancy services

● Z merely provides the consultancy services that Company X has contracted to provide under the Agreement, i.e., this does not involve entering into further contracts on behalf of Company X

In summary although Z has authority to enter into contracts on behalf of Company X, they have not engaged Company X in business activities in Australia through habitual conclusion of contracts for the purposes of Article M(6) of the Country X tax treaty.

Therefore, it is considered that Company X does not have a PE in Australia for the purposes of Article M of the Country X tax treaty.

Accordingly, by virtue of the overriding effect of Article N of the Country X tax treaty, no part of the income received by Company X from the provision of consultancy services under the Agreement in respect of the 2017 and 2018 income years is assessable under subsection 6-5(3) of the ITAA

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