Edited version of your written advice

Authorisation Number: 1051267817297

Date of advice: 17 August 2017

Ruling

Subject: Australian Income Tax Obligations

Question 1

Is ABC Pty Limited ('ABC’) a resident of the United Kingdom ('UK’) for the purpose of the Australia-United Kingdom double tax agreement ('Aust-UK DTA’), due to the operation of sub-Article 4(4) of the Aust-UK DTA?

Answer

Yes.

Question 2

Is ABC carrying on a business at or through a permanent establishment ('PE’) in Australia, as defined by the Aust-UK DTA?

Answer

No.

Question 3

Does the income earned by ABC constitute assessable income for Australian income tax purposes?

Answer

Not applicable, as business profits of ABC is not taxable in Australia pursuant to Article 7 of the Aust-UK DTA.

This ruling applies for the following periods:

Income Year ended 30 June 201x to

Income Year ended 30 June 201y

The scheme commences on:

The income year ended 30 June 201x

Relevant facts and circumstances

Industry Background Information

In relation to manufacturing of medicine, release for supply is a mandatory step, in which the last manufacturer in the supply chain certifies each batch of medicines produced, before being released to the Australian market. This is to ensure that batch has been produced and quality controlled in compliance with all requirements under the Therapeutic Goods Act 1989 (TG Act).

Under Australian Code of Good Wholesaling Practice for Medicines in Schedules 2,3,4 and 8 which came into effect on 1 April 2011, manufacturer’s agents and importers are responsible for the effective, efficient and safe handling, storage and distribution of prescribed medicine in the supply chain.

A Marketing Authorisation (MA) relates to the details of the medicine involved in the Australian Register of Therapeutic Goods (ARTG), as well as all other matters in relation to the product registration or listing agreed in writing between the Therapeutic Goods Administration (TGA) and the sponsor.

ABC is listed as a sponsor for a number of ABC group’s products sold in Australia which are registered on the ARTG. As required by TG Act:

㘀therapeutic goods (including prescription drugs and medication) must be included on the ARTG before they can be sold in Australia; and

㘀a sponsor must be a resident of Australia or be an incorporated body in Australia and conducting business in Australia where the representative of the company is residing in Australia.

Information Provided by the Taxpayer

You advised the following in relation to ABC:

㘀ABC was established because Australian regulations require a Marketing Authorisation to distribute pharmaceutical products in Australia be held by a party formed in Australia, and the ABC group did not want to grant the MAs to an unrelated distributor.

㘀ABC has 3 directors:

– Mr X – is based and resides in the UK.

– Mr Y – is based and resides in the UK.

– Mr Z – is based and resides in Australia.

㘀ABC's board meetings are held by way of teleconferences with Mr X and Mr Y dialling in from the UK and Mr Z from Australia. To date, these board meetings have been held on an annual basis. This is also expected to be the case going forward. All board decisions are made by majority vote, and thus all decisions are made in the UK. Broadly, the board meetings deal with Australian legal and company law matters.

㘀No ABC group entity provides Mr Z with any equipment. No ABC group entity pays Mr Z an allowance to maintain an office. Mr Z has not granted any ABC group entity the right to access any office or property that he maintains.

㘀Mr X and Mr Y are also directors of ABC's parent entity, ABC UK Limited ('ABC UK'), and they are also shareholders in the ultimate ABC group holding company. All other board members of ABC UK are based in the UK.

㘀ABC UK is a resident of the UK.

㘀The following are held by the Accounting Firm as adviser to ABC at the head office of Accounting Firm, which is an office building in Sydney, Australia:

– Company Statement

– Audit Relief Minute

– Solvency Resolution

㘀ABC UK's board makes all the commercial decisions which impact ABC from the UK. Regarding the process of determining the Australian third party distributor, ABC UK shortlisted a number of distributors, held meetings with them and requested the shortlisted parties to provide a distribution agency proposal, including a fee quote. As a consequence of this process, ABC UK chose the Australian distributor based on competence and fees.

㘀All day-to-day operations for ABC are undertaken by employees or directors of ABC UK from locations outside Australia.

