Edited version of your written advice

Authorisation Number: 1051489362224

Date of advice: 01 March 2019

Ruling

Subject: Permanent establishment under a Double Tax Agreement

Question

Is Foreign Co liable to Australian income tax on income derived under a Contract with Australia?

Answer

No.

This ruling applies for the following periods:

The relevant income years

The scheme commences on:

The relevant start date

Relevant facts and circumstances

Foreign Co is incorporated in and is a tax resident of a foreign country.

Foreign Co entered into a service contract with Australia Co.

Under the service Contract Foreign Co provides services to the Australia Co. Business activities are not undertaken in Australia or Australian territories.

Foreign Co has no office in Australia.

A small number of employees of Foreign Co sometimes work from their Australian home when they come to visit their families in Australia. The total number of days of those employees’ presence in Australia will be more than 183 collectively in any year of income. Business activities are performed using laptops which have been brought into Australian by the employees.

Foreign Co does not direct the employees to work from home.

Relevant legislative provisions

Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income done at Sydney on 6 August 1982 (as amended)

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

International Tax Agreements Act 1953 Subsection 4(1)

International Tax Agreements Act 1953 Subsection 4(2)

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (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 whether Australia has a taxing right in respect of income derived in Australia by a foreign resident company, we must also consider the International Tax Agreements Act 1953 (Agreements Act).

Subsection 4(1) of the Agreements Act incorporates the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited situations).

Article 7 of the relevant Double Tax Agreement (the Agreement) governs the taxation of business profits derived from Australia by a resident of the other country. Under Article 7 of the Agreement, the business profits of an enterprise of the other country shall be only taxable in the other country unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If so, the profit of the enterprise that is attributable to that permanent establishment in Australia may be taxed in Australia.

Foreign Co is a resident of the other country for the purposes of the Agreement.

The term ‘permanent establishment’ is defined in Article 5(1) of the Agreement to mean

… a fixed place of business through which the business of an enterprise is wholly or partly carried on

Article 5(2) of the Agreement contains a list of examples that each may be regarded as constituting a permanent establishment, such as:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

(g) an agricultural, pastoral or forestry property;

(h) a building site or construction, assembly or installation project which exists for more than 9 months; and

(i) an installation, drilling rig or ship that, for an aggregate period of at least 6 months in any 24 month period, is used by an enterprise of one of the Contracting States in the other Contracting State for dredging or for or in connection with the exploration or exploitation of natural resources of the sea-bed and subsoil.

In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4714; (1990) 21 ATR 531 (Thiel), the High Court accepted that the OECD Commentaries may be referred to when interpreting tax treaties in accordance with Article 32 of the Vienna Convention (See paragraph 90 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia’s Double Tax Agreements).

Paragraph 44 of the OECD Commentaries on Article 5: Concerning the definition of permanent establishment (Commentary on Article 5) affirms that:

A permanent establishment begins to exist as soon as the enterprise commences to carry on its business through a fixed place of business. This is the case once the enterprise prepares, at the place of business, the activity for which the place of business is to serve permanently. The period of time during which the fixed place of business itself is being set up by the enterprise should not be counted, provided that this activity differs substantially from the activity for which the place of business is to serve permanently

On this basis, the definition of a ‘permanent establishment’ contains three conditions (as outlined in paragraph 6 of the OECD Commentaries):

● the existence of a ‘place of business’,

● this place of business must be fixed, and

● the business of the enterprise is, wholly or partly, carried on through this fixed place of business.

Existence of a ‘place of business’

On 21 November 2017, the OECD Council approved the contents of the 2017 Update to the OECD Model Tax Convention (OECD Commentary).

The OECD Commentary on Article 5 relevantly states at paragraph 10 that –

The term “place of business” covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose… It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise…

When considering whether an employee’s home office will be the employer’s “place of business” and therefore constitute a permanent establishment of the employer, OECD commentary on Model Article 5 provides the following guidance:

11. … Whether a location may be considered to be at the disposal of an enterprise in such a way that it may constitute a “place of business through which the business of [that] enterprise is wholly or partly carried on” will depend on that enterprise having the effective power to use that location as well as the extent of the presence of the enterprise at that location and the activities that it performs there….

18. Even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the automatic conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise. Whether or not a home office constitutes a location at the disposal of the enterprise will depend on the facts and circumstances of each case. In many cases, the carrying on of business activities at the home of an individual (e.g. an employee) will be so intermittent or incidental that the home will not be considered to be a location at the disposal of the enterprise (see paragraph 12 above). Where, however, a home office is used on a continuous basis for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has required the individual to use that location to carry on the enterprise’s business (e.g. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered to be at the disposal of the enterprise.

19. A clear example is that of a non-resident consultant who is present for an extended period in a given State where she carries on most of the business activities of her own consulting enterprise from an office set up in her home in that State; in that case, that home office constitutes a location at the disposal of the enterprise. Where, however, a cross-frontier worker performs most of his work from his home situated in one State rather than from the office made available to him in the other State, one should not consider that the home is at the disposal of the enterprise because the enterprise did not require that the home be used for its business activities. It should be noted, however, that since the vast majority of employees reside in a State where their employer has at its disposal one or more places of business to which these employees report, the question of whether or not a home office constitutes a location at the disposal of an enterprise will rarely be a practical issue. Also, the activities carried on at a home office will often be merely auxiliary and will therefore fall within the exception of paragraph 4.

In this case, Foreign Co does not have an office in Australia. While its employees who render services in Australia do so from their family home in Australia, Foreign Co doesn’t require them to do so. The employees do it because it is more convenient for them and Foreign Co allows it. The mere fact that the employees work from home does not mean their family homes are at the disposal of Foreign Co. Therefore, the employees’ homes in Australia are not a place of business for Foreign Co. Foreign Co does not satisfy the first condition of the definition.

We consider that Foreign Co does not satisfy any other tests in Article 5 of the Agreement, i.e. the operation of the enterprise in Australia through a dependent agent having authority to conclude contracts on Foreign Co’s behalf or the use of substantial equipment.

Conclusion

Accordingly Foreign Co does not have a permanent establishment in Australia and therefore in accordance with Article 7 of the Agreement the profits of Foreign Co will not be taxed in Australia.

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