Edited version of private advice

Authorisation Number: 1051871778229

Date of advice: 20 July 2021

Ruling

Subject: Permanent establishment

Question 1

Does the Company have a permanent establishment in Australia in relation to the activities pursuant to Article 5 of the Country X Double Taxation Agreement?

Answer

No

Question 2

Will the profits of the Company be excluded from tax in Australia under Article 7 of the Country X Double Taxation Agreement?

Answer

Yes

Question 3

Will the Company be required to lodge an Australian taxation return?

Answer

No

This ruling applies for the following period:

The relevant income tax years

The scheme commences on:

A relevant date

Relevant facts and circumstances

Group structure

The Company was incorporated in Australia. It is a wholly owned subsidiary of a Foreign Parent Company which is a resident of the Country X.

Business activities

The Company has an agreement with an Australian Entity to sell the Australian Entity's gift vouchers on-line to Australian consumers. The Company receives commission from the sales. This is the only source of income for the Company.

The Company does not have any agent to conclude contracts on the Company's behalf.

The Company does not have a fixed place of business through which its enterprise is carried on. It does not have an office or warehouse or any other premise in Australia at its disposal.

Commercial reasons for incorporating in Australia

The decision was made to incorporate in Australia in order to effectively partner with Australian banks to ensure acceptable and efficient payment systems are in place for Australian customers.

Employees

The Company does not have any employees in Australia and does not have any agents in Australia that conclude contracts on its behalf.

MLI Determination

The Australian and Country X's Competent Authorities have made a determination of the Company's residence under the Country X Double Taxation Agreement as modified by paragraph 1 of Article 4 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ('the Multilateral Instrument'). The decision is that the Company is deemed to be a resident only in the Country X for the purposes of the Country X Double Taxation Agreement.

Reasons for decision

Question 1

Summary

The Company does not have a permanent establishment in Australia in relation to the activities carried out under the agreement with the Australian Entity, pursuant to Article 5 of the Country X Double Taxation Agreement.

Detailed reasoning

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).

The Agreements Act gives the Country X Double Taxation Agreement the force of law in Australia.

Article 7 of the Country X Double Taxation Agreement governs the taxation of business profits derived from Australia by a resident of the Country X. Under Article 7 of the Country X Double Taxation Agreement, the business profits of an enterprise of the Country X shall be only taxable in the Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If so, the profits of the enterprise that are attributable to that permanent establishment in Australia may be taxed in Australia.

The Country X Double Taxation Agreement applies to persons who are residents of one of more of the Contracting States. The Company is deemed to be the Country X resident for the purposes of the Country X Double Taxation Agreement.

The term 'permanent establishment' is defined in Article 5 of the Country X Double Taxation Agreement.

Article 5 of the Country X Double Taxation Agreement contains a list of examples that each may be regarded as constituting a permanent establishment.

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).

The Commissioner has also expressed the view at paragraph 18 of Taxation Ruling TR 2002/5 Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? that it is appropriate to take into account the commentary text when interpreting the definition of permanent establishment in subsection 6(1) of the ITAA 1936.

On 21 November 2017, the OECD Council approved the contents of the 2017 Update to the OECD Model Tax Convention (OECD Commentary). Paragraph 44 of the OECD 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 Commentary on Article 5):

•        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'

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...

Paragraph 20 of the OECD Commentary on Article 5 goes on to state -

The words "through which" must be given a wide meaning so as to apply to any situation where business activities are carried on at a particular location that is at the disposal of the enterprise for that purpose. Thus, for instance, an enterprise engaged in paving a road will be considered to be carrying on its business "through" the location where this activity takes place

The Company does not have an office or warehouse or any other premise in Australia. The services required to be performed by the Company under the agreement with the Australian Entity are performed online. It is therefore necessary to consider whether the website constitutes a fixed place of business of the Company.

In considering whether the website will be a 'place of business', paragraphs 123 - 124 of the OECD commentary on Article 5 provides the following guidance:

123. Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a "place of business" as there is no "facility such as premises or, in certain instances, machinery or equipment" (see paragraph 6 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server.

124. The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise (see paragraphs 10 to 19 above), even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met

While the OECD commentary on e-commerce indicates a computer server could be a permanent establishment of a taxpayer in certain circumstances, the Company does not have a computer server situated in Australia at its own disposal. It simply carries on its business via the website. The website does not in itself constitute tangible property. Therefore, the Company does not have a physical presence in Australia and the website is not a permanent establishment of the Company.

As a result, the Company does not have a location that can constitute a 'place of business'. Therefore, there is no "place of business" in Australia, through which the business of the Company is carried on.

Deemed Permanent Establishment

Under Article 5 of the Country X Double Taxation Agreement an enterprise shall be deemed to have a permanent establishment in Australia and to carry on business through that permanent establishment if it maintains substantial equipment for rental or other purposes for more than 12 months.

As mentioned, the Company does not maintain a server or any other assets in Australia and so will not be deemed to have a permanent establishment due to maintaining substantial equipment in Australia.

An enterprise will also be deemed to have a permanent establishment in Australia under Article 5 of the Country X Double Taxation Agreement where a dependent agent is acting on behalf of an enterprise and has, and habitually exercises, an authority to conclude contracts on behalf of the enterprise.

The Company will not be deemed to have a permanent establishment in Australia under Article 5 of the Country X Double Taxation Agreement as there are no dependant agents or any other parties with the authority to conclude contracts on behalf of the Company.

Conclusion

The Company does not have a permanent establishment in Australia under Article 5 of the Country X Double Taxation Agreement for the services pursuant to its agreement with the Australian Entity.

Question 2

Summary

The profits of the Company will be excluded from tax in Australia under Article 7 of the Country X Double Taxation Agreement.

Detailed reasoning

Article 7 of the Country X Double Taxation Agreement governs the taxation of business profits derived from Australia by a resident of the Country X. Under Article 7 of the Country X Double Taxation Agreement, the business profits of an enterprise of the Country X shall be only taxable in the Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The Company is a Country X resident for the purposes of the Country X Double Taxation Agreement. It does not have a permanent establishment in Australia. Therefore, Article 7 of the Country X Double Taxation Agreement will apply to the Company and allocate sole taxing rights to the Country X in relation to profits made from the arrangement.

Question 3

Summary

The Company will not be required to lodge an Australian taxation return.

Detailed reasoning

Section 161 of the ITAA 1936 provides that every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for a year of income within the period specified in the notice.

The notice published by the Commissioner each year pursuant to Section 161 provides (at table C) that non-resident companies are required to lodge a tax return where they have derived income (including capital gains) that is taxable in Australia.

As the Company does not have income that is taxable in Australia, there is no requirement to lodge a tax return in Australia.

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