㘀An arm’s length Distribution Agreement was entered into between ABC and the following parties collectively:

– Australian company: DEF Pty Ltd in relation to products distributed in Australia; and

– New Zealand company: DEF NZ Pty Ltd in relation to products distributed in New Zealand.

㘀ABC has no office in Australia or any other physical space which is at its disposal.

㘀ABC has no employees or other personnel based in Australia.

㘀ABC does not physically hold any stock in Australia.

㘀Accounting Firm performs on behalf of ABC limited company secretarial and corporate governance services and limited tax advisory services on a time and materials fee basis. Accounting Firm Australia has no authority to enter into any contract on behalf of ABC.

㘀DEF Pty Ltd does not, and has no authority to, conclude contracts on behalf of ABC.

㘀DEF Pty Ltd is independent of ABC and is acting in the ordinary course of its business. In particular, DEF Pty Ltd is not related to the ABC group and is not financially dependent on the ABC group. In addition, DEF Pty Ltd was chosen based on competence and fees.

㘀Under the UK tax law, ABC is an UK resident, on the basis that its central management and control ('CM&C’) is located in the UK.

You provided copies of minutes for board meeting as examples which showed, amongst other issues, that:

㘀The board meetings were held and all 3 directors attended;

㘀decisions were made by the Board relating to financial reporting and solvency of ABC; and

㘀ABC have not prepared director’s report or financial report, as they are exempt from having to do so pursuant to relief provided by ASIC.

You provided ABC’s Constitution which showed the following:

㘀It permits board meetings to be held via teleconferences, and permits board meetings to be held within or outside of Australia.

㘀It allows for directors to make determinations to pay dividends at a meeting of directors.

㘀The address of ABC UK Limited is an address in the UK.

You provided a copy of the Distribution Agreement. See below at “Distribution Agreement between ABC and DEF Pty Ltd” for more information.

Publicly available information relating to ABC and ABC group

ASIC Company records show that the registered office of ABC is the head office address of Accounting Firm, which is an office building in Australia.

ABC group products sold in Australia

A number of medicines of ABC group are available for sale in Australia of which ABC is a sponsor, and of which DEF Pty Ltd is a distributor/supplier.

DEF Pty Ltd

DEF Pty Ltd does not provide the distribution services to ABC exclusively as it also distributes a number of other non-ABC group products to the Australian market.

Distribution Agreement between ABC and DEF Pty Ltd

The Distribution Agreement between ABC and DEF Pty Ltd contains roles and responsibilities of ABC and DEF Pty Ltd in relation to the following areas:

㘀Marketing Authorisation

㘀Pharmaceutical product pricing and reimbursement

㘀Manufacture and supply

㘀Distribution

㘀Invoicing and payment

㘀Intellectual property rights

㘀Storage and supply/distribution

㘀Pharmacovigilance

Relevant legislative provisions

Corporations Act 2001 section 172

Income Tax Assessment Act 1997 Division 6

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1936 section 6(1)

International Tax Agreements Act 1953 subsection 4(1)

International Tax Agreements Act 1953 subsection 4(2)

International Tax Agreements Act 1953 subsection 5(1)

Reasons for decision

Note:

References made to Aust-UK DTA is a reference to the Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, signed 21 August 2003 and entered into force 17 December 2003.

The term drugs, pharmaceutical products, medicines, medications and pharmaceutical products are used interchangeably throughout this document.

Question 1

Summary

ABC is a resident of the UK for the purpose of the Aust-UK DTA, due to the operation of sub-Article 4(4) of the Aust-UK DTA. Particularly, ABC’s 'place of effective management’ for the purpose of Article 4 of the Aust-UK DTA is located in UK.

