Edited version of private ruling

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Ruling

Subject: Assessability of Australian source income

Is the income of foreign company A that is attributable to the work carried out by its Australian subsidiary from its premises in Australia, assessable in Australia?

Yes.

This ruling applies for the following period:

Income year ended 30 June 2010

Income year ending 30 June 2011

Relevant facts and circumstances

Foreign company X is a Public Limited Company (Plc) in the Foreign Country X.

Foreign company X is a resident of Foreign country X and a foreign resident of Australia for income tax purposes.

Australian company A is a wholly owned Australian subsidiary of foreign company X.

Both of these entities are in the same industry.

Foreign company X has signed a contract with an Australian client to provide services.

Australian company A will perform the work to provide some of the services to the Australian client on behalf of foreign company X.

In your earlier response you state that:

· The contract to provide these services was signed in the foreign country X between the Australia client and foreign company X. Australian company A is not a party to this contract.

· Foreign company X does not reimburse Australian company A for the cost of accommodation or staff and makes no other contribution to the financing of the business carried on by Australian company A.

· Australian company A is not remunerated by reference to transaction, commission or fixed regular payments or in some other way from foreign company X for this service.

· Foreign company X and Australian company A do not enter into agreements with each other for the supply of services.

· Australian company A does not have authority to enter into employment contracts with the successful candidates. The contract between the client and candidates is not signed by Australian company A.

· Australian company A is responsible for performing majority of the work under contract.

In a subsequent response you provided the following additional information:

· The only input foreign company X will have would be to confirm the specification of the contract requirements.

· Australian company A has not provided this service to foreign company X in the past but the arrangement to perform this service is anticipated to be ongoing as long as there are contracts in place that foreign company X has with Australian clients.

· Approximately 30% of the Australian company A staff are performing the work on behalf of foreign company X. The office based part of the selection process will be done in City B and City C.

· Currently, there is an informal internal group arrangement between Australian company A and foreign company X for the sourcing of the Australian contracts being serviced by foreign company X. Invoicing for the work done will take place under the Group transfer pricing arrangements to compensate Australian company A for the work performed to fulfil the contracts.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 6-5(2)

International Tax Agreements Act 1953

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year, and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

The income derived from provision of services in Australia is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to tax on Australian sourced income, 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 (Agreements Act).

In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2005) (the OECD Model Commentary).

The Agreements Act contains the tax treaty between Australia and Foreign country X (the Country X Agreement). The Country X Agreement operates to avoid the double taxation of income received by Australian and Country X residents.

The Country X Agreement, the business profits of an enterprise of Country X shall be only taxable in Country X unless the enterprise carries on business in Australia through a permanent establishment (PE) situated in Australia. If so, so much of the profit of the enterprise's profit attributable to the PE in Australia may be taxed in Australia.

The Country X Agreement provides that PE in relation to an enterprise means a fixed place of business through which the business of the enterprise is wholly or partly carried on, and includes a branch or an office.

The Country X Agreement provides that if a resident company of Australia is controls or controlled by a Country X resident company, or which carries on business in Australia, shall not make either company a PE of the other.

OECD Model Commentary on this paragraph provides that, merely having a subsidiary in Australia will not make the subsidiary a PE of the parent company. However, the parent company may be found to have a PE under the Country X Agreement, if certain space or premises of the subsidiary is at the disposal of the parent company and the parent company carries on business through the subsidiary's place of business. The parent company may be found to have a PE where the subsidiary has a place of business under the Country X Agreement unless, the subsidiary acts in the ordinary course of its business as an independent agent as per the Country X Agreement.

PE is defined in the Country X Agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes a branch or an office.

The OECD Model Commentary generally contains the following three conditions:

(a) the existence of a place of business

(b) the fact that this place must be fixed, and

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

In this regard, the OECD Model Commentary on this paragraph provide that 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. This is subject to the fact that the place is at the disposal for a sufficiently long period of time so as to constitute a 'fixed place of business' and the activities that are performed go beyond the activities that are preparatory or auxiliary in character.

In addition, the OECD Model Commentary provides that if the business of an enterprise is carried on mainly by dependent agents it makes no difference whether or not the dependent agent is authorised to conclude contracts if they work at the fixed place of business.

In this case, Australian company A will service to fulfil part of foreign company X's contract. The office based part of the selection process will be done from its office in City B and City C and other work may be conducted in other locations around Australia.

The work carried out by Australian company A for foreign company X is the main or important function of their business. These activities would not be considered to fall within those that are of preparatory or auxiliary character. Furthermore, this arrangement for Australian company A to carry out the work for foreign company X is anticipated to be ongoing as long as Foreign company A has contracts that require work from Australia.

Hence, the business activities of foreign company X are conducted at fixed places of business through the offices of Australian company A in Australia. However, these places of business will not be deemed to be a PE of foreign company X if the business is conducted by Australian company A as an independent agent of foreign company X.

The Country X Agreement provides that an enterprise shall not be deemed to have a PE in Australia because it carries on business in Australia 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.

The OECD Model Commentary provides that a person will come within the scope of this paragraph and will not constitute a PE of the enterprise on whose behalf they act only if:

· they are independent of the enterprise both legally and economically, and

· they act in the ordinary course of their business when acting on behalf of the enterprise.

Furthermore, the OECD Model Commentary on this paragraph also provides that an independence status is not likely if the person perform activities which economically, belong to the sphere of the enterprise rather than to that of their own business operations.

Although Australian company A is in the same business of recruiting as foreign company X, however when Australian company A is acting for foreign company X, they are not performing under the normal expected commercial arrangement. Foreign company X and Australian company A do not enter into agreements with each other for the supply of services. Australian company A is not remunerated by reference to transaction, commission or fixed regular payments or in some other way from foreign company X for this services.

There is only an informal internal group arrangement to service this contract of foreign company X. Invoicing for the work done will take place under the group transfer pricing arrangements to compensate Australian company A for the work performed.

The arrangement described is not normal commercial arrangements of an independent agent or an agent of independent status. Australian company A performs works that economically belong to foreign company X rather than to that of its own business. The work done by Australian company A is for foreign company X's contract, it benefits foreign company X but there is no economic benefit for Australian company A in a normal commercial sense.

Accordingly, Australian company A is not considered to be carrying these activities in the ordinary course of its business as a normal agent of an independent status under the Country X Agreement.

In conclusion, the offices of Australian company A from where the services are carried out by Australian company A for the foreign company X would constitute a PE of foreign company X under the Country X Agreement. The work carried out by Australian company A for foreign company X is not considered to fall within those that are merely of preparatory or auxiliary character and Australian company A is not considered to be acting as an agent of an independent status of foreign company X under the Country X Agreement.

Consequently, so much of the profit of foreign company X attributable to the work carried out by Australian company A that constitute its PE in Australia is subject to tax in Australia under the Country X Agreement. Therefore, this income of foreign company X attributable to the work carried out by Australian company A is assessable income of foreign company X in Australia under subsection 6-5(3) of the ITAA 1997.