ATO Interpretative Decision

ATO ID 2004/931

Income tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Is income derived by the taxpayer, an entity which is resident in the United States of America (US), from ordering and distributing activity carried out by its Australian subsidiary, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The income derived by the taxpayer, an entity which is resident in the US, from ordering and distributing activity carried out by its Australian subsidiary, is not assessable under subsection 6-5(3) of the ITAA 1997 as the taxpayer is not carrying on a business through a permanent establishment in Australia.

Facts

The taxpayer is a resident entity of the US and a non-resident of Australia for income tax purposes. The taxpayer markets consumer goods worldwide through a direct marketing system.

The taxpayer has established a wholly owned subsidiary in Australia whose primary function is to sell its products as wholesale to Australian distributors. The taxpayer has registered for GST purposes in Australia, forming a GST group with its Australian subsidiary.

The taxpayer has non resident affiliates which manufacture some of its products. It also purchases products from third party manufacturers in Australia.

On receipt of an electronic order from the Australian subsidiary, the taxpayer prepares a purchase order to third party manufacturers in Australia and directs them to deliver the products to different locations in Australia. For convenience, the Australian subsidiary prints out and faxes the purchase order on behalf of the taxpayer to the third party manufacturers.

The third party Australian manufacturer delivers the products directly to the Australian subsidiary and invoices the taxpayer. The Australian subsidiary notifies the taxpayer when the products are delivered. The taxpayer sends an invoice to the Australian subsidiary for the products delivered and pays the third party manufacturer. The prices for products charged by the taxpayer to the Australian subsidiary comply with the arm's length principle for related party dealings.

The products sold to the Australian subsidiary are not subject to further processing by the subsidiary before being on-sold to its distributors.

The taxpayer plays no further role and assumes no other risks with respect to sales by the Australian subsidiary to its distributors. The subsidiary does not perform any other functions for the taxpayer. It provides the usual reports to the taxpayer which are normally required of subsidiaries.

The taxpayer does not have an office, a factory or a workshop in Australia. The taxpayer does not have a dependent agent who has the authority to conclude contracts on its behalf in Australia.

The taxpayer uses the address of its Australian subsidiary as its contact address for GST purposes.

Reasons for Decision

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 during the income year.

In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for limited provisions).

Schedule 2 and 2A to the Agreements Act contains the convention between Australia and the US (USA Convention) and the protocol amending the USA Convention (US Protocol).

Under Article 7 of the USA Convention, the business profits of a US enterprise shall be taxable only in the US unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The term 'permanent establishment' is defined in Article 5(1) of the USA Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Article 5(2) of the USA Convention contains a list of examples, each of which can be regarded as constituting a permanent establishment, such as a place of management, an office, a branch, a factory or a workshop.

Article 5(3)(d) of the USA Convention provides that an enterprise shall not be regarded as having a permanent establishment solely as a result of maintaining of fixed place of business for the purpose of purchasing goods or merchandise.

Article 5(4) of the USA Convention identifies circumstances where a permanent establishment will be deemed to exist. Article 5(4)(a) of the USA Convention provides that an enterprise of the US will be deemed to have a permanent establishment in Australia if the enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia.

Article 5(4)(d) of the USA Convention provides that an enterprise of the US will be deemed to have a permanent establishment in Australia where it

1.

owns goods or merchandise that is subjected to substantial processing by an enterprise in Australia after the US enterprise either purchased the goods in Australia (and such goods are not subjected to prior substantial processing outside Australia), or

2.

produced the goods or merchandise in Australia.

Article 5(6) of the USA Convention provides that control of one company by another does not of itself mean that either company is a permanent establishment of the other.

The taxpayer does not have a place of business in Australia (such as premises or equipment) with a certain degree of permanence through which it wholly or partly carries on its business for the purpose of Article 5(1) of the USA Convention.

Although the taxpayer has a subsidiary in Australia and uses the address of the subsidiary as a place of contact for GST registration purposes, it does not have a place of management, an office, a branch, a factory or a workshop in Australia to come within definition of the term 'permanent establishment' under Article 5(2) of the USA Convention.

Article 5(4)(a) of the USA Convention will not apply as the taxpayer does not have a dependent agent who has authority to conclude contracts on its behalf and habitually exercises that authority in Australia. The Australian subsidiary is not considered as a dependant agent as it has no authority to conclude contracts on behalf of the taxpayer.

Article 5(4)(d) of the USA Convention will not apply as the products which are purchased by the taxpayer from third party manufacturers and subsequently sold to its subsidiary are not subject to substantial processing by the subsidiary before being on-sold.

Consequently, Article 7 of the USA Convention applies and the income is not taxable in Australia as the taxpayer is not carrying on its business through a permanent establishment in Australia. The income is therefore not assessable under subsection 6-5(3) of the ITAA 1997.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(3)

Related ATO Interpretative Decisions
ATO ID 2003/889

Keywords
Double tax agreements
Exempt income
Permanent establishment
United States

Siebel/TDMS Reference Number:  3891538

Business Line:  Public Groups and International

Date of publication:  26 November 2004

ISSN: 1445-2782