Detailed reasoning

One of the objectives of the Aust-UK DTA is to avoid double taxation with respect to taxes on income. As per paragraph 43 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (TR 2001/13), the ATO’s general approach when determining a taxpayer’s liability for Australian income tax where a DTA may be applicable, is as follows:

1. determine whether any tax liability appears to arise on its face and, if so, the quantum of that liability, under the relevant Assessment Act and the Rates Acts;

2. determine whether any Article of the DTA operates to preclude or limit the Assessment Act and Rates Acts liability, to 'pick up' domestic law concepts or to support the general domestic law provisions. It is just as significant to establish whether the relevant DTA leaves an issue unaddressed and dealt with by domestic law; and,

3. determine whether a provision of the DTA or of the Agreements Act dictates how the taxing right is to be exercised, or whether the Source of Income Article or a corresponding provision in the Agreements Act operates to require that the first step be revisited.

Thus, prior to considering the application of sub-Article 4(4) of the Aust-UK DTA to ABC, the Commissioner needs to consider whether Australian tax laws may give rights to taxation in Australia in relation to ABC.

Residency and Taxation under Australian tax laws

Division 6 of the ITAA 1997 discusses what assessable income is, and what it includes and excludes. Generally speaking, where a company is an Australian resident for Australian tax purpose, its assessable income consists of amounts of ordinary income (see section 6-5 of the ITAA 1997) and statutory income (see section 6-10 of the ITAA 1997) it derives during an income year derived directly or indirectly from all sources, whether in or out of Australia. In other words, a company that is an Australian resident for Australian tax purpose is subject to Australian taxation on its worldwide income.

A company is an Australian resident for tax purpose under section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) if it is incorporated in Australia. As ABC is a company incorporated in Australia, it is an Australian resident for Australian tax purposes, and thus it is subject to Australian taxation on its worldwide income.

Double Taxation

You have advised us that under UK taxation laws, ABC is a UK resident, on the basis that its central management and control is located in the UK.

Generally speaking, under UK taxation laws, a company that is based in the UK pays Corporation Tax (which is a tax covered by the Aust-UK DTA) on all its profits from the UK and abroad. As such there is a potential for double taxation under Australian and UK taxation laws with respect to one or more types of income derived by ABC.

Aust–UK DTA

As ABC may be subject to double taxation under Australian and UK taxation laws with respect to one or more types of income it derives, the Aust-UK DTA provides relief from double taxation in relation to ABC’s income.

Subsection 5(1) of the International Tax Agreements Act 1953 ('Agreements Act’) gives Aust-UK DTA the force of law in Australia. The effect of subsection 4(1) of the Agreements Act is that the DTAs are to be interpreted and read as one with the ITAA 1997 and/or ITAA 1936. Generally subsection 4(2) of the Agreements Act deals with possible conflicts by effectively providing that the terms of the DTAs override those of the ITAA 1997 and/or ITAA 1936 (except for Part IVA of the ITAA 1936) and the Rates Acts, in the event of any inconsistency.

Article 4 of Aust–UK DTA

Article 4 of the Aust-UK DTA provides how ABC’s residency for tax purpose should be determined under Australian and UK taxation laws.

Sub-Article 4(1) of the Aust-UK DTA provides the following:

For the purposes of this Convention, a person is a resident of a Contracting State:

(a) in the case of the United Kingdom, if the person is a resident of the United Kingdom for the purposes of United Kingdom tax; and

(b) in the case of Australia, if the person is a resident of Australia for the purposes of Australian tax.

Sub-Article 4(4) of the Aust-UK DTA provides the following:

Where by reason of the preceding provisions of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. (emphasis added)

It should be noted that the phrase 'place of effective management’ is not defined in the Aust-UK DTA. Paragraph 72 of TR 2001/13 states that in instances where a term in the DTA is not defined by the DTA, reference is to be made to the meaning of the term for the purposes of Australian tax laws, but only in accordance with the direction in the undefined terms provision of the General Definitions Article, 'unless the context otherwise requires’. This aspect of the General Definitions Article in Australia’s DTAs is closely based on the corresponding OECD Model Convention provision, and as such, it is relevant to consider what the OECD Commentaries to that Model say about this provision.

With regards to 'place of effective management’, the Commentary on Article 4 Concerning the Definition of Resident (Article 4 Commentary) provides, at paragraph 24, the following:

㘀it is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made;

㘀it will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management; and

㘀an entity may have more than one place of management, but it can have only one place of effective management at any one time.

The above is similar to the ATO’s consideration of the test of 'central management and control’ in relation to a company for Australian tax law purposes. As such, examining the concept of 'central management and control’ and how that applies to ABC will assist in determining ABC’s 'place of effective management’.

Central management and control

Central management and control is the control and direction of a company’s operations. The key element is the making of high-level decisions that set the company’s general policies, and determine the direction of its operations and the type of transactions it will enter. The control and direction of a company is different from the day-to-day conduct and management of its activities and operations.

With regards to who exercises central management and control of a company, it is not determined by identifying who has the legal power or authority to control and direct a company, but who controls and directs a company’s operations in reality. Normally, where a company is run in accordance with its constitution and the normal company law rules, its directors will control and direct its operations.

You advised the ATO that:

㘀there are 3 directors of ABC, two of which are located in the UK and the other located in Australia. The two UK directors are also directors of ABC UK;

㘀generally speaking, board meetings by the three directors concerns Australian legal and company law matters; and

㘀ABC UK’s board makes all the commercial decisions which impact ABC from the UK.

Documents recording decisions are relevant evidence of who makes the decisions of a company (and where they make them). However, if the documents record a state of affairs that the evidence shows did not exist, they will be disregarded in favour of the evidence showing what actually happened. Documents provided showed that in relation to past 3 board meetings held, which all directors attended, decisions were made by the Board relating to financial reporting and solvency of ABC.

A determination of where central management and control of a company is exercised is not where decisions are merely recorded and formalised, or where the company’s constitution, bylaws or articles of association require it be controlled and directed, if in reality it occurs elsewhere. Matters that the courts have considered when identifying where those who control and direct the operations of a company do so from include the following. Note that none of these factors alone necessarily identify or determine where central management and control of a company is exercised, and the relevance and weight to be given to each factor will depend on the facts and circumstances of the case:

㘀where the governing body of the company meets

㘀where the company declares and pays dividends

㘀where the shareholder’s meetings are held

㘀where the company’s register of shareholders is kept

㘀where the company’s books are kept

㘀where its registered office is located

㘀where those who control and direct the company’s operations live

㘀where its shareholders reside

㘀the nature of the business and whether it dictates where control and management decisions are made in practice

㘀minutes or other documents recording where high-level decisions are made.

With consideration to the factors above, you advised the ATO the following:

㘀where the governing body of the company meets - UK

You advised that board meetings have been conducted via teleconferences, with 2 of the 3 directors in UK, and 1 director in Australia. The Constitution permits board meetings to be held via teleconferences, and permits board meetings to be held within or outside of Australia.

㘀where the company declares and pays dividends – N/A

Based on documentation provided it does not appear that any dividends have been declared or paid since incorporation. The Constitution allows for directors to make determinations to pay dividends at a meeting of directors.

㘀where the shareholder’s meetings are held – N/A

Based on documentation provided it does not appear that any shareholder meetings have been held since incorporation. The Constitution and the Corporations Act 2001 does not explicitly state where shareholder’s meetings are required to be held.

㘀where the company’s register of shareholders is kept - Australia

The Constitution does not explicitly state where Register of shareholder is required to be kept. Section 172 of Corporations Act 2001 provides that Register of shareholders can be kept at one or more of the following locations:

– the company’s registered office;

– the company’s principal place of business in Australia;

– a place in Australia (whether of the company or of someone else) where the work involved in maintaining the Register is done; or

– another place in Australia approved by ASIC.

㘀where the company’s books are kept - Australia

You advised that the following are held by Accounting Firm as adviser to ABC at the head office of Accounting Firm, which is an office building in Sydney, Australia:

– Company Statement

– Audit Relief Minute

– Solvency Resolution

The Constitution indicates that if accounting and other financial records are required to be kept by the Corporations Act 2001 or the Constitution, that these be kept at the office or at such other places as the directors think fit and at all times be open to inspection by the directors. However, to date ABC does not appear to have prepared director’s report or financial report pursuant to relief provided by ASIC (as indicated by the board meeting minutes).

㘀where its registered office is located - Australia

According to the ASIC records, the registered office of ABC is the head office of the Accounting Firm, which is an office building in Sydney, Australia.

㘀where those who control and direct the company’s operations live - UK

You advised the following:

– the 2 directors, X and Mr Y, that are also directors of ABC UK, reside in the UK.

– the other director, Mr Z, resides in Australia.

㘀where its shareholders reside - UK

You advised that ABC UK (the sole shareholder) is a resident of the UK. The Constitution shows that ABC UK’s address is an UK address.

㘀the nature of the business and whether it dictates where control and management decisions are made in practice - UK

You advised the following:

– The ABC group business model is to use third party distribution agents around the world to distribute ABC group products. Generally, the ABC group does not establish local offices or have local employees involved in distribution, marketing or sales.

– ABC was established to hold Marketing Authorisations for pharmaceutical product ABC group wishes to sell or distribute in Australia.

– ABC UK’s board makes all commercial decisions which impact ABC from the UK.

㘀minutes or other documents recording where high-level decisions are made - Australia

You advised that the following are held by Accounting Firm as adviser to ABC at the head office of Accounting Firm, which is an office building in Sydney, Australia:

– Company Statement

– Audit Relief Minute

– Solvency Resolution

Although ABC’s registered office is an Australian address, and company’s books and documents recording high-level decisions are kept in Australia, these appear to be located in Australia due to requirements of Corporations Act 2001. Based on the information provided, it could be reasonably concluded that the making of high-level decisions mainly rest with the shareholders who are residents of the UK. Given the facts and circumstances above, we consider that more weighting is to be given to where decisions are made and persons making such decisions reside.

Application of Aust–UK DTA with regards to Residency of ABC

Based on the above discussion and consideration of the different factors, ABC’s 'place of effective management’ for the purpose of Article 4 of the Aust-UK DTA is located in the UK. As such, under sub-Article 4(4) of the Aust-UK DTA, ABC is deemed to be a resident of the UK.

Question 2

Summary

ABC is not carrying on a business at or through a permanent establishment (PE) in Australia, as per the Aust-UK DTA. Particularly:

㘀the registered office of ABC does not give rise to a permanent establishment under sub-Article 5(1);

㘀the premise which stores ABC’s pharmaceutical products is deemed not to be a permanent establishment under sub-Article 5(1) or sub-Article 5(5), as the use of the premise satisfies one or more of the conditions listed in the paragraph;

㘀ABC is not deemed to have a permanent establishment in Australia under sub-Article 5(7) of Aust-UK DTA as DEF Pty Ltd is an independent agent of ABC; and

㘀as DEF Pty Ltd is not a dependent agent of ABC, ABC is not deemed to have a permanent establishment under sub-Article 5(6) of Aust-UK DTA.

Detailed reasoning

Article 7 of the Aust-UK DTA provides how the business profits of ABC should be taxed under Australian and UK taxation laws. Particularly, sub-Article s 7(1) and 7(2) of the Aust-UK DTA provide the following:

1 The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. (emphasis added)

2 Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated in that other State, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises.

Thus, if ABC (an entity which is a resident of the UK under Aust-UK DTA) is found to be carrying on a business at or through a PE in Australia, its profits may be taxed in Australia under the Aust-UK DTA, but only so much of the profits attributable to a permanent establishment in Australia. Conversely, if ABC does not carry on a business in Australia through a permanent establishment, its profits shall be taxable only in the UK under the Aust-UK DTA.

Article 5 of the Aust-UK DTA explains the term PE. Sub-Article 5(1) explains that PE is a fixed place of business through which the business of an enterprise is wholly or partly carried on. In other words, to be a PE, the following requirements must be met:

a) there must be a place of business;

b) the place of business must be fixed (both in terms of physical location and in terms of time); and

c) the business of the enterprise must be carried on through this fixed place.

Sub-Article 5(2) elaborates on the meaning of PE by giving examples (by no means intended to be exhaustive) of what may constitute a permanent establishment.

Commentary on Article 5 Concerning the Definition of Permanent Establishment (Article 5 Commentary) discusses the concept of the location being at the disposal of the enterprise in the finding of a 'permanent establishment’ under sub-Article 5(1). In this instance, the following premises are not at the disposal of ABC, thus, they do not give rise to ABC having a 'permanent establishment’ under sub-Article 5(1):

㘀the registered office of ABC as per ASIC Company records (being the address of Accounting Firm’s head office). Further, you advised us that Accounting Firm performs on behalf of ABC limited company secretarial and corporate governance services and limited tax advisory services on a time and materials fee basis, and has no authority to enter into any contract on behalf of ABC; and

㘀the address where ABC group products are delivered to for storage and distribution in Australia. Further, the Distribution Agreement states that ABC can only access the premise to inspect the products stored by giving DEF Pty Ltd at least 5 Business Days’ notice. Also, the premise is also deemed not to be a permanent establishment under sub-Article 5(5), as the use of the premise satisfies one or more of the conditions listed in the paragraph.

Sub-Articles 5(3) to 5(8) of provide exceptions to the general definition of PE in certain circumstances. The application of sub-Article 5(5) is already discussed above. Of particular relevance to the circumstances of this case are sub-Articles 5(6) and 5(7), as follows:

5(6) Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person - other than an agent of an independent status to whom paragraph 7 of this Article applies - 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 permanent establishment in that State in respect of any activities which that person undertakes for that enterprise unless the activities of such person are limited to those mentioned in paragraph 5 of this Article which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

5(7) An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such brokers or agents are acting in the ordinary course of their business as such.

Sub-Article 5(6) is concerned with activities of persons who are considered to be dependent agents i.e.: persons, whether or not employees of the enterprise, who are not independent agents falling under sub-Article 5(7). Of particular importance is the consideration of whether such agent could habitually exercise 'the authority to conclude contracts on behalf of the enterprise’. The following consideration is relevant in finding that an agent had an 'authority to conclude contract’:

㘀the agent has sufficient authority to bind the enterprise’s participation in the business activity in the State concerned;

㘀it applies to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. Lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to an agent. For example, an agent may be considered to possess actual authority to conclude contracts where he solicits and receives (but does not formally finalise) orders which are sent directly to a warehouse from which goods are delivered and where the foreign enterprise routinely approves the transactions; and

㘀the 'authority to conclude contracts’ must cover contracts relating to operations which constitute the business proper of the enterprise.

In relation to sub-Article 5(7), Article 5 Commentary explains that a person will come within the scope of this paragraph (ie: the agent will not constitute a permanent establishment of the enterprise whose behalf he acts) only if:

a) he is independent of the enterprise both legally and economically, and

b) he acts in the ordinary course of his business when acting on behalf of the enterprise.

Whether a person is independent of the enterprise represented depends on the extent of the obligations which this person has in relation to the enterprise. As paragraph 38 of Article 5 Commentary explains, the important criterions to consider are:

㘀Where the person’s commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it (emphasis added); and

㘀whether the entrepreneurial risk has to be borne by the person or by the enterprise the person represents (emphasis added).

When considering the criteria of detailed instructions or to comprehensive control, regard is to be given to the following:

㘀The fact that the principal is relying on the special skill and knowledge of the agent is an indication of independence.

㘀It may be a feature of the operation of an agreement that an agent will provide substantial information to a principal in connection with the business conducted under the agreement. This is not in itself a sufficient criterion for determination that the agent is dependent unless the information is provided in the course of seeking approval from the principal for the manner in which the business is to be conducted. The provision of information which is simply intended to ensure the smooth running of the agreement and continued good relations with the principal is not a sign of dependence.

When considering the criteria of entrepreneurial risk, independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time. However, this fact is not by itself determinative. All the facts and circumstances must be taken into account to determine whether the agent’s activities constitute an autonomous business conducted by him in which he bears risk and receives reward through the use of his entrepreneurial skills and knowledge.

Further indicators suggesting than an agent is independent include:

㘀a prevalence of profit-based or turnover-based elements determining the remuneration of the agent; and

㘀activities, simultaneously or consecutively, for more than one principal.

In considering whether DEF Pty Ltd is a dependent or independent agent of ABC, consideration is to be given to how prescribed drugs are supplied and distributed in Australia when examining the relationship between DEF Pty Ltd and ABC.

Generally speaking, the pharmaceutical industry in Australia is heavily regulated, with the majority of prescription drugs supplied or distributed in the following manner:

Manufacturer → Wholesaler/Distributor → Pharmacist/Hospitals → Patients/Consumers

There are stringent legislative and regulatory requirements in relation to the manufacturing, storage, supply and distribution of pharmaceutical products. These include:

㘀TG Act and Therapeutic Goods Regulations 1990; and

㘀Australian Code of Good Wholesaling Practice for Medicines in Schedules 2,3,4 and 8.

ABC has been established because Australian regulations require MAs to distribute products in Australia to be held by a party formed in Australia. Amongst other requirements, a sponsor must be an Australian resident or an entity incorporated in Australia. A MA relates to the details of the drug involved in the ARTG, as well as all other matters in relation to the product registration or listing agreed in writing between the TGA and the sponsor.

We note that under the Distribution Agreement, DEF Pty Ltd is required to provide certain information to ABC on a regular basis. However, this must be viewed in light of the stringent requirements in relation to the supply of pharmaceutical products in Australia.

In relation to DEF Pty Ltd, we note that:

㘀it also acts as a distributor of a number of other non-ABC group pharmaceutical products, which suggests that it is acting as agent for a number of other persons or entities apart from ABC, and thus is unlikely to be solely reliant on its business dealings with ABC for its source of income;

㘀the Distribution Agreement mentions that DEF Pty Ltd has significant experience in distributing and marketing pharmaceutical products in Australia. This is suggestive of ABC’s reliance on the special skills and knowledge of DEF Pty Ltd;

㘀under the Distribution Agreement, broadly speaking, DEF Pty Ltd is remunerated on a revenue share of the selling price basis, suggestive of remuneration with turnover-based elements;

㘀according to the Distribution Agreement, it could be reasonably concluded that ABC group does not have comprehensive control over DEF Pty Ltd.

㘀in terms of the question who bears the commercial risk, some commercial risks have been passed onto DEF Pty Ltd.

Based on the information available, there is nothing to suggest that DEF Pty Ltd was not acting in the ordinary course of its business in its dealings with ABC. Although none of the factors referred to above in or of itself is determinative, they are at least indicative that DEF Pty Ltd has maintained its independence. Thus it could be reasonably concluded that DEF Pty Ltd is an independent agent of ABC.

With regards to whether DEF Pty Ltd has the authority to conclude contracts on behalf of ABC, based on the information available, there is no evidence to suggest that DEF Pty Ltd has the ability to conclude contracts which constitutes the business proper of ABC.

In conclusion:

㘀the registered office of ABC does not give rise to a permanent establishment under sub-Article 5(1);

㘀the premise which stores ABC’s pharmaceutical products is deemed not to be a permanent establishment under sub-Article 5(1) or sub-Article 5(5), as the use of the premise satisfies one or more of the conditions listed in the paragraph; and

㘀as DEF Pty Ltd is an independent agent of ABC, ABC is not deemed to have a permanent establishment in Australia under sub-Article 5(7) of Aust-UK DTA. Further, as DEF Pty Ltd is not a dependent agent of ABC, ABC is not deemed to have a permanent establishment in Australia under sub-Article 5(6) of Aust-UK DTA.

Question 3

Summary

Not applicable, as the business profits of ABC are not taxable in Australia pursuant to Article 7 of the Aust-UK DTA.

Detailed reasoning

As discussed in Question 2 above, as ABC does not carry on a business at or through a permanent establishment in Australia, its profits shall be taxable only in the UK as per sub-Article 7(1) of the Aust-UK DTA. Thus, its income shall only be taxed in the UK, and consequently there is no income taxable in Australia as Australia does not have taxing rights over the business profits of ABC.